UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2016March 31, 2017

OR
¨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 November 1, 2016, 7,232,986May 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 September 30, 2016,March 31, 2017, and December 31, 20152016 (Unaudited)
3
  
Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30,March 31, 2017, and 2016 and 2015 (Unaudited)
5
  
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30,March 31, 2017, and 2016 and 2015 (Unaudited)
6
  
Condensed Consolidated Statements of Stockholder’s Equity for the NineThree Months Ended September 30,March 31, 2017, and 2016 and 2015 (Unaudited)
7
  
Condensed Consolidated Statements of Cash Flows for the NineThree Months Ended September 30,March 31, 2017, and 2016 and 2015 (Unaudited)
8
  
Notes to Condensed Consolidated Financial Statements (Unaudited)
10
  
Note 1 - Organization and Basis of Presentation
10
  
Note 2 - AcquisitionApplication of Recent Accounting Pronouncements
10
  
Note 3 - Application of Recent Accounting PronouncementsDividends
1112
  
Note 4 - DividendsSummary of Investments
1312
  
Note 5 - Summary of InvestmentsDerivative Financial Instruments
1316
  
Note 6 - Derivative Financial InstrumentsSummary of Offsetting Assets and Liabilities
1820
  
Note 7 - Summary of Offsetting Assets and LiabilitiesFair Value Measurements
2422
  
Note 8 - Fair Value MeasurementsOther Comprehensive Income
2527
  
Note 9 - Other ComprehensiveEmployee Benefit Plans
29
Note 10 - Income Taxes
30
Note 11 - Segment Information
30
Note 12 - Commitments and Contingencies
32
  
Note 10 - Employee Benefit Plans
37
Note 11 - Income Taxes
38
Note 12 - Segment Information
38
Note 13 - Commitments and Contingencies
41
Note 14 - Subsequent Events
4233
 Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
4334
 Item 3
Quantitative and Qualitative Disclosures About Market Risk
5844
 Item 4
Controls and Procedures
6045
    
Part II
Other Information
6146
 Item 1
Legal Proceedings
6146
 Item 1A
Risk Factors
6146
 Item 6
Exhibits
6348
    
  
Signature
6348



Part I     Financial Information
Item1.    Interim Financial Statements


 GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Balance Sheets
September 30, 2016,March 31, 2017 and December 31, 20152016
(In Thousands, Except Share Amounts)
(Unaudited)
 
 September 30, 2016 December 31, 2015 March 31, 2017 December 31, 2016
Assets  
  
  
  
Investments:  
  
  
  
Fixed maturities, available-for-sale, at fair value (amortized cost $19,455,887 and $20,007,462) $20,826,141
 $20,531,627
Fixed maturities, held-for-trading, at fair value (amortized cost $392,407 and $612,899) 398,880
 615,839
Mortgage loans on real estate (net of allowances of $2,882 and $2,890) 3,568,114
 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 4,056,284
 4,092,661
 4,016,844
 4,019,648
Short-term investments (amortized cost $2,314,307 and $267,026) 2,314,307
 267,026
Short-term investments (amortized cost $744,063 and $303,988) 744,063
 303,988
Limited partnership and other corporation interests 35,935
 40,980
 37,948
 34,895
Other investments 15,023
 15,189
 14,529
 15,052
Total investments 31,214,684
 28,811,026
 30,886,268
 30,600,850
        
Other assets:  
  
  
  
Cash 53,291
 34,362
Reinsurance receivable 605,419
 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”) 322,671
 414,143
 490,487
 486,690
Investment income due and accrued 304,924
 283,183
 315,826
 287,681
Collateral under securities lending agreements 99,404
 —
 94,531
 —
Due from parent and affiliates 80,882
 62,596
 86,834
 81,995
Goodwill 137,683
 137,683
 137,683
 137,683
Other intangible assets 20,940
 23,819
 19,297
 20,087
Other assets 1,063,101
 874,918
 1,014,949
 1,021,210
Assets of discontinued operations 18,914
 21,910
 17,213
 17,652
Separate account assets 27,775,827
 26,631,193
 27,597,906
 27,037,765
Total assets $61,697,740
 $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
September 30, 2016,March 31, 2017, and December 31, 20152016
(In Thousands, Except Share Amounts)
(Unaudited)
 
 September 30, 2016 December 31, 2015 March 31, 2017 December 31, 2016
Liabilities and stockholder’s equity  
  
  
  
Policy benefit liabilities:  
  
  
  
Future policy benefits $28,728,131
 $27,110,981
 $29,230,356
 $28,872,899
Policy and contract claims 379,670
 354,899
 384,990
 372,259
Policyholders’ funds 254,712
 299,577
 241,167
 285,554
Provision for policyholders’ dividends 53,429
 55,481
 48,070
 49,521
Undistributed earnings on participating business 21,154
 17,024
 16,000
 15,573
Total policy benefit liabilities 29,437,096
 27,837,962
 29,920,583
 29,595,806
        
General liabilities:  
  
  
  
Due to parent and affiliates 538,672
 540,310
 539,884
 537,990
Commercial paper 99,971
 93,371
 98,645
 99,049
Payable under securities lending agreements 99,404
 —
 94,531
 —
Deferred income tax liabilities, net 400,844
 137,116
 230,519
 191,911
Other liabilities 935,419
 755,651
 737,179
 816,304
Liabilities of discontinued operations 18,914
 21,910
 17,213
 17,652
Separate account liabilities 27,775,827
 26,631,193
 27,597,906
 27,037,765
Total liabilities 59,306,147
 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 842,979
 840,874
 863,451
 863,031
Accumulated other comprehensive income 653,912
 233,438
 299,854
 235,875
Retained earnings 887,469
 800,721
 863,952
 906,122
Total stockholder’s equity 2,391,593
 1,882,266
 2,034,550
 2,012,321
Total liabilities and stockholder’s equity $61,697,740
 $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 and Nine Months Ended September 30,March 31, 2017, and 2016 and 2015
(In Thousands)
(Unaudited)
 
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
 2016 2015 2016 2015 2017 2016
Revenues:  
  
      
  
Premium income $146,100
 $154,017
 $377,845
 $374,437
 $152,241
 $154,927
Fee income 246,413
 225,242
 709,844
 688,020
 255,116
 225,067
Other revenue 3,228
 1,820
 9,747
 5,460
 2,384
 3,149
Net investment income 291,539
 363,057
 979,080
 942,082
 313,471
 331,785
Realized investment gains (losses), net:  
  
  
  
  
  
Total other-than-temporary gains (losses), net —
 (363) (536) (921) —
 (536)
Other-than-temporary (gains) losses, net, transferred to other comprehensive income (loss) —
 —
 —
 108
Other realized investment gains (losses), net 33,374
 22,914
 107,193
 57,423
 (11,754) 31,806
Total realized investment gains (losses), net 33,374
 22,551
 106,657
 56,610
 (11,754) 31,270
Total revenues 720,654
 766,687
 2,183,173
 2,066,609
 711,458
 746,198
Benefits and expenses:  
  
      
  
Life and other policy benefits 172,855
 176,926
 529,985
 486,950
 170,289
 186,636
Increase (decrease) in future policy benefits 7,540
 20,226
 (75,221) (5,482) 126
 (14,015)
Interest credited or paid to contractholders 154,248
 147,177
 455,018
 433,829
 153,946
 148,310
Provision for policyholders’ share of (losses) earnings on participating business (106) 44
 (525) (457) (2) (169)
Dividends to policyholders 12,324
 13,241
 37,619
 42,763
 15,069
 15,981
Total benefits 346,861
 357,614
 946,876
 957,603
 339,428
 336,743
General insurance expenses 307,329
 263,608
 878,367
 776,735
 307,131
 276,528
Amortization of DAC and VOBA 3,504
 37,538
 40,397
 65,245
 5,322
 539
Interest expense 7,648
 9,646
 26,051
 28,928
 7,630
 9,724
Total benefits and expenses 665,342
 668,406
 1,891,691
 1,828,511
 659,511
 623,534
Income before income taxes 55,312
 98,281
 291,482
 238,098
 51,947
 122,664
Income tax expense 15,295
 30,708
 79,043
 78,926
 17,117
 24,038
Net income $40,017
 $67,573
 $212,439
 $159,172
 $34,830
 $98,626
 
See notes to condensed consolidated financial statements.



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Comprehensive Income (Loss)
Three and Nine Months Ended September 30,March 31, 2017, and 2016 and 2015
(In Thousands)
(Unaudited)
 
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
 2016 2015 2016 2015 2017 2016
Net income $40,017
 $67,573
 $212,439
 $159,172
 $34,830
 $98,626
Components of other comprehensive income (loss)  
  
  
  
Components of other comprehensive income  
  
Unrealized holding gains (losses), net, arising on available-for-sale fixed maturity investments 55,849
 (5,568) 895,589
 (318,529) 130,229
 446,610
Unrealized holding gains (losses), net, arising on cash flow hedges (7,805) 14,804
 (3,307) 15,326
 (6,955) (1,604)
Reclassification adjustment for (gains) losses, net, realized in net income (10,284) (8,036) (61,375) (43,511) 1,475
 (22,456)
Net unrealized gains (losses) related to investments 37,760
 1,200
 830,907
 (346,714) 124,749
 422,550
Future policy benefits, DAC and VOBA adjustments (18,214) (2,383) (190,985) 42,075
 (28,466) (76,240)
Employee benefit plan adjustment 2,494
 3,098
 6,962
 8,635
 2,146
 2,234
Other comprehensive income (loss) before income taxes 22,040
 1,915
 646,884
 (296,004)
Income tax expense (benefit) related to items of other comprehensive income (loss) 7,715
 669
 226,410
 (103,603)
Other comprehensive income (loss)(1)
 14,325
 1,246
 420,474
 (192,401)
Total comprehensive income (loss) $54,342
 $68,819
 $632,913
 $(33,229)
Other comprehensive income before income taxes 98,429
 348,544
Income tax expense related to items of other comprehensive income 34,450
 121,991
Other comprehensive income(1)
 63,979
 226,553
Total comprehensive income $98,809
 $325,179

(1) Other comprehensive income (loss) includes the non-credit component of impaired gains (losses), net, on fixed maturities available-for-sale in the amounts of $(959)$(1,089) and $(1,979)$(1,895) for the three months ended September 30,March 31, 2017, and 2016, and 2015, respectively, and $(5,326) and $(3,208) for the nine months ended September 30, 2016, and 2015, respectively.
 
See notes to condensed consolidated financial statements.



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Stockholder’s Equity
NineThree Months Ended September 30,March 31, 2017, and 2016 and 2015
(In Thousands)
(Unaudited)
 
 Nine Months Ended September 30, 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 —
 —
 —
 212,439
 212,439
 —
 —
 —
 34,830
 34,830
Other comprehensive income, net of income taxes —
 —
 420,474
 —
 420,474
 —
 —
 63,979
 —
 63,979
Dividends —
 —
 —
 (125,691) (125,691) —
 —
 —
 (77,000) (77,000)
Capital contribution - stock-based compensation —
 1,637
 —
 —
 1,637
 —
 420
 —
 —
 420
Income tax benefit on stock-based compensation —
 468
 —
 —
 468
Balances, September 30, 2016 $7,233
 $842,979
 $653,912
 $887,469
 $2,391,593
Balances, March 31, 2017 $7,293
 $863,451
 $299,854
 $863,952
 $2,034,550

 Nine Months Ended September 30, 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 —
 —
 —
 159,172
 159,172
 —
 —
 —
 98,626
 98,626
Other comprehensive loss, net of income taxes —
 —
 (192,401) —
 (192,401)
Other comprehensive income, net of income taxes —
 —
 226,553
 —
 226,553
Dividends —
 —
 —
 (139,711) (139,711) —
 —
 —
 (73,401) (73,401)
Capital contribution - stock-based compensation —
 1,247
 —
 —
 1,247
 —
 534
 —
 —
 534
Income tax benefit on stock-based compensation —
 1,031
 —
 —
 1,031
 —
 141
 —
 —
 141
Balances, September 30, 2015 $7,032
 $779,942
 $410,617
 $769,260
 $1,966,851
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
NineThree Months Ended September 30,March 31, 2017, and 2016 and 2015
(In Thousands)
(Unaudited)
 
 Nine Months Ended September 30, Three Months Ended March 31,
 2016 2015 2017 2016
Net cash provided by operating activities $559,179
 $575,631
 $361,764
 $142,740
        
Cash flows from investing activities:  
  
  
  
Proceeds from sales, maturities and redemptions of investments:  
  
  
  
Fixed maturities, available-for-sale 4,829,009
 4,196,254
 1,825,006
 1,983,974
Mortgage loans on real estate 310,664
 277,454
 54,480
 92,302
Limited partnership interests, other corporation interests and other investments 9,386
 4,001
 1,426
 2,567
Purchases of investments:  
  
  
  
Fixed maturities, available-for-sale (4,138,915) (2,791,939) (1,599,114) (1,818,569)
Mortgage loans on real estate (626,431) (233,924) (335,324) (117,720)
Limited partnership interests, other corporation interests and other investments (5,491) (1,496) (4,555) (1,593)
Net change in short-term investments (1,988,191) (2,198,699) (439,510) (546,036)
Net change in policy loans 5,980
 (7,481) 279
 (29)
Purchases of furniture, equipment and software (33,405) (60,321)
Purchases of furniture, equipment, and software (9,978) (12,064)
Net cash used in investing activities (1,637,394) (816,151) (507,290) (417,168)
        
Cash flows from financing activities:  
  
  
  
Contract deposits 2,756,047
 1,760,310
 778,744
 851,509
Contract withdrawals (1,500,963) (1,308,587) (543,572) (510,660)
Net change in due to/from parent and affiliates (19,924) (15,686) (2,921) (11,274)
Dividends paid (125,691) (139,711) (77,000) (73,401)
Payments for and interest paid on financing element derivatives, net (5,281) (8,027) (1,870) (3,000)
Contingent consideration (14,233) —
Net change in commercial paper borrowings 6,600
 (2,305) (404) 5,800
Net change in book overdrafts 121
 (1,164) (12,672) 92
Employee taxes paid for withheld shares (180) (433)
Income tax benefit on share-based compensation 468
 1,031
 —
 141
Net cash provided by financing activities 1,097,144
 285,861
 140,125
 258,774
        
Net increase in cash 18,929
 45,341
Cash, beginning of year 34,362
 12,775
Cash, end of period $53,291
 $58,116
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
NineThree Months Ended September 30,March 31, 2017, and 2016 and 2015
(In Thousands)
(Unaudited)
 
 Nine Months Ended September 30, Three Months Ended March 31,
 2016 2015 2017 2016
Supplemental disclosures of cash flow information:  
    
  
Net cash paid during the year for:  
  
  
  
Income taxes $(24,118) $(29,791) $(3,139) $(8,305)
Interest (21,685) (18,697) (3,199) (140)
        
Non-cash investing and financing transactions during the years:        
Share-based compensation expense $1,637
 $1,247
 $420
 $534
 
See notes to condensed consolidated financial statements. (Concluded)


9
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 and nine months ended September 30, 2016,March 31, 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 September 30, 2016,March 31, 2017, and for all periods presented. The condensed consolidated results of operations and condensed consolidated statement of cash flows for the ninethree months ended September 30, 2016,March 31, 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.  Acquisitions
Putnam Retirement BusinessApplication of Recent Accounting Pronouncements

Description of transactionRecently adopted accounting pronouncements

On January 1, 2015,In March 2016, the Company acquiredFASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The new guidance is effective for the retirement businessfiscal 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 Putnam Investments, LLC (“Putnam”), an affiliatechange. The new guidance changed several aspects of the Company.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 transaction was accounted for asadoption of this ASU did not have a combination between entities under common control. As such,material effect on 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.Company’s condensed consolidated financial statements.





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3.  Application of Recent Accounting Pronouncements

Recently adopted accounting pronouncements

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. The update primarily amends the criteria used to evaluate whether certain variable interest entities (“VIEs”) should be consolidated. The update also modifies the criteria used to determine whether partnerships and similar entities are 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 period presentation.

In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. 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.

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2015-07”).  The update required assets being valued using net asset value (“NAV”) as a practical expedient to be excluded from the fair value hierarchy table.  The update is effective for interim and annual periods beginning after December 15, 2015.  The adoption of this ASU did not have an impact on the Company’s consolidated financial position or results of operations; however, the Company has investments in separate accounts for which fair value is estimated using NAV as a practical expedient.  As such, for the period ended September 30, 2016, the Company has retroactively applied this guidance as required by the ASU and removed $533,961 from the December 31, 2015, Level 2 investments in separate accounts in the fair value hierarchy table in Note 8 to conform to current period presentation. 

Future adoption of new accounting pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”)., effective for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted. The update outlinesguidance may be applied retrospectively for all periods presented or retrospectively with a comprehensive accounting model for revenue arising from customer contracts and supersedes most currentcumulative-effect adjustment at the date of adoption. The new guidance will supersede nearly all existing revenue recognition guidance including industry-specific guidance. Whileunder U.S. GAAP; however, it will not impact the update does not apply toaccounting 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, administrationfinancial 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 recognizerecognizes 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. The FASB has also issued several updates to ASU 2014-09 including ASU 2016-08, RevenueCompany’s implementation efforts are primarily focused on certain fee income earned from Contracts with Customers: Principal versus Agent Considerations (improving theoperabilityassets under management, assets under administration, shareholder servicing, administration and understandability of the implementation guidance on principal versus agent considerations), ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (reducing thecost and complexity of applying the guidance on identifying promised goods orrecordkeeping services, and investment advisory services as well as the evaluation of certain incremental costs to improveobtain a customer contract which are to be deferred and recognized over the operability and understandability of the licensing implementation guidance), and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients (amending the guidance on collectability, non cash consideration, presentation of sales tax, and transition). In adopting ASU 2014-09, the Company may use either a full retrospective or a modified retrospective approach. The update is effective for public business entities for interim and annual periods beginning after December 15, 2017. Early adoption is permitted as of accounting periods beginning after December 15, 2016.expected customer life. The Company is currently evaluatingcontinues 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. The update requires that all years in the claims development table that precede the current reporting period and the related disclosure

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about the history of claims duration should be presented as required supplementary information.  The update also includes a disclosure objective of providing information about claim frequency along with a description of methodologies for determining claim frequency information, unless it is impracticable to do so.  The update is effective for annual reporting periods beginning after December 15, 2015, and for interim reporting periods within annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company does not believe this ASU will have a material impact on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.  Liabilities, 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 assessmenteliminating certain disclosure requirements related to identify impairment, use of exit price notion when measuring the fair value of financial instruments for disclosure purposes, separate presentationmeasured 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 clarifyclarifying 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 consolidated financial statements.

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

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

In March 2016, the FASB issued ASU 2016-09, 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 does not believe this ASU will have a material impact on itscondensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13,, Financial Instruments: Credit Losses: Measurement of Credit Losses on Financial Instruments,. The standardeffective for fiscal years and interim periods within those beginning after December 15, 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 update is effective for fiscal years and interim periods within those beginning after

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December 15, 2019 and early adoption is permitted for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of this update on its condensed consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), . The standard amends the guidance on the classification of certain cash receipts and payments on the statement of cash flows including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate and bank-owned life insurance policies, distributions from equity method investees, beneficial interests in securitized transactions, and separately identifiable cash flows and application of the predominance principle. The update is effective for fiscal years and interim periods within those beginning after December 15, 2017 and early2017. Early adoption is permitted. This ASU addresses diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company is currently evaluating the impact of this update on its condensed consolidated financial statements.


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In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash (a consensus of the Emerging Issues Task Force), effective for fiscal years and interim periods within those beginning after December 15, 2017. Early adoption is permitted. This update requires organizations to show the changes in the 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 January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other, 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 the goodwill impairment test and will require management to perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.  Any amount by which the carrying amount exceeds the reporting unit’s fair value (not to exceed the goodwill allocated to that reporting unit) is recognized as 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 ninethree months ended September 30,March 31, 2017, and 2016, and 2015, the Company paid dividends of $125,691$77,000 and $139,711,$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”): 
 September 30, 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 $1,046,224
 $81,922
 $144
 $1,128,002
 $—
 $1,813,394
 $46,163
 $19,189
 $1,840,368
 $—
Obligations of U.S. states and their subdivisions 1,928,679
 322,860
 329
 2,251,210
 —
 1,889,794
 215,426
 5,121
 2,100,099
 —
Foreign government securities 2,167
 —
 3
 2,164
 —
Corporate debt securities (2)
 13,618,838
 913,997
 128,748
 14,404,087
 (1,650) 14,270,203
 512,816
 229,442
 14,553,577
 (1,248)
Asset-backed securities 1,473,550
 133,681
 10,569
 1,596,662
 (77,118) 1,443,721
 101,214
 16,671
 1,528,264
 (70,463)
Residential mortgage-backed securities 93,656
 3,389
 328
 96,717
 (33) 124,522
 4,200
 996
 127,726
 (106)
Commercial mortgage-backed securities 1,162,680
 56,854
 2,456
 1,217,078
 —
 1,353,588
 23,313
 18,836
 1,358,065
 —
Collateralized debt obligations 130,093
 166
 38
 130,221
 —
 532,580
 1,693
 36
 534,237
 —
Total fixed maturities $19,455,887
 $1,512,869
 $142,615
 $20,826,141
 $(78,801) $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

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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, 2016
  Amortized Gross unrealized Gross unrealized Estimated fair value OTTI (gain) loss
Fixed maturities: cost gains losses and carrying value 
included in AOCI (1)
U.S. government direct obligations and U.S. agencies $3,022,279
 $47,791
 $34,958
 $3,035,112
 $—
Obligations of U.S. states and their subdivisions 1,890,568
 214,411
 6,317
 2,098,662
 —
Corporate debt securities (2)
 13,811,597
 477,316
 309,164
 13,979,749
 (1,488)
Asset-backed securities 1,226,493
 104,274
 18,388
 1,312,379
 (72,464)
Residential mortgage-backed securities 138,292
 3,867
 1,167
 140,992
 23
Commercial mortgage-backed securities 1,222,257
 23,207
 20,182
 1,225,282
 —
Collateralized debt obligations 361,241
 339
 53
 361,527
 —
Total fixed maturities $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 $135,187 and estimated fair value of $111,978.

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

(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 $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. 
September 30, 2016March 31, 2017
Amortized cost Estimated fair valueAmortized cost Estimated fair value
Maturing in one year or less$654,368
 $680,991
$644,280
 $662,742
Maturing after one year through five years3,780,675
 4,030,915
3,845,273
 4,018,406
Maturing after five years through ten years6,312,627
 6,719,852
6,950,269
 7,068,702
Maturing after ten years5,138,873
 5,613,359
5,073,643
 5,282,788
Mortgage-backed and asset-backed securities3,569,344
 3,781,024
4,914,337
 5,009,698
Total fixed maturities$19,455,887
 $20,826,141
$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.
 








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The following table summarizes information regarding the sales of securities classified as available-for-sale: 
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
2016 2015 2016 20152017 2016
Proceeds from sales$421,245
 $192,100
 $3,777,445
 $3,187,977
$1,580,522
 $1,682,893
Gross realized gains from sales8,487
 6,632
 55,154
 38,567
12,433
 19,857
Gross realized losses from sales24
 478
 170
 802
15,257
 11

Included in net investment income are unrealized gains (losses) of $(277) and $12,622 for the three months ended March 31, 2017, and 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, 2017 December 31, 2016
Principal$3,843,130
 $3,558,863
Unamortized premium (discount) and fees, net4,909
 5,541
Foreign exchange translation(1,799) (2,696)
Mortgage provision allowance(1,309) (2,882)
Total mortgage loans$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, 2017, and December 31, 2016, respectively: 
 March 31, 2017 December 31, 2016
Performing$3,844,775
 $3,560,243
Non-performing1,465
 1,465
Total$3,846,240
 $3,561,708

The following table summarizes activity in the mortgage provision allowance:
 Three Months Ended March 31, 2017 
Year Ended
December 31, 2016
 Commercial mortgages Commercial mortgages
Beginning balance$2,882
 $2,890
Provision increases—
 536
Provision decreases(1,573) (544)
Ending balance$1,309
 $2,882
    
Allowance ending balance by basis of impairment method:   
Individually evaluated for impairment$536
 $536
Collectively evaluated for impairment773
 2,346
    
Recorded investment balance in the mortgage loan portfolio, gross of allowance, by basis of impairment method:$3,846,240
 $3,561,708
Individually evaluated for impairment1,465
 1,465
Collectively evaluated for impairment3,844,775
 3,560,243
Limited partnership and other corporationinterests — At March 31, 2017, and December 31, 2016, the Company had $37,948 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

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Mortgage loans on real estate — The following table summarizes the carrying value of the mortgage loan portfolio by component:  
 September 30, 2016 December 31, 2015
Principal$3,565,454
 $3,242,627
Unamortized premium (discount) and fees, net6,530
 7,967
Foreign exchange translation(988) —
Mortgage provision allowance(2,882) (2,890)
Total mortgage loans$3,568,114
 $3,247,704
The following table summarizes the recorded investment of the mortgage loan portfolio by risk assessment category as of September 30, 2016, and December 31, 2015, respectively. 
 September 30, 2016 December 31, 2015
Performing$3,569,531
 $3,249,129
Non-performing1,465
 1,465
Total$3,570,996
 $3,250,594

The following table summarizes activity in the mortgage provision allowance:
 Nine Months Ended September 30, 2016 
Year Ended
December 31, 2015
 Commercial mortgages Commercial mortgages
Beginning balance$2,890
 $2,890
Provision increases536
 —
Provision decreases(544) —
Ending balance$2,882
 $2,890
    
Allowance ending balance by basis of impairment method:   
Individually evaluated for impairment$536
 $—
Collectively evaluated for impairment2,346
 2,890
    
Recorded investment balance in the mortgage loan portfolio, gross of allowance, by basis of impairment method:$3,570,996
 $3,250,594
Individually evaluated for impairment4,039
 14,031
Collectively evaluated for impairment3,566,957
 3,236,563
Limited partnership and other corporationinterests — At September 30, 2016, and December 31, 2015, the Company had $35,935 and $40,980, respectively, invested in limited partnership and other corporation interests. Limited partnership interests represent the Company’s minority ownership interests in pooled investment funds that primarily make private equity investments across diverse industries and geographical focuses. The Company has determined its interest in each limited partnership to be considered a variable interest entity (“VIE”). Consolidation is not required as the Company is not deemed to be the primary beneficiary of the VIEs.

The carrying value and maximum exposure to loss in relation to the activities of the VIEs was $33,484$35,565 and $38,504$32,444 at September 30, 2016,March 31, 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 $8,146 and $14,000 at September 30, 2016, and December 31, 2015, respectively.


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Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



Securities lending — Securities with a cost or amortized cost of $156,098$164,390 and estimated fair values of $160,351$160,012 were on loan under the program at September 30, 2016.March 31, 2017. There were no securities on loan at December 31, 2015.2016.  The Company received cash of $99,404$94,531 and securities with a fair value of $66,259$70,537 as collateral at September 30, 2016.March 31, 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.

Under the securities lending program the collateral pledged is, by definition, the securities loaned against the cash borrowed. The following table summarizes the cash collateral liability under the securities lending program, by class of collateral pledged:securities loaned:
 September 30, 2016 December 31, 2015 March 31, 2017 December 31, 2016
Cash collateral liability by class of loaned security        
U.S. government direct obligations and U.S. agencies $6,220
 $—
 $1,025
 $—
Foreign government securities 1,063
 —
Corporate debt securities 92,121
 —
 93,506
 —
Total $99,404
 $—
 $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:
 September 30, 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 $15,444

$21

$11,155

$123

$26,599

$144
 $1,254,124

$18,974

$10,181

$215

$1,264,305

$19,189
Obligations of U.S. states and their subdivisions 8,841

110

10,656

219

19,497

329
 165,820

4,641

10,394

480

176,214

5,121
Foreign government securities 2,164

3

—

—

2,164

3
Corporate debt securities 835,440

26,089

876,692

102,659

1,712,132

128,748
 3,711,201

121,580

880,097

107,862

4,591,298

229,442
Asset-backed securities 338,576

3,289

208,678

7,280

547,254

10,569
 458,552

4,905

271,982

11,766

730,534

16,671
Residential mortgage-backed securities 7,145

4

16,106

324

23,251

328
 5,755

18

13,386

978

19,141

996
Commercial mortgage-backed securities 113,741

889

27,563

1,567

141,304

2,456
 630,766

16,473

35,929

2,363

666,695

18,836
Collateralized debt obligations 45,552

38

—

—

45,552

38
 30,980

36

—

—

30,980

36
Total fixed maturities $1,366,903

$30,443

$1,150,850

$112,172

$2,517,753

$142,615
 $6,257,198

$166,627

$1,221,969

$123,664

$7,479,167

$290,291
 
















 
















Total number of securities in an unrealized loss position  

136

 

124

 

260
  

554

 

132

 

686
 

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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 $216,739,$99,938, or 60%26%, from December 31, 2015,2016, to September 30, 2016.March 31, 2017. The majority, or $200,024,$69,161, of the decrease was in the less than twelve months category. The overall decrease in unrealized losses was across all asset classes and reflects lower interest rates at September 30, 2016,March 31, 2017, compared to December 31, 2015,2016, resulting in generally higher valuations of these fixed maturity securities.
 
Total unrealized losses greater than twelve months decreased by $16,715$30,777 from December 31, 2015,2016, to September 30, 2016.March 31, 2017.  Corporate debt securities account for 92%87%, or $102,659,$107,862, of the unrealized losses and OTTI greater than twelve months at September 30, 2016.March 31, 2017.  Non-investment grade corporate debt securities account for $13,441$7,851 of the unrealized losses and OTTI greater than twelve months, and $7,572$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 7%10% of the unrealized losses and OTTI greater than twelve months at September 30, 2016.March 31, 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.

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Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



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

 Three Months Ended September 30, Nine Months Ended September 30,
 2016 2015 2016 2015
Beginning balance$94,687
 $106,913
 $102,343
 $119,532
Initial impairments - credit loss on securities not previously impaired—
 —
 —
 450
Reductions:       
Due to sales, maturities or payoffs during the period—
 (521) —
 (521)
Due to increases in cash flows expected to be collected that are recognized over the remaining life of the security(4,405) (13,057) (12,061) (26,126)
Ending balance$90,282
 $93,335
 $90,282
 $93,335
 Three Months Ended March 31,
 2017 2016
Beginning balance$83,665
 $102,343
Reductions due to increases in cash flows expected to be collected that are recognized over the remaining life of the security(3,306) (3,927)
Ending balance$80,359
 $98,416

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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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 $69,984$49,235 and $76,107$38,324 as of September 30, 2016,March 31, 2017, and December 31, 2015,2016, respectively.  The Company had pledged collateral related to these derivatives of $28,526zero and $45,940zero as of September 30, 2016,March 31, 2017, and December 31, 2015,2016, respectively, in the normal course of business.  If the credit-risk-related contingent features were triggered on September 30, 2016,March 31, 2017, the fair value of assets that could be required to settle the derivatives in a net liability position was $41,458.$49,235.
 
At September 30, 2016,March 31, 2017, and December 31, 2015,2016, the Company had pledged $28,526zero and $50,924zero of unrestricted cash collateral to counterparties in the normal course of business, while other counterparties had pledged $80,630$80,145 and $19,060$103,214 of unrestricted cash collateral to the Company to satisfy collateral netting agreements, respectively.
 
At September 30, 2016,March 31, 2017, the Company estimated $7,972$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.

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Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



Fair value hedges
Interest rate swap agreements are used to convert the interest rate on certain debt securities from a fixed rate to a floating rate to manage the interest rate risk of the change in the fair value of certain fixed rate maturity investments.
 
Not designated as hedging instruments
 
The Company enters into certain transactions in which derivatives are hedging an economic risk but hedge accounting is not elected.  These derivative instruments include:  exchange-traded interest rate swap futures, over-the-counter (“OTC”) interest rate swaptions, OTC interest rate swaps, exchange-traded Eurodollar interest rate futures, and treasury interest rate futures.  Certain of the Company’s OTC derivatives are cleared and settled through a central clearing counterparty while others are bilateral contracts between the Company and a counterparty.
 
The derivative instruments mentioned above are economic hedges and used to manage risk.  These transactions are used to offset changes in liabilities including those in variable annuity products, hedge the economic effect of a large increase in interest rates, manage the potential variability in future interest payments due to a change in credited interest rates and the related change in cash flows due to increased surrenders, and manage interest rate risks of forecasted acquisitions of fixed rate maturity investments and forecasted liability pricing.

Cross-currencyForeign 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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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. 


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Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



The following tables summarize the notional amount and fair value of derivative financial instruments, excluding embedded derivatives:
September 30, 2016March 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

$(13,852)
$13,490

$27,342
$419,800

$37,308

$37,308

$—
Cross-currency swaps561,467

46,194

51,284

5,090
666,577

32,731

43,652

10,921
Total cash flow hedges981,267

32,342

64,774

32,432
1,086,377

70,039

80,960

10,921






















Total derivatives designated as hedges981,267

32,342

64,774

32,432
1,086,377

70,039

80,960

10,921






















Derivatives not designated as hedges: 

 

 

 
 

 

 

 
Interest rate swaps480,100

22,921

32,982

10,061
486,100

(6,708)
8,187

14,895
Futures on equity indices24,260

—

—

—
31,433

—

—

—
Interest rate futures107,400

—

—

—
74,600

—

—

—
Interest rate swaptions166,664

191

191

—
162,464

265

265

—
Other forward contracts2,437,760

7,268

7,891

623
2,538,450

6,784

7,817

1,033
Cross-currency swaps662,935

14,700

41,528

26,828
612,733

19,152

42,071

22,919
Total derivatives not designated as hedges3,879,119

45,080

82,592

37,512
3,905,780

19,493

58,340

38,847
Total derivative financial instruments$4,860,386

$77,422

$147,366

$69,944
$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.

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Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



December 31, 2015December 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 swaps380,873

28,714

28,736

22
614,208

45,347

53,641

8,294
Total cash flow hedges524,673

40,557

40,579

22
1,034,008

78,737

87,031

8,294






















Total derivatives designated as hedges524,673

40,557

40,579

22
1,034,008

78,737

87,031

8,294






















Derivatives not designated as hedges: 

 

 

 
 

 

 

 
Interest rate swaps303,600

3,240

8,295

5,055
468,100

(4,358)
8,982

13,340
Futures on equity indices29,310

—

—

—
34,422

—

—

—
Interest rate futures117,200

—

—

—
81,500

—

—

—
Interest rate swaptions151,204

189

189

—
165,534

354

354

—
Cross-currency swaps662,935

(51,759)
19,537

71,296
612,733

33,371

50,018

16,647
Total derivatives not designated as hedges1,264,249

(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 ninethree months ended September 30, 2016,March 31, 2017, was $752,800, $1,110,757, $149,391, $153,961,$897,400, $1,239,581, $114,425, $163,232, and $2,645,834$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 September 30, Three Months Ended September 30, Three Months Ended March 31, Three Months Ended March 31, 
2016 2015 2016 2015 2017 2016 2017 2016 
Cash flow hedges: 
  
  
  
  
  
  
  
 
Interest rate swaps$(401) $(937) $1,335
 $1,490
(A)$(148) $525
 $1,220
 $1,494
(A)
Interest rate swaps(4,284) —
 (1,092) —
(B)3,843
 —
 (880) —
(B)
Cross-currency swaps(3,120) 15,741
 1,576
 630
(A)(10,650) (2,129) 1,102
 992
(A)
Interest rate futures—
 —
 —
 (21)(A)
Total cash flow hedges$(7,805) $14,804
 $1,819
 $2,099
 $(6,955) $(1,604) $1,442
 $2,486
 

(A) Net investment income.
(B) Interest expense.


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 Gain (loss) recognized in OCI on derivatives (Effective portion) Gain (loss) reclassified from OCI
into net income (Effective portion)		 
 Nine Months Ended September 30, Nine Months Ended September 30, 
 2016 2015 2016 2015 
Cash flow hedges: 
  
  
  
 
Interest rate swaps$4,098
 $(311) $4,166
 $5,183
(A)
Interest rate swaps(29,017) —
 (1,675) —
(B)
Cross-currency swaps21,612
 15,637
 3,777
 1,329
(A)
Interest rate futures—
 —
 —
 (64)(A)
Total cash flow hedges$(3,307) $15,326
 $6,268
 $6,448
 

(A) Net investment income.
(B) Interest expense.

 Gain (loss) on derivatives
recognized in net income		 Gain (loss) on hedged assets
recognized in net income		 
 Three Months Ended September 30, Three Months Ended September 30, 
 2016 2015 2016 2015 
Fair value hedges: 
  
  
  
 
Interest rate swaps$—
 $(620)(A)$—
 $—
 
Interest rate swaps—
 323
(B)—
 —
 
Items hedged in interest rate swaps—
 —
 —
 623
(A)
Items hedged in interest rate swaps—
 —
 —
 (323)(B)
Total fair value hedges$—
 $(297) $—
 $300
 
 Gain (loss) on derivatives recognized in net income 
 Three Months Ended March 31, 
 2017 2016 
Derivatives not designated as hedging instruments: 
  
 
Futures on equity indices$(684)(A)$(230)(A)
Futures on equity indices(1,284)(B)(1,441)(B)
Interest rate swaps(1,549)(A)10,622
(A)
Interest rate futures(14)(A)(204)(A)
Interest rate futures5
(B)(32)(B)
Interest rate swaptions(27)(A)134
(A)
Interest rate swaptions(74)(B)(195)(B)
Other forward contracts6,784
(A)3,056
(A)
Other forward contracts(5,597)(B)2,938
(B)
Cross-currency swaps(14,168)(A)12,199
(A)
Total derivatives not designated as hedging instruments$(16,608) $26,847
 

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

 Gain (loss) on derivatives
recognized in net income		 Gain (loss) on hedged assets
recognized in net income		 
 Nine Months Ended September 30, Nine Months Ended September 30, 
 2016 2015 2016 2015 
Fair value hedges: 
  
  
  
 
Interest rate swaps$—
 $(1,489)(A)$—
 $—
 
Interest rate swaps—
 765
(B)—
 —
 
Items hedged in interest rate swaps—
 —
 —
 1,493
(A)
Items hedged in interest rate swaps—
 —
 —
 (765)(B)
Total fair value hedges$—
 $(724) $—
 $728
 

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


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Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



 Gain (loss) on derivatives recognized in net income 
 Three Months Ended September 30, 
 2016 2015 
Derivatives not designated as hedging instruments: 
  
 
Futures on equity indices$510
(A)$478
(A)
Futures on equity indices(2,081)(B)1,111
(B)
Interest rate swaps418
(A)6,480
(A)
Interest rate futures134
(A)(99)(A)
Interest rate futures(183)(B)(117)(B)
Interest rate swaptions23
(A)928
(A)
Interest rate swaptions(39)(B)—
(B)
Other forward contracts(8,286)(A)32,538
(A)
Other forward contracts19,413
(B)8,504
(B)
Cross-currency swaps1,872
(A)36,845
(A)
Total derivatives not designated as hedging instruments$11,781
 $86,668
 

(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 
 Nine Months Ended September 30, 
 2016 2015 
Derivatives not designated as hedging instruments: 
  
 
Futures on equity indices$103
(A)$896
(A)
Futures on equity indices(5,358)(B)122
(B)
Interest rate swaps19,727
(A)553
(A)
Interest rate futures(77)(A)(214)(A)
Interest rate futures(249)(B)55
(B)
Interest rate swaptions96
(A)2,919
(A)
Interest rate swaptions(256)(B)(2,076)(B)
Other forward contracts7,268
(A)14,778
(A)
Other forward contracts31,509
(B)6,414
(B)
Cross-currency swaps62,147
(A)44,549
(A)
Total derivatives not designated as hedging instruments$114,910
 $67,996
 

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

Embedded derivative - Guaranteed Lifetime Withdrawal Benefit

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

The estimated fair value of the GLWB was a liability position of $31,277$4,042 and $11,257$5,712 at September 30, 2016,March 31, 2017, and December 31, 2015,2016, respectively. The changes in fair value of the GLWB were unrealized gains (losses) of $(590)$1,670 and $(6,858)

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Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



$(10,450) for the three months ended September 30,March 31, 2017, and 2016, and 2015, respectively, and $(20,020) and $(3,370) for the nine months ended September 30, 2016, and 2015, respectively.

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: 

September 30, 2016 March 31, 2017

  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 (assets):
recognized assets (1)
 instruments received fair value 
recognized assets (1)
 instruments received fair value
Derivative instruments (2)

$123,415

$(35,579)
$78,757

$9,079
 $104,020

$(35,694)
$(65,290)
$3,036
Short-term reverse repurchase agreement (3)
 300,000
 (300,000) —
 —
 34,500
 (34,500) —
 —
Total financial instruments (assets) 423,415
 (335,579) 78,757
 9,079
 138,520
 (70,194) (65,290) 3,036


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Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)




September 30, 2016 March 31, 2017

  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 (liabilities):
recognized liabilities (1)
 instruments pledged fair value 
recognized liabilities (1)
 instruments pledged fair value
Derivative instruments (4)

35,579
 (35,579) —
 —
 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.
(2) The estimated fair value of derivative instrument assets is reported in other assets in the condensed consolidated balance sheets. Derivative transactions entered into under ISDA master agreements include income and expense accruals.
(3) The estimated fair value of derivative instrument liabilities is reported in other liabilities in the condensed consolidated balance sheets. Derivative transactions entered into under ISDA master agreements include income and expense accruals.
 

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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
September 30, 2016March 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)		 Totalin active
markets for
identical assets
(Level 1)		 other
observable
inputs
(Level 2)		 Significant
unobservable
inputs
(Level 3)		 Total
Assets 
  
  
  
 
  
  
  
Fixed maturities available-for-sale: 
  
  
  
 
  
  
  
U.S. government direct obligations and U.S. agencies$—

$1,128,002

$—

$1,128,002
$—

$1,840,368

$—

$1,840,368
Obligations of U.S. states and their subdivisions—

2,251,210

—

2,251,210
—

2,100,099

—

2,100,099
Foreign government securities—

2,164

—

2,164
Corporate debt securities—

14,389,380

14,707

14,404,087
—

14,542,646

10,931

14,553,577
Asset-backed securities—

1,596,662

—

1,596,662
—

1,528,264

—

1,528,264
Residential mortgage-backed securities—

96,717

—

96,717
—

127,726

—

127,726
Commercial mortgage-backed securities—

1,217,078

—

1,217,078
—

1,358,065

—

1,358,065
Collateralized debt obligations—

130,221

—

130,221
—

534,237

—

534,237
Total fixed maturities available-for-sale—

20,811,434

14,707

20,826,141
—

22,031,405

10,931

22,042,336
Fixed maturities held-for-trading: 

 

 

 
 

 

 

 
U.S. government direct obligations and U.S. agencies—

341,368

—

341,368
—

129,296

—

129,296
Corporate debt securities—

56,390

—

56,390
—

55,249

—

55,249
Commercial mortgage-backed securities—

1,122

—

1,122
—

1,072

—

1,072
Total fixed maturities held-for-trading—

398,880

—

398,880
—

185,617

—

185,617
Short-term investments338,051

1,976,256

—

2,314,307
262,866

481,197

—

744,063
Collateral under securities lending agreements99,404

—

—

99,404
94,531

—

—

94,531
Collateral under derivative counterparty collateral agreements109,156

—

—

109,156
80,145

—

—

80,145
Derivative instruments designated as hedges: 

 

 

 
 

 

 

 
Interest rate swaps—

13,490

—

13,490
—

37,308

—

37,308
Cross-currency swaps—
 51,284
 —
 51,284
—
 43,652
 —
 43,652
Derivative instruments not designated as hedges: 

 

 

 
 

 

 

 
Interest rate swaps—

32,982

—

32,982
—

8,187

—

8,187
Interest rate swaptions—

191

—

191
—

265

—

265
Other forward contracts—

7,891

—

7,891
—

7,817

—

7,817
Cross-currency swaps—

41,528

—

41,528
—

42,071

—

42,071
Total derivative instruments—

147,366

—

147,366
—

139,300

—

139,300
Separate account assets (1)
15,580,267

11,738,559

—

27,775,827
15,849,064

11,330,972

—

27,597,906
Total assets$16,126,878

$35,072,495

$14,707

$51,671,081
$16,286,606

$34,168,491

$10,931

$50,883,898






















Liabilities 

 

 

 
 

 

 

 
Payable under securities lending agreements$99,404

$—

$—

$99,404
$94,531

$—

$—

$94,531
Collateral under derivative counterparty collateral agreements80,630
 —
 —
 80,630
80,145
 —
 —
 80,145
Derivative instruments designated as hedges: 

 

 

 
 

 

 

 
Interest rate swaps—

27,342

—

27,342
Cross-currency swaps—

5,090

—

5,090
—

10,921

—

10,921
Derivative instruments not designated as hedges: 

 

 

 
 

 

 

 
Interest rate swaps—

10,061

—

10,061
—

14,895

—

14,895
Other forward contracts—

623

—

623
—

1,033

—

1,033
Cross-currency swaps—

26,828

—

26,828
—

22,919

—

22,919
Total derivative instruments—

69,944

—

69,944
—

49,768

—

49,768
Embedded derivatives - GLWB—
 —
 31,277
 31,277
—
 —
 4,042
 4,042
Separate account liabilities (2)
4

517,570

—

517,574
26

409,044

—

409,070
Total liabilities$180,038

$587,514

$31,277

$798,829
$174,702

$458,812

$4,042

$637,556

(1) Included in the total fair value amount are $457$418 million of investments as of September 30, 2016March 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.
 (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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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, 2015December 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)		 Totalin 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 investments132,288

134,738

—

267,026
267,851

36,137

—

303,988
Collateral under derivative counterparty collateral agreements69,984

—

—

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 (1)
15,249,966

10,847,266

—

26,631,193
15,407,992

11,199,924

—

27,037,765
Total assets$15,452,238

$32,193,532

$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 (2)
24

290,293

—

290,317
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 $534$430 million of investments as of December 31, 20152016 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.


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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 marketevaluated prices from independent pricing services.  In cases where marketthese 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 derivativeDerivative 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.
 

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(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
Recurring Level 3 financial assets and liabilities

Three Months Ended September 30, 2016Three Months Ended March 31, 2017
Assets LiabilitiesAssets Liabilities
Fixed maturities  available-for-sale EmbeddedFixed maturities  available-for-sale Embedded
Corporate derivativesCorporate derivatives
debt securities - GLWBdebt securities - GLWB
Balances, July 1, 2016$15,056

$30,687
Balances, January 1, 2017$11,639

$5,712
Realized and unrealized gains (losses) included in: 

  

 
Net income (loss)—
 590
—
 1,670
Other comprehensive income (loss)245

—
(364)
—
Settlements(594)
—
(344)
—
Balances, September 30, 2016$14,707

$31,277
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets and liabilities held at September 30, 2016$—

$590
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 September 30, 2015Three Months Ended March 31, 2016
Assets LiabilitiesAssets Liabilities
Fixed maturities 
available-for-sale
   Embedded
Fixed maturities 
available-for-sale
 Embedded
Corporate Asset-backed   derivativesCorporate derivatives
debt securities securities Total - GLWBdebt securities - GLWB
Balances, July 1, 2015$5,065

$31
 $5,096
 $2,919
Balances, January 1, 2016$4,538

$11,257
Realized and unrealized gains (losses) included in: 

 
  
   

 
Net income (loss)—
 —
 —
 6,858
—
 (10,450)
Other comprehensive income (loss)(66)
—
 (66) —
366

—
Settlements(216)
9
 (207) —
(598)
—
Balances, September 30, 2015$4,783

$40
 $4,823
 $9,777
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets and liabilities held at September 30, 2015$—

$—
 $—
 $6,858
Transfers into Level 3 (1)
11,236
 —
Balances, March 31, 2016$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)
(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:
Range
Valuation TechniqueUnobservable InputMarch 31, 2017December 31, 2016
Embedded derivatives - GLWBRisk neutral stochastic valuation methodologyEquity volatility15% - 28%15% - 30%
Swap curve1.38% - 2.66%0.75% - 3.00%
Mortality rateBased on the Annuity 2000 Mortality TableBased on the Annuity 2000 Mortality Table
Base Lapse rate1% - 15%1% - 15%

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Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



 Recurring Level 3 financial assets and liabilities
 Nine Months Ended September 30, 2016
 Assets Liabilities
 Fixed maturities  available-for-sale Embedded
 Corporate derivatives
 debt securities - GLWB
Balances, January 1, 2016$4,538
 $11,257
Realized and unrealized gains (losses) included in: 
  
Net income (loss)—
 20,020
Other comprehensive income (loss)720
 —
Settlements(1,787) —
Transfers into Level 3 (1)
11,236
 —
Balances, September 30, 2016$14,707
 $31,277
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets and liabilities held at September 30, 2016$—
 $20,020

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

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


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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:
  September 30, 2016
  Fair Value Valuation Technique Unobservable Input Range
Embedded derivatives - GLWB $31,277
 Risk neutral stochastic valuation methodology Equity volatility 15% - 28%
      Swap curve 0.5% - 2.50%
      Mortality rate Based on the Annuity 2000 Mortality Table
      Lapse rate 1% - 15%

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

Fair value of financial instruments
 
The following tables summarize the carrying amounts and estimated fair values of the Company’s financial instruments and investments not carried at fair value on a recurring basis:
September 30, 2016 December 31, 2015March 31, 2017 December 31, 2016
Carrying Estimated Carrying EstimatedCarrying Estimated Carrying Estimated
amount fair value amount fair valueamount fair value amount fair value
Assets 
  
  
  
 
  
  
  
Mortgage loans on real estate$3,568,114
 $3,795,123
 $3,247,704
 $3,362,496
$3,844,931
 $3,915,687
 $3,558,826
 $3,574,240
Policy loans4,056,284
 4,056,284
 4,092,661
 4,092,661
4,016,844
 4,016,844
 4,019,648
 4,019,648
Limited partnership interests30,336
 30,262
 35,039
 34,882
32,579
 31,947
 29,345
 29,822
Other investments14,293
 44,723
 14,596
 44,723
13,935
 44,243
 14,382
 44,687
              
Liabilities 
  
  
  
 
  
  
  
Annuity contract benefits without life contingencies$12,254,743
 $12,357,043
 $11,104,721
 $10,839,205
$12,383,984
 $12,249,498
 $12,291,378
 $12,129,631
Policyholders’ funds254,712
 254,712
 299,577
 299,577
241,167
 241,167
 285,554
 285,554
Commercial paper99,971
 99,971
 93,371
 93,371
98,645
 98,645
 99,049
 99,049
Notes payable534,299
 515,795
 532,575
 563,633
534,339
 528,415
 531,092
 495,004
 

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Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



The methods and assumptions used to estimate the fair value of financial instruments not carried at fair value on a recurring basis are summarized as follows: 

Mortgage loans on real estate

Mortgage loan fair value estimates are generally based on discounted cash flows.  A discount rate matrix is used where the discount rate valuing a specific mortgage generally corresponds to that mortgage’s remaining term and credit quality.  Management believes the discount rate used is comparable to the credit, interest rate, term, servicing costs, and risks of loans similar to the portfolio loans that the Company would make today given its internal pricing strategy.  The estimated fair value is classified as Level 2.
 
Policy loans
 
Policy loans are funds provided to policy holders in return for a claim on the policy. The funds provided are limited to the cash surrender value of the underlying policy. The nature of policy loans is to have a negligible default risk as the loans are fully collateralized by the value of the policy. Policy loans do not have a stated maturity and the balances and accrued interest are repaid either by the policyholder or with proceeds from the policy. Due to the collateralized nature of policy loans and unpredictable timing of repayments, the Company believes the fair value of policy loans approximates carrying value. The estimated fair value is classified as Level 2.
 
Limited partnership interests
 
Limited partnership interests, accounted for using the cost method, represent the Company’s minority ownership interests in pooled investment funds.  These funds employ varying investment strategies that primarily make private equity investments across diverse industries and geographical focuses.  The estimated fair value was determined using the partnership financial statement reported capital account or net asset value adjusted for other relevant information which may impact the exit value of the investments.  Distributions by these investments are generated from investment gains, from operating income generated by the underlying investments of the funds, and from liquidation of the underlying assets of the funds which are estimated to be liquidated over the next one to 10 years.  The estimated fair value is classified as Level 3.




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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 appraised value which includes factors such as comparable property sales, property income analysis, and capitalization rates.  The estimated fair value is classified as Level 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.

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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 September 30, 2016Three 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		 TotalUnrealized
holding gains
/ losses
arising on
fixed
maturities,
available-for-
sale		 Unrealized
holding gains
/ losses
arising on
cash flow
hedges		 Future policy
benefits, DAC
and VOBA
adjustments		 Employee
benefit plan
adjustment		 Total
Balances, July 1, 2016$855,034
 $45,316
 $(178,086) $(82,677) $639,587
Balances, January 1, 2017$311,748
 $67,076
 $(58,646) $(84,303) $235,875
Other comprehensive income (loss) before reclassifications36,302
 (5,074) (11,839) —
 19,389
84,649
 (4,521) (18,503) —
 61,625
Amounts reclassified from AOCI(5,503) (1,182) —
 1,621
 (5,064)1,896
 (937) —
 1,395
 2,354
Net current period other comprehensive income (loss)30,799
 (6,256) (11,839) 1,621
 14,325
86,545
 (5,458) (18,503) 1,395
 63,979
Balances, September 30, 2016$885,833
 $39,060
 $(189,925) $(81,056) $653,912
Balances, March 31, 2017$398,293
 $61,618
 $(77,149) $(82,908) $299,854
 
 Three Months Ended September 30, 2015
 Unrealized
holding gains
/ losses
arising on
fixed
maturities,
available-for-
sale		 Unrealized
holding gains
/ losses
arising on
cash flow
hedges		 Future policy
benefits, DAC
and VOBA
adjustments		 Employee
benefit plan
adjustment		 Total
Balances, July 1, 2015$560,527
 $30,653
 $(79,296) $(102,513) $409,371
Other comprehensive income (loss) before reclassifications(3,619) 9,623
 (1,549) (7) 4,448
Amounts reclassified from AOCI(3,859) (1,364) —
 2,021
 (3,202)
Net current period other comprehensive income (loss)(7,478) 8,259
 (1,549) 2,014
 1,246
Balances, September 30, 2015$553,049
 $38,912
 $(80,845) $(100,499) $410,617

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Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



Nine Months Ended September 30, 2016Three 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		 TotalUnrealized
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
$339,520
 $45,284
 $(65,785) $(85,581) $233,438
Other comprehensive income (loss) before reclassifications582,133
 (2,150) (124,140) —
 455,843
290,296
 (1,043) (49,556) —
 239,697
Amounts reclassified from AOCI(35,820) (4,074) —
 4,525
 (35,369)(12,980) (1,616) —
 1,452
 (13,144)
Net current period other comprehensive income (loss)546,313
 (6,224) (124,140) 4,525
 420,474
277,316
 (2,659) (49,556) 1,452
 226,553
Balances, September 30, 2016$885,833
 $39,060
 $(189,925) $(81,056) $653,912
Balances, March 31, 2016$616,836
 $42,625
 $(115,341) $(84,129) $459,991
 Nine Months Ended September 30, 2015
 Unrealized
holding gains
/ losses
arising on
fixed
maturities,
available-for-
sale		 Unrealized
holding gains
/ losses
arising on
cash flow
hedges		 Future policy
benefits, DAC
and VOBA
adjustments		 Employee
benefit plan
adjustment		 Total
Balances, January 1, 2015$784,183
 $33,141
 $(108,194) $(106,112) $603,018
Other comprehensive income (loss) before reclassifications(207,043) 9,962
 27,349
 (222) (169,954)
Amounts reclassified from AOCI(24,091) (4,191) —
 5,835
 (22,447)
Net current period other comprehensive income (loss)(231,134) 5,771
 27,349
 5,613
 (192,401)
Balances, September 30, 2015$553,049
 $38,912
 $(80,845) $(100,499) $410,617

The following tables present the composition of other comprehensive income (loss):
 
 Three Months Ended September 30, 2016
 Before-tax Tax (expense) Net-of-tax
 amount benefit amount
Unrealized holding gains (losses), net, arising on fixed maturities, available-for-sale$55,849
 $(19,547) $36,302
Unrealized holding gains (losses), net, arising on cash flow hedges(7,805) 2,731
 (5,074)
Reclassification adjustment for (gains) losses, net, realized in net income(10,284) 3,599
 (6,685)
Net unrealized gains (losses) related to investments37,760
 (13,217) 24,543
Future policy benefits, DAC and VOBA adjustments(18,214) 6,375
 (11,839)
Net unrealized gains (losses)19,546
 (6,842) 12,704
Employee benefit plan adjustment2,494
 (873) 1,621
Other comprehensive income (loss)$22,040
 $(7,715) $14,325

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Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)


 Three Months Ended March 31, 2017
 Before-tax Tax (expense) Net-of-tax
 amount benefit amount
Unrealized holding gains (losses), net, arising on fixed maturities, available-for-sale$130,229
 $(45,580) $84,649
Unrealized holding gains (losses), net, arising on cash flow hedges(6,955) 2,434
 (4,521)
Reclassification adjustment for (gains) losses, net, realized in net income1,475
 (516) 959
Net unrealized gains (losses) related to investments124,749
 (43,662) 81,087
Future policy benefits, DAC and VOBA adjustments(28,466) 9,963
 (18,503)
Net unrealized gains (losses)96,283
 (33,699) 62,584
Employee benefit plan adjustment2,146
 (751) 1,395
Other comprehensive income (loss)$98,429
 $(34,450) $63,979

Three Months Ended September 30, 2015Three Months Ended March 31, 2016
Before-tax Tax (expense) Net-of-taxBefore-tax Tax (expense) Net-of-tax
amount benefit amountamount benefit amount
Unrealized holding gains (losses), net, arising on fixed maturities, available-for-sale$(5,568) $1,949
 $(3,619)$446,610
 $(156,314) $290,296
Unrealized holding gains (losses), net, arising on cash flow hedges14,804
 (5,181) 9,623
(1,604) 561
 (1,043)
Reclassification adjustment for (gains) losses, net, realized in net income(8,036) 2,813
 (5,223)(22,456) 7,860
 (14,596)
Net unrealized gains (losses) related to investments1,200
 (419) 781
422,550
 (147,893) 274,657
Future policy benefits, DAC and VOBA adjustments(2,383) 834
 (1,549)(76,240) 26,684
 (49,556)
Net unrealized gains (losses)(1,183) 415
 (768)346,310
 (121,209) 225,101
Employee benefit plan adjustment3,098
 (1,084) 2,014
2,234
 (782) 1,452
Other comprehensive income (loss)$1,915
 $(669) $1,246
$348,544
 $(121,991) $226,553

 Nine Months Ended September 30, 2016
 Before-tax Tax (expense) Net-of-tax
 amount benefit amount
Unrealized holding gains (losses), net, arising on fixed maturities, available-for-sale$895,589
 $(313,456) $582,133
Unrealized holding gains (losses), net, arising on cash flow hedges(3,307) 1,157
 (2,150)
Reclassification adjustment for (gains) losses, net, realized in net income(61,375) 21,481
 (39,894)
Net unrealized gains (losses) related to investments830,907
 (290,818) 540,089
Future policy benefits, DAC and VOBA adjustments(190,985) 66,845
 (124,140)
Net unrealized gains (losses)639,922
 (223,973) 415,949
Employee benefit plan adjustment6,962
 (2,437) 4,525
Other comprehensive income (loss)$646,884
 $(226,410) $420,474

 Nine Months Ended September 30, 2015
 Before-tax Tax (expense) Net-of-tax
 amount benefit amount
Unrealized holding gains (losses), net, arising on fixed maturities, available-for-sale$(318,529) $111,486
 $(207,043)
Unrealized holding gains (losses), net, arising on cash flow hedges15,326
 (5,364) 9,962
Reclassification adjustment for (gains) losses, net, realized in net income(43,511) 15,229
 (28,282)
Net unrealized gains (losses) related to investments(346,714) 121,351
 (225,363)
Future policy benefits, DAC and VOBA adjustments42,075
 (14,726) 27,349
Net unrealized gains (losses)(304,639) 106,625
 (198,014)
Employee benefit plan adjustment8,635
 (3,022) 5,613
Other comprehensive income (loss)$(296,004) $103,603
 $(192,401)


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Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



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

 Three Months Ended September 30,  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 $(8,465) $(5,937) Other realized investment (gains) losses, net $2,917
 $(19,970) Other realized investment (gains) losses, net
 (8,465) (5,937) Total before tax 2,917
 (19,970) Total before tax
 (2,962) (2,078) Tax expense or benefit 1,021
 (6,990) Tax expense or benefit
 $(5,503) $(3,859) Net of tax $1,896
 $(12,980) Net of tax
          
Unrealized holding (gains) losses, net, arising on cash flow hedges $(2,911) $(2,099) Net investment income $(2,322) $(2,486) Net investment income
 1,092
 —
 Interest Expense 880
 —
 Interest Expense
 (1,819) (2,099) Total before tax (1,442) (2,486) Total before tax
 (637) (735) Tax expense or benefit (505) (870) Tax expense or benefit
 $(1,182) $(1,364) Net of tax $(937) $(1,616) Net of tax
          
Amortization of employee benefit plan items          
Prior service (benefits) $(150)
(1) 
$(159)
(1) 
  $73
(1) 
$(151)
(1) 
 
Actuarial (gains) 2,644
(1) 
3,268
(1) 
  2,073
(1) 
2,385
(1) 
 
 2,494
 3,109
 Total before tax 2,146
 2,234
 Total before tax
 873
 1,088
 Tax expense or benefit 751
 782
 Tax expense or benefit
 $1,621
 $2,021
 Net of tax $1,395
 $1,452
 Net of tax
          
Total reclassification $(5,064) $(3,202) 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).
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,
 
Defined Benefit 
Pension Plan
 
Post-Retirement 
Medical Plan
 Supplemental Executive
Retirement Plan		 Total
 2017 2016 2017 2016 2017 2016 2017 2016
Components of net periodic cost (benefit): 
  
  
  
  
  
    
Service cost$(2,067) $1,335
 $357
 $293
 $(4) $73
 $(1,714) $1,701
Interest cost6,121
 6,282
 188
 175
 405
 444
 6,714
 6,901
Expected return on plan assets(5,118) (6,278) —
 —
 —
 —
 (5,118) (6,278)
Amortization of unrecognized prior service costs (benefits)—
 —
 (52) (276) 125
 125
 73
 (151)
Amortization of losses (gains) from earlier periods2,199
 2,485
 (113) (85) (13) (15) 2,073
 2,385
Net periodic cost (benefit)$1,135
 $3,824
 $380
 $107
 $513
 $627
 $2,028
 $4,558

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Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



  Nine Months Ended September 30,  
  2016 2015  
Details about accumulated other 
comprehensive income (loss) components		 Amount reclassified from accumulated other comprehensive income (loss) Affected line item in the statement where net income is presented
Unrealized holding (gains) losses, net, arising on fixed maturities, available-for-sale $(55,107) $(37,063) Other realized investment (gains) losses, net
  (55,107) (37,063) Total before tax
  (19,287) (12,972) Tax expense or benefit
  $(35,820) $(24,091) Net of tax
       
Unrealized holding (gains) losses, net, arising on cash flow hedges $(7,943) $(6,448) Net investment income
  1,675
 —
 Interest Expense
  (6,268) (6,448) Total before tax
  (2,194) (2,257) Tax expense or benefit
  $(4,074) $(4,191) Net of tax
       
Amortization of employee benefit plan items      
Prior service costs (benefits) $(452)
(1) 
$(520)
(1) 
 
Actuarial losses (gains) 7,414
(1) 
9,497
(1) 
 
  6,962
 8,977
 Total before tax
  2,437
 3,142
 Tax expense or benefit
  $4,525
 $5,835
 Net of tax
       
Total reclassification $(35,369) $(22,447) Net of tax

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


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Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



10.  Employee Benefit Plans
Net periodic cost (benefit) of the Defined Benefit Pension, Post-Retirement Medical, and Supplemental Executive Retirement plans included in general insurance expenses in the accompanying condensed consolidated statements of income includes the following components:
 Three Months Ended September 30,
 
Defined Benefit 
Pension Plan
 
Post-Retirement 
Medical Plan
 Supplemental Executive
Retirement Plan		 Total
 2016 2015 2016 2015 2016 2015 2016 2015
Components of net periodic cost (benefit): 
  
  
  
  
  
    
Service cost$3,417
 $1,521
 $349
 $254
 $73
 $70
 $3,839
 $1,845
Interest cost6,384
 5,996
 184
 167
 444
 531
 7,012
 6,694
Expected return on plan assets(6,237) (7,084) —
 —
 —
 —
 (6,237) (7,084)
Amortization of unrecognized prior service costs (benefits)—
 3
 (275) (395) 125
 233
 (150) (159)
Amortization of losses (gains) from earlier periods2,726
 3,086
 (67) 16
 (15) 166
 2,644
 3,268
Net periodic cost (benefit)$6,290
 $3,522
 $191
 $42
 $627
 $1,000
 $7,108
 $4,564
                
 Nine Months Ended September 30,
 Defined Benefit 
Pension Plan		 Post-Retirement 
Medical Plan		 Supplemental Executive
Retirement Plan		 Total
 2016 2015 2016 2015 2016 2015 2016 2015
Components of net periodic cost (benefit): 
  
  
  
  
  
    
Service cost$6,087
 $4,538
 $935
 $781
 $219
 $211
 $7,241
 $5,530
Interest cost18,948
 17,990
 534
 420
 1,332
 1,592
 20,814
 20,002
Expected return on plan assets(18,793) (21,258) —
 —
 —
 —
 (18,793) (21,258)
Amortization of unrecognized prior service costs (benefits)—
 10
 (827) (1,230) 375
 700
 (452) (520)
Amortization of losses (gains) from earlier periods7,695
 9,298
 (237) (298) (44) 497
 7,414
 9,497
Net periodic cost (benefit)$13,937
 $10,578
 $405
 $(327) $1,882
 $3,000
 $16,224
 $13,251

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 $803$678 with respect to its Post-Retirement Medical Plan and $3,336 with respect to its Supplemental Executive Retirement Plan during the year ended December 31, 2016.2017.  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.
 

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The following table summarizes contributions to the Defined Benefit Pension Plan and payments made to the Post-Retirement Medical Plan and the Supplemental Executive Retirement Plan:
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
 2016 2015 2016 2015 2017 2016
Payments to the Post-Retirement Medical Plan 212
 576
 603
 1,100
 169
 204
Payments to the Supplemental Executive Retirement Plan 834
 830
 2,502
 3,995
 834
 834

11.10.  Income Taxes
 
The provision for income taxes is comprised of the following:
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
 2016 2015 2016 2015 2017 2016
Current (benefit) expense $(1,399)
$29,568
 $41,725
 $67,705
Current expense $12,959

$10,640
Deferred expense 16,694
 1,140
 37,318
 11,221
 4,158
 13,398
Total income tax provision $15,295
 $30,708
 $79,043
 $78,926
 $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:
 Nine Months Ended September 30, 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 (2.7)% (2.8)% (3.3)% (2.3)%
Tax credits (7.3)% (0.3)% (0.8)% (16.3)%
State income taxes, net of federal benefit 2.5 % 1.9 % 1.8 % 2.3 %
Other, net (0.4)% (0.7)% 0.3 % 0.9 %
Effective income tax rate 27.1 % 33.1 % 33.0 % 19.6 %
 
TheDuring the three months ended March 31, 2017, and 2016, the Company recorded a decrease of $5,824 and an increase of $1,008 in unrecognized tax benefits duringin the nine months ended September 30, 2016,amount of $1,994 and 2015,$1,843 respectively. The Company does not anticipate material changesanticipates additional decreases to its unrecognized tax benefits of $7,000 to $9,000 in the next twelve months. The Company expects that the majority of the decrease in its unrecognized tax benefits will not impact the effective tax rate.
 
The Company files income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years 2012 and prior.  Tax years 2013 through 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.
 
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

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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. 

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Individual Markets
 
The Individual Markets reporting and operating segment distributes life insurance annuity, and retirementindividual 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.  IntersegmentThe Company evaluates performance of its reportable segments based on their profitability from operations after income taxes. Inter-segment transactions and balances have been eliminated in consolidation.  The Company’s operations are not materially dependent on one or a few customers, brokers, or agents.

The following tables summarize segment financial information:
 Three Months Ended September 30, 2016 Three Months Ended March 31, 2017
 Individual Empower     Individual Empower    
 Markets Retirement Other Total Markets Retirement Other Total
Revenue:  
  
  
  
  
  
  
  
Premium income $126,770
 $605
 $18,725
 $146,100
 $131,559
 $91
 $20,591
 $152,241
Fee income 23,553
 221,342
 1,518
 246,413
 25,981
 227,320
 1,815
 255,116
Other revenue —
 3,228
 —
 3,228
 —
 2,384
 —
 2,384
Net investment income 185,747
 94,383
 11,409
 291,539
 184,205
 117,620
 11,646
 313,471
Realized investment gains (losses), net 11,026
 21,565
 783
 33,374
 584
 (12,316) (22) (11,754)
Total revenues 347,096
 341,123
 32,435
 720,654
 342,329
 335,099
 34,030
 711,458
Benefits and expenses:  
  
  
  
  
  
  
  
Policyholder benefits 280,821
 51,730
 14,310
 346,861
 270,088
 47,629
 21,711
 339,428
Operating expenses 35,948
 263,327
 19,206
 318,481
 38,386
 255,764
 25,933
 320,083
Total benefits and expenses 316,769
 315,057
 33,516
 665,342
 308,474
 303,393
 47,644
 659,511
Income (loss) before income taxes 30,327
 26,066
 (1,081) 55,312
 33,855
 31,706
 (13,614) 51,947
Income tax expense (benefit) 10,102
 5,442
 (249) 15,295
 11,650
 10,426
 (4,959) 17,117
Net income (loss) $20,225
 $20,624
 $(832) $40,017
 $22,205
 $21,280
 $(8,655) $34,830
 

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 Three Months Ended September 30, 2015 Three Months Ended March 31, 2016
 Individual Empower     Individual Empower    
 Markets Retirement Other Total Markets Retirement Other Total
Revenue:  
  
  
  
  
  
  
  
Premium income $132,761
 $477
 $20,779
 $154,017
 $133,286
 $346
 $21,295
 $154,927
Fee income 19,745
 204,488
 1,009
 225,242
 22,724
 200,923
 1,420
 225,067
Other revenue —
 1,820
 —
 1,820
 —
 3,149
 —
 3,149
Net investment income 222,445
 127,160
 13,452
 363,057
 207,693
 110,534
 13,558
 331,785
Realized investment gains (losses), net 8,304
 14,247
 —
 22,551
 11,806
 19,471
 (7) 31,270
Total revenues 383,255
 348,192
 35,240
 766,687
 375,509
 334,423
 36,266
 746,198
Benefits and expenses:  
  
  
  
  
  
  
  
Policyholder benefits 270,614
 54,401
 32,599
 357,614
 267,497
 49,917
 19,329
 336,743
Operating expenses 49,407
 242,841
 18,544
 310,792
 37,223
 231,640
 17,928
 286,791
Total benefits and expenses 320,021
 297,242
 51,143
 668,406
 304,720
 281,557
 37,257
 623,534
Income (loss) before income taxes 63,234
 50,950
 (15,903) 98,281
 70,789
 52,866
 (991) 122,664
Income tax expense (benefit) 21,539
 14,884
 (5,715) 30,708
 23,834
 651
 (447) 24,038
Net income (loss) $41,695
 $36,066
 $(10,188) $67,573
 $46,955
 $52,215
 $(544) $98,626
         
  Nine Months Ended September 30, 2016
  Individual Empower    
  Markets Retirement Other Total
Revenue:  
  
  
  
Premium income $311,110
 $1,311
 $65,424
 $377,845
Fee income 71,823
 633,679
 4,342
 709,844
Other revenue —
 9,747
 —
 9,747
Net investment income 619,633
 321,972
 37,475
 979,080
Realized investment gains (losses), net 37,602
 68,278
 777
 106,657
Total revenues 1,040,168
 1,034,987
 108,018
 2,183,173
Benefits and expenses:  
  
  
  
Policyholder benefits 749,790
 153,587
 43,499
 946,876
Operating expenses 127,181
 761,827
 55,807
 944,815
Total benefits and expenses 876,971
 915,414
 99,306
 1,891,691
Income (loss) before income taxes 163,197
 119,573
 8,712
 291,482
Income tax expense (benefit) 55,183
 20,579
 3,281
 79,043
Net income (loss) $108,014
 $98,994
 $5,431
 $212,439


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

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

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Commissioners), at anytime.  The Company was in compliance with all covenants at September 30, 2016,March 31, 2017, and December 31, 2015.2016.  At September 30, 2016,March 31, 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 $1,166,730$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 September 30, 2016,March 31, 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 September 30, 2016,March 31, 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 September 30, 2016,March 31, 2017, and December 31, 2015,2016, were $376,191$550,139 and $50,692,$438,458, of which $82,831$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.

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Unfavorable outcomes in such matters may result in a material impact on the Company's financial position, results of operations, or cash flows.

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

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

14.13.  Subsequent Events

The Company evaluated subsequent events throughOn April 26, 2017, the date the condensed consolidated financial statements were issued. The Company concluded that no subsequent events have occurred that would require recognition or disclosure in the condensed consolidated financial statements.Company’s Board of Directors declared a dividend of $60,301 payable on June 15, 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.2016.  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 and nine months ended September 30, 2016,March 31, 2017, compared with the same period in 2015.2016.  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 continueshas completed its program activities related to incur strategic andintegrating the J.P. Morgan Retirement Plan Services business, development expenses as it focuses on enhancements, which will improveimproving the client-facing experience as well as streamlinestreamlining the back-office processing over the next several years.  The Company originally anticipated investing approximately $150 million in total on this multi-year initiative and has invested $147 million by September 30, 2016.  The Company expects the remaining investment to complete integration activities to be approximately $5 million to $10 million.  In 2015, these costs decreased net earnings by $34 million and it is expected these costs will decrease net earnings by approximately $20 million to $25 million in 2016.  For the three and nine months ended September 30, 2016, these costs have decreased net earnings by $6 million and $19 million, respectively.  

The Company has set an annual cost-savings target of $40 million to $50 million pre-tax.  Integration activities are expected to be completed by the second quarter of 2017 with the annual reduction of operating costs fully reflected upon the completion of the business transformation in the next two to three years.  These synergies are expected to be achieved through efficiencies from the conversion of business onto a single back-office platform, increased utilization of Great West Global Business Services India Private Limited (“Great West Global”), which launched in the third quarter of 2015, with 529 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 September 30, 2016December 31, 2016.

Synergies have been achieved through efficiencies from 7.5 million at September 30, 2015.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 willwas 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 continues to analyzehas analyzed the rule against current business practices, primarily in its Empower Retirement and Individual Markets businesses.practices. The rule may requirerequires 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 S&P 500 index at September 30, 2016March 31, 2017 was up by 3% compared to June 30, 2016 and up by 6% compared to January 1, 2016.2017. The S&P 500 index at September 30, 2015March 31, 2016 was downup by 7% compared to June 30, 2015 and was down by 7%less than 1% compared to January 1, 2015.2016.  The average of the S&P 500 index was up by 7%19% during the three months ended September 30, 2016, and was down by less than 1% during the nine months ended September 30, 2016, respectively,March 31, 2017, when compared to the same period in 2015.2016.
 2016 2015 2017 2016
S&P 500 Index Close Average in Quarter Average for Year to Date Close Average in Quarter Average for Year to Date Close Average in Quarter Close Average in Quarter
September 30 2,168
 2,161
 2,063
 1,920
 2,027
 2,064
June 30 2,099
 2,074
 2,013
 2,063
 2,102
 2,083
March 31 2,060
 1,952
 1,952
 2,068
 2,064
 2,064
 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 increased for the three and nine months ended September 30, 2016,March 31, 2017, when compared to the same period in 2015.2016. For the three months ended September 30, 2016,March 31, 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. For the nine months ended September 30, 2016, the variance was primarily due to higher asset-based fees, driven by growth in these assets, due to positive net cash flows.
 
Interest rates decreased during the first nine months of 2016 as compared to 2015 when interest rates were volatile. The 10-year U.S. Treasury rate at September 30, 2016, was up by 11 basis points as compared to June 30, 2016 andMarch 31, 2017, was down by 6710 basis points as compared to January 1, 2016.2017. The rate at September 30, 2015March 31, 2016 was down by 29 basis points as compared to June 30, 2015 and was down by 1149 basis points as compared to January 1, 2015.2016. The average of the 10-year U.S. Treasury rate during the three months ended September 30, 2016,March 31, 2017, was downup by 6654 basis points when compared to 2015 and the rate during the nine months ended September 30, 2016 was down by 38 basis points when compared to 2015.

2016.
 2016 2015 2017 2016
10-Year Treasury Rate Close Average in Quarter Average for Year to Date Close Average in Quarter Average for Year to Date Close Average in Quarter Close Average in Quarter
September 30 1.60% 1.56% 1.74% 2.06% 2.22% 2.12%
June 30 1.49% 1.75% 1.89% 2.35% 2.16% 2.07%
March 31 1.78% 1.91% 1.91% 1.94% 1.97% 1.97% 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 thosesome 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 September 30, 2016,March 31, 2017, the Company recorded unfavorable changes in unrealized gains (losses), net,realized losses on forward settling to be announced (“TBA”) securities of $41$6 million, as compared to 2015. For the nine months ended September 30, 2016, the Company recorded favorable changesgains of $18$3 million in unrealized gains (losses), net, primarily due to cross-currency swaps. Additionally, the realized gains (losses), net, on forward settling TBA securities had favorable changes of $11 million and $25 million for the three and nine months ended September 30, 2016, as compared to 2015.

Unrealized gains (losses) on fixed maturity investments fluctuate with changes in the prevailing interest rates.  When interest rates rise, market values of fixed maturity investments generally fall.  During2016. For the three months ended September 30, 2016, fixed maturity investments' unrealized investment gains (losses), net, recognizedMarch 31, 2017, the Company recorded losses in net investment income had an unfavorable changeon cross-currency swaps of $5 million, as compared to 2015. Conversely, when prevailing interest rates fall, market values of fixed maturity investments rise. For the nine months ended September 30, 2016 there was a favorable change of $6$14 million, compared to 2015. The Company also recordedgains of $12 million in other comprehensive income favorable changes in unrealized gains (losses), net, on fixed maturity investments, of $48 million and $846 million for the three and nine months ended September 30, 2016, respectively, compared


to unfavorable changes of $10 million and $355 million for the three and nine months ended September 30, 2015, respectively. The realized gains (losses), net, on fixed maturity investments had a favorable change of $6 million and $31 million for the three and nine months ended September 30, 2016, respectively, as compared to 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. OperatingAdjusted 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 September 30, 2016March 31, 2017 compared with the three months ended September 30, 2015March 31, 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. OperatingAdjusted 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 net income and a reconciliation of net income to adjusted operating income:
 Three Months Ended September 30, 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 $20
 $42
 $(22) (52)% $22
 $47
 $(25) (53)%
Empower Retirement segment 21
 36
 (15) (42)% 21
 52
 (31) (60)%
Other segment (1) (10) 9
 (90)% (8) (1) (7) 700 %
Total net (loss) income 40
 68
 (28) (41)% 35
 98
 (63) (64)%
Adjustments to net (loss) income                
Unrealized investment gains (losses), net (9) 69
 (78) (113)% (3) 28
 (31) (111)%
Realized investment gains (losses), net 33
 23
 10
 43 % (12) 31
 (43) (139)%
Pro-rata tax (expense) benefit (1)
 (8) (32) 24
 (75)% 5
 (21) 26
 (124)%
Operating income (loss) $24
 $8
 $16
 200 %
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 $78$31 million, or 113%111%, from a gain of $69$28 million in 20152016 to a loss of $9$3 million in 2016.2017. The change was due to a $41 million unfavorable change from forward settling TBA securities, a $32$29 million unfavorable change from derivatives and a $5 millionin addition to an unfavorable change of $6 million from bonds.bonds, partially offset by a favorable change of $4 million from forward settling TBA securities.

Realized investment gains (losses), net, had a favorablean unfavorable change of $10$43 million, or 43%139%, from a gain of $31 million in 2016 to $33a loss of $12 million during the three months ended September 30, 2016, when compared to the same period in 2015.2017. The change was due to a $10$36 million favorableunfavorable change from bonds, a $9 million unfavorable change from forward settling TBA securities, andpartially offset by a $6$2 million favorable change from bonds, partially offset by a $6 million unfavorable change from derivatives.mortgages.

Pro-rata tax expense decreasedchanged by $24$26 million, to an expensea benefit of $8$5 million in 2016,2017, primarily resulting fromdue to the unfavorable change in total unrealized investment gains (losses), net.



Nine Months Ended September 30, 2016 compared with the nine months ended September 30, 2015
The following is a summary of the contributions of each segment to net income and a reconciliation of net income to operating income:
  Nine Months Ended September 30, Increase Percentage
Income statement data (In millions) 2016 2015 (decrease) change
Net (loss) income        
Individual Markets segment $108
 $98
 $10
 10 %
Empower Retirement segment 99
 76
 23
 30 %
Other segment 5
 (15) 20
 (133)%
Total net (loss) income 212
 159
 53
 33 %
Adjustments to net (loss) income        
Unrealized investment gains (losses), net 73
 56
 17
 30 %
Realized investment gains (losses), net 107
 57
 50
 88 %
Pro-rata tax (expense) benefit (1)
 (63) (39) (24) (62)%
Operating income (loss) $95
 $85
 $10
 12 %

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

Unrealized investment gains (losses), net, had a favorable change of $17 million, or 30%, to a gain of $73 million during the nine months ended September 30, 2016, when compared to the same period in 2015. The change was driven by an $18 million favorable change in unrealized gains on derivatives and a $6 million favorable change in unrealized gains on bonds, offset by unrealized losses on forward settling TBA securities of $7 million.

Realized investment gains (losses), net, had a favorable change of $50 million, or 88%, to $107 million during the nine months ended September 30, 2016, when compared to the same period in 2015. The change was driven by a favorable change of $31 million from gains on bonds and a $25 million favorable change in gains on forward settling TBA security transactions, partially offset by unfavorable changes of $6 million in derivatives.

Pro-rata tax expense increased by $24 million, or 62%, to $63 million during the nine months ended September 30, 2016, when compared to the same period in 2015, resulting from the favorable change in unrealized and realized investment gains (losses), net.




Company Results of Operations
 
Three months ended September 30, 2016March 31, 2017 compared with the three months ended September 30, 2015March 31, 2016
 
The following is a summary of certain financial data of the Company:
  
 Three Months Ended September 30, Increase Percentage Three Months Ended March 31, Increase Percentage
Income statement data (In millions) 2016 2015 (decrease) change 2017 2016 (decrease) change
Premium income $146
 $154
 $(8) (5)% $153
 $155
 $(2) (1)%
Fee income 246
 225
 21
 9 % 255
 225
 30
 13 %
Other revenue 3
 2
 1
 50 % 2
 3
 (1) (33)%
Net investment income 301
 295
 6
 2 %
Total revenues 696
 676
 20
 3 %
Adjusted net investment income 316
 304
 12
 4 %
Total adjusted operating revenues 726
 687
 39
 6 %
Policyholder benefits 347
 358
 (11) (3)% 339
 337
 2
 1 %
Operating expenses 318
 311
 7
 2 % 320
 287
 33
 11 %
Total benefits and expenses 665
 669
 (4) (1)% 659
 624
 35
 6 %
Income (loss) before income taxes 31
 7
 24
 343 %
Income tax (benefit) expense 7
 (1) 8
 (800)%
Operating income (loss) $24
 $8
 $16
 200 %
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 increaseddecreased by $16$15 million, or 200%25%, to $24$45 million for the three months ended September 30, 2016,March 31, 2017, when compared to the same period in 2015.2016. The increasedecrease was primarily due to increased operating expenses and adjusted income tax expense, partially offset by higher fee income and lower policyholder benefits, partially offset by higher income tax expense and higher operating expenses.

Fee income increased by $21 million, or 9%, to $246 million for the three months ended September 30, 2016, when compared to the same periodfavorable changes in 2015 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.
Policyholder benefits decreased by $11 million, or 3%, to $347 million for the three months ended September 30, 2016, when compared to the same period in 2015 primarily driven by more lapses on term life insurance policies, partially offset by higher policyholder benefits in Individual Markets due to unfavorable mortality experience.

Operating expenses increased by $7 million, or 2%, to $318 million for the three months ended September 30, 2016, when compared to the same period in 2015 primarily due to higher salaries and benefits as a result of higher headcount due to business growth, partially offset by lower deferred acquisition costs (“DAC”) amortization.
Income tax expense increased by $8 million, from a benefit of $1 million in 2015 to an expense of $7 million in 2016 primarily due to higher operating income before tax.


Nine Months Ended September 30, 2016 compared with the nine months ended September 30, 2015
The following is a summary of certain financial data of the Company:
  Nine Months Ended September 30, Increase Percentage
Income statement data (In millions) 2016 2015 (decrease) change
Premium income $378
 $374
 $4
 1 %
Fee income 710
 688
 22
 3 %
Other revenue 10
 5
 5
 100 %
Net investment income 905
 887
 18
 2 %
Total revenues 2,003
 1,954
 49
 3 %
Policyholder benefits 947
 958
 (11) (1)%
Operating expenses 945
 871
 74
 8 %
Total benefits and expenses 1,892
 1,829
 63
 3 %
Income (loss) before income taxes 111
 125
 (14) (11)%
Income tax (benefit) expense 16
 40
 (24) (60)%
Operating income (loss) $95
 $85
 $10
 12 %

The Company’s consolidated operating income increased by $10 million, or 12%, to $95 million for the nine months ended September 30, 2016, when compared to the same period in 2015. The change was primarily due to lower income tax expense, higher fee income, higher net investment income, and lower policyholder benefits, partially offset by increased operating expenses.

Fee income increased by $22 million, or 3%, to $710 million for the nine months ended September 30, 2016, when compared to the same period in 2015, primarily due to higher asset-based fees, driven by growth in these assets, due to positive net cash flows.

Net investment income had a favorable change of $18 million, or 2%, to $905 million during the nine months ended September 30, 2016, when compared to the same period in 2015. This was primarily due to higher investment income on bonds, mortgages, and policy loans as a result of higher invested asset balances, partially offset by lower yields.

Policyholder benefits decreased by $11 million, or 1%, to $947 million for the three months ended September 30, 2016, when compared to the same period in 2015 primarily driven by more lapses on term life insurance policies, partially offset by higher policyholder benefits in Individual Markets due to unfavorable mortality experience.
Operating expenses increased by $74 million, or 8%, to $945 million for the nine months ended September 30, 2016, when compared to the same period in 2015 primarily due to higher salaries and benefits as a result of higher headcount due to business growth, partially offset by lower DAC amortization.
Income tax expense decreased by $24 million, or 60%, to $16 million for the nine months ended September 30, 2016, when compared to the same period in 2015 primarily due to a management election to claim foreign tax credits in addition to a decrease in operating income before tax.



Individual Markets Segment Results of Operations
Three months ended September 30, 2016 compared with the three months ended September 30, 2015
The following is a summary of certain financial data of the Individual Markets segment:
  Three Months Ended September 30, Increase Percentage
Income statement data (In millions) 2016 2015 (decrease) change
Premium income $127
 $133
 $(6) (5)%
Fee income 24
 20
 4
 20 %
Net investment income 191
 191
 —
 — %
Total revenues 342
 344
 (2) (1)%
Policyholder benefits 281
 271
 10
 4 %
Operating expenses 36
 49
 (13) (27)%
Total benefits and expenses 317
 320
 (3) (1)%
Income (loss) before income taxes 25
 24
 1
 4 %
Income tax (benefit) expense 8
 8
 —
 — %
Operating income (loss) $17
 $16
 $1
 6 %
Operating income for the Individual Markets segment increased by $1 million, or 6%, to $17 million, during the three months ended September 30, 2016, when compared to the same period in 2015. The change was primarily due to lower operating expenses, partially offset by higher policyholder benefits.

Policyholder benefits increased by $10 million, or 4%, to $281 million for the three months ended September 30, 2016, when compared to the same period in 2015 primarily due to unfavorable mortality experience.

Operating expenses decreased by $13 million, or 27%, to $36 million for the three months ended September 30, 2016, when compared to the same period in 2015 primarily due to lower DAC amortization, partially offset by an increase in salaries and benefits as a result of increased headcount due to business growth.


Nine Months Ended September 30, 2016 compared with the nine months ended September 30, 2015
The following is a summary of certain financial data of the Individual Markets segment:

  Nine Months Ended September 30, Increase Percentage
Income statement data (In millions) 2016 2015 (decrease) change
Premium income $311
 $309
 $2
 1 %
Fee income 72
 66
 6
 9 %
Net investment income 569
 566
 3
 1 %
Total revenues 952
 941
 11
 1 %
Policyholder benefits 750
 726
 24
 3 %
Operating expenses 127
 117
 10
 9 %
Total benefits and expenses 877
 843
 34
 4 %
Income (loss) before income taxes 75
 98
 (23) (23)%
Income tax (benefit) expense 24
 33
 (9) (27)%
Operating income (loss) $51
 $65
 $(14) (22)%

Operating income for the Individual Markets segment decreased by $14 million, or 22%, to $51 million during the nine months ended September 30, 2016, when compared to the same period in 2015. The change was primarily due to higher policyholder benefits and operating expenses, partially offset by lower income tax expense, higher fee income and higheradjusted net investment income.

Fee income increased by $6$30 million, or 9%13%, to $72$255 million for the ninethree months ended September 30, 2016,March 31, 2017, when compared to the same period in 20152016. This increase was primarily duerelated to positivean increase in asset-based variable fee income resulting from increased average asset levels driven by sales and higher average equity market levels.

Adjusted net cash flows.
Net investment income had a favorable change of $3increased by $12 million, or 1%4%, to $569 million for the nine months ended September 30, 2016, when compared to the same period in 2015. This$316 million. The increase was dueprimarily related to higher investment income earned on bonds, mortgages, and policy loans as a result of higher invested asset balances, partially offset by lower yields.

Policyholder benefitsOperating expenses increased by $24$33 million, or 3%11%, to $750$320 million for the ninethree months ended September 30, 2016,March 31, 2017, when compared to the same period in 20152016 primarily due to unfavorable mortality experience.higher salaries and benefits and deferred acquisition costs (“DAC”) amortization.
Adjusted income tax expense increased by $19 million, from an expense of $3 million in 2016 to $22 million in 2017 primarily due to a management election to claim foreign tax credits during 2016.

Operating expenses






Individual Markets Segment Results of Operations
Three months ended March 31, 2017 compared with the three months ended March 31, 2016
The following is a summary of certain financial data of the Individual Markets segment:
  Three Months Ended March 31, Increase Percentage
Income statement data (In millions) 2017 2016 (decrease) change
Premium income $132
 $134
 $(2) (1)%
Fee income 26
 23
 3
 13 %
Adjusted net investment income 190
 186
 4
 2 %
Total adjusted operating revenues 348
 343
 5
 1 %
Policyholder benefits 270
 268
 2
 1 %
Operating expenses 38
 37
 1
 3 %
Total benefits and expenses 308
 305
 3
 1 %
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)%
Adjusted operating income for the Individual Markets segment during the three months ended March 31, 2017 was comparable to to the same period in 2016. This was primarily due to favorable changes in adjusted net investment income, partially offset by increased by $10adjusted income tax expense.

Adjusted net investment income had a favorable change of $4 million, or 9%2%, to $127$190 million for the ninethree months ended September 30, 2016,March 31, 2017, when compared to the same period in 2015 primarily due to2016. The primary driver of the change was higher salariesinvestment income on bonds and benefitsmortgages as a result of higher headcount due to business growth.invested asset balances, partially offset by lower yields.

IncomeAdjusted income tax expense decreasedincreased by $9$3 million, or 27%,from an expense of $11 million in 2016 to $24$14 million during the nine months ended September 30, 2016, when compared to the same period in 20152017 primarily due to lower operating income before tax.favorable changes in net investment income.


��




Empower Retirement Segment Results of Operations
 
Three months ended September 30, 2016March 31, 2017 compared with the three months ended September 30, 2015March 31, 2016
 
The following is a summary of certain financial data of the Empower Retirement segment:
 
 Three Months Ended September 30, Increase Percentage Three Months Ended March 31, Increase Percentage
Income statement data (In millions) 2016 2015 (decrease) change 2017 2016 (decrease) change
Fee income $221
 $204
 $17
 8 % $227
 $201
 $26
 13 %
Other revenue 3
 2
 1
 50 % 2
 3
 (1) (33)%
Net investment income 99
 91
 8
 9 %
Total revenues 323
 297
 26
 9 %
Adjusted net investment income 115
 104
 11
 11 %
Total adjusted operating revenues 344
 308
 36
 12 %
Policyholder benefits 52
 54
 (2) (4)% 48
 50
 (2) (4)%
Operating expenses 263
 243
 20
 8 % 256
 232
 24
 10 %
Total benefits and expenses 315
 297
 18
 6 % 304
 282
 22
 8 %
Income (loss) before income taxes 8
 —
 8
 100 %
Income tax (benefit) expense (1) (3) 2
 (67)%
Operating income (loss) $9
 $3
 $6
 200 %
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)%
  
OperatingAdjusted operating income for the Empower Retirement segment increaseddecreased by $6$7 million, or 200%21%, to $9$27 million for the three months ended September 30, 2016,March 31, 2017, when compared to the same period in 2015.2016. The change was primarily due to higher operating expenses and adjusted income tax expense, partially offset by favorable fee income and adjusted net investment income, partially offset by higher operating expenses.income.

Fee income increased by $17$26 million, or 8%13%, to $221$227 million for the three months ended September 30, 2016,March 31, 2017, when compared to the same period in 2015,2016. This increase was primarily duerelated to higheran increase in asset-based fees,variable fee income resulting from increased average asset levels driven by growth in these assets, due to positive net cash flowssales and higher average equity market levels.

NetAdjusted net investment income had a favorable change of $8$11 million, or 9%11%, to $99$115 million for the three months ended September 30, 2016,March 31, 2017, when compared to the same period in 2015.2016. The primary driver of the change was higher investment income on bonds and mortgages as a result of higher invested asset balances, partially offset by lower yields.

Operating expenses increased by $20$24 million, or 8%10%, to $263$256 million for the three months ended September 30, 2016,March 31, 2017, when compared to the same period in 2015.2016. The increase was primarily due to an increase in salaries and benefits as a result of increased headcount due to business growth, partially offset by lower DAC amortization.





Nine Months Ended September 30, 2016 compared with the nine months ended September 30, 2015
The following is a summary of certain financial data of the Empower Retirement segment:
  Nine Months Ended September 30, Increase Percentage
Income statement data (In millions) 2016 2015 (decrease) change
Premium income $1
 $—
 $1
 100 %
Fee income 634
 619
 15
 2 %
Other revenue 10
 5
 5
 100 %
Net investment income 299
 281
 18
 6 %
Total revenues 944
 905
 39
 4 %
Policyholder benefits 154
 151
 3
 2 %
Operating expenses 762
 704
 58
 8 %
Total benefits and expenses 916
 855
 61
 7 %
Income (loss) before income taxes 28
 50
 (22) (44)%
Income tax (benefit) expense (11) 15
 (26) (173)%
Operating income (loss) $39
 $35
 $4
 11 %
Operating income for the Empower Retirement segment increased by $4 million, or 11%, to $39 million for the nine months ended September 30, 2016, when compared to the same period in 2015. The change was primarily due to lower income tax expense, higher net investment income, and higher fee income, partially offset by higher operating expenses.

Fee income increased by $15 million, or 2%, to $634 million for the nine months ended September 30, 2016, when compared to the same period in 2015, primarily due to higher asset-based fees, driven by growth in these assets, due to positive net cash flows.
Net investment income had a favorable change of $18 million, or 6%, to $299 million for the nine months ended September 30, 2016, when compared to the same period in 2015. The primary driver of the change was higher investment income on bonds and mortgages as a result of higher invested asset balances, partially offset by lower yields.

Operating expenses increased by $58 million, or 8%, to $762 million for the nine months ended September 30, 2016, when compared to the same period in 2015. The change was primarily due to higher salaries and benefits as a result of higher headcount due to business growth, partially offset by lowerand DAC amortization.

IncomeAdjusted income tax changed by $26expense had an unfavorable change of $21 million, from an expense of $15or 263%, to $13 million to a benefit of $11 million duringfor the ninethree months ended September 30, 2016,March 31, 2017, when compared to the same period in 2015.2016. The change wasincreased tax expense is primarily due to a management election to claim foreign tax credits in addition to lowera decrease in adjusted operating income before tax.tax during 2016.






Other Segment Results of Operations
 
Three months ended September 30, 2016March 31, 2017 compared with the three months ended September 30, 2015March 31, 2016
 
The following is a summary of certain financial data of the Company’s Other segment:
 Three Months Ended September 30, Increase Percentage Three Months Ended March 31, Increase Percentage
Income statement data (In millions) 2016 2015 (decrease) change 2017 2016 (decrease) change
Premium income $19
 $21
 $(2) (10)% $21
 $21
 $—
 — %
Fee income 1
 1
 —
 — % 2
 1
 1
 100 %
Net investment income 11
 13
 (2) (15)%
Total revenues 31
 35
 (4) (11)%
Adjusted net investment income 11
 14
 (3) (21)%
Total adjusted operating revenues 34
 36
 (2) (6)%
Policyholder benefits 14
 33
 (19) (58)% 21
 19
 2
 11 %
Operating expenses 19
 19
 —
 — % 26
 18
 8
 44 %
Total benefits and expenses 33
 52
 (19) (37)% 47
 37
 10
 27 %
Income (loss) before income taxes (2) (17) 15
 (88)%
Income tax (benefit) expense —
 (6) 6
 (100)%
Operating income (loss) $(2) $(11) $9
 (82)%
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 %
  
OperatingAdjusted operating loss for the Company’s Other segment decreasedincreased by $9$7 million, or 82%700%, to a loss of $2$8 million for the three months ended September 30, 2016March 31, 2017 compared to a loss of $11$1 million in 2015.2016. The decreaseincrease in adjusted operating loss iswas primarily due to lower policyholder benefits,higher operating expenses, partially offset by higheran increase in the adjusted income tax expense.benefit.

Policyholder benefits decreasedOperating expenses increased by $19$8 million, or 58%44%, to $14$26 million for the three months ended September 30, 2016March 31, 2017 primarily due to more lapses on term life insurance policies compared to the prior year.restructuring costs.

IncomeAdjusted income tax benefit decreasedincreased by $6$5 million, or 100%, to no expensea benefit of $7 million for the three months ended September 30, 2016March 31, 2017 primarily due to lowera higher adjusted operating loss before tax.



Nine Months Ended September 30, 2016 compared with the nine months ended September 30, 2015
The following is a summary of certain financial data of the Company’s Other segment:
  Nine Months Ended September 30, Increase Percentage
Income statement data (In millions) 2016 2015 (decrease) change
Premium income $66
 $65
 $1
 2 %
Fee income 4
 3
 1
 33 %
Net investment income 37
 40
 (3) (8)%
Total revenues 107
 108
 (1) (1)%
Policyholder benefits 43
 81
 (38) (47)%
Operating expenses 56
 50
 6
 12 %
Total benefits and expenses 99
 131
 (32) (24)%
Income (loss) before income taxes 8
 (23) 31
 (135)%
Income tax (benefit) expense 3
 (8) 11
 (138)%
Operating income (loss) $5
 $(15) $20
 (133)%
Operating income for the Company’s Other segment increased by $20 million, or 133%, to $5 million for the nine months ended September 30, 2016, when compared to a loss of $15 million in the same period in 2015. The change in operating income is primarily due to lower policyholder benefits, partially offset by higher income tax expense and higher operating expenses.

Policyholder benefits decreased by $38 million, or 47%, to $43 million for the nine months ended September 30, 2016 primarily driven by more lapses on term life insurance policies compared to the prior year.

Operating expenses increased by $6 million, or 12%, to $56 million for the nine months ended September 30, 2016, when compared to the same period in 2015 primarily due to a legal settlement.

Income tax expense increased by $11 million, or 138%, to an expense of $3 million for the nine months ended September 30, 2016 compared to a benefit of $8 million in 2015 primarily due to higher operating income before income taxes.



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

The Company follows rigorous procedures to control interest rate risk and observes strict asset and liability matching guidelines.  These guidelines ensure that even under changing market conditions, the Company’s assets should meet the cash flow and income requirements of its liabilities. Using dynamic modeling to analyze the effects of a range of possible market changes upon investments and policyholder benefits, the Company works to ensure that its investment portfolio is appropriately structured to fulfill financial obligations to its policyholders.
 
The following table presents the percentage distribution of the carrying values of the Company’s general account investment portfolio: 
(In millions)
September 30, 2016
December 31, 2015
March 31, 2017
December 31, 2016
Fixed maturities, available-for-sale
$20,826

66.7%
$20,532

71.3%
$22,042

71.4%
$22,154

72.4%
Fixed maturities, held-for-trading
399

1.3%
616

2.1%
186

0.6%
515

1.7%
Mortgage loans on real estate
3,568

11.4%
3,248

11.3%
3,845

12.4%
3,559

11.6%
Policy loans
4,056

13.0%
4,093

14.2%
4,017

13.0%
4,020

13.1%
Short-term investments
2,315

7.4%
266

0.9%
743

2.4%
303

1.0%
Limited partnership and other corporation interests
36

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
$31,215

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 methodologyCompany generally takes into accountconsiders 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 September 30, 2016 December 31, 2015 March 31, 2017 December 31, 2016
AAA 19.5% 27.8% 23.4% 27.3%
AA 15.8% 14.8% 14.7% 13.9%
A 33.2% 29.5% 32.3% 30.8%
BBB 30.3% 26.9% 28.4% 26.8%
BB and below (Non-investment grade) 1.2% 1.0% 1.2% 1.2%
Total 100.0% 100.0% 100.0% 100.0%


The September 30, 2016,March 31, 2017, AAA rating percentage decreased as compared to December 31, 2015,2016, 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 September 30, 2016 December 31, 2015 March 31, 2017 December 31, 2016
Utility 19.7% 17.6% 18.6% 18.1%
Finance 11.7% 10.2% 11.9% 10.8%
Consumer 10.7% 9.3% 10.3% 9.7%
Natural resources 7.0% 6.5% 6.6% 6.3%
Transportation 3.9% 3.2% 4.1% 3.6%
Other 15.2% 13.0% 14.2% 13.3%
 
Mortgage Loans on Real Estate
 
The Company’s mortgage loans on real estate are comprised 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 $432$279 million and $301$322 million as of September 30, 2016,March 31, 2017, and December 31, 2015,2016, respectively.  The September 30, 2016,March 31, 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 September 30, 2016,March 31, 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 $100$99 million and $93$99 million of commercial paper outstanding as of September 30, 2016,March 31, 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 ninethree months ended September 30, 2016.March 31, 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 September 30, 2016,March 31, 2017, and December 31, 2015,2016, were $376$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 $300$35 million and zero at September 30, 2016,March 31, 2017, and December 31, 2015,2016, respectively.  Non-cash collateral on deposit with the third-party custodian on the Company’s behalf was $306$35 million and zero at September 30, 2016,March 31, 2017, and December 31, 2015,2016, 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 $66$71 million as collateral at September 30, 2016,March 31, 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, 2015.2016.

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 Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”).  The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and to ensure that the information required to be disclosed by the Company in reports that it files under the Exchange Act is accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, the President and Chief Executive Officer and Principal Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of September 30, 2016.March 31, 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 and nine months ended September 30, 2016.March 31, 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
 
From time to time, the Company may be threatened with, or named as a defendant in, lawsuits, mediations, arbitrations, and administrative claims. Any such claims that are decided against the Company could harm the Company’s business. The Company is also subject to periodic regulatory audits and inspections which could result in fines or other disciplinary actions. Unfavorable outcomes in such matters may result in a material impact on the Company's financial position, results of operations, or cash flows.
 
The Company is defending lawsuits relating to the costs and features of certain of its retirement or fund products. These actions have not reached the trial stage. Management believes the claims are without merit and will defend these actions. Based on the information known, these actions will not have a material adverse effect on the consolidated financial position of the Company.

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

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 NumberTitle
31.1Rule 13a-14(a)/15-d14(a) Certification
31.2Rule 13a-14(a)/15-d14(a) Certification
3218 U.S.C. 1350 Certification
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Great-West Life & Annuity Insurance Company
 
By:/s/Kara Roe Date:November 10, 2016May 12, 2017
  Kara Roe   
  Vice President, Controller, and Principal Accounting Officer   


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