UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended March 31, ~~2016~~2017



¨	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 ¨	Emerging growth company ¨

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

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Act.

Yes ¨ �� No x

As of May ~~1, 2016, 7,032,000~~12, 2017, 7,292,708 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 March 31, ~~2016,~~2017, and December 31, ~~2015~~2016 (Unaudited)	3
		Condensed Consolidated Statements of Income for the Three Months Ended March 31, ~~2016~~2017, and ~~2015~~2016 (Unaudited)	5
		Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, ~~2016,~~2017, and ~~2015~~2016 (Unaudited)	6
		Condensed Consolidated Statements of Stockholder’s Equity for the Three Months Ended March 31, ~~2016,~~2017, and ~~2015~~2016 (Unaudited)	7
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, ~~2016,~~2017, and ~~2015~~2016 (Unaudited)	8
		Notes to Condensed Consolidated Financial Statements (Unaudited)	10
		Note 1 - Organization and Basis of Presentation	10
		Note 2 - ~~Acquisition~~Application of Recent Accounting Pronouncements	1110
		Note 3 - ~~Application of Recent Accounting Pronouncements~~Dividends	1112
		Note 4 - ~~Dividends~~Summary of Investments	1312
		Note 5 - ~~Summary of Investments~~Derivative Financial Instruments	1316
		Note 6 - ~~Derivative Financial Instruments~~Summary of Offsetting Assets and Liabilities	1820
		Note 7 - ~~Summary of Offsetting Assets and Liabilities~~Fair Value Measurements	22
		Note 8 - ~~Fair Value Measurements~~Other Comprehensive Income	2327
		Note 9 - ~~Other Comprehensive Income~~Employee Benefit Plans	29
		Note 10 - ~~Employee Benefit Plans~~Income Taxes	30
		Note 11 - Segment Information	30
		Note 12 - Commitments and Contingencies	32
		Note ~~11 - Income Taxes~~	33
		~~Note 12 - Segment Information~~	34
		~~Note~~ 13 ~~- Commitments and Contingencies~~	36
		~~Note 14~~ - Subsequent Events	3633
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3734
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	4644
	Item 4	Controls and Procedures	4745

Part II	Other Information		4746
	Item 1	Legal Proceedings	4746
	Item 1A	Risk Factors	4846
	Item 6	Exhibits	4948

		Signature	4948

Part I Financial Information

Item1. Interim Financial Statements

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Balance Sheets

March 31, ~~2016,~~2017 and December 31, ~~2015~~2016

(In Thousands, Except Share Amounts)

(Unaudited)


	March 31, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Assets
Investments:
Fixed maturities, available-for-sale, at fair value (amortized cost $19,884,469 and $20,007,462)	$	20,838,179	$	20,531,627
Fixed maturities, held-for-trading, at fair value (amortized cost $553,871 and $612,899)	569,611		615,839
Mortgage loans on real estate (net of allowances of $2,882 and $2,890)	3,275,312		3,247,704
Fixed maturities, available-for-sale, at fair value (amortized cost $21,427,802 and $21,672,727)					$	22,042,336	$	22,153,703
Fixed maturities, held-for-trading, at fair value (amortized cost $183,595 and $519,495)					185,617		514,738
Mortgage loans on real estate (net of allowances of $1,309 and $2,882)					3,844,931		3,558,826
Policy loans	4,069,236		4,092,661		4,016,844		4,019,648
Short-term investments (amortized cost $808,515 and $267,026)	808,515		267,026
Short-term investments (amortized cost $744,063 and $303,988)					744,063		303,988
Limited partnership and other corporation interests	37,077		40,980		37,948		34,895
Other investments	14,974		15,189		14,529		15,052
Total investments	29,612,904		28,811,026		30,886,268		30,600,850

Other assets:
Cash	18,708		34,362
Reinsurance receivable	609,377		604,946
Cash and cash equivalents					12,920		18,321
Reinsurance recoverable					597,096		598,864
Deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”)	391,883		414,143		490,487		486,690
Investment income due and accrued	316,742		283,183		315,826		287,681
Collateral under securities lending agreements	107,654		—		94,531		—
Due from parent and affiliates	78,570		62,596		86,834		81,995
Goodwill	137,683		137,683		137,683		137,683
Other intangible assets	22,846		23,819		19,297		20,087
Other assets	938,940		874,918		1,014,949		1,021,210
Assets of discontinued operations	19,951		21,910		17,213		17,652
Separate account assets	27,239,781		26,631,193		27,597,906		27,037,765
Total assets	$	59,495,039	$	57,899,779	$	61,271,010	$	60,308,798



See notes to condensed consolidated financial statements.		(Continued)

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Balance Sheets

March 31, ~~2016,~~2017, and December 31, ~~2015~~2016

(In Thousands, Except Share Amounts)

(Unaudited)


	March 31, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Liabilities and stockholder’s equity
Policy benefit liabilities:
Future policy benefits	$	27,591,907	$	27,110,981	$	29,230,356	$	28,872,899
Policy and contract claims	364,276		354,899		384,990		372,259
Policyholders’ funds	262,651		299,577		241,167		285,554
Provision for policyholders’ dividends	54,060		55,481		48,070		49,521
Undistributed earnings on participating business	19,768		17,024		16,000		15,573
Total policy benefit liabilities	28,292,662		27,837,962		29,920,583		29,595,806

General liabilities:
Due to parent and affiliates	544,988		540,310		539,884		537,990
Commercial paper	99,171		93,371		98,645		99,049
Payable under securities lending agreements	107,654		—		94,531		—
Deferred income tax liabilities, net	272,504		137,116		230,519		191,911
Other liabilities	783,609		755,651		737,179		816,304
Liabilities of discontinued operations	19,951		21,910		17,213		17,652
Separate account liabilities	27,239,781		26,631,193		27,597,906		27,037,765
Total liabilities	57,360,320		56,017,513		59,236,460		58,296,477

Commitments and contingencies (See Note 13)
Commitments and contingencies (See Note 12)

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
Common stock, $1 par value, 50,000,000 shares authorized; 7,292,708 shares issued and outstanding					7,293		7,293
Additional paid-in capital	841,549		840,874		863,451		863,031
Accumulated other comprehensive income	459,991		233,438		299,854		235,875
Retained earnings	825,946		800,721		863,952		906,122
Total stockholder’s equity	2,134,719		1,882,266		2,034,550		2,012,321
Total liabilities and stockholder’s equity	$	59,495,039	$	57,899,779	$	61,271,010	$	60,308,798



See notes to condensed consolidated financial statements.		(Concluded)

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Income

Three Months Ended March 31, ~~2016,~~2017, and ~~2015~~2016

(In Thousands)

(Unaudited)


	Three Months Ended March 31,						Three Months Ended March 31,
	2016			2015			2017			2016
Revenues:
Premium income	$	154,927		$	145,703		$	152,241		$	154,927
Fee income	225,067			225,277			255,116			225,067
Other revenue	3,149			1,820			2,384			3,149
Net investment income	331,785			358,856			313,471			331,785
Realized investment gains (losses), net:
Total other-than-temporary gains (losses), net	(536		)	(558		)	—			(536		)
Other-than-temporary (gains) losses, net, transferred to other comprehensive income (loss)	—			108
Other realized investment gains (losses), net	31,806			18,650			(11,754		)	31,806
Total realized investment gains (losses), net	31,270			18,200			(11,754		)	31,270
Total revenues	746,198			749,856			711,458			746,198
Benefits and expenses:
Life and other policy benefits	186,636			149,539			170,289			186,636
(Decrease) increase in future policy benefits	(14,015		)	17,351
Increase (decrease) in future policy benefits							126			(14,015		)
Interest credited or paid to contractholders	148,310			142,891			153,946			148,310
Provision for policyholders’ share of losses on participating business	(169		)	(451		)
Provision for policyholders’ share of (losses) earnings on participating business							(2		)	(169		)
Dividends to policyholders	15,981			18,341			15,069			15,981
Total benefits	336,743			327,671			339,428			336,743
General insurance expenses	276,528			244,484			307,131			276,528
Amortization of DAC and VOBA	539			17,556			5,322			539
Interest expense	9,724			9,637			7,630			9,724
Total benefits and expenses	623,534			599,348			659,511			623,534
Income before income taxes	122,664			150,508			51,947			122,664
Income tax expense	24,038			51,896			17,117			24,038
Net income	$	98,626		$	98,612		$	34,830		$	98,626

See notes to condensed consolidated financial statements.

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Comprehensive Income

Three Months Ended March 31, ~~2016,~~2017, and ~~2015~~2016

(In Thousands)

(Unaudited)


	Three Months Ended March 31,						Three Months Ended March 31,
	2016			2015			2017			2016
Net income	$	98,626		$	98,612		$	34,830		$	98,626
Components of other comprehensive income
Unrealized holding gains (losses), net, arising on available-for-sale fixed maturity investments	446,610			181,375			130,229			446,610
Unrealized holding gains (losses), net, arising on cash flow hedges	(1,604		)	17,155			(6,955		)	(1,604		)
Reclassification adjustment for (gains) losses, net, realized in net income	(22,456		)	(30,437		)	1,475			(22,456		)
Net unrealized gains (losses) related to investments	422,550			168,093			124,749			422,550
Future policy benefits, DAC and VOBA adjustments	(76,240		)	(35,129		)	(28,466		)	(76,240		)
Employee benefit plan adjustment	2,234			2,603			2,146			2,234
Other comprehensive income before income taxes	348,544			135,567			98,429			348,544
Income tax expense related to items of other comprehensive income	121,991			47,448			34,450			121,991
Other comprehensive income⁽¹⁾	226,553			88,119			63,979			226,553
Total comprehensive income	$	325,179		$	186,731		$	98,809		$	325,179

⁽¹⁾Other comprehensive income includes the non-credit component of impaired gains (losses), net, on fixed maturities available-for-sale in the amounts of ~~$(1,895)~~$(1,089) and ~~$(2,543)~~$(1,895) for the three months ended March 31, ~~2016,~~2017, and ~~2015,~~2016, respectively.

See notes to condensed consolidated financial statements.

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Stockholder’s Equity

Three Months Ended March 31, ~~2016,~~2017, and ~~2015~~2016

(In Thousands)

(Unaudited)


	Three Months Ended March 31, 2016												Three Months Ended March 31, 2017

	Common stock		Additional paid-in capital		Accumulated other comprehensive income		Retained earnings			Total			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
Balances, January 1, 2017													$	7,293	$	863,031	$	235,875	$	906,122		$	2,012,321
Net income	—		—		—		98,626			98,626			—		—		—		34,830			34,830
Other comprehensive income, net of income taxes	—		—		226,553		—			226,553			—		—		63,979		—			63,979
Dividends	—		—		—		(73,401		)	(73,401		)	—		—		—		(77,000		)	(77,000		)
Capital contribution - stock-based compensation	—		534		—		—			534			—		420		—		—			420
Income tax benefit on stock-based compensation	—		141		—		—			141
Balances, March 31, 2016	$	7,233	$	841,549	$	459,991	$	825,946		$	2,134,719
Balances, March 31, 2017													$	7,293	$	863,451	$	299,854	$	863,952		$	2,034,550


	Three Months Ended March 31, 2015												Three Months Ended March 31, 2016

	Common stock		Additional paid-in capital		Accumulated other comprehensive income		Retained earnings			Total			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
Balances, January 1, 2016													$	7,233	$	840,874	$	233,438	$	800,721		$	1,882,266
Net income	—		—		—		98,612			98,612			—		—		—		98,626			98,626
Other comprehensive income, net of income taxes	—		—		88,119		—			88,119			—		—		226,553		—			226,553
Dividends	—		—		—		(77,309		)	(77,309		)	—		—		—		(73,401		)	(73,401		)
Capital contribution - stock-based compensation	—		525		—		—			525			—		534		—		—			534
Income tax benefit on stock-based compensation	—		275		—		—			275			—		141		—		—			141
Balances, March 31, 2015	$	7,032	$	778,464	$	691,137	$	771,102		$	2,247,735
Balances, March 31, 2016													$	7,233	$	841,549	$	459,991	$	825,946		$	2,134,719

See notes to condensed consolidated financial statements.

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31, ~~2016,~~2017, and ~~2015~~2016

(In Thousands)

(Unaudited)


	Three Months Ended March 31,						Three Months Ended March 31,
	2016			2015			2017			2016
Net cash provided by operating activities	$	142,307		$	298,843		$	361,764		$	142,740

Cash flows from investing activities:
Proceeds from sales, maturities and redemptions of investments:
Fixed maturities, available-for-sale	1,983,974			3,024,890			1,825,006			1,983,974
Mortgage loans on real estate	92,302			54,923			54,480			92,302
Limited partnership interests, other corporation interests and other investments	2,567			1,174			1,426			2,567
Purchases of investments:
Fixed maturities, available-for-sale	(1,818,569		)	(1,009,516		)	(1,599,114		)	(1,818,569		)
Mortgage loans on real estate	(117,720		)	(131,172		)	(335,324		)	(117,720		)
Limited partnership interests, other corporation interests and other investments	(1,593		)	(123		)	(4,555		)	(1,593		)
Net change in short-term investments	(546,036		)	(2,170,798		)	(439,510		)	(546,036		)
Net change in policy loans	(29		)	(141		)	279			(29		)
Purchases of furniture, equipment and software	(12,064		)	(23,451		)
Purchases of furniture, equipment, and software							(9,978		)	(12,064		)
Net cash used in investing activities	(417,168		)	(254,214		)	(507,290		)	(417,168		)

Cash flows from financing activities:
Contract deposits	851,509			428,073			778,744			851,509
Contract withdrawals	(510,660		)	(401,887		)	(543,572		)	(510,660		)
Net change in due to/from parent and affiliates	(11,274		)	16,067			(2,921		)	(11,274		)
Dividends paid	(73,401		)	(77,309		)	(77,000		)	(73,401		)
Payments for and interest paid on financing element derivatives, net	(3,000		)	(4,169		)	(1,870		)	(3,000		)
Net change in commercial paper borrowings	5,800			(8,600		)	(404		)	5,800
Net change in book overdrafts	92			(1,722		)	(12,672		)	92
Employee taxes paid for withheld shares							(180		)	(433		)
Income tax benefit on share-based compensation	141			275			—			141
Net cash provided by (used in) financing activities	259,207			(49,272		)
Net cash provided by financing activities							140,125			258,774

Net decrease in cash	(15,654		)	(4,643		)
Cash, beginning of year	34,362			12,775
Cash, end of period	$	18,708		$	8,132
Net decrease in cash and cash equivalents							(5,401		)	(15,654		)
Cash and cash equivalents, beginning of year							18,321			34,362
Cash and cash equivalents, end of period							$	12,920		$	18,708



See notes to condensed consolidated financial statements.		(Continued)

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31, ~~2016,~~2017, and ~~2015~~2016

(In Thousands)

(Unaudited)


	Three Months Ended March 31,						Three Months Ended March 31,
	2016			2015			2017			2016
Supplemental disclosures of cash flow information:
Net cash paid during the year for:
Income taxes	$	(8,305	)	$	(11,488	)	$	(3,139	)	$	(8,305	)
Interest	(140		)	(56		)	(3,199		)	(140		)

Non-cash investing and financing transactions during the years:
Share-based compensation expense	$	534		$	525		$	420		$	534



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.~~company formed in 1998. GWL&A Financial is a direct wholly-owned subsidiary of Great-West Lifeco U.S. ~~Inc.~~LLC (“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,~~2016, 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 months ended March 31, ~~2016,~~2017, 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.~~2016.

In the opinion of management, these statements include all normal recurring adjustments necessary to fairly present the Company’s condensed consolidated results of operations, financial position, and cash flows as of March 31, ~~2016,~~2017, and for all periods presented. The condensed consolidated results of operations and condensed consolidated statement of cash flows for the three months ended March 31, ~~2016,~~2017, 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. Application of Recent Accounting Pronouncements

Recently adopted accounting pronouncements

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The new guidance is effective for the fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and requires a modified retrospective, a retrospective or a prospective transition approach depending upon the type of change. The new guidance changed several aspects of the accounting for share-based payment award transactions, including: (i) income tax consequences when awards vest or are settled; (ii) classification of awards as either equity or liabilities due to statutory tax withholding requirements; and (iii) classification on the statement of cash flows. The adoption of this ASU did not have a material effect on the Company’s condensed consolidated financial statements.

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

~~2. Acquisitions~~

~~Putnam Retirement Business~~

~~Description of transaction~~

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

~~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”)., effective for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted. The ~~update outlines~~guidance may be applied retrospectively for all periods presented or retrospectively with a ~~comprehensive model for accounting for revenue arising from contracts with customers and supersedes most current~~cumulative-effect adjustment at the date of adoption. The new guidance will supersede nearly all existing revenue recognition guidance ~~including industry-specific guidance. While~~under U.S. GAAP; however, it will not impact the ~~update does not apply to~~accounting for insurance and investment 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~~financial services insurance, leases, financial instruments and ~~record-keeping services, and investment advisory services.~~guarantees. The core principle of the model requires that an entity ~~should recognize~~recognizes 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’s implementation efforts are primarily focused on certain fee income earned from assets under management, assets under administration, shareholder servicing, administration and recordkeeping services, and investment advisory services as well as the ~~Company may use either~~evaluation of certain incremental costs to obtain a ~~full retrospective or a modified retrospective approach. The update is effective for public business entities for interim~~customer contract which are to be deferred and ~~annual periods beginning after December 15, 2017, based upon an update issued by~~recognized over the ~~FASB in August 2015. Early adoption is permitted as of accounting periods beginning after December 15, 2016.~~expected customer life. The Company ~~is currently evaluating~~continues to evaluate the impact of this update on its condensed 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

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~~Notes to Condensed Consolidated Financial Statements~~

~~(Dollars in Thousands)~~

~~(Unaudited)~~

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).~~ , effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for the instrument-specific credit risk provision. 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~~eliminating certain disclosure requirements related to ~~identify impairment, use of exit price notion when measuring the fair value of~~ financial instruments ~~for disclosure purposes, separate presentation~~measured at amortized cost and adding disclosures related to the measurement categories 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 significant assumptions used to estimate fair value of a financial instrument measured at amortized cost on the balance sheet,liabilities, 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~~clarifying 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 iseffective 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 condensed consolidated financial ~~statements.~~statements and anticipates the primary change to be the requirement for equity investments such as limited partnership interests, that are currently accounted for under the cost method, to be measured at fair value with changes in the fair value recognized in net income.

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. This update requires organizations to recognize lease assets and lease liabilities on the balance sheet with lease terms of more than 12 months and also disclose certain qualitative and quantitative information about leasing arrangements. The Company’s implementation efforts are primarily focused on the review of its existing lease contracts and performing a completeness assessment over the lease population. The Company is currently evaluating the impact of this update on its condensed consolidated financial statements.

In ~~March~~June 2016, the FASB issued ASU ~~2016-05,~~ 2016-13,~~Derivative Contract Novations~~ Financial Instruments: Credit Losses: Measurement of Credit Losses on Financial Instruments, . 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.~~2019. Early adoption is permitted for fiscal years beginning after December 15, 2018. This update 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 account for debt instruments. The Company is currently evaluating the impact of this update on its condensed consolidated financial statements.

In ~~March~~August 2016, the FASB issued ASU ~~2016-06,~~2016-15, ~~Derivatives~~Statement of Cash Flows: Classification of Certain Cash Receipts and ~~Hedging: Contingent Put and Call Options in Debt Instruments~~Cash Payments (a consensus of the Emerging Issues Task Force), ~~. The amendments clarify the steps required to assess whether a call or put option meets the criteria for bifurcation as an embedded derivative. The update is~~ effective for fiscal years and interim periods within those beginning after December 15, ~~2016. The Company does not expect this update to have a material impact on the Company’s financial statements.~~

~~In March 2016, the FASB issued~~2017. Early adoption is permitted. This ASU ~~2016-07,~~ ~~Investments - Equity Method~~addresses diversity in how certain cash receipts 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 increasecash payments are presented and classified in the ~~level~~statement of ~~ownership interest or degree of influence. The update is effective for fiscal years and interim periods within those beginning after December 15, 2016.~~cash flows. The Company is currently evaluating the impact of this update on its condensed 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 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 financial statements.

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(Dollars in Thousands)

(Unaudited)

In ~~April~~November 2016, the FASB issued ASU ~~2016-10,~~2016-18, ~~Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. The amendments are intended to reduce the cost and complexity~~Statement of ~~applying the guidance on identifying promised goods or services and to improve the operability and understandability~~Cash Flows: Restricted Cash (a consensus of the ~~licensing implementation guidance. The~~Emerging Issues Task Force), effective ~~date~~ for ~~this~~fiscal years and interim periods within those beginning after December 15, 2017. Early adoption is permitted. This update isrequires organizations to show the ~~same as~~changes in the ~~effective date for ASU 2014-09.~~total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The Company is currently evaluating the impact of this update on its condensed consolidated financial statements.

In ~~May 2016,~~January 2017, the FASB issued ASU ~~2016-12~~2017-04, Intangibles - Goodwill and Other, ~~Revenue~~effective for annual or any interim goodwill impairment tests after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The update eliminates Step 2 from ~~Contracts~~the goodwill impairment test and will require management to perform its goodwill impairment test by comparing the fair value of a reporting unit with ~~Customers: Narrow-Scope Improvements and Practical Expedients. The standard amends guidance in~~its carrying amount. Any amount by which the ~~new revenue standard on collectibility, noncash consideration, presentation of sales tax, and transition and are intended~~carrying amount exceeds the reporting unit’s fair value (not to ~~address implementation issues~~exceed the goodwill allocated to that ~~were raised by stakeholders and provide additional practical expedients. The effective date for this update~~reporting unit) is ~~the same~~recognized as ~~the effective date for ASU 2014-09.~~an impairment charge. The Company is currently evaluating the impact of this update on its condensed consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, effective for annual reporting periods beginning on or after December 15, 2017, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual period. This update requires organizations to disaggregate the service cost component from the other components of net benefit costs in the income statement and present it with other current compensation costs for the related employees and present while providing guidance for capitalization eligibility for service costs. The Company is currently evaluating the impact of this update in its condensed consolidated financial statements.

4.3. Dividends

The maximum amount of dividends, which can be paid to stockholders by insurance companies domiciled in the State of Colorado, is subject to restrictions relating to statutory surplus and statutory net gain from operations. Prior to the payment of any dividends, the Company seeks approval from the Colorado Insurance Commissioner. During the three months ended March 31, ~~2016,~~2017, and ~~2015,~~2016, the Company paid dividends of ~~$73,401~~$77,000 and ~~$77,309,~~$73,401, respectively, to its parent, GWL&A Financial.

5.4. Summary of Investments

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


	March 31, 2016											March 31, 2017
	Amortized		Gross unrealized		Gross unrealized		Estimated fair value		OTTI (gain) loss			Amortized		Gross unrealized		Gross unrealized		Estimated fair value		OTTI (gain) loss
Fixed maturities:	cost		gains		losses		and carrying value		included in AOCI ⁽¹⁾			cost		gains		losses		and carrying value		included in AOCI ⁽¹⁾
U.S. government direct obligations and U.S. agencies	$	2,306,623	$	89,965	$	741	$	2,395,847	$	—		$	1,813,394	$	46,163	$	19,189	$	1,840,368	$	—
Obligations of U.S. states and their subdivisions	1,942,741		290,203		1,166		2,231,778		—			1,889,794		215,426		5,121		2,100,099		—
Foreign government securities	2,250		—		3		2,247		—
Corporate debt securities ⁽²⁾	12,768,568		652,028		224,945		13,195,651		(1,733		)	14,270,203		512,816		229,442		14,553,577		(1,248		)
Asset-backed securities	1,627,812		123,351		15,742		1,735,421		(81,066		)	1,443,721		101,214		16,671		1,528,264		(70,463		)
Residential mortgage-backed securities	105,454		3,808		880		108,382		(43		)	124,522		4,200		996		127,726		(106		)
Commercial mortgage-backed securities	1,122,101		41,831		4,068		1,159,864		—			1,353,588		23,313		18,836		1,358,065		—
Collateralized debt obligations	8,920		69		—		8,989		—			532,580		1,693		36		534,237		—
Total fixed maturities	$	19,884,469	$	1,201,255	$	247,545	$	20,838,179	$	(82,842	)	$	21,427,802	$	904,825	$	290,291	$	22,042,336	$	(71,817	)

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

⁽²⁾ ~~Includes perpetual debt investments with amortized cost of $149,062 and estimated fair value of $107,421.~~

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(Dollars in Thousands)

(Unaudited)

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 $115,037 and estimated fair value of $105,162.


	December 31, 2015											December 31, 2016
	Amortized		Gross unrealized		Gross unrealized		Estimated fair value		OTTI (gain) loss			Amortized		Gross unrealized		Gross unrealized		Estimated fair value		OTTI (gain) loss
Fixed maturities:	cost		gains		losses		and carrying value		included in AOCI ⁽¹⁾			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	$	—		$	3,022,279	$	47,791	$	34,958	$	3,035,112	$	—
Obligations of U.S. states and their subdivisions	1,988,214		238,862		7,903		2,219,173		50			1,890,568		214,411		6,317		2,098,662		—
Foreign government securities	2,291		—		5		2,286		—
Corporate debt securities ⁽²⁾	12,388,886		437,207		320,381		12,505,712		(1,810		)	13,811,597		477,316		309,164		13,979,749		(1,488		)
Asset-backed securities	1,196,326		128,406		13,362		1,311,370		(86,474		)	1,226,493		104,274		18,388		1,312,379		(72,464		)
Residential mortgage-backed securities	122,146		4,734		1,508		125,372		(123		)	138,292		3,867		1,167		140,992		23
Commercial mortgage-backed securities	1,009,320		19,117		11,529		1,016,908		—			1,222,257		23,207		20,182		1,225,282		—
Collateralized debt obligations	9,112		—		58		9,054		—			361,241		339		53		361,527		—
Total fixed maturities	$	20,007,462	$	883,519	$	359,354	$	20,531,627	$	(88,357	)	$	21,672,727	$	871,205	$	390,229	$	22,153,703	$	(73,929	)

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

⁽²⁾ Includes perpetual debt investments with amortized cost of ~~$149,062~~$135,187 and estimated fair value of ~~$116,423.~~$113,239.

See Note 87 for additional discussion regarding fair value measurements.

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


	March 31, 2016				March 31, 2017
	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
Maturing in one year or less	$	691,217	$	716,630	$	644,280	$	662,742
Maturing after one year through five years	3,663,240		3,892,707		3,845,273		4,018,406
Maturing after five years through ten years	5,699,079		5,940,455		6,950,269		7,068,702
Maturing after ten years	5,023,933		5,288,230		5,073,643		5,282,788
Mortgage-backed and asset-backed securities	4,807,000		5,000,157		4,914,337		5,009,698
Total fixed maturities	$	19,884,469	$	20,838,179	$	21,427,802	$	22,042,336

Mortgage-backed (commercial and residential) and asset-backed securities include those issued by the U.S. government and U.S. agencies.

~~The following table summarizes information regarding the sales of securities classified as available-for-sale:~~

Three Months Ended March 31,
2016 2015
Proceeds from sales $ 1,682,893
$ 2,658,671
Gross realized gains from sales 19,857
23,351
Gross realized losses from sales 11
20

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Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

The following table summarizes information regarding the sales of securities classified as available-for-sale:



	Three Months Ended March 31,
	2017		2016
Proceeds from sales	$	1,580,522	$	1,682,893
Gross realized gains from sales	12,433		19,857
Gross realized losses from sales	15,257		11

Included in net investment income are unrealized gains (losses) of ~~$12,622~~$(277) and ~~$908~~$12,622 for the three months ended March 31, ~~2016,~~2017, and ~~2015,~~2016, respectively, on held-for-trading fixed maturity investments still held at period end.

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


	March 31, 2016			December 31, 2015			March 31, 2017			December 31, 2016
Principal	$	3,271,087		$	3,242,627		$	3,843,130		$	3,558,863
Unamortized premium (discount) and fees, net	7,107			7,967			4,909			5,541
Foreign exchange translation							(1,799		)	(2,696		)
Mortgage provision allowance	(2,882		)	(2,890		)	(1,309		)	(2,882		)
Total mortgage loans	$	3,275,312		$	3,247,704		$	3,844,931		$	3,558,826

The following table summarizes the recorded investment of the mortgage loan portfolio by risk assessment category as of March 31, ~~2016,~~2017, and December 31, ~~2015, respectively.~~2016, respectively:


	March 31, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Performing	$	3,276,729	$	3,249,129	$	3,844,775	$	3,560,243
Non-performing	1,465		1,465		1,465		1,465
Total	$	3,278,194	$	3,250,594	$	3,846,240	$	3,561,708

The following table summarizes activity in the mortgage provision allowance:


	Three Months Ended March 31, 2016			Year Ended December 31, 2015		Three Months Ended March 31, 2017			Year Ended December 31, 2016
	Commercial mortgages			Commercial mortgages		Commercial mortgages			Commercial mortgages
Beginning balance	$	2,890		$	2,890	$	2,882		$	2,890
Provision increases	536			—		—			536
Provision decreases	(544		)	—		(1,573		)	(544		)
Ending balance	$	2,882		$	2,890	$	1,309		$	2,882

Allowance ending balance by basis of impairment method:
Individually evaluated for impairment	$	536		$	—	$	536		$	536
Collectively evaluated for impairment	2,346			2,890		773			2,346

Recorded investment balance in the mortgage loan portfolio, gross of allowance, by basis of impairment method:	$	3,278,194		$	3,250,594	$	3,846,240		$	3,561,708
Individually evaluated for impairment	13,922			14,031		1,465			1,465
Collectively evaluated for impairment	3,264,272			3,236,563		3,844,775			3,560,243

Limited partnership and other corporation interests — At March 31, ~~2016,~~2017, and December 31, ~~2015,~~2016, the Company had ~~$37,077~~$37,948 and ~~$40,980,~~$34,895, 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

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Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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 ~~$34,601~~$35,565 and ~~$38,504~~$32,444 at March 31, ~~2016,~~2017, and December 31, ~~2015,~~2016, respectively.

~~Special deposits~~ — The Company had securities on deposit with government authorities as required by certain insurance laws with fair values of $7,014 and $14,000 at March 31, 2016, and December 31, 2015, respectively.

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~~GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Dollars in Thousands)~~

~~(Unaudited)~~

Securities lending — Securities with a cost or amortized cost of ~~$169,660 and zero,~~$164,390 and estimated fair values of ~~$167,578 and zero,~~$160,012 were on loan under the program at March 31, ~~2016, and~~2017. There were no securities on loan at December 31, ~~2015, respectively.~~2016. The Company received cash of ~~$107,654 and zero,~~$94,531 and securities with a fair value of ~~$64,776 and zero,~~$70,537 as collateral at March 31, ~~2016, and December 31, 2015, respectively.~~2017. 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.

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


	March 31, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Securities lending transactions
Cash collateral liability by class of loaned security
U.S. government direct obligations and U.S. agencies	$	7,091	$	—	$	1,025	$	—
Corporate debt securities	160,487		—		93,506		—
Total secured borrowings	$	167,578	$	—
Total					$	94,531	$	—

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:


	March 31, 2016												March 31, 2017
	Less than twelve months				Twelve months or longer				Total				Less than twelve months				Twelve months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
Fixed maturities:	fair value		loss and OTTI		fair value		loss and OTTI		fair value		loss and OTTI		fair value		loss and OTTI		fair value		loss and OTTI		fair value		loss and OTTI
U.S. government direct obligations and U.S. agencies	$	50,371	$	439	$	53,275	$	302	$	103,646	$	741	$	1,254,124	$	18,974	$	10,181	$	215	$	1,264,305	$	19,189
Obligations of U.S. states and their subdivisions	10,796		143		78,883		1,023		89,679		1,166		165,820		4,641		10,394		480		176,214		5,121
Foreign government securities	2,248		3		—		—		2,248		3
Corporate debt securities	2,052,304		74,189		865,541		150,756		2,917,845		224,945		3,711,201		121,580		880,097		107,862		4,591,298		229,442
Asset-backed securities	388,520		5,968		207,508		9,774		596,028		15,742		458,552		4,905		271,982		11,766		730,534		16,671
Residential mortgage-backed securities	4,858		9		18,107		871		22,965		880		5,755		18		13,386		978		19,141		996
Commercial mortgage-backed securities	143,070		2,254		61,814		1,814		204,884		4,068		630,766		16,473		35,929		2,363		666,695		18,836
Collateralized debt obligations													30,980		36		—		—		30,980		36
Total fixed maturities	$	2,652,167	$	83,005	$	1,285,128	$	164,540	$	3,937,295	$	247,545	$	6,257,198	$	166,627	$	1,221,969	$	123,664	$	7,479,167	$	290,291

Total number of securities in an unrealized loss position			246				155				401				554				132				686

1615

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)


	December 31, 2015												December 31, 2016
	Less than twelve months				Twelve months or longer				Total				Less than twelve months				Twelve months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
Fixed maturities:	fair value		loss and OTTI		fair value		loss and OTTI		fair value		loss and OTTI		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	$	2,006,588	$	34,752	$	10,526	$	206	$	2,017,114	$	34,958
Obligations of U.S. states and their subdivisions	267,581		7,903		—		—		267,581		7,903		216,154		5,922		10,498		395		226,652		6,317
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		4,119,630		170,453		860,153		138,711		4,979,783		309,164
Asset-backed securities	247,082		4,372		182,404		8,990		429,486		13,362		316,065		6,971		230,331		11,417		546,396		18,388
Residential mortgage-backed securities	—		—		18,625		1,508		18,625		1,508		16,962		102		14,297		1,065		31,259		1,167
Commercial mortgage-backed securities	429,175		11,154		44,498		375		473,673		11,529		592,508		17,535		26,068		2,647		618,576		20,182
Collateralized debt obligations	9,054		58		—		—		9,054		58		160,612		53		—		—		160,612		53
Total fixed maturities	$	6,725,965	$	230,467	$	821,922	$	128,887	$	7,547,887	$	359,354	$	7,428,519	$	235,788	$	1,151,873	$	154,441	$	8,580,392	$	390,229

Total number of securities in an unrealized loss position			558				106				664				610				128				738

Fixed maturity investments — Total unrealized losses and OTTI decreased by ~~$111,809,~~$99,938, or ~~31%~~26%, from December 31, ~~2015,~~2016, to March 31, ~~2016.~~2017. The majority, or $69,161, of the decrease was in the less than twelve months category. The overall decrease in unrealized losses was across ~~most~~all asset classes and reflects lower interest rates at March 31, ~~2016,~~2017, compared to December 31, ~~2015,~~2016, resulting in generally higher valuations of these fixed maturity securities.

Total unrealized losses greater than twelve months ~~increased~~decreased by ~~$35,653~~$30,777 from December 31, ~~2015,~~2016, to March 31, ~~2016.~~2017. Corporate debt securities account for ~~92%~~87%, or ~~$150,756,~~$107,862, of the unrealized losses and OTTI greater than twelve months at March 31, ~~2016.~~2017. Non-investment grade corporate debt securities account for ~~$19,440~~$7,851 of the unrealized losses and OTTI greater than twelve months, and ~~$13,166~~$2,176 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%10% of the unrealized losses and OTTI greater than twelve months at March 31, ~~2016.~~2017. The present value of the cash flows expected to be collected is not less than amortized cost and management does not have the intent to sell these assets; therefore, an OTTI was not recognized in earnings.

Other-than-temporary impairment recognition — The OTTI on fixed maturity securities where the loss portion is bifurcated and the credit related component is recognized in realized investment gains (losses) is summarized as follows:


	Three Months Ended March 31,						Three Months Ended March 31,
	2016			2015			2017			2016
Beginning balance	$	102,343		$	119,532		$	83,665		$	102,343
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	(3,927		)	(4,329		)	(3,306		)	(3,927		)
Ending balance	$	98,416		$	115,653		$	80,359		$	98,416

~~Table of Contents~~

~~GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Dollars in Thousands)~~

~~(Unaudited)~~

6.5. 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.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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 ~~$77,578~~$49,235 and ~~$76,107~~$38,324 as of March 31, ~~2016,~~2017, and December 31, ~~2015,~~2016, respectively. The Company had pledged collateral related to these derivatives of ~~$33,155~~zero and ~~$45,940~~zero as of March 31, ~~2016,~~2017, and December 31, ~~2015,~~2016, respectively, in the normal course of business. If the credit-risk-related contingent features were triggered on March 31, ~~2016,~~2017, the fair value of assets that could be required to settle the derivatives in a net liability position was ~~$44,422.~~$49,235.

At March 31, ~~2016,~~2017, and December 31, ~~2015,~~2016, the Company had pledged ~~$33,155~~zero and ~~$50,924~~zero of unrestricted cash collateral to counterparties in the normal course of business, while other counterparties had pledged ~~$22,450~~$80,145 and ~~$19,060~~$103,214 of unrestricted cash collateral to the Company to satisfy collateral netting agreements, respectively.

At March 31, ~~2016,~~2017, the Company estimated ~~$4,651~~$10,436 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.

~~Table of Contents~~

~~GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Dollars in Thousands)~~

~~(Unaudited)~~

~~Cross-currency~~Foreign currency contracts

Cross-currency swaps and foreign currency forwards 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. The Company uses foreign currency forwards to reduce the risk of foreign currency exchange rate changes on proceeds received on sales of foreign denominated debt instruments; however, hedge accounting is not elected.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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:


	March 31, 2016									March 31, 2017
			Net derivatives			Asset derivatives		Liability derivatives				Net derivatives			Asset derivatives		Liability derivatives
	Notional amount		Fair value			Fair value ⁽¹⁾		Fair value ⁽¹⁾		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	$	11,443		$	13,867	$	2,424	$	419,800	$	37,308		$	37,308	$	—
Cross-currency swaps	389,294		25,518			29,992		4,474		666,577		32,731			43,652		10,921
Total cash flow hedges	809,094		36,961			43,859		6,898		1,086,377		70,039			80,960		10,921

Total derivatives designated as hedges	809,094		36,961			43,859		6,898		1,086,377		70,039			80,960		10,921

Derivatives not designated as hedges:
Interest rate swaps	361,100		13,850			21,619		7,769		486,100		(6,708		)	8,187		14,895
Futures on equity indices	32,259		—			—		—		31,433		—			—		—
Interest rate futures	137,500		—			—		—		74,600		—			—		—
Interest rate swaptions	144,704		179			179		—		162,464		265			265		—
Other forward contracts	1,687,650		3,056			4,161		1,105		2,538,450		6,784			7,817		1,033
Cross-currency swaps	662,935		(38,149		)	21,716		59,865		612,733		19,152			42,071		22,919
Total derivatives not designated as hedges	3,026,148		(21,064		)	47,675		68,739		3,905,780		19,493			58,340		38,847
Total derivative financial instruments	$	3,835,242	$	15,897		$	91,534	$	75,637	$	4,992,157	$	89,532		$	139,300	$	49,768

⁽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.

1918

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)


	December 31, 2015									December 31, 2016
			Net derivatives			Asset derivatives		Liability derivatives				Net derivatives			Asset derivatives		Liability derivatives
	Notional amount		Fair value			Fair value ⁽¹⁾		Fair value ⁽¹⁾		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	$	—	$	419,800	$	33,390		$	33,390	$	—
Cross-currency swaps	380,873		28,714			28,736		22		614,208		45,347			53,641		8,294
Total cash flow hedges	524,673		40,557			40,579		22		1,034,008		78,737			87,031		8,294

Total derivatives designated as hedges	524,673		40,557			40,579		22		1,034,008		78,737			87,031		8,294

Derivatives not designated as hedges:
Interest rate swaps	303,600		3,240			8,295		5,055		468,100		(4,358		)	8,982		13,340
Futures on equity indices	29,310		—			—		—		34,422		—			—		—
Interest rate futures	117,200		—			—		—		81,500		—			—		—
Interest rate swaptions	151,204		189			189		—		165,534		354			354		—
Cross-currency swaps	662,935		(51,759		)	19,537		71,296		612,733		33,371			50,018		16,647
Total derivatives not designated as hedges	1,264,249		(48,330		)	28,021		76,351		1,362,289		29,367			59,354		29,987
Total derivative financial instruments	$	1,788,922	$	(7,773	)	$	68,600	$	76,373	$	2,396,297	$	108,104		$	146,385	$	38,281

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

Notional amounts are used to express the extent of the Company’s involvement in derivative transactions and represent a standard measurement of the volume of its derivative activity. Notional amounts represent those amounts used to calculate contractual flows to be exchanged and are not paid or received. The average notional outstanding during the three months ended March 31, ~~2016,~~2017, was ~~$620,400, $1,050,124, $165,772, $146,329,~~$897,400, $1,239,581, $114,425, $163,232, and ~~$1,324,717~~$1,545,788 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,~~2016, was ~~$443,589, $937,242, $111,801, $212,299,~~$784,900, $1,141,967, $145,658, $156,632, and ~~$5,014,845~~$2,230,167 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)						Gain (loss) recognized in OCI on derivatives (Effective portion)						Gain (loss) reclassified from OCI into net income (Effective portion)
	Three Months Ended March 31,					Three Months Ended March 31,						Three Months Ended March 31,						Three Months Ended March 31,
	2016			2015		2016		2015				2017			2016			2017			2016
Cash flow hedges:
Interest rate swaps	$	525		$	3,141	$	1,494	$	1,856		(A)	$	(148	)	$	525		$	1,220		$	1,494	(A)
Interest rate swaps												3,843			—			(880		)	—		(B)
Cross-currency swaps	(2,129		)	14,014		992		423			(A)	(10,650		)	(2,129		)	1,102			992		(A)
Interest rate futures	—			—		—		(21		)	(A)
Total cash flow hedges	$	(1,604	)	$	17,155	$	2,486	$	2,258			$	(6,955	)	$	(1,604	)	$	1,442		$	2,486

(A) Net investment income.

(B) Interest expense.

2019

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

Gain (loss) on derivatives
recognized in net income Gain (loss) on hedged assets
recognized in net income
Three Months Ended March 31, Three Months Ended March 31,
2016 2015 2016 2015
Fair value hedges:

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

Interest rate swaps —
630
(B) —
—

Items hedged in interest rate swaps —
—
—
1,443
(A)
Items hedged in interest rate swaps —
—
—
(630 ) (B)
Total fair value hedges $ —
$ (808 ) $ —
$ 813

~~(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 derivatives recognized in net income
	Three Months Ended March 31,								Three Months Ended March 31,
	2016				2015				2017				2016
Derivatives not designated as hedging instruments:
Futures on equity indices	$	(230	)	(A)	$	147		(A)	$	(684	)	(A)	$	(230	)	(A)
Futures on equity indices	(1,441		)	(B)	(723		)	(B)	(1,284		)	(B)	(1,441		)	(B)
Interest rate swaps	10,622			(A)	2,822			(A)	(1,549		)	(A)	10,622			(A)
Interest rate futures	(204		)	(A)	(151		)	(A)	(14		)	(A)	(204		)	(A)
Interest rate futures	(32		)	(B)	135			(B)	5			(B)	(32		)	(B)
Interest rate swaptions	134			(A)	910			(A)	(27		)	(A)	134			(A)
Interest rate swaptions	(195		)	(B)	(987		)	(B)	(74		)	(B)	(195		)	(B)
Other forward contracts	3,056			(A)	16,825			(A)	6,784			(A)	3,056			(A)
Other forward contracts	2,938			(B)	(9,340		)	(B)	(5,597		)	(B)	2,938			(B)
Cross-currency swaps	12,199			(A)	45,046			(A)	(14,168		)	(A)	12,199			(A)
Total derivatives not designated as hedging instruments	$	26,847			$	54,684			$	(16,608	)		$	26,847

(A) Net investment income.

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

Embedded derivative - Guaranteed Lifetime Withdrawal Benefit

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

The estimated fair value of the GLWB was ~~$21,707~~$4,042 and ~~$11,257~~$5,712 at March 31, ~~2016,~~2017, and December 31, ~~2015,~~2016, respectively. The changes in fair value of the GLWB were ~~$10,450~~$1,670 and ~~$2,770~~$(10,450) for the three months ended March 31, ~~2016,~~2017, and ~~2015,~~2016, respectively.

~~Table of Contents~~

~~GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Dollars in Thousands)~~

~~(Unaudited)~~

7.6. Summary of Offsetting Assets and Liabilities

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

March 31, 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⁾

$ 77,202

$ (48,039 )
$ 22,217

$ 6,946
Derivative instruments (liabilities) ⁽³⁾
69,160
(48,039 ) (20,817 ) 304



	March 31, 2017
			Gross fair value not offset
			in balance sheets
	Gross fair value of		Financial			Cash collateral			Net
Financial instruments (assets):	recognized assets ⁽¹⁾		instruments			received			fair value
Derivative instruments ⁽²⁾	$	104,020	$	(35,694	)	$	(65,290	)	$	3,036
Short-term reverse repurchase agreement ⁽³⁾	34,500		(34,500		)	—			—
Total financial instruments (assets)	138,520		(70,194		)	(65,290		)	3,036

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

March 31, 2017

Gross fair value not offset

in balance sheets

Gross fair value of

Financial

Cash collateral

Net

Financial instruments (liabilities):

recognized liabilities ⁽¹⁾

instruments

pledged

fair value

Derivative instruments ⁽⁴⁾

35,943

(35,694

)

—

249

⁽¹⁾The gross fair value of derivative instrument and short-term reverse repurchase agreement 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 short-term reverse repurchase agreement assets is reported in short-term investments in the condensed consolidated balance sheets. The collateral is held by an independent third-party custodian under a tri-party agreement.

⁽⁴⁾The estimated fair value of derivative instrument liabilities is reported in other liabilities in the condensed consolidated balance sheets. Derivative transactions entered into under ISDA master agreements include income and expense accruals.


	December 31, 2015										December 31, 2016
			Gross fair value not offset										Gross fair value not offset
			in balance sheets										in balance sheets
	Gross fair value of		Financial			Cash collateral			Net		Gross fair value of		Financial			Cash collateral		Net
Financial instruments:	recognized assets/liabilities ⁽¹⁾		instruments			received/(pledged)			fair value		recognized assets/liabilities ⁽¹⁾		instruments			received/(pledged)		fair value
Derivative instruments (assets) ⁽²⁾	$	66,435	$	(38,236	)	$	19,060		$	9,139	$	119,862	$	(26,254	)	$	92,756	$	852
Derivative instruments (liabilities) ⁽³⁾	76,107		(38,236		)	(37,871		)	—		26,254		(26,254		)	—		—

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

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

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

8.7. 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								Assets and liabilities measured at fair value on a recurring basis
	March 31, 2016								March 31, 2017
	Quoted prices		Significant						Quoted prices		Significant
	in active markets for identical assets (Level 1)		other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total		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	$	—	$	2,395,847	$	—	$	2,395,847	$	—	$	1,840,368	$	—	$	1,840,368
Obligations of U.S. states and their subdivisions	—		2,231,778		—		2,231,778		—		2,100,099		—		2,100,099
Foreign government securities	—		2,247		—		2,247
Corporate debt securities	—		13,180,109		15,542		13,195,651		—		14,542,646		10,931		14,553,577
Asset-backed securities	—		1,735,421		—		1,735,421		—		1,528,264		—		1,528,264
Residential mortgage-backed securities	—		108,382		—		108,382		—		127,726		—		127,726
Commercial mortgage-backed securities	—		1,159,864		—		1,159,864		—		1,358,065		—		1,358,065
Collateralized debt obligations	—		8,989		—		8,989		—		534,237		—		534,237
Total fixed maturities available-for-sale	—		20,822,637		15,542		20,838,179		—		22,031,405		10,931		22,042,336
Fixed maturities held-for-trading:
U.S. government direct obligations and U.S. agencies	—		511,509		—		511,509		—		129,296		—		129,296
Corporate debt securities	—		56,991		—		56,991		—		55,249		—		55,249
Commercial mortgage-backed securities	—		1,111		—		1,111		—		1,072		—		1,072
Total fixed maturities held-for-trading	—		569,611		—		569,611		—		185,617		—		185,617
Short-term investments	369,283		439,232		—		808,515		262,866		481,197		—		744,063
Collateral under securities lending agreements	107,654		—		—		107,654		94,531		—		—		94,531
Collateral under derivative counterparty collateral agreements	55,605		—		—		55,605		80,145		—		—		80,145
Derivative instruments designated as hedges:
Interest rate swaps	—		13,867		—		13,867		—		37,308		—		37,308
Cross-currency swaps	—		29,992		—		29,992		—		43,652		—		43,652
Derivative instruments not designated as hedges:
Interest rate swaps	—		21,619		—		21,619		—		8,187		—		8,187
Interest rate swaptions	—		179		—		179		—		265		—		265
Other forward contracts	—		4,161		—		4,161		—		7,817		—		7,817
Cross-currency swaps	—		21,716		—		21,716		—		42,071		—		42,071
Total derivative instruments	—		91,534		—		91,534		—		139,300		—		139,300
Separate account assets	15,170,321		12,069,460		—		27,239,781
Separate account assets ⁽¹⁾									15,849,064		11,330,972		—		27,597,906
Total assets	$	15,702,863	$	33,992,474	$	15,542	$	49,710,879	$	16,286,606	$	34,168,491	$	10,931	$	50,883,898

Liabilities
Payable under securities lending agreements	$	107,654	$	—	$	—	$	107,654	$	94,531	$	—	$	—	$	94,531
Collateral under derivative counterparty collateral agreements	22,450		—		—		22,450		80,145		—		—		80,145
Derivative instruments designated as hedges:
Interest rate swaps	—		2,424		—		2,424
Cross-currency swaps	—		4,474		—		4,474		—		10,921		—		10,921
Derivative instruments not designated as hedges:
Interest rate swaps	—		7,769		—		7,769		—		14,895		—		14,895
Other forward contracts	—		1,105		—		1,105		—		1,033		—		1,033
Cross-currency swaps	—		59,865		—		59,865		—		22,919		—		22,919
Total derivative instruments	—		75,637		—		75,637		—		49,768		—		49,768
Embedded derivatives - GLWB	—		—		21,707		21,707		—		—		4,042		4,042
Separate account liabilities ⁽¹⁾	38		256,885		—		256,923
Separate account liabilities ⁽²⁾									26		409,044		—		409,070
Total liabilities	$	130,142	$	332,522	$	21,707	$	484,371	$	174,702	$	458,812	$	4,042	$	637,556

⁽¹⁾Included in the total fair value amount are $418 million of investments as of March 31, 2017 for which the fair value is estimated using net asset value per unit as a practical expedient which are excluded from the disclosure requirement to classify amounts in the fair value hierarchy in connection with the adoption of ASU 2015-07.

⁽¹⁾⁽²⁾Includes only separate account instruments which are carried at the fair value of the underlying liabilities owned by the separate accounts.

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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								Assets and liabilities measured at fair value on a recurring basis
	December 31, 2015								December 31, 2016
	Quoted prices		Significant						Quoted prices		Significant
	in active markets for identical assets (Level 1)		other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total		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	$	—	$	3,035,112	$	—	$	3,035,112
Obligations of U.S. states and their subdivisions	—		2,219,173		—		2,219,173		—		2,098,662		—		2,098,662
Foreign government securities	—		2,286		—		2,286
Corporate debt securities	—		12,501,174		4,538		12,505,712		—		13,968,110		11,639		13,979,749
Asset-backed securities	—		1,311,370		—		1,311,370		—		1,312,379		—		1,312,379
Residential mortgage-backed securities	—		125,372		—		125,372		—		140,992		—		140,992
Commercial mortgage-backed securities	—		1,016,908		—		1,016,908		—		1,225,282		—		1,225,282
Collateralized debt obligations	—		9,054		—		9,054		—		361,527		—		361,527
Total fixed maturities available-for-sale	—		20,527,089		4,538		20,531,627		—		22,142,064		11,639		22,153,703
Fixed maturities held-for-trading:
U.S. government direct obligations and U.S. agencies	—		558,208		—		558,208		—		458,067		—		458,067
Corporate debt securities	—		56,566		—		56,566		—		55,591		—		55,591
Commercial mortgage-backed securities	—		1,065		—		1,065		—		1,080		—		1,080
Total fixed maturities held-for-trading	—		615,839		—		615,839		—		514,738		—		514,738
Short-term investments	132,288		134,738		—		267,026		267,851		36,137		—		303,988
Collateral under derivative counterparty collateral agreements	69,984		—		—		69,984		103,214		—		—		103,214
Derivative instruments designated as hedges:
Interest rate swaps	—		11,843		—		11,843		—		33,390		—		33,390
Cross-currency swaps	—		28,736		—		28,736		—		53,641		—		53,641
Derivative instruments not designated as hedges:
Interest rate swaps	—		8,295		—		8,295		—		8,982		—		8,982
Interest rate swaptions	—		189		—		189		—		354		—		354
Cross-currency swaps	—		19,537		—		19,537		—		50,018		—		50,018
Total derivative instruments	—		68,600		—		68,600		—		146,385		—		146,385
Separate account assets	15,249,966		11,381,227		—		26,631,193
Separate account assets ⁽¹⁾									15,407,992		11,199,924		—		27,037,765
Total assets	$	15,452,238	$	32,727,493	$	4,538	$	48,184,269	$	15,779,057	$	34,039,248	$	11,639	$	50,259,793

Liabilities
Collateral under derivative counterparty collateral agreements	$	19,060	$	—	$	—	$	19,060	$	103,214	$	—	$	—	$	103,214
Derivative instruments designated as hedges:
Cross-currency swaps	—		22		—		22		—		8,294		—		8,294
Derivative instruments not designated as hedges:
Interest rate swaps	—		5,055		—		5,055		—		13,340		—		13,340
Cross-currency swaps	—		71,296		—		71,296		—		16,647		—		16,647
Total derivative instruments	—		76,373		—		76,373		—		38,281		—		38,281
Embedded derivatives - GLWB	—		—		11,257		11,257		—		—		5,712		5,712
Separate account liabilities ⁽¹⁾	24		290,293		—		290,317
Separate account liabilities ⁽²⁾									55		336,468		—		336,523
Total liabilities	$	19,084	$	366,666	$	11,257	$	397,007	$	103,269	$	374,749	$	5,712	$	483,730

⁽¹⁾Included in the total fair value amount are $430 million of investments as of December 31, 2016 for which the fair value is estimated using net asset value per unit as a practical expedient which are excluded from the disclosure requirement to classify amounts in the fair value hierarchy in connection with the adoption of ASU 2015-07.

⁽²⁾ Includes only separate account instruments which are carried at the fair value of the underlying liabilities owned by the separate accounts.

2423

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

The methods and assumptions used to estimate the fair value of 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~~evaluated prices from independent pricing services. In cases where ~~market~~these 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~~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.

2524

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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



	Recurring Level 3 financial assets and liabilities
	Three Months Ended March 31, 2017
	Assets			Liabilities
	Fixed maturities available-for-sale			Embedded
	Corporate			derivatives
	debt securities			- GLWB
Balances, January 1, 2017	$	11,639		$	5,712
Realized and unrealized gains (losses) included in:
Net income (loss)	—			1,670
Other comprehensive income (loss)	(364		)	—
Settlements	(344		)	—
Balances, March 31, 2017	$	10,931		$	4,042
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 March 31, 2017	$	—		$	1,670


	Recurring Level 3 financial assets and liabilities					Recurring Level 3 financial assets and liabilities
	Three Months Ended March 31, 2016					Three Months Ended March 31, 2016
	Assets			Liabilities		Assets			Liabilities
	Fixed maturities available-for-sale			Embedded		Fixed maturities available-for-sale			Embedded
	Corporate			derivatives		Corporate			derivatives
	debt securities			- GLWB		debt securities			- GLWB
Balances, January 1, 2016	$	4,538		$	11,257	$	4,538		$	11,257
Realized and unrealized gains (losses) included in:
Net income	—			10,450
Other comprehensive income	366			—
Net income (loss)						—			(10,450		)
Other comprehensive income (loss)						366			—
Settlements	(598		)	—		(598		)	—
Transfers into Level 3 ⁽¹⁾	11,236			—		11,236			—
Balances, March 31, 2016	$	15,542		$	21,707	$	15,542		$	21,707
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 March 31, 2016	$	—		$	10,450	$	—		$	(10,450	)

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

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

Recurring Level 3 financial assets and liabilities

Three Months Ended March 31, 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) —
—
—
2,770
Other comprehensive income (loss) (28 )
—
(28 ) —
Settlements (485 )
(3 ) (488 ) —
Balances, March 31, 2015 $ 5,329

$ 33
$ 5,362
$ 9,177
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets and liabilities held at March 31, 2015 $ —

$ —
$ —
$ 2,770



			Range
	Valuation Technique	Unobservable Input	March 31, 2017	December 31, 2016
Embedded derivatives - GLWB	Risk neutral stochastic valuation methodology	Equity volatility	15% - 28%	15% - 30%
		Swap curve	1.38% - 2.66%	0.75% - 3.00%
		Mortality rate	Based on the Annuity 2000 Mortality Table	Based on the Annuity 2000 Mortality Table
		Base Lapse rate	1% - 15%	1% - 15%

2625

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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:~~

March 31, 2016
Fair Value Valuation Technique Unobservable Input Range
Embedded derivatives - GLWB $ 21,707
Risk neutral stochastic valuation methodology Equity volatility 15% - 28%
Swap curve 0.85% - 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 and investments not carried at fair value on a recurring basis:


	March 31, 2016				December 31, 2015				March 31, 2017				December 31, 2016
	Carrying		Estimated		Carrying		Estimated		Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value		amount		fair value		amount		fair value
Assets
Mortgage loans on real estate	$	3,275,312	$	3,463,079	$	3,247,704	$	3,362,496	$	3,844,931	$	3,915,687	$	3,558,826	$	3,574,240
Policy loans	4,069,236		4,069,236		4,092,661		4,092,661		4,016,844		4,016,844		4,019,648		4,019,648
Limited partnership interests	33,372		32,725		35,039		34,882		32,579		31,947		29,345		29,822
Other investments	14,459		44,723		14,596		44,723		13,935		44,243		14,382		44,687

Liabilities
Annuity contract benefits without life contingencies	$	11,428,441	$	11,492,552	$	11,104,721	$	10,839,205	$	12,383,984	$	12,249,498	$	12,291,378	$	12,129,631
Policyholders’ funds	262,651		262,651		299,577		299,577		241,167		241,167		285,554		285,554
Commercial paper	99,171		99,171		93,371		93,371		98,645		98,645		99,049		99,049
Notes payable	541,840		562,486		532,575		563,633		534,339		528,415		531,092		495,004

~~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 1one to 10 years. The estimated fair value is classified as Level 3.

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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 2.3.

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.

9.8. Other Comprehensive Income

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


	Three Months Ended March 31, 2016															Three Months Ended March 31, 2017
	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			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
Balances, January 1, 2017																$	311,748	$	67,076		$	(58,646	)	$	(84,303	)	$	235,875
Other comprehensive income (loss) before reclassifications	290,296			(1,043		)	(49,556		)	—			239,697			84,649		(4,521		)	(18,503		)	—			61,625
Amounts reclassified from AOCI	(12,980		)	(1,616		)	—			1,452			(13,144		)	1,896		(937		)	—			1,395			2,354
Net current period other comprehensive income (loss)	277,316			(2,659		)	(49,556		)	1,452			226,553			86,545		(5,458		)	(18,503		)	1,395			63,979
Balances, March 31, 2016	$	616,836		$	42,625		$	(115,341	)	$	(84,129	)	$	459,991
Balances, March 31, 2017																$	398,293	$	61,618		$	(77,149	)	$	(82,908	)	$	299,854

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)


	Three Months Ended March 31, 2015															Three Months Ended March 31, 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			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
Balances, January 1, 2016																$	339,520		$	45,284		$	(65,785	)	$	(85,581	)	$	233,438
Other comprehensive income (loss) before reclassifications	117,894			11,151			(22,834		)	(215		)	105,996			290,296			(1,043		)	(49,556		)	—			239,697
Amounts reclassified from AOCI	(18,316		)	(1,468		)	—			1,907			(17,877		)	(12,980		)	(1,616		)	—			1,452			(13,144		)
Net current period other comprehensive income (loss)	99,578			9,683			(22,834		)	1,692			88,119			277,316			(2,659		)	(49,556		)	1,452			226,553
Balances, March 31, 2015	$	883,761		$	42,824		$	(131,028	)	$	(104,420	)	$	691,137
Balances, March 31, 2016																$	616,836		$	42,625		$	(115,341	)	$	(84,129	)	$	459,991

~~Table of Contents~~

~~GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Dollars in Thousands)~~

~~(Unaudited)~~

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


	Three Months Ended March 31, 2016									Three Months Ended March 31, 2017
	Before-tax			Tax (expense)			Net-of-tax			Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount			amount			benefit			amount
Unrealized holding gains (losses), net, arising on fixed maturities, available-for-sale	$	446,610		$	(156,314	)	$	290,296		$	130,229		$	(45,580	)	$	84,649
Unrealized holding gains (losses), net, arising on cash flow hedges	(1,604		)	561			(1,043		)	(6,955		)	2,434			(4,521		)
Reclassification adjustment for (gains) losses, net, realized in net income	(22,456		)	7,860			(14,596		)	1,475			(516		)	959
Net unrealized gains (losses) related to investments	422,550			(147,893		)	274,657			124,749			(43,662		)	81,087
Future policy benefits, DAC and VOBA adjustments	(76,240		)	26,684			(49,556		)	(28,466		)	9,963			(18,503		)
Net unrealized gains (losses)	346,310			(121,209		)	225,101			96,283			(33,699		)	62,584
Employee benefit plan adjustment	2,234			(782		)	1,452			2,146			(751		)	1,395
Other comprehensive income (loss)	$	348,544		$	(121,991	)	$	226,553		$	98,429		$	(34,450	)	$	63,979


	Three Months Ended March 31, 2015									Three Months Ended March 31, 2016
	Before-tax			Tax (expense)			Net-of-tax			Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount			amount			benefit			amount
Unrealized holding gains (losses), net, arising on fixed maturities, available-for-sale	$	181,375		$	(63,481	)	$	117,894		$	446,610		$	(156,314	)	$	290,296
Unrealized holding gains (losses), net, arising on cash flow hedges	17,155			(6,004		)	11,151			(1,604		)	561			(1,043		)
Reclassification adjustment for (gains) losses, net, realized in net income	(30,437		)	10,653			(19,784		)	(22,456		)	7,860			(14,596		)
Net unrealized gains (losses) related to investments	168,093			(58,832		)	109,261			422,550			(147,893		)	274,657
Future policy benefits, DAC and VOBA adjustments	(35,129		)	12,295			(22,834		)	(76,240		)	26,684			(49,556		)
Net unrealized gains (losses)	132,964			(46,537		)	86,427			346,310			(121,209		)	225,101
Employee benefit plan adjustment	2,603			(911		)	1,692			2,234			(782		)	1,452
Other comprehensive income (loss)	$	135,567		$	(47,448	)	$	88,119		$	348,544		$	(121,991	)	$	226,553

3028

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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 March 31,									Three Months Ended March 31,
	2016				2015					2017				2016
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	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	$	(19,970	)		$	(28,179	)		Other realized investment (gains) losses, net	$	2,917			$	(19,970	)		Other realized investment (gains) losses, net
	(19,970		)		(28,179		)		Total before tax	2,917				(19,970		)		Total before tax
	(6,990		)		(9,863		)		Tax expense or benefit	1,021				(6,990		)		Tax expense or benefit
	$	(12,980	)		$	(18,316	)		Net of tax	$	1,896			$	(12,980	)		Net of tax

Unrealized holding (gains) losses, net, arising on cash flow hedges	$	(2,486	)		$	(2,258	)		Net investment income	$	(2,322	)		$	(2,486	)		Net investment income
	(2,486		)		(2,258		)		Total before tax	880				—				Interest Expense
	(870		)		(790		)		Tax expense or benefit	(1,442		)		(2,486		)		Total before tax
	$	(1,616	)		$	(1,468	)		Net of tax	(505		)		(870		)		Tax expense or benefit
										$	(937	)		$	(1,616	)		Net of tax

Amortization of employee benefit plan items
Prior service (benefits)	$	(151	)	⁽¹⁾	$	(181	)	⁽¹⁾		$	73		⁽¹⁾	$	(151	)	⁽¹⁾
Actuarial (gains)	2,385			⁽¹⁾	3,115			⁽¹⁾		2,073			⁽¹⁾	2,385			⁽¹⁾
	2,234				2,934				Total before tax	2,146				2,234				Total before tax
	782				1,027				Tax expense or benefit	751				782				Tax expense or benefit
	$	1,452			$	1,907			Net of tax	$	1,395			$	1,452			Net of tax

Total reclassification	$	(13,144	)		$	(17,877	)		Net of tax	$	2,354			$	(13,144	)		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 109 for additional details).

~~Table of Contents~~

~~GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Dollars in Thousands)~~

~~(Unaudited)~~

~~10.~~9. Employee Benefit Plans

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


	Three Months Ended March 31,																							Three Months Ended March 31,
	Defined Benefit Pension Plan						Post-Retirement Medical Plan						Supplemental Executive Retirement Plan					Total						Defined Benefit Pension Plan						Post-Retirement Medical Plan						Supplemental Executive Retirement Plan						Total
	2016			2015			2016			2015			2016			2015		2016			2015			2017			2016			2017			2016			2017			2016			2017			2016
Components of net periodic cost (benefit):
Service cost	$	1,335		$	1,509		$	293		$	264		$	73		$	70	$	1,701		$	1,843		$	(2,067	)	$	1,335		$	357		$	293		$	(4	)	$	73		$	(1,714	)	$	1,701
Interest cost	6,282			5,997			175			126			444			531		6,901			6,654			6,121			6,282			188			175			405			444			6,714			6,901
Expected return on plan assets	(6,278		)	(7,087		)	—			—			—			—		(6,278		)	(7,087		)	(5,118		)	(6,278		)	—			—			—			—			(5,118		)	(6,278		)
Amortization of unrecognized prior service costs (benefits)	—			3			(276		)	(417		)	125			233		(151		)	(181		)	—			—			(52		)	(276		)	125			125			73			(151		)
Amortization of losses (gains) from earlier periods	2,485			3,106			(85		)	(157		)	(15		)	166		2,385			3,115			2,199			2,485			(113		)	(85		)	(13		)	(15		)	2,073			2,385
Net periodic cost (benefit)	$	3,824		$	3,528		$	107		$	(184	)	$	627		$	1,000	$	4,558		$	4,344		$	1,135		$	3,824		$	380		$	107		$	513		$	627		$	2,028		$	4,558

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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 ~~$816~~$678 with respect to its Post-Retirement Medical Plan and ~~$3,337~~$3,336 with respect to its Supplemental Executive Retirement Plan during the year ended December 31, ~~2016.~~2017. The Company expects to make contributions of zero to its Defined Benefit Pension Plan during the year ended December 31, ~~2016.~~2017. A December 31 measurement date is used for the employee benefit plans.

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


	Three Months Ended March 31,		Three Months Ended March 31,
	2016	2015	2017	2016
Payments to the Post-Retirement Medical Plan	204	133	169	204
Payments to the Supplemental Executive Retirement Plan	834	2,335	834	834

~~Table of Contents~~

~~GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Dollars in Thousands)~~

~~(Unaudited)~~

~~11.~~10. Income Taxes

The provision for income taxes is comprised of the following:

Three Months Ended March 31,
2016 2015
Current $ 10,640

$ 28,094
Deferred 13,398
23,802
Total income tax provision $ 24,038
$ 51,896



	Three Months Ended March 31,
	2017		2016
Current expense	$	12,959	$	10,640
Deferred expense	4,158		13,398
Total income tax provision	$	17,117	$	24,038

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


	Three Months Ended March 31,				Three Months Ended March 31,
	2016		2015		2017		2016
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%	35.0	%
Income tax effect of:
Investment income not subject to federal tax	(2.3	)%	(2.0	)%	(3.3	)%	(2.3	)%
Tax credits	(16.3	)%	(0.2	)%	(0.8	)%	(16.3	)%
State income taxes, net of federal benefit	2.3	%	1.3	%	1.8	%	2.3	%
Other, net	0.9	%	0.4	%	0.3	%	0.9	%
Effective income tax rate	19.6	%	34.5	%	33.0	%	19.6	%

During the three months ended March 31, ~~2016,~~2017, and ~~2015,~~2016, the Company recorded an increase in unrecognized tax benefits in the amount of ~~$1,843~~$1,994 and ~~$2,695,~~$1,843 respectively. The Company anticipates additional ~~increases~~decreases to its unrecognized tax benefits of ~~$5,000~~$7,000 to ~~$7,000~~$9,000 in the next twelve months. The Company expects that the majority of the ~~increase~~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~~2012 and prior. Tax years ~~2012~~2013 through ~~2014~~2015 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.

~~Table of Contents~~

~~GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Dollars in Thousands)~~

~~(Unaudited)~~

~~12.~~11. 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

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

resources based upon the results of Lifeco U.S. and other U.S. affiliates prepared in accordance with International Financial Reporting Standards. The CODM, in his capacity as CEO of the Company, reviews the Company’s financial information only

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

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

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

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

Individual Markets

The Individual Markets reporting and operating segment distributes life insurance ~~annuity,~~ and ~~retirement~~individual annuity 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”) (“the GWSC operating segment”), corporate items not directly allocated to the other operating segments, and interest expense on long-term debt.

The accounting principles used to determine segment results are the same as those used in the consolidated financial statements. The Company evaluates performance of its reportable segments based on their profitability from operations after income taxes. Inter-segment transactions and balances have been eliminated in consolidation. The Company’s operations are not materially dependent on one or a few customers, brokers, or agents. The following tables summarize segment financial information:



	Three Months Ended March 31, 2017
	Individual		Empower
	Markets		Retirement			Other			Total
Revenue:
Premium income	$	131,559	$	91		$	20,591		$	152,241
Fee income	25,981		227,320			1,815			255,116
Other revenue	—		2,384			—			2,384
Net investment income	184,205		117,620			11,646			313,471
Realized investment gains (losses), net	584		(12,316		)	(22		)	(11,754		)
Total revenues	342,329		335,099			34,030			711,458
Benefits and expenses:
Policyholder benefits	270,088		47,629			21,711			339,428
Operating expenses	38,386		255,764			25,933			320,083
Total benefits and expenses	308,474		303,393			47,644			659,511
Income (loss) before income taxes	33,855		31,706			(13,614		)	51,947
Income tax expense (benefit)	11,650		10,426			(4,959		)	17,117
Net income (loss)	$	22,205	$	21,280		$	(8,655	)	$	34,830

3431

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

~~The following tables summarize segment financial information:~~



	Three Months Ended March 31, 2016
	Individual		Empower
	Markets		Retirement		Other			Total
Revenue:
Premium income	$	133,286	$	346	$	21,295		$	154,927
Fee income	22,724		200,923		1,420			225,067
Other revenue	—		3,149		—			3,149
Net investment income	207,693		110,534		13,558			331,785
Realized investment gains (losses), net	11,806		19,471		(7		)	31,270
Total revenues	375,509		334,423		36,266			746,198
Benefits and expenses:
Policyholder benefits	267,497		49,917		19,329			336,743
Operating expenses	37,223		231,640		17,928			286,791
Total benefits and expenses	304,720		281,557		37,257			623,534
Income (loss) before income taxes	70,789		52,866		(991		)	122,664
Income tax expense (benefit)	23,834		651		(447		)	24,038
Net income (loss)	$	46,955	$	52,215	$	(544	)	$	98,626

Three Months Ended March 31, 2015
Individual Empower
Markets Retirement Other Total
Revenue:

Premium income $ 124,962
$ —
$ 20,741
$ 145,703
Fee income 21,502
202,821
954
225,277
Other revenue —
1,820
—
1,820
Net investment income 217,653
127,730
13,473
358,856
Realized investment gains (losses), net 8,400
9,800
—
18,200
Total revenues 372,517
342,171
35,168
749,856
Benefits and expenses:

Policyholder benefits 256,323
49,045
22,303
327,671
Operating expenses 35,941
221,030
14,706
271,677
Total benefits and expenses 292,264
270,075
37,009
599,348
Income (loss) before income taxes 80,253
72,096
(1,841 ) 150,508
Income tax expense (benefit) 28,222
24,380
(706 ) 51,896
Net income (loss) $ 52,031
$ 47,716
$ (1,135 ) $ 98,612

~~Table of Contents~~

~~GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Dollars in Thousands)~~

~~(Unaudited)~~

~~13.~~12. 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

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

Commissioners), at anytime. The Company was in compliance with all covenants at March 31, ~~2016,~~2017, and December 31, ~~2015.~~2016. At March 31, ~~2016,~~2017, and December 31, ~~2015,~~2016, 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 ~~$1,169,670~~$1,154,380 and renews annually until it expires on July 3, 2027. The second letter of credit is for $70,000 and renews annually until it expires on December 31, 2017. At March 31, ~~2016,~~2017, and December 31, ~~2015,~~2016, there were no outstanding amounts related to the letters of credit.

In addition, the Company has other letters of credit with a total amount of $9,095, renewable annually for an indefinite period of time. At March 31, ~~2016,~~2017, and December 31, ~~2015,~~2016, there were no outstanding amounts related to those letters of credit.

The Company makes commitments to fund partnership interests, mortgage loans on real estate, and other investments in the normal course of its business. The amounts of these unfunded commitments at March 31, ~~2016,~~2017, and December 31, ~~2015,~~2016, were ~~$205,160~~$550,139 and ~~$50,692,~~$438,458, of which ~~$28,010~~$88,903 and ~~$8,692~~$93,440 were related to cost basis limited partnership interests, respectively, all of which is due within one year from the dates indicated.

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

The Company 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 ~~are at their early stages.~~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.~~13. Subsequent Events

On April ~~28, 2016,~~26, 2017, the Company’s Board of Directors declared a dividend of ~~$31,430,~~$60,301 payable on June 15, ~~2016,~~2017, 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 ~~this report.~~the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments, some of which may be global or national in scope, such as general economic conditions and interest rates, some of which may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation, and others of which may relate to the Company specifically, such as credit, volatility, and other risks associated with its investment portfolio and other factors.

Readers should also consider other matters, including any risks and uncertainties, discussed in documents filed by the Company and certain of its subsidiaries with the Securities and Exchange Commission. The following discussion addresses the Company’s results of operations for the three months ended March 31, ~~2016,~~2017, compared with the same period in ~~2015. The~~2016. This discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2015,~~2016, 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~~has completed its program activities related to ~~incur strategic and~~integrating the J.P. Morgan Retirement Plan Services business, ~~development expenses as it focuses on enhancements, which will improve~~improving the client-facing experience as well as ~~streamline~~streamlining 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 $126 million already invested by March 31, 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 months ended March 31, 2016, these costs have decreased net earnings by $6 million.

The Company has set an annual costs savings target of $40 to $50 million pre-tax. Integration activities are expected to be completed by the second quarter of 2017 with the annual reduction of operating costs 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, which launched in the third quarter of 2015, with over 350 professionals based in India, as well as scale-driven cost improvements. Ongoing operations will include amortization expense from system and infrastructure enhancements.processing. 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 approximately 8.2 million at March 31, 2017 from over 8 million at December 31, 2016.

Synergies have been achieved through efficiencies from the conversion of business onto a single back-office platform, increased utilization of Great West Global, which launched in the third quarter of 2015, with over 600 professionals based in India, as well as scale-driven cost improvements. The impact of these synergies has been mostly offset by the reinvestment in ongoing development as well as customer acquisition and retention.

On April 6, 2016, the U.S. Department of Labor (“DOL”) 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~~was generally be required by April 10, 2017 (certain parts by January 1, 2018). On April 4, 2017, the DOL extended the general compliance date for the rule from April 10, 2017 to June 9, 2017 (with no extension of the January 1, 2018 date). The Company ~~is in the process of analyzing~~has analyzed the rule against current business ~~practices in its Empower Retirement and Individual Markets businesses.~~practices. The rule ~~may require~~requires 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. The Company is continuing with its implementation plan for compliance with the new June 9, 2017 compliance date.

The Company continues to monitor the potential for significant policy changes following the 2016 U.S. elections, including corporate tax reform which would have an impact on the Company’s deferred tax assets and liabilities as well as the effective tax rate in subsequent periods.

Current Market Conditions

The ~~financial markets strengthened during the three months ended~~S&P 500 index at March 31, ~~2016.~~2017 was up by 6% compared to January 1, 2017. The S&P 500 index as at March 31, 2016 was up by less than 1% compared to January 1, 2016. The ~~S&P 500 index at March 31, 2015 was up by less than 1% when compared to January 1, 2015. The~~ average of the S&P 500 index was up by 19% during the three months ended March 31, ~~2016, was down by 5%~~2017, when compared to the same period in ~~2015.~~2016.


	2016		2015		2017		2016
S&P 500 Index	Close	Average in Quarter	Close	Average in Quarter	Close	Average in Quarter	Close	Average in Quarter
March 31	2,060	1,952	2,068	2,064	2,363	2,324	2,060	1,952
January 1	2,044		2,059		2,239		2,044

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~~increased for the three months ended March 31, ~~2016,~~2017, when compared to the same period in ~~2015, as a result of higher average account balances partially offset by decreased average performance of the U.S. equities market.~~

~~Interest rates decreased during~~2016. For the three months ended March 31, ~~2016.~~ 2017, the variance was primarily due to higher asset-based fees, driven by growth in these assets, due to positive net cash flows and higher average equity market levels.

The 10-year U.S. Treasury rate at March 31, 2017, was down by 10 basis points as compared to January 1, 2017. The rate at March 31, 2016 was down by 49 basis points as compared to January 1, 2016. The ~~rate at March 31, 2015 was down by 23 basis points as compared to January 1, 2015. The~~ average of the 10-year U.S. Treasury rate during the three months ended March 31, ~~2016,~~2017, was ~~down~~up by 654 basis points when compared to ~~the same period in 2015.~~

2016.


	2016				2015				2017				2016
10-Year Treasury Rate	Close		Average in Quarter		Close		Average in Quarter		Close		Average in Quarter		Close		Average in Quarter
March 31	1.78	%	1.91	%	1.94	%	1.97	%	2.35	%	2.45	%	1.78	%	1.91	%
January 1	2.27	%			2.17	%			2.45	%			2.27	%

Unrealized gains on fixed maturity investments fluctuate with changes in the prevailing interest rates. When interest rates decrease, market values of fixed maturity investments generally increase. The Company has recorded in other comprehensive income favorable changes in unrealized gains (losses), net, on fixed maturity investments, of $134 million for the three months ended March 31, 2017, compared to favorable changes of $430 million for the three months ended March 31, 2016. This resulted in an increase in accumulated other comprehensive income (loss), net of policy holder related amounts, and deferred taxes.

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~~some derivative instruments, ~~when~~ hedge accounting is not ~~elected,~~elected; therefore all gains or losses from these transactions are recorded in the condensed 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.~~net income. For the three months ended March 31, ~~2016,~~2017, the Company recorded ~~unfavorable changes in unrealized gains (losses), net, of $14 million,~~realized losses on forward settling to be announced (“TBA”) securities asof $6 million, compared to ~~the same period~~gains of $3 million in ~~2015. Additionally, the realized gains (losses), net, on forward settling TBA securities had favorable changes of $12 million for~~2016. For the three months ended March 31, ~~2016, as compared to~~2017, the ~~same period in 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 March 31, 2016, fixed maturity investments' unrealized investment gains (losses), net, recognizedCompany recorded losses in net investment income ~~had a favorable change~~on cross-currency swaps of $14 million, as compared to ~~the same period~~gains of $12 million in 2015. The Company also recorded in other comprehensive income favorable changes in unrealized gains (losses), net, on fixed maturity investments, of $430 million for the three months ended March 31, 2016, and favorable changes of $156 million for the three months ended March 31, 2015, respectively. The realized gains (losses), net, on fixed maturity investments had an unfavorable change of $1 million for the three months ended March 31, 2016, as compared to the same period in 2015.2016.

Reconciliation of Net Income to Adjusted Operating Income

The Company uses the same accounting policies and procedures to measure adjusted 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 adjusted operating income as net income, excluding realized and unrealized gains and losses on investments and derivatives and their related tax effect. ~~Operating~~Adjusted 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 adjusted operating income measures may not be comparable to similarly titled measures reported by other companies.

Three months ended March 31, ~~2016,~~2017 compared with the three months ended March 31, ~~2015~~2016

The Company believes that the presentation of adjusted 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~~Adjusted 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 adjusted operating income:


	Three Months Ended March 31,						Increase			Percentage		Three Months Ended March 31,						Increase			Percentage
Income statement data (In millions)	2016			2015			(decrease)			change		2017			2016			(decrease)			change
Net (loss) income
Individual Markets segment	$	47		$	52		$	(5	)	(10	)%	$	22		$	47		$	(25	)	(53	)%
Empower Retirement segment	52			48			4			8	%	21			52			(31		)	(60	)%
Other segment	(1		)	(1		)	—			—	%	(8		)	(1		)	(7		)	700	%
Total net (loss) income	98			99			(1		)	(1	)%	35			98			(63		)	(64	)%
Adjustments to net (loss) income
Unrealized investment gains (losses), net	28			62			(34		)	(55	)%	(3		)	28			(31		)	(111	)%
Realized investment gains (losses), net	31			18			13			72	%	(12		)	31			(43		)	(139	)%
Pro-rata tax (expense) benefit⁽¹⁾	(21		)	(28		)	7			(25	)%	5			(21		)	26			(124	)%
Operating income	$	60		$	47		$	13		28	%
Adjusted operating income (loss)												$	45		$	60		$	(15	)	(25	)%

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

Unrealized investment gains (losses), net, had an unfavorable change of ~~$34~~$31 million, or ~~55%~~111%, tofrom a gain of $28 million ~~during the three months ended March 31,~~in 2016 ~~when compared~~ to ~~the same period~~a loss of $3 million in ~~2015.~~2017. The ~~primary driver of the~~ change was due to a ~~$34~~$29 million unfavorable change from derivatives in addition to an unfavorable change of $6 million from bonds, partially offset by a ~~$14~~favorable change of $4 million from forward settling TBA securities.

Realized investment gains (losses), net, had an unfavorable change of $43 million, or 139%, from a gain of $31 million in 2016 to a loss of $12 million in 2017. The change was due to a $36 million unfavorable change from bonds, a $9 million unfavorable change from forward settling TBA securities, partially offset by a ~~$14 million favorable change from bonds.~~

Realized investment gains (losses), net, had a favorable change of $13 million, or 72%, to $31 million during the three months ended March 31, 2016, when compared to the same period in 2015. The change was primarily driven by a $12 million favorable change from forward settling TBA securities in addition to a $2 million favorable change from ~~mortgage gains, partially offset by a $1 million unfavorable change from other investments.~~mortgages.

Pro-rata tax expense ~~decreased~~changed by $7$26 million, ~~from $28~~to a benefit of $5 million in ~~2015~~2017, primarily due to ~~$21 million in 2016 resulting from~~ the unfavorable change in total unrealized and realized investment gains (losses), net.

Company Results of Operations

Three months ended March 31, ~~2016,~~2017 compared with the three months ended March 31, ~~2015~~2016

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


	Three Months Ended March 31,				Increase			Percentage		Three Months Ended March 31,				Increase			Percentage
Income statement data (In millions)	2016		2015		(decrease)			change		2017		2016		(decrease)			change
Premium income	$	155	$	146	$	9		6	%	$	153	$	155	$	(2	)	(1	)%
Fee income	225		225		—			—	%	255		225		30			13	%
Other revenue	3		2		1			50	%	2		3		(1		)	(33	)%
Net investment income	304		297		7			2	%
Total revenues	687		670		17			3	%
Adjusted net investment income										316		304		12			4	%
Total adjusted operating revenues										726		687		39			6	%
Policyholder benefits	337		328		9			3	%	339		337		2			1	%
Operating expenses	287		272		15			6	%	320		287		33			11	%
Total benefits and expenses	624		600		24			4	%	659		624		35			6	%
Income before income taxes	63		70		(7		)	(10	)%
Income tax (benefit) expense	3		23		(20		)	(87	)%
Operating income	$	60	$	47	$	13		28	%
Adjusted operating income (loss) before income taxes										67		63		4			6	%
Adjusted income tax (benefit) expense										22		3		19			633	%
Adjusted operating income (loss)										$	45	$	60	$	(15	)	(25	)%

The Company’s consolidated adjusted operating income ~~increased~~decreased by ~~$13~~$15 million, or ~~28%~~25%, to ~~$60~~$45 million for the three months ended March 31, ~~2016,~~2017, when compared to the same period in ~~2015.~~2016. The ~~increase~~decrease was primarily due to ~~lower~~increased operating expenses and adjusted income tax ~~expense.~~

expense, partially offset by higher fee income and favorable changes in adjusted net investment income.

~~Premium~~Fee income increased by $9$30 million, or 6%13%, to ~~$155~~$255 million for the three months ended March 31, ~~2016,~~2017, when compared to the same period in ~~2015.~~2016. This increase was primarily related to ~~the Company’s Individual Markets segment which had~~ an increase ~~of $9 million due to lower group health~~in asset-based variable fee income resulting from increased average asset levels driven by sales and ~~group life refunds.~~higher average equity market levels.

~~Net~~Adjusted net investment income increased by $7$12 million, or 2%4%, to ~~$304 million during the three months ended March 31, 2016, when compared~~$316 million. The increase was primarily related to ~~the same period in 2015. The primary driver of the change was~~ higher investment income earned on bonds, mortgages, and policy loans as a result of higher ~~volume~~invested asset balances, partially offset by lower ~~rates.~~yields.

~~Policyholder benefits~~Operating expenses increased by $9$33 million, or 3%11%, to ~~$337~~$320 million for the three months ended March 31, ~~2016,~~2017, when compared to the same period in 2015, primarily due to the Company’s Individual Markets segment which had an increase of $11 million. The increase was primarily driven by an increase in death claims of $36 million, partially offset by reserve released on death claims of $25 million.

~~Operating expenses increased by $15 million, or 6%, to $287 million for the three months ended March 31,~~ 2016 when compared to the same period in 2015 primarily due to the Company’s Empower Retirement segment which had an increase of $11 million. The increase was primarily attributable to a $24 million increase in operating expenses primarily from increased salaries and benefits as a result of increased headcount due to business growth. This increase was partially offset by a $13 million decrease in DAC amortization primarily due to higher ~~expected future profits.~~salaries and benefits and deferred acquisition costs (“DAC”) amortization.

~~Income~~Adjusted income tax expense ~~had a favorable change of $20~~increased by $19 million, from ~~$23 million in 2015 to~~an expense of $3 million in 2016 to $22 million in 2017 primarily due to ~~lower income taxes as a result of~~ a management election to claim foreign tax credits ~~in addition to decrease in operating income before tax.~~during 2016.

Individual Markets Segment Results of Operations

Three months ended March 31, ~~2016,~~2017 compared with the three months ended March 31, ~~2015~~2016

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


	Three Months Ended March 31,				Increase			Percentage		Three Months Ended March 31,				Increase			Percentage
Income statement data (In millions)	2016		2015		(decrease)			change		2017		2016		(decrease)			change
Premium income	$	134	$	125	$	9		7	%	$	132	$	134	$	(2	)	(1	)%
Fee income	23		22		1			5	%	26		23		3			13	%
Net investment income	186		186		—			—	%
Total revenues	343		333		10			3	%
Adjusted net investment income										190		186		4			2	%
Total adjusted operating revenues										348		343		5			1	%
Policyholder benefits	268		257		11			4	%	270		268		2			1	%
Operating expenses	37		36		1			3	%	38		37		1			3	%
Total benefits and expenses	305		293		12			4	%	308		305		3			1	%
Income before income taxes	38		40		(2		)	(5	)%
Income tax expense	11		14		(3		)	(21	)%
Operating income	$	27	$	26	$	1		4	%
Adjusted operating income (loss) before income taxes										40		38		2			5	%
Adjusted income tax (benefit) expense										14		11		3			27	%
Adjusted operating income (loss)										$	26	$	27	$	(1	)	(4	)%

~~Operating~~Adjusted operating income for the Individual Markets segment ~~increased by $1 million, or 4%, to $27 million,~~ during the three months ended March 31, ~~2016, when compared~~2017 was comparable to to the same period in ~~2015. The increase~~2016. This was primarily due to ~~higher premiums and lower~~favorable changes in adjusted net investment income, ~~tax expense~~ partially offset by ~~higher policyholder benefits.~~increased adjusted income tax expense.

~~Premium~~Adjusted net investment income ~~increased by $9~~had a favorable change of $4 million, or 7%2%, to ~~$134~~$190 million for the three months ended March 31, ~~2016,~~2017, when compared to the same period in ~~2015. This increase~~2016. The primary driver of the change was ~~primarily related to lower group health~~higher investment income on bonds and ~~group life refunds.~~

Policyholder benefits increased by $11 million, or 4%, to $268 million for the three months ended March 31, 2016, when compared to the same period in 2015, primarily driven by an increase in death claims of $36 million, partially offset by reserve released on death claims of $25 million.

~~Income tax expense decreased by $3 million, or 21%, to $11 million during the three months ended March 31, 2016, when compared to the same period in 2015, primarily~~mortgages as a result of ~~a management election~~higher invested asset balances, partially offset by lower yields.

Adjusted income tax expense increased by $3 million, from an expense of $11 million in 2016 to ~~claim foreign tax credits.~~$14 million in 2017 primarily due to favorable changes in net investment income.



				��

Empower Retirement Segment Results of Operations

Three months ended March 31, ~~2016,~~2017 compared with the three months ended March 31, ~~2015~~2016

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


	Three Months Ended March 31,					Increase			Percentage		Three Months Ended March 31,					Increase			Percentage
Income statement data (In millions)	2016			2015		(decrease)			change		2017		2016			(decrease)			change
Fee income	$	201		$	202	$	(1	)	—	%	$	227	$	201		$	26		13	%
Other revenue	3			2		1			50	%	2		3			(1		)	(33	)%
Net investment income	104			98		6			6	%
Total revenues	308			302		6			2	%
Adjusted net investment income											115		104			11			11	%
Total adjusted operating revenues											344		308			36			12	%
Policyholder benefits	50			49		1			2	%	48		50			(2		)	(4	)%
Operating expenses	232			221		11			5	%	256		232			24			10	%
Total benefits and expenses	282			270		12			4	%	304		282			22			8	%
Income before income taxes	26			32		(6		)	(19	)%
Income tax (benefit) expense	(8		)	10		(18		)	(180	)%
Operating income	$	34		$	22	$	12		55	%
Adjusted operating income (loss) before income taxes											40		26			14			54	%
Adjusted income tax (benefit) expense											13		(8		)	21			(263	)%
Adjusted operating income (loss)											$	27	$	34		$	(7	)	(21	)%

~~Operating~~Adjusted operating income for the Empower Retirement segment ~~increased~~decreased by ~~$12~~$7 million, or ~~55%~~21%, to ~~$34~~$27 million for the three months ended March 31, ~~2016,~~2017, when compared to the same period in ~~2015.~~2016. The ~~increase~~change was primarily due to ~~favorable~~higher operating expenses and adjusted income tax expense, ~~and higher net investment income~~ partially offset by ~~higher operating expenses.~~favorable fee income and adjusted net investment income.

~~Net investment~~Fee income increased by $6$26 million, or 6%13%, to ~~$104~~$227 million for the three months ended March 31, ~~2016,~~2017, when compared to the same period in ~~2015.~~2016. This increase was primarily related to an increase in asset-based variable fee income resulting from increased average asset levels driven by sales and higher average equity market levels.

Adjusted net investment income had a favorable change of $11 million, or 11%, to $115 million for the three months ended March 31, 2017, when compared to the same period in 2016. The primary driver of the change was higher investment income on bonds ~~mortgages,~~ and ~~policy loans~~mortgages as a result of higher ~~volume~~invested asset balances, partially offset by lower ~~rates.~~yields.

Operating expenses increased by ~~$11~~$24 million, or 5%10%, to ~~$232~~$256 million for the three months ended March 31, ~~2016,~~2017, when compared to the same period in ~~2015.~~2016. The increase was primarily ~~attributable~~due to ~~a $24 million increase in operating expenses primarily from increased~~higher salaries and benefits ~~as a result of increased headcount due to business growth. This increase was partially offset by a $13 million decrease in~~and DAC ~~amortization primarily due to expected higher future profits.~~amortization.

~~Income~~Adjusted income tax expense had ~~a favorable~~an unfavorable change of ~~$18~~$21 million, ~~from an~~or 263%, to $13 million for the three months ended March 31, 2017, when compared to the same period in 2016. The increased tax expense ~~of $10 million in 2015~~is primarily due to ~~a benefit of $8 million in 2016, primarily as a result of~~ a management election to claim foreign tax credits in addition to a decrease in adjusted operating income before ~~tax.~~tax during 2016.

Other Segment Results of Operations

Three months ended March 31, ~~2016,~~2017 compared with the three months ended March 31, ~~2015~~2016

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



	Three Months Ended March 31,						Increase			Percentage
Income statement data (In millions)	2017			2016			(decrease)			change
Premium income	$	21		$	21		$	—		—	%
Fee income	2			1			1			100	%
Adjusted net investment income	11			14			(3		)	(21	)%
Total adjusted operating revenues	34			36			(2		)	(6	)%
Policyholder benefits	21			19			2			11	%
Operating expenses	26			18			8			44	%
Total benefits and expenses	47			37			10			27	%
Adjusted operating income (loss) before income taxes	(13		)	(1		)	(12		)	1,200	%
Adjusted income tax (benefit) expense	(5		)	—			(5		)	100	%
Adjusted operating income (loss)	$	(8	)	$	(1	)	$	(7	)	700	%

Three Months Ended March 31, Increase Percentage
Income statement data (In millions) 2016 2015 (decrease) change
Premium income $ 21
$ 21
$ —
— %
Fee income 1
1
—
— %
Net investment income 14
13
1
8 %
Total revenues 36
35
1
3 %
Policyholder benefits 19
22
(3 ) (14 )%
Operating expenses 18
15
3
20 %
Total benefits and expenses 37
37
—
— %
Income before income taxes (1 ) (2 ) 1
(50 )%
Income tax benefit —
(1 ) 1
(100 )%
Operating loss $ (1 ) $ (1 ) $ —
— %

~~Operating~~Adjusted operating loss for the Company’s Other segment ~~remained the same~~increased by $7 million, or 700%, to a loss of $8 million for the three months ended March 31, ~~2016 and 2015.~~2017 compared to a loss of $1 million in 2016. The increase in adjusted operating loss was primarily due to higher operating expenses, partially offset by an increase in the adjusted income tax benefit.

Operating expenses increased by $8 million, or 44%, to $26 million for the three months ended March 31, 2017 primarily due to restructuring costs.

Adjusted income tax benefit increased by $5 million, or 100%, to a benefit of $7 million for the three months ended March 31, 2017 primarily due to a higher adjusted operating loss before tax.

Investment Operations

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

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

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


(In millions)	March 31, 2016				December 31, 2015				March 31, 2017				December 31, 2016
Fixed maturities, available-for-sale	$	20,838	70.4	%	$	20,532	71.3	%	$	22,042	71.4	%	$	22,154	72.4	%
Fixed maturities, held-for-trading	570		1.9	%	616		2.1	%	186		0.6	%	515		1.7	%
Mortgage loans on real estate	3,275		11.1	%	3,248		11.3	%	3,845		12.4	%	3,559		11.6	%
Policy loans	4,069		13.7	%	4,093		14.2	%	4,017		13.0	%	4,020		13.1	%
Short-term investments	809		2.7	%	266		0.9	%	743		2.4	%	303		1.0	%
Limited partnership and other corporation interests	37		0.1	%	41		0.1	%	38		0.1	%	35		0.1	%
Other investments	15		0.1	%	15		0.1	%	15		0.1	%	15		0.1	%
Total investments	$	29,613	100.0	%	$	28,811	100.0	%	$	30,886	100.0	%	$	30,601	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 independent external rating agencies and the ~~rating agencies. The Company’s internal rating methodology~~Company generally ~~takes into account~~considers ratings from ~~Standard & Poor’s Ratings Services, Fitch Ratings, and Moody’s Investor Services, Inc.~~several of these major ratings agencies to develop its internal rating. 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	March 31, 2016		December 31, 2015		March 31, 2017		December 31, 2016
AAA	25.8	%	27.8	%	23.4	%	27.3	%
AA	15.2	%	14.8	%	14.7	%	13.9	%
A	30.1	%	29.5	%	32.3	%	30.8	%
BBB	27.8	%	26.9	%	28.4	%	26.8	%
BB and below (Non-investment grade)	1.1	%	1.0	%	1.2	%	1.2	%
Total	100.0	%	100.0	%	100.0	%	100.0	%

The March 31, 2017, AAA rating percentage decreased as compared to December 31, 2016, as the Company sold AAA-rated government agency MBS pools to enter into forward settling TBA contracts which are treated as derivatives.

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


Sector	March 31, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Utility	18.8	%	17.6	%	18.6	%	18.1	%
Finance	10.4	%	10.2	%	11.9	%	10.8	%
Consumer	10.0	%	9.3	%	10.3	%	9.7	%
Natural resources	6.8	%	6.5	%	6.6	%	6.3	%
Transportation	3.4	%	3.2	%	4.1	%	3.6	%
Other	14.2	%	13.0	%	14.2	%	13.3	%

Mortgage Loans on Real Estate

The Company’s mortgage loans on real estate are comprised ~~exclusively~~primarily 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.~~types. 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, forwards, 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,~~2016, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Application of Recent Accounting Pronouncements

See Note 32 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 and cash equivalents that totaled ~~$649~~$279 million and ~~$301~~$322 million as of March 31, ~~2016,~~2017, and December 31, ~~2015,~~2016, respectively. The March 31, ~~2016,~~2017, and December 31, ~~2015,~~2016, short-term investments included above exclude any amounts held to settle TBA forward contracts. In addition, 99% of the fixed maturity portfolio carried an investment grade rating at March 31, ~~2016,~~2017, and December 31, ~~2015,~~2016, 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 $99 million and ~~$93~~$99 million of commercial paper outstanding as of March 31, ~~2016,~~2017, and December 31, ~~2015,~~2016, 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 three months ended March 31, ~~2016.~~2017. The Company does not anticipate the need for borrowings under this facility and the loss of its availability would not significantly impact its liquidity.

Capital resources provide protection for policyholders and financial strength to support the underwriting of insurance risks and allow for continued business growth. The amount of capital resources that may be needed is determined by the Company’s senior management and Board of Directors, as well as by regulatory requirements. The allocation of resources to new long-term business commitments is designed to achieve an attractive return, tempered by considerations of risk and the need to support the Company’s existing business.

Off-Balance Sheet Arrangements

The Company makes commitments to fund partnership interests, mortgage loans on real estate, and other investments in the normal course of its business. The amounts of these unfunded commitments at March 31, ~~2016,~~2017, and December 31, ~~2015,~~2016, were ~~$205~~$550 million and ~~$51~~$438 million, respectively. The precise timing of the fulfillment of the commitment cannot be predicted; however, these amounts are due within one year of the dates indicated. There are no other obligations or liabilities arising from such arrangements that are reasonably likely to become material.

The Company participates in a short-term reverse repurchase program for the purpose of enhancing the total return on its investment portfolio. This type of transaction involves the purchase of securities with a simultaneous agreement to sell similar securities at a future date at an agreed-upon price. In exchange, the financial institutions put non-cash collateral on deposit with a third-party custodian on behalf of the Company. The amount of securities purchased in connection with these transactions was $35 million and zero at March 31, 2017, and December 31, 2016, respectively. Non-cash collateral on deposit with the third-party custodian on the Company’s behalf was $35 million and zero at March 31, 2017, and December 31, 2016, respectively, which cannot be sold or re-pledged and which has not been recorded on the condensed consolidated balance sheets. Collateral related to the reverse repurchase agreements generally consists of U.S. government or U.S. government agency securities.

The Company participates in a securities lending program in which the Company lends securities that are held as part of its general account investment portfolio to third parties for the purpose of enhancing the total return on its investment portfolio. The Company generally requires initial collateral in an amount greater than or equal to 102% of the fair value of domestic securities loaned and 105% of foreign securities loaned. The Company received securities with a fair value of ~~$65~~$71 million ~~and zero~~ as collateral at March 31, ~~2016, and December 31, 2015, respectively,~~2017, which have not been recorded on the condensed consolidated balance sheets as the Company does not have effective control. There were no securities on loan and therefore no securities were received as collateral at December 31, 2016.

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,~~2016, under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company’s management, with the participation of its President and Chief Executive Officer and its Principal ~~Accounting~~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 ~~Accounting~~Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of March 31, ~~2016.~~2017.

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,~~2016, 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 months ended March 31, ~~2016.~~2017. Management is committed to continuing to improve its internal control processes and will continue to review its financial reporting controls and procedures.

Part II Other Information

Item 1. Legal Proceedings

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

~~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 ~~are at their early stages.~~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 estimated loss is not expected to have a material effect on the Company’s consolidated financial position, results of its operations or cash flows.

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.

Counterparties with whom the Company transfers risk may be unable or unwilling to do business with the Company.

The Company may not be able to secure financing to meet the liquidity or capital needs of the Company.

Item 6. Exhibits

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

Index to Exhibits



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

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

Great-West Life & Annuity Insurance Company



By:	/s/	Kara Roe	Date:	May ~~11, 2016~~12, 2017
		Kara Roe
		Vice President, Controller, and Principal Accounting Officer

4948



	Gain (loss) on derivatives recognized in net income						Gain (loss) on hedged assets recognized in net income
	Three Months Ended March 31,						Three Months Ended March 31,
	2016		2015				2016		2015
Fair value hedges:
Interest rate swaps	$	—	$	(1,438	)	(A)	$	—	$	—
Interest rate swaps	—		630			(B)	—		—
Items hedged in interest rate swaps	—		—				—		1,443			(A)
Items hedged in interest rate swaps	—		—				—		(630		)	(B)
Total fair value hedges	$	—	$	(808	)		$	—	$	813