UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 (Mark One)

 

 

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

 

 

 

 

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. 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

See notes to condensed consolidated financial statements.

 

 

See notes to condensed consolidated financial statements.

 

 

 

 

 

Great-West Life & Annuity Insurance Company (“GWLA”) and its subsidiaries (collectively, the “Company”) is a direct wholly-owned subsidiary of GWL&A Financial Inc. (“GWL&A Financial”), a holding company formed in 1998.  GWL&A Financial is a direct wholly-owned subsidiary of Great-West Lifeco U.S. 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.

 

 

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, 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 and nine months ended March 31,September 30, 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, 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,September 30, 2017, and for all periods presented. The condensed consolidated results of operations and condensed consolidated statement of cash flows for the threenine months ended March 31,September 30, 2017, are not necessarily indicative of the results or cash flows expected for the full year.

 

 

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.

The Company’s implementation efforts are primarily focused on certaincustomer contracts with fee income earned from assets under management, assets under administration, shareholder servicing, administration and recordkeeping services, and investment advisory services as well as the evaluation of certain incremental costs to obtain a customer contract. The Company anticipates that the adoption of this update will primarily impact the accounting for certain contract costs and contract fulfillment costs, which are tocurrently expensed as incurred. Under the new standard, these costs will be deferred and recognized as expenses over the expected customer life. TheWhile the Company continues to evaluate the impactmake progress in its assessment and implementation of this update, it has not yet finalized a range of the potential quantitative impact on its condensed consolidated financial statements.statements or whether the Company will adopt on a prospective or retrospective basis.

 

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 threenine months ended March 31,September 30, 2017, and 2016, the Company paid dividends of $77,000$145,301 and $73,401,$125,691, respectively, to its parent, GWL&A Financial. 

 

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”): 

 

See Note 7 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. 

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: 

 

The following table summarizes the recorded investment of the mortgage loan portfolio by risk assessment category as of March 31,September 30, 2017, and December 31, 2016, respectively: 

The following table summarizes activity in the mortgage provision allowance:

 

Limited partnership and other corporation interests — At March 31,September 30, 2017 and December 31, 2016, the Company had $37,948$45,117 and $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

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 $35,565$42,734 and $32,444 at March 31,September 30, 2017, and December 31, 2016, respectively.

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.

 

 

Total unrealized losses greater than twelve months decreased by $30,777$54,914 from December 31, 2016, to March 31,September 30, 2017.  Corporate debt securities account for 87%83%, or $107,862,$82,816, of the unrealized losses and OTTI greater than twelve months at March 31,September 30, 2017.  Non-investment grade corporate debt securities account for $7,851$5,693 of the unrealized losses and OTTI greater than twelve months, and $2,176 of the losses are on perpetual debt investments issued by investment grade rated banks in the United Kingdom.months. Management does not have the intent to sell these assets; therefore, an OTTI was not recognized in earnings.

 

Asset-backed securities account for 10% of the unrealized losses and OTTI greater than twelve months at March 31,September 30, 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.

 

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

The ISDA Master Agreements contain provisions that would allow the counterparties to require immediate settlement of all derivative instruments in a net liability position if the Company were to default on any debt obligations over a certain threshold.  The MSFTA contain provisions which do not stipulate a threshold for default and only apply to debt obligations between the Company and the specific counterparty.  The aggregate fair value, inclusive of accrued income and expense, of derivative instruments with credit-risk-related contingent features that were in a net liability position was $49,235$81,632 and $38,324 as of March 31,September 30, 2017, and December 31, 2016, respectively.  The Company had pledged collateral related to these derivatives of zero$16,171 and zero as of March 31,September 30, 2017, and December 31, 2016, respectively, in the normal course of business.  If the credit-risk-related contingent features were triggered on March 31,September 30, 2017, the fair value of assets that could be required to settle the derivatives in a net liability position was $49,235.$65,461.

 

At March 31,September 30, 2017, and December 31, 2016, the Company had pledged zero$16,171 and zero of unrestricted cash collateral to counterparties in the normal course of business, while other counterparties had pledged $80,145$25,353 and $103,214 of unrestricted cash collateral to the Company to satisfy collateral netting agreements, respectively.

 

At March 31,September 30, 2017, the Company estimated $10,436$10,544 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.

 

 

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.

 

 

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

 

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

 

Cross-currency 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.

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

 

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.