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 March 31, 20172018

 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 May 12, 2017, 7,292,70814, 2018, 7,320,176 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 
 Item 1
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
 Item 2
 Item 3
 Item 4
    
Part II
 Item 1
 Item 1A
 Item 6
    
  



Part I     Financial Information
Item1.    Interim Financial Statements


 GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Balance Sheets
March 31, 20172018 and December 31, 20162017
(In Thousands, Except Share Amounts)
(Unaudited)
 
 March 31, 2017 December 31, 2016 March 31, 2018 December 31, 2017
Assets  
  
  
  
Investments:  
  
  
  
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
Fixed maturities, available-for-sale, at fair value (amortized cost $22,821,271 and $22,762,962) $23,183,757
 $23,593,139
Fixed maturities, held-for-trading, at fair value (amortized cost $20,182 and $20,512) 20,254
 21,059
Mortgage loans on real estate (net of allowances of $773 and $773) 4,151,760
 4,005,187
Policy loans 4,016,844
 4,019,648
 4,067,552
 4,104,094
Short-term investments (amortized cost $744,063 and $303,988) 744,063
 303,988
Limited partnership and other corporation interests 37,948
 34,895
Short-term investments (amortized cost $297,520 and $350,266) 297,520
 350,266
Limited partnership interests 53,120
 45,540
Other investments 14,529
 15,052
 17,918
 17,997
Total investments 30,886,268
 30,600,850
 31,791,881
 32,137,282
        
Other assets:  
  
  
  
Cash and cash equivalents
 12,920
 18,321
 20,572
 17,211
Reinsurance recoverable 597,096
 598,864
 589,117
 589,080
Deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”) 490,487
 486,690
 632,548
 518,510
Investment income due and accrued 315,826
 287,681
 330,514
 299,362
Collateral under securities lending agreements 94,531
 
 95,024
 
Due from parent and affiliates 86,834
 81,995
 101,768
 114,133
Goodwill 137,683
 137,683
 137,683
 137,683
Other intangible assets 19,297
 20,087
 16,413
 17,085
Other assets 1,014,949
 1,021,210
 1,040,593
 954,250
Assets of discontinued operations 17,213
 17,652
 15,232
 16,095
Separate account assets 27,597,906
 27,037,765
 26,843,072
 27,660,571
Total assets $61,271,010
 $60,308,798
 $61,614,417
 $62,461,262
 
See notes to condensed consolidated financial statements. (Continued)



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Balance Sheets
March 31, 2017,2018 and December 31, 20162017
(In Thousands, Except Share Amounts)
(Unaudited)
 
 March 31, 2017 December 31, 2016 March 31, 2018 December 31, 2017
Liabilities and stockholder’s equity  
  
  
  
Policy benefit liabilities:  
  
  
  
Future policy benefits $29,230,356
 $28,872,899
 $30,202,676
 $30,048,927
Policy and contract claims 384,990
 372,259
 401,815
 389,029
Policyholders’ funds 241,167
 285,554
 247,781
 280,578
Provision for policyholders’ dividends 48,070
 49,521
 40,403
 41,972
Undistributed earnings on participating business 16,000
 15,573
 12,070
 14,636
Total policy benefit liabilities 29,920,583
 29,595,806
 30,904,745
 30,775,142
        
General liabilities:  
  
  
  
Due to parent and affiliates 539,884
 537,990
 559,754
 553,901
Commercial paper 98,645
 99,049
 85,882
 99,886
Payable under securities lending agreements 94,531
 
 95,024
 
Deferred income tax liabilities, net 230,519
 191,911
 50,926
 93,203
Other liabilities 737,179
 816,304
 854,700
 812,875
Liabilities of discontinued operations 17,213
 17,652
 15,232
 16,095
Separate account liabilities 27,597,906
 27,037,765
 26,843,072
 27,660,571
Total liabilities 59,236,460
 58,296,477
 59,409,335
 60,011,673
        
Commitments and contingencies (See Note 12) 

 

Commitments and contingencies (See Note 13) 

 

        
Stockholder’s equity:  
  
  
  
Preferred stock, $1 par value, 50,000,000 shares authorized; none issued and outstanding 
 
 
 
Common stock, $1 par value, 50,000,000 shares authorized; 7,292,708 shares issued and outstanding 7,293
 7,293
Common stock, $1 par value, 50,000,000 shares authorized; 7,320,176 shares issued and outstanding 7,320
 7,320
Additional paid-in capital 863,451
 863,031
 950,586
 949,520
Accumulated other comprehensive income 299,854
 235,875
 137,775
 440,957
Retained earnings 863,952
 906,122
 1,109,401
 1,051,792
Total stockholder’s equity 2,034,550
 2,012,321
 2,205,082
 2,449,589
Total liabilities and stockholder’s equity $61,271,010
 $60,308,798
 $61,614,417
 $62,461,262
 
See notes to condensed consolidated financial statements. (Concluded)



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Income
Three Months Ended March 31, 2017,2018 and 20162017
(In Thousands)
(Unaudited)
 
 Three Months Ended March 31, Three Months Ended March 31,
 2017 2016 2018 2017
Revenues:  
  
    
Premium income $152,241
 $154,927
 $144,682
 $152,241
Fee income 255,116
 225,067
 275,964
 255,116
Other revenue 2,384
 3,149
 2,985
 2,384
Net investment income 313,471
 331,785
 338,141
 313,471
Realized investment gains (losses), net:  
  
Total other-than-temporary gains (losses), net 
 (536)
Other realized investment gains (losses), net (11,754) 31,806
Total realized investment gains (losses), net (11,754) 31,270
Investment (losses) gains, net (43,743) (11,754)
Total revenues 711,458
 746,198
 718,029
 711,458
Benefits and expenses:  
  
    
Life and other policy benefits 170,289
 186,636
 187,544
 170,289
Increase (decrease) in future policy benefits 126
 (14,015)
(Decrease) increase in future policy benefits (22,008) 126
Interest credited or paid to contractholders 153,946
 148,310
 161,283
 153,946
Provision for policyholders’ share of (losses) earnings on participating business (2) (169)
Provision for policyholders’ share of losses on participating business (516) (2)
Dividends to policyholders 15,069
 15,981
 12,282
 15,069
Total benefits 339,428
 336,743
 338,585
 339,428
General insurance expenses 307,131
 276,528
 298,132
 307,131
Amortization of DAC and VOBA 5,322
 539
 11,292
 5,322
Interest expense 7,630
 9,724
 7,809
 7,630
Total benefits and expenses 659,511
 623,534
 655,818
 659,511
Income before income taxes 51,947
 122,664
 62,211
 51,947
Income tax expense 17,117
 24,038
 13,553
 17,117
Net income $34,830
 $98,626
 $48,658
 $34,830
 
See notes to condensed consolidated financial statements.



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2017,2018 and 20162017
(In Thousands)
(Unaudited)
 
  Three Months Ended March 31,
  2017 2016
Net income $34,830
 $98,626
Components of other comprehensive income  
  
Unrealized holding gains (losses), net, arising on available-for-sale fixed maturity investments 130,229
 446,610
Unrealized holding gains (losses), net, arising on cash flow hedges (6,955) (1,604)
Reclassification adjustment for (gains) losses, net, realized in net income 1,475
 (22,456)
Net unrealized gains (losses) related to investments 124,749
 422,550
Future policy benefits, DAC and VOBA adjustments (28,466) (76,240)
Employee benefit plan adjustment 2,146
 2,234
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
  Three Months Ended March 31,
  2018 2017
Net income $48,658
 $34,830
Components of other comprehensive (loss) income  
  
Unrealized holding (losses) gains, net, arising on available-for-sale fixed maturity investments (459,680) 130,229
Unrealized holding (losses) gains, net, arising on cash flow hedges (6,496) (6,955)
Reclassification adjustment for (gains) losses, net, realized in net income (5,587) 1,475
Net unrealized (losses) gains related to investments (471,763) 124,749
Future policy benefits, DAC and VOBA adjustments 87,408
 (28,466)
Employee benefit plan adjustment 580
 2,146
Other comprehensive (loss) income before income taxes (383,775) 98,429
Income tax (benefit) expense related to items of other comprehensive income (80,593) 34,450
Other comprehensive (loss) income(1)
 (303,182) 63,979
Total comprehensive (loss) income $(254,524) $98,809

(1) Other comprehensive (loss) income includes the non-credit component of impaired (losses) gains, (losses), net, on fixed maturities available-for-sale in the amounts of $(1,089)$(16,222) and $(1,895)$(1,089) for the three months ended March 31, 2017,2018 and 2016,2017, respectively.
 
See notes to condensed consolidated financial statements.



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Stockholder’s Equity
Three Months Ended March 31, 2017,2018 and 20162017
(In Thousands)
(Unaudited)
 
 Three Months Ended March 31, 2017 Three Months Ended March 31, 2018
                    
 
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, 2017 $7,293
 $863,031
 $235,875
 $906,122
 $2,012,321
Balances, January 1, 2018 $7,320
 $949,520
 $440,957
 $1,051,792
 $2,449,589
Cumulative impact of adopting ASC 606, net of tax 
 
 
 32,952
 32,952
Adjusted balances, January 1, 2018 7,320
 949,520
 440,957
 1,084,744
 2,482,541
Net income 
 
 
 34,830
 34,830
 
 
 
 48,658
 48,658
Other comprehensive income, net of income taxes 
 
 63,979
 
 63,979
Other comprehensive loss, net of income taxes 
 
 (303,182) 
 (303,182)
Dividends 
 
 
 (77,000) (77,000) 
 
 
 (24,001) (24,001)
Capital contribution(1)
 
 848
 
 
 848
Capital contribution - stock-based compensation 
 420
 
 
 420
 
 218
 
 
 218
Balances, March 31, 2017 $7,293
 $863,451
 $299,854
 $863,952
 $2,034,550
Balances, March 31, 2018 $7,320
 $950,586
 $137,775
 $1,109,401
 $2,205,082
(1) In February 2018, the Company received a capital contribution from its parent, GWL&A Financial, in the amount of $848. No additional shares of the Company were issued in relation to this contribution.


 Three Months Ended March 31, 2016 Three Months Ended March 31, 2017
                    
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
other
comprehensive
income
 
Retained
earnings
 Total 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
other
comprehensive
income
 
Retained
earnings
 Total
Balances, January 1, 2016 $7,233
 $840,874
 $233,438
 $800,721
 $1,882,266
Balances, January 1, 2017 $7,293
 $863,031
 $235,875
 $906,122
 $2,012,321
Net income 
 
 
 98,626
 98,626
 
 
 
 34,830
 34,830
Other comprehensive income, net of income taxes 
 
 226,553
 
 226,553
 
 
 63,979
 
 63,979
Dividends 
 
 
 (73,401) (73,401) 
 
 
 (77,000) (77,000)
Capital contribution - stock-based compensation 
 534
 
 
 534
 
 420
 
 
 420
Income tax benefit on stock-based compensation 
 141
 
 
 141
Balances, March 31, 2016 $7,233
 $841,549
 $459,991
 $825,946
 $2,134,719
Balances, March 31, 2017 $7,293
 $863,451
 $299,854
 $863,952
 $2,034,550
 
See notes to condensed consolidated financial statements.



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2017,2018 and 20162017
(In Thousands)
(Unaudited)
 Three Months Ended March 31, Three Months Ended March 31,
 2017 2016 2018 2017
Net cash provided by operating activities $361,764
 $142,740
Net cash (used in) provided by operating activities $(4,922) $357,163
        
Cash flows from investing activities:  
  
  
  
Proceeds from sales, maturities and redemptions of investments:  
  
  
  
Fixed maturities, available-for-sale 1,825,006
 1,983,974
 1,261,881
 1,825,006
Mortgage loans on real estate 54,480
 92,302
 79,649
 54,480
Limited partnership interests, other corporation interests and other investments 1,426
 2,567
Limited partnership interests and other investments 2,585
 3,106
Purchases of investments:  
  
  
  
Fixed maturities, available-for-sale (1,599,114) (1,818,569) (1,242,999) (1,599,114)
Mortgage loans on real estate (335,324) (117,720) (223,500) (335,324)
Limited partnership interests, other corporation interests and other investments (4,555) (1,593)
Limited partnership interests and other investments (6,805) (4,555)
Net change in short-term investments (439,510) (546,036) 61,688
 (439,510)
Net change in policy loans 279
 (29) 854
 279
Purchases of furniture, equipment, and software (9,978) (12,064) (9,841) (9,978)
Net cash used in investing activities (507,290) (417,168) (76,488) (505,610)
        
Cash flows from financing activities:  
  
  
  
Contract deposits 778,744
 851,509
 700,628
 778,744
Contract withdrawals (543,572) (510,660) (610,434) (543,572)
Net change in due to/from parent and affiliates (2,921) (11,274)
Dividends paid (77,000) (73,401) (24,001) (77,000)
Capital contribution 848
 
Payments for and interest paid on financing element derivatives, net (1,870) (3,000) (938) (1,870)
Net change in commercial paper borrowings (404) 5,800
 (14,004) (404)
Net change in book overdrafts (12,672) 92
 32,704
 (12,672)
Employee taxes paid for withheld shares (180) (433) (32) (180)
Income tax benefit on share-based compensation 
 141
Net cash provided by financing activities 140,125
 258,774
 84,771
 143,046
        
Net decrease in cash and cash equivalents (5,401) (15,654)
Net increase (decrease) in cash and cash equivalents 3,361
 (5,401)
Cash and cash equivalents, beginning of year 18,321
 34,362
 17,211
 18,321
Cash and cash equivalents, end of period $12,920
 $18,708
 $20,572
 $12,920
 
See notes to condensed consolidated financial statements. (Continued)


GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2017,2018 and 20162017
(In Thousands)
(Unaudited)
 
 Three Months Ended March 31, Three Months Ended March 31,
 2017 2016 2018 2017
Supplemental disclosures of cash flow information:  
    
  
Net cash paid during the year for:  
  
  
  
Income taxes $(3,139) $(8,305) $(3,377) $(3,139)
Interest (3,199) (140) (3,799) (3,199)
        
Non-cash investing and financing transactions during the years:        
Share-based compensation expense $420
 $534
 $218
 $420
Fair value of assets acquired in settlement of fixed maturity investments 12,336
 
 
See notes to condensed consolidated financial statements. (Concluded)


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Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)




1.  Organization and Basis of Presentation
 
Organization
 
Great-West Life & Annuity Insurance Company (“GWLA”) and its subsidiaries (collectively, the “Company”) is a direct wholly-owned subsidiary of GWL&A Financial Inc. (“GWL&A Financial”), a holding company formed in 1998.  GWL&A Financial is a direct wholly-owned subsidiary of Great-West Lifeco U.S. 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, 2016,2017, which was derived from the Company’s audited consolidated financial statements, and the unaudited interim condensed consolidated financial statements as of and for the three months ended March 31, 2017,2018, have been prepared in accordance with the instructions for Form 10-Q.  In compliance with those instructions, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.  As such, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.
 
In the opinion of management, these statements include all normal recurring adjustments necessary to fairly present the Company’s condensed consolidated results of operations, financial position, and cash flows as of March 31, 2017,2018, and for all periods presented. The condensed consolidated results of operations and condensed consolidated statement of cash flows for the three months ended March 31, 2017,2018, are not necessarily indicative of the results or cash flows expected for the full year.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2.  Application of Recent Accounting Pronouncements

Recently adopted accounting pronouncements

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





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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



Future adoption of new accounting pronouncements

In May, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers,(“ASU 2014-09” and all the related amendments to customer contracts (collectively “ASC 606”), effective for fiscal yearsinterim and annual periods beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted. The guidance may be applied retrospectively for all periods presented or retrospectively with a cumulative-effect adjustment at the date of adoption. The new guidance will supersede2017. ASC 606 supersedes nearly all existing revenue recognition guidance under U.S. GAAP; however, it willdid not impact the accounting for insurance and investment contracts within the scope of financial services insurance, leases, financial instruments and guarantees. The core principle of the model requires that an entity recognizes revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The update also requires increased disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. See Note 9 for additional information.


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Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605.

The Company’s implementation effortsprimary impact of ASC 606 to the Company relates to the accounting for certain contract costs and contract fulfillment costs, which were expensed as incurred under ASC 605. Under ASC 606, these costs are primarily focused on certain fee income earned from assets under management, assets under administration, shareholder servicing, administrationdeferred and recordkeeping services, and investment advisory services as well asamortized over the evaluationexpected life of certain incremental costs to obtain athe customer contract, which arethe Company determined to be deferred and recognized over the expected customer life.10 years. The Company continuespresents these contract costs and contract fulfillment costs on the balance sheet as a part of the DAC and VOBA balance.

The Company recorded a net increase to evaluateopening retained earnings of $32,952, net of tax, as of January 1, 2018 due to the cumulative impact of this update on its condensed consolidated financial statements.adopting ASC 606.

In January, 2016, the FASB issued ASU 2016-01,Recognition and Measurement of Financial Assets and Financial Liabilities, effective for fiscal yearsinterim and annual periods beginning after December 15, 2017, including interim periods within those fiscal years.  Early adoption is permitted for the instrument-specific credit risk provision.2017. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments byincluding 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, eliminating certain disclosure requirements related to financial instruments measured at amortized cost, and adding disclosures related to the measurement categories of financial assets and financial liabilities, requiring entitiesliabilities.  The primary impact 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 the fair value option for financial instruments, and clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.  The Company is currently evaluating the impact of this update on itsCompany’s condensed consolidated financial statements and anticipateswas that the primary change to be the requirement for equity investments such asCompany’s limited partnership interests, that are currentlywere accounted for under the cost method, to beare now measured at fair value with changes in the fair value recognized in net income. The adoption of this standard did not have a material impact on the Company’s 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), effective for fiscal years and interim periods within those beginning after December 15, 2017. This ASU addresses diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The primary impacts to the Company’s condensed consolidated financial statement include reclassification of proceeds received from the settlement of corporate-owned life insurance policies (“COLI”) from cash flow from operations to cash flow from investing and reclassification of certain change in due to / from parent and affiliate from investing to operating. As the Company has retroactively applied this guidance as required by the ASU, the following updates were made to the condensed consolidated cash flow statement for the three months ended March 31, 2017 to conform to current year presentation:
Reclassification of proceeds received from the settlement of COLIs of $1,680 from cash flow from operations to cash flows from investing; and
Reclassification of change in due to / from parent and affiliate of $2,921 from cash flow from financing to cash flows from operations.

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. 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 adoption of this standard did not have a material impact on the 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. 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 while providing guidance for capitalization eligibility for service costs. The adoption of this standard did not have a material impact on the condensed consolidated financial statements.



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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



Future adoption of new accounting pronouncements
In February 2016, the FASB issued ASU 2016-02,Leases, effective for annual reporting periods beginning on or after December 15, 2018, and interim periods within those annual periods. Earlier application is permitted 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 evaluatingcontinues to evaluate the impact of this update on its condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13,Financial Instruments: Credit Losses: Measurement of Credit Losses on Financial Instruments, effective 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 Company is currently evaluatingcontinues to evaluate 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), effective for fiscal years and interim periods within those beginning after December 15, 2017. 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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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



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 evaluatingperforms its goodwill impairment annually in the impact4th quarter or more frequently if events or circumstances indicate that there may be justification for performing an interim test. The adoption of this updatestandard is not anticipated to have a material impact 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.

3.  Dividends
 
The maximum amount of dividends, which can be paid to stockholders by insurance companies domiciled in the State of Colorado, is subject to restrictions relating to statutory surplus and statutory net gain from operations.  Prior to the payment of any dividends, the Company seeks approval from the Colorado Insurance Commissioner.  During the three months ended March 31, 2017,2018 and 2016,2017, the Company paid dividends of $77,000$24,001 and $73,401,$77,000, respectively, to its parent, GWL&A Financial. 


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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



4.  Summary of Investments
 
The following tables summarize fixed maturity investments classified as available-for-sale and the non-credit-related component of other-than-temporary impairments (“OTTI”) in accumulated other comprehensive income (loss) (“AOCI”): 
 March 31, 2017 March 31, 2018
 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 $1,813,394
 $46,163
 $19,189
 $1,840,368
 $
 $1,392,346
 $32,603
 $25,591
 $1,399,358
 $
Obligations of U.S. states and their subdivisions 1,889,794
 215,426
 5,121
 2,100,099
 
 1,877,627
 186,166
 3,226
 2,060,567
 
Corporate debt securities (2)
 14,270,203
 512,816
 229,442
 14,553,577
 (1,248) 15,555,511
 380,876
 246,981
 15,689,406
 (887)
Asset-backed securities 1,443,721
 101,214
 16,671
 1,528,264
 (70,463) 1,592,351
 76,838
 18,172
 1,651,017
 (32,154)
Residential mortgage-backed securities 124,522
 4,200
 996
 127,726
 (106) 137,413
 2,278
 1,109
 138,582
 (110)
Commercial mortgage-backed securities 1,353,588
 23,313
 18,836
 1,358,065
 
 1,374,477
 6,728
 32,708
 1,348,497
 
Collateralized debt obligations 532,580
 1,693
 36
 534,237
 
 891,546
 4,785
 1
 896,330
 
Total fixed maturities $21,427,802
 $904,825
 $290,291
 $22,042,336
 $(71,817) $22,821,271
 $690,274
 $327,788
 $23,183,757
 $(33,151)
          
(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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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



OTTI (gain) loss was in an unrealized gain position due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.
(2) Includes perpetual debt investments with amortized cost of $115,037$89,267 and estimated fair value of $105,162.$88,877.

 December 31, 2016 December 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 $3,022,279
 $47,791
 $34,958
 $3,035,112
 $
 $1,837,748
 $41,777
 $7,883
 $1,871,642
 $
Obligations of U.S. states and their subdivisions 1,890,568
 214,411
 6,317
 2,098,662
 
 1,872,120
 220,507
 1,655
 2,090,972
 
Corporate debt securities (2)
 13,811,597
 477,316
 309,164
 13,979,749
 (1,488) 15,234,473
 581,991
 110,377
 15,706,087
 (1,018)
Asset-backed securities 1,226,493
 104,274
 18,388
 1,312,379
 (72,464) 1,622,806
 105,301
 10,131
 1,717,976
 (56,735)
Residential mortgage-backed securities 138,292
 3,867
 1,167
 140,992
 23
 63,187
 2,446
 649
 64,984
 (140)
Commercial mortgage-backed securities 1,222,257
 23,207
 20,182
 1,225,282
 
 1,352,906
 17,692
 12,989
 1,357,609
 
Collateralized debt obligations 361,241
 339
 53
 361,527
 
 779,722
 4,227
 80
 783,869
 
Total fixed maturities $21,672,727
 $871,205
 $390,229
 $22,153,703
 $(73,929) $22,762,962
 $973,941
 $143,764
 $23,593,139
 $(57,893)
          
(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$89,267 and estimated fair value of $113,239.$87,348.
 
See Note 7 for additional discussion regarding fair value measurements.


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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



The amortized cost and estimated fair value of fixed maturity investments classified as available-for-sale, based on estimated cash flows, are shown in the table below.  Actual maturities will likely differ from these projections because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 
March 31, 2017March 31, 2018
Amortized cost Estimated fair valueAmortized cost Estimated fair value
Maturing in one year or less$644,280
 $662,742
$813,963
 $826,233
Maturing after one year through five years3,845,273
 4,018,406
3,808,805
 3,869,012
Maturing after five years through ten years6,950,269
 7,068,702
8,164,513
 8,147,763
Maturing after ten years5,073,643
 5,282,788
4,993,140
 5,270,972
Mortgage-backed and asset-backed securities4,914,337
 5,009,698
5,040,850
 5,069,777
Total fixed maturities$21,427,802
 $22,042,336
$22,821,271
 $23,183,757
   

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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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



The following table summarizes information regarding the sales of securities classified as available-for-sale:
 Three Months Ended March 31,
 2017 2016
Proceeds from sales$1,580,522
 $1,682,893
Gross realized gains from sales12,433
 19,857
Gross realized losses from sales15,257
 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.
 Three Months Ended March 31,
 2018 2017
Proceeds from sales$966,420
 $1,580,522
Gross realized gains from sales12,274
 12,433
Gross realized losses from sales6,283
 15,257
    

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 categorycategorized as performing was $4,152,533 and $4,005,960 as of March 31, 2017,2018 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
2017, respectively.

The following table summarizes activity in the mortgage provision allowance:
Three Months Ended March 31, 2017 
Year Ended
December 31, 2016
Three Months Ended March 31, 2018 Year Ended December 31, 2017
Commercial mortgages Commercial mortgagesCommercial mortgages Commercial mortgages
Beginning balance$2,882
 $2,890
$773
 $2,882
Provision increases
 536

 157
Charge-off
 (663)
Recovery
 (30)
Provision decreases(1,573) (544)
 (1,573)
Ending balance$1,309
 $2,882
$773
 $773
      
Allowance ending balance by basis of impairment method:      
Individually evaluated for impairment$536
 $536
Collectively evaluated for impairment773
 2,346
773
 773
      
Recorded investment balance in the mortgage loan portfolio, gross of allowance, by basis of impairment method:$3,846,240
 $3,561,708
$4,152,533
 $4,005,960
Individually evaluated for impairment1,465
 1,465
2,871
 2,942
Collectively evaluated for impairment3,844,775
 3,560,243
4,149,662
 4,003,018
   
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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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



Limited partnershipinterests — Limited partnership interests represent the Company’s minority ownership interests in pooled investment funds that primarily make private equity investments across diverse industries and geographical focuses. The Company has determined its interest in each limited partnership to be considered a variable interest entity (“VIE”). Consolidation is not required as the Company is not deemed to be the primary beneficiary of the VIEs.

The carrying value and maximum exposure to loss in relation to the activities of the VIEs was $35,565$53,120 and $32,444$45,540 at March 31, 2017,2018 and December 31, 2016,2017, respectively.

Securities lending — Securities with a cost or amortized cost of $164,390$128,151 and estimated fair values of $160,012$122,278 were on loan under the program at March 31, 2017.2018. There were no securities on loan at December 31, 2016.2017.  The Company received cash of $94,531$95,024 and securities with a fair value of $70,537$31,424 as collateral at March 31, 2017.2018. 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 byis $95,024, and class of securities loaned:
    March 31, 2017 December 31, 2016
Cash collateral liability by class of loaned security      
U.S. government direct obligations and U.S. agencies   $1,025
 $
Corporate debt securities   93,506
 
Total   $94,531
 $
loaned consists entirely of corporate debt securities.

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

Unrealized losses on fixed maturity investments classified as available-for-sale — The following tables summarize unrealized investment losses, including the non-credit-related portion of OTTI losses reported in AOCI, by class of investment:
 March 31, 2017 March 31, 2018
 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 $1,254,124

$18,974

$10,181

$215

$1,264,305

$19,189
 $735,249

$19,678

$151,508

$5,913

$886,757

$25,591
Obligations of U.S. states and their subdivisions 165,820

4,641

10,394

480

176,214

5,121
 94,712

1,113

37,455

2,113

132,167

3,226
Corporate debt securities 3,711,201

121,580

880,097

107,862

4,591,298

229,442
 6,254,337

140,152

1,667,376

106,829

7,921,713

246,981
Asset-backed securities 458,552

4,905

271,982

11,766

730,534

16,671
 667,026

10,231

209,018

7,941

876,044

18,172
Residential mortgage-backed securities 5,755

18

13,386

978

19,141

996
 81,291

411

10,464

698

91,755

1,109
Commercial mortgage-backed securities 630,766

16,473

35,929

2,363

666,695

18,836
 778,597

15,656

287,246

17,052

1,065,843

32,708
Collateralized debt obligations 30,980

36





30,980

36
 21,000

1





21,000

1
Total fixed maturities $6,257,198

$166,627

$1,221,969

$123,664

$7,479,167

$290,291
 $8,632,212

$187,242

$2,363,067

$140,546

$10,995,279

$327,788
 
















Total number of securities in an unrealized loss position  

554

 

132

 

686
  

808

 

271

 

1,079
 

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



 December 31, 2016 December 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 $2,006,588

$34,752

$10,526

$206

$2,017,114

$34,958
 $755,861

$4,159

$230,447

$3,724

$986,308

$7,883
Obligations of U.S. states and their subdivisions 216,154

5,922

10,498

395

226,652

6,317
 24,908

180

37,012

1,475

61,920

1,655
Corporate debt securities 4,119,630

170,453

860,153

138,711

4,979,783

309,164
 2,229,585

19,568

2,036,323

90,809

4,265,908

110,377
Asset-backed securities 316,065

6,971

230,331

11,417

546,396

18,388
 544,778

3,011

245,341

7,120

790,119

10,131
Residential mortgage-backed securities 16,962

102

14,297

1,065

31,259

1,167
 4,405

23

11,416

626

15,821

649
Commercial mortgage-backed securities 592,508

17,535

26,068

2,647

618,576

20,182
 342,820

2,451

295,164

10,538

637,984

12,989
Collateralized debt obligations 160,612

53





160,612

53
 7,277

80





7,277

80
Total fixed maturities $7,428,519

$235,788

$1,151,873

$154,441

$8,580,392

$390,229
 $3,909,634

$29,472

$2,855,703

$114,292

$6,765,337

$143,764
Total number of securities in an unrealized loss position  

368

 

293

 

661
 
















            
Total number of securities in an unrealized loss position  

610

 

128

 

738

Fixed maturity investments — Total unrealized losses and OTTI decreasedincreased by $99,938,$184,024, or 26%128%, from December 31, 2016,2017 to March 31, 2017.2018. The majority, or $69,161,$157,770, of the decreaseincrease was in the less than twelve months category. The overall decreaseincrease in unrealized losses was across allmost asset classes and reflects lowerhigher interest rates at March 31, 2017,2018, compared to December 31, 2016,2017, resulting in generally higherlower valuations of these fixed maturity securities.
 
Total unrealized losses greater than twelve months decreasedincreased by $30,777$26,254 from December 31, 2016,2017 to March 31, 2017.2018.  Corporate debt securities account for 87%76%, or $107,862,$106,829, of the unrealized losses and OTTI greater than twelve months at March 31, 2017.2018.  Non-investment grade corporate debt securities account for $7,851$7,612 of the unrealized losses and OTTI greater than twelve months, and $2,176 of the losses are on perpetual debt investments issued by investment grade rated banks in the United Kingdom.months. Management does not have the intent to sell these assets; therefore, an OTTI was not recognized in earnings.
 
Asset-backed and commercial-backed securities account for 10%18% of the unrealized losses and OTTI greater than twelve months at March 31, 2017.2018.  The present value of the cash flows expected to be collected is not less than amortized cost and management does not have the intent to sell these assets; therefore, an OTTI was not recognized in earnings.

Other-than-temporary impairment recognition — The OTTI on fixed maturity securities where the loss portion is bifurcated and the credit related component is recognized in realized investment (losses) gains (losses) is summarized as follows:
Three Months Ended March 31, Three Months Ended March 31,
2017 2016 2018 2017
Beginning balance$83,665
 $102,343
 $62,231
 $83,665
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)
Reductions:    
Due to sales, maturities or payoffs during the period (1,510) 
Due to increases in cash flows expected to be collected that are recognized over the remaining life of the security (7,946) (3,306)
Ending balance$80,359
 $98,416
 $52,775
 $80,359

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


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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



The ISDA Master Agreements contain provisions that would allow the counterparties to require immediate settlement of all derivative instruments in a net liability position if the Company were to default on any debt obligations over a certain threshold.  The MSFTA contain provisions which do not stipulate a threshold for default and only apply to debt obligations between the Company and the specific counterparty.  The aggregate fair value, inclusive of accrued income and expense, of derivative instruments with credit-risk-related contingent features that were in a net liability position was $49,235$138,689 and $38,324$93,761 as of March 31, 2017,2018, and December 31, 2016,2017, respectively.  The Company had pledged collateral related to these derivatives of zero$117,240 and zero$42,750 as of March 31, 2017,2018, and December 31, 2016,2017, respectively, in the normal course of business.  If the credit-risk-related contingent features were triggered on March 31, 2017,2018, the fair value of assets that could be required to settle the derivatives in a net liability position was $49,235.$21,449.
 
At March 31, 2017,2018, and December 31, 2016,2017, the Company had pledged zero$128,868 and zero$52,330 of unrestricted cash collateral to counterparties in the normal course of business, while other counterparties had pledged $80,145$637 and $103,214$5,490 of unrestricted cash collateral to the Company to satisfy collateral netting agreements, respectively.
 
At March 31, 2017,2018, the Company estimated $10,436$62,494 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.
 
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 counterpartythe Chicago Mercantile Exchange ("CME") while others are bilateral contracts between the Company and a counterparty.
 
In 2017, the CME amended its rulebook to classify variation margin transfers as settlement payments instead of collateral. The Company adjusts the fair value by the variation margin payments on derivatives cleared through the CME.

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.

Foreign currency contracts
 
Cross-currency swaps and foreign currency forwards are used to manage the foreign currency exchange rate risk associated with investments denominated in other than U.S. dollars.  The Company uses cross-currency swaps to convert interest and principal payments on foreign denominated debt instruments into U.S. dollars.  Cross-currency swaps may be designated as cash flow hedges; however, hedge accounting is not always elected. The Company uses foreign currency forwards to reduce the risk of foreign currency exchange rate changes on proceeds received on sales of foreign denominated debt instruments; however, hedge accounting is not elected.




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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



Equity contracts

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

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

The following tables summarize the notional amount and fair value of derivative financial instruments, excluding embedded derivatives:
March 31, 2017March 31, 2018
  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

$37,308

$37,308

$
$22,300

$6,156

$6,156

$
Cross-currency swaps666,577

32,731

43,652

10,921
864,609

(65,232)
10,404

75,636
Total cash flow hedges1,086,377

70,039

80,960

10,921
886,909

(59,076)
16,560

75,636






















Total derivatives designated as hedges1,086,377

70,039

80,960

10,921
886,909

(59,076)
16,560

75,636






















Derivatives not designated as hedges: 

 

 

 
 

 

 

 
Interest rate swaps486,100

(6,708)
8,187

14,895
534,100

775

1,703

928
Futures on equity indices31,433






57,609






Interest rate futures74,600






47,300






Interest rate swaptions162,464

265

265


172,761

135

135


Other forward contracts2,538,450

6,784

7,817

1,033
820,000

3,691

3,691


Cross-currency swaps612,733

19,152

42,071

22,919
612,733

(49,242)
12,882

62,124
Total derivatives not designated as hedges3,905,780

19,493

58,340

38,847
2,244,503

(44,641)
18,411

63,052
Total derivative financial instruments$4,992,157

$89,532

$139,300

$49,768
$3,131,412

$(103,717)
$34,971

$138,688
       
(1) The estimated fair value excludesincludes accrued income and expense. The estimated fair value of all derivatives in an asset position is reported within other assets and the estimated fair value of all derivatives in a liability position is reported within other liabilities in the condensed consolidated balance sheets.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



December 31, 2016December 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

$33,390

$33,390

$
$388,800

$7,476

$7,476

$
Cross-currency swaps614,208

45,347

53,641

8,294
800,060

(31,358)
19,958

51,316
Total cash flow hedges1,034,008

78,737

87,031

8,294
1,188,860

(23,882)
27,434

51,316






















Total derivatives designated as hedges1,034,008

78,737

87,031

8,294
1,188,860

(23,882)
27,434

51,316






















Derivatives not designated as hedges: 

 

 

 
 

 

 

 
Interest rate swaps468,100

(4,358)
8,982

13,340
519,100

1,902

3,530

1,628
Futures on equity indices34,422






22,074






Interest rate futures81,500






60,700






Interest rate swaptions165,534

354

354


164,522

75

75


Cross-currency swaps612,733

33,371

50,018

16,647
612,733

(21,279)
20,320

41,599
Total derivatives not designated as hedges1,362,289

29,367

59,354

29,987
1,379,129

(19,302)
23,925

43,227
Total derivative financial instruments$2,396,297

$108,104

$146,385

$38,281
$2,567,989

$(43,184)
$51,359

$94,543
       
(1) The estimated fair value excludes accrued income and expense. The estimated fair value of all derivatives in an asset position is reported within other assets and the estimated fair value of all derivatives in a liability position is reported within other liabilities in the condensed consolidated balance sheets.
 
Notional amounts are used to express the extent of the Company’s involvement in derivative transactions and represent a standard measurement of the volume of its derivative activity.  Notional amounts represent those amounts used to calculate contractual flows to be exchanged and are not paid or received. The average notional outstanding during the three months ended March 31, 2017,2018, was $897,400, $1,239,581, $114,425, $163,232,$747,900, $1,461,328, $89,085, $170,701, and $1,545,788$1,652,500 for interest rate swaps, cross-currency swaps, futures, swaptions, and other forward contracts, respectively. The average notional outstanding during the year ended December 31, 2016,2017, was $784,900, $1,141,967, $145,658, $156,632,$905,977, $1,323,398, $108,438, $162,896, and $2,230,167$2,231,196 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 and comprehensive income reported by cash flow hedges and economicderivatives not designated as hedges, excluding embedded derivatives: 

Gain (loss) recognized in OCI on derivatives (Effective portion) Gain (loss) reclassified from OCI
into net income (Effective portion)
 Gain (loss) recognized in OCI on derivatives (Effective portion) Gain (loss) reclassified from OCI
into net income (Effective portion)
 
Three Months Ended March 31, Three Months Ended March 31, Three Months Ended March 31, Three Months Ended March 31, 
2017 2016 2017 2016 2018 2017 2018 2017 
Cash flow hedges: 
  
  
  
  
  
  
  
 
Interest rate swaps$(148) $525
 $1,220
 $1,494
(A)$(1,012) $(148) $928
 $1,220
(A)
Interest rate swaps3,843
 
 (880) 
(B)29,029
 3,843
 (255) (880)(B)
Cross-currency swaps(10,650) (2,129) 1,102
 992
(A)(34,513) (10,650) (526) 1,102
(A)
Total cash flow hedges$(6,955) $(1,604) $1,442
 $2,486
 $(6,496) $(6,955) $147
 $1,442
 
(A) Net investment income.
(B) Interest expense.
         

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



Gain (loss) on derivatives recognized in net income Gain (loss) on derivatives recognized in net income 
Three Months Ended March 31, Three Months Ended March 31, 
2017 2016 2018 2017 
Derivatives not designated as hedging instruments: 
  
  
  
 
Futures on equity indices$(684)(A)$(230)(A)$
(A)$(684)(A)
Futures on equity indices(1,284)(B)(1,441)(B)(641)(B)(1,284)(B)
Interest rate swaps(1,549)(A)10,622
(A)
(A)(1,549)(A)
Interest rate swaps(10,966)(B)
(B)
Interest rate futures(14)(A)(204)(A)
(A)(14)(A)
Interest rate futures5
(B)(32)(B)48
(B)5
(B)
Interest rate swaptions(27)(A)134
(A)
(A)(27)(A)
Interest rate swaptions(74)(B)(195)(B)36
(B)(74)(B)
Other forward contracts6,784
(A)3,056
(A)
(A)6,784
(A)
Other forward contracts(5,597)(B)2,938
(B)(20,368)(B)(5,597)(B)
Cross-currency swaps(14,168)(A)12,199
(A)
(A)(14,168)(A)
Cross-currency swaps(28,144)(B)
(B)
Total derivatives not designated as hedging instruments$(16,608) $26,847
 $(60,035) $(16,608) 
(A) Net investment income.
(B) Represents realizedinvestment (losses) 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(losses) gains, net in the condensed consolidated statements of income.

The estimated fair value of the GLWB was $4,042$3,993 and $5,712$11,095 at March 31, 2017,2018, and December 31, 2016,2017, respectively. The changes in fair value of the GLWB were $1,670$7,102 and $(10,450)$1,670 for the three months ended March 31, 2017,2018, and 2016,2017, respectively.

6.  Summary of Offsetting Assets and Liabilities
 
The Company enters into derivative transactions and short-term reverse repurchase agreements with several approved counterparties. The Company’s derivative transactions are generally governed by MSFTA or ISDA Master Agreements which provide for legally enforceable set-off and close-out netting in the event of default or bankruptcy of the Company’s counterparties.  The Company’s MSFTA and ISDA Master Agreements generally include provisions which require both the pledging and accepting of collateral in connection with its derivative transactions. These provisions have the effect of securing each party’s position to the extent of collateral held. Short-term reverse repurchase agreements also include collateral provisions with the counterparty. The following tables summarize the effect of master netting arrangements on the Company’s financial position in the normal course of business and in the event of default or bankruptcy of the Company’s counterparties: 
 March 31, 2017 March 31, 2018
   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   Net
Financial instruments (assets): 
recognized assets (1)
 instruments received fair value 
recognized assets (1)
 instruments Cash collateral fair value
Derivative instruments (2)
 $104,020

$(35,694)
$(65,290)
$3,036
 $34,971

$(31,280)
$(637)
$3,054
Short-term reverse repurchase agreement (3)
 34,500
 (34,500) 
 
Short-term reverse repurchase agreements (3)
 15,900
 (15,900) 
 
Total financial instruments (assets) 138,520
 (70,194) (65,290) 3,036
 $50,871
 $(47,180) $(637) $3,054

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



        
 March 31, 2017 March 31, 2018
   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   Net
Financial instruments (liabilities): 
recognized liabilities (1)
 instruments pledged fair value 
recognized liabilities (1)
 instruments Cash collateral fair value
Derivative instruments (4)
 35,943
 (35,694) 
 249
 $138,689
 $(31,280) $(107,344) $65
        
(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, 2016
 
  Gross fair value not offset  
 
  in balance sheets  
 
Gross fair value of Financial Cash collateral Net
Financial instruments:
recognized assets/liabilities (1)
 instruments received/(pledged) fair value
Derivative instruments (assets) (2)

$119,862

$(26,254)
$92,756

$852
Derivative instruments (liabilities) (3)

26,254

(26,254)




 
December 31, 2017
 
  Gross fair value not offset  
 
  in balance sheets  
 
Gross fair value of Financial   Net
Financial instruments (assets):
recognized assets/liabilities (1)
 instruments Cash collateral fair value
Derivative instruments (2)

$52,738

$(47,827)
$(4,911)
$
Short-term reverse repurchase agreements (3)
 23,200
 (23,200) 
 
Total financial instruments (assets) $75,938
 $(71,027) $(4,911) $
         
  December 31, 2017
    Gross fair value not offset  
    in balance sheets  
  Gross fair value of Financial   Net
Financial instruments (liabilities): 
recognized liabilities (1)
 instruments Cash collateral fair value
Derivative instruments (4)

$93,761

$(47,827)
$(42,750)
$3,184
         
(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.
 

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



7.  Fair Value Measurements
 
Recurring fair value measurements
 
The following tables present the Company’s financial assets and liabilities carried at fair value on a recurring basis by fair value hierarchy category:

Assets and liabilities measured at
fair value on a recurring basis
Assets and liabilities measured at
fair value on a recurring basis
March 31, 2017March 31, 2018
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$

$1,840,368

$

$1,840,368
$

$1,399,358

$

$1,399,358
Obligations of U.S. states and their subdivisions

2,100,099



2,100,099


2,060,567



2,060,567
Corporate debt securities

14,542,646

10,931

14,553,577


15,680,119

9,287

15,689,406
Asset-backed securities

1,528,264



1,528,264


1,651,017



1,651,017
Residential mortgage-backed securities

127,726



127,726


138,582



138,582
Commercial mortgage-backed securities

1,358,065



1,358,065


1,348,497



1,348,497
Collateralized debt obligations

534,237



534,237


896,330



896,330
Total fixed maturities available-for-sale

22,031,405

10,931

22,042,336


23,174,470

9,287

23,183,757
Fixed maturities held-for-trading: 

 

 

 
 

 

 

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

129,296



129,296


16,134



16,134
Corporate debt securities

55,249



55,249


3,074



3,074
Commercial mortgage-backed securities

1,072



1,072


1,046



1,046
Total fixed maturities held-for-trading

185,617



185,617


20,254



20,254
Short-term investments262,866

481,197



744,063
227,360

70,160



297,520
Limited partnership interests (1)

 
 
 53,120
Collateral under securities lending agreements94,531





94,531


95,024



95,024
Collateral under derivative counterparty collateral agreements80,145





80,145
129,505





129,505
Derivative instruments designated as hedges: 

 

 

 
 

 

 

 
Interest rate swaps

37,308



37,308


6,156



6,156
Cross-currency swaps
 43,652
 
 43,652

 10,404
 
 10,404
Derivative instruments not designated as hedges: 

 

 

 
 

 

 

 
Interest rate swaps

8,187



8,187


1,703



1,703
Interest rate swaptions

265



265


135



135
Other forward contracts

7,817



7,817


3,691



3,691
Cross-currency swaps

42,071



42,071


12,882



12,882
Total derivative instruments

139,300



139,300


34,971



34,971
Separate account assets (1)
15,849,064

11,330,972



27,597,906
16,097,613

10,361,781



26,843,072
Total assets$16,286,606

$34,168,491

$10,931

$50,883,898
$16,454,478

$33,756,660

$9,287

$50,604,103






















Liabilities 

 

 

 
 

 

 

 
Payable under securities lending agreements$94,531

$

$

$94,531
$

$95,024

$

$95,024
Collateral under derivative counterparty collateral agreements80,145
 
 
 80,145
$637
 $
 $
 $637
Derivative instruments designated as hedges: 

 

 

 
 

 

 

 
Cross-currency swaps

10,921



10,921


75,636



75,636
Derivative instruments not designated as hedges: 

 

 

 
 

 

 

 
Interest rate swaps

14,895



14,895


928



928
Other forward contracts

1,033



1,033







Cross-currency swaps

22,919



22,919


62,124



62,124
Total derivative instruments

49,768



49,768


138,688



138,688
Embedded derivatives - GLWB
 
 4,042
 4,042

 
 3,993
 3,993
Separate account liabilities (2)
26

409,044



409,070
18

350,653



350,671
Total liabilities$174,702

$458,812

$4,042

$637,556
$655

$584,365

$3,993

$589,013
       
(1) Included in the total fair value amount are $418$384 million of investmentsseparate account assets and $53 million of limited partnership interests as of March 31, 20172018 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.expedient.
 (2) Includes only separate account instruments which are carried at the fair value of the underlying liabilities owned by the separate accounts.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)




Assets and liabilities measured at
fair value on a recurring basis
Assets and liabilities measured at
fair value on a recurring basis
December 31, 2016December 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$

$3,035,112

$

$3,035,112
$

$1,871,642

$

$1,871,642
Obligations of U.S. states and their subdivisions

2,098,662



2,098,662


2,090,972



2,090,972
Corporate debt securities

13,968,110

11,639

13,979,749


15,696,349

9,738

15,706,087
Asset-backed securities

1,312,379



1,312,379


1,717,976



1,717,976
Residential mortgage-backed securities

140,992



140,992


64,984



64,984
Commercial mortgage-backed securities

1,225,282



1,225,282


1,357,609



1,357,609
Collateralized debt obligations

361,527



361,527


783,869



783,869
Total fixed maturities available-for-sale

22,142,064

11,639

22,153,703


23,583,401

9,738

23,593,139
Fixed maturities held-for-trading: 

 

 

 
 

 

 

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

458,067



458,067


16,836



16,836
Corporate debt securities

55,591



55,591


3,156



3,156
Commercial mortgage-backed securities

1,080



1,080


1,067



1,067
Total fixed maturities held-for-trading

514,738



514,738


21,059



21,059
Short-term investments(1)267,851

36,137



303,988
288,302

61,964



350,266
Collateral under derivative counterparty collateral agreements103,214





103,214
57,820





57,820
Derivative instruments designated as hedges: 

 

 

 
 

 

 

 
Interest rate swaps

33,390



33,390


7,476



7,476
Cross-currency swaps
 53,641
 
 53,641

 19,958
 
 19,958
Derivative instruments not designated as hedges: 

 

 

 
 

 

 

 
Interest rate swaps

8,982



8,982


3,530



3,530
Interest rate swaptions

354



354


75



75
Cross-currency swaps

50,018



50,018


20,320



20,320
Total derivative instruments

146,385



146,385


51,359



51,359
Separate account assets (1)
15,407,992

11,199,924



27,037,765
16,523,630

10,736,532



27,660,571
Total assets$15,779,057

$34,039,248

$11,639

$50,259,793
$16,869,752

$34,454,315

$9,738

$51,734,214






















Liabilities 

 

 

 
 

 

 

 
Collateral under derivative counterparty collateral agreements$103,214
 $
 $
 $103,214
$5,490
 $
 $
 $5,490
Derivative instruments designated as hedges: 

 

 

 
 

 

 

 
Cross-currency swaps

8,294



8,294


51,316



51,316
Derivative instruments not designated as hedges: 

 

 

 
 

 

 

 
Interest rate swaps

13,340



13,340


1,628



1,628
Cross-currency swaps

16,647



16,647


41,599



41,599
Total derivative instruments

38,281



38,281


94,543



94,543
Embedded derivatives - GLWB
 
 5,712
 5,712

 
 11,095
 11,095
Separate account liabilities (2)
55

336,468



336,523
8

409,266



409,274
Total liabilities$103,269

$374,749

$5,712

$483,730
$5,498

$503,809

$11,095

$520,402
       
(1) Included in the total fair value amountamounts are $430$400 million of investments as of December 31, 20162017 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.expedient.
 (2) Includes only separate account instruments which are carried at the fair value of the underlying liabilities owned by the separate accounts.








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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



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 evaluated prices from independent pricing services.  In cases where these prices are not readily available, fair values are estimated by the Company.  To determine estimated fair value for these instruments, the Company generally utilizes discounted cash flowsflow 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.
 
Derivative counterparty collateral agreements
 
Included in other assets is cash collateral received from or pledged to derivative counterparties and included in other liabilities is the obligation to return the cash collateral to the counterparties.  The carrying value of the collateral is a reasonable estimate of fair value.
 
Derivative instruments
 
Included in other assets and other liabilities are derivative financial instruments. The estimated fair values of OTC derivatives, primarily consisting of cross-currency swaps, interest rate swaps, interest rate swaptions, and other forward contracts, are the estimated amounts the Company would receive or pay to terminate the agreements at the end of each reporting period, taking into consideration current interest rates and other relevant factors.

Embedded derivative - GLWB

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

Limited partnership interests
Limited partnership interests 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 net asset value, determined using the partnership financial statement reported capital account adjusted for other relevant information which may impact the exit value of the investments, is used as a practical expedient to estimate fair value. 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. 

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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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



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

Three Months Ended March 31, 2017Three Months Ended March 31, 2018
Assets LiabilitiesAssets Liabilities
Fixed maturities  available-for-sale EmbeddedFixed maturities  available-for-sale 
Embedded derivatives
- GLWB
Corporate derivativesCorporate debt securities  
debt securities - GLWB
Balances, January 1, 2017$11,639

$5,712
Balances, January 1, 2018$9,738
 $11,095
Realized and unrealized gains (losses) included in: 

  
  
Net income (loss)
 1,670

 7,102
Other comprehensive income (loss)(364)

(13) 
Settlements(344)

(438) 
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
Balances, March 31, 2018$9,287
 $3,993
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets and liabilities held at March 31, 2018$
 $7,102
   


Recurring Level 3 financial assets and liabilities
Recurring Level 3 financial assets and liabilities

Three Months Ended March 31, 2016Three Months Ended March 31, 2017
Assets LiabilitiesAssets Liabilities
Fixed maturities 
available-for-sale
 Embedded
Fixed maturities 
available-for-sale
 Embedded derivatives - GLWB
Corporate derivativesCorporate debt securities  
debt securities - GLWB
Balances, January 1, 2016$4,538

$11,257
Balances, January 1, 2017$11,639
 $5,712
Realized and unrealized gains (losses) included in: 

  
  
Net income (loss)
 (10,450)
 1,670
Other comprehensive income (loss)366


(364) 
Settlements(598)

(344) 
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)
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
   
(1) Transfers into Level 3 are due primarily





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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to decreased observability of inputsCondensed Consolidated Financial Statements
(Dollars in valuation methodologies.Thousands)
(Unaudited)




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 Technique Unobservable Input March 31, 20172018 December 31, 20162017
Embedded derivatives - GLWB Risk neutral stochastic valuation methodology Equity volatility 15% - 28%30% 15% - 30%
    Swap curve 1.38%2.31% - 2.66%2.85% 0.75%1.69% - 3.00%2.54%
    Mortality rate Based on the Annuity 2000 Mortality Table Based on the Annuity 2000 Mortality Table
    Base Lapse rate 1% - 15% 1% - 15%

25

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



Fair value of financial instruments
 
The following tables summarize the carrying amounts and estimated fair values of the Company’s financial instruments and investments not carried at fair value on a recurring basis:
 March 31, 2018 December 31, 2017
 
 
 Fair value 
 
 Fair value
 Carrying Estimated hierarchy Carrying Estimated hierarchy
 amount fair value level amount fair value level
Assets 
  
    
  
  
Mortgage loans on real estate$4,151,760
 $4,140,846
 2 $4,005,187
 $4,066,800
 2
Policy loans4,067,552
 4,067,552
 2 4,104,094
 4,104,094
 2
Limited partnership interests (1)

 
 
 43,281
 45,009
 
Other investments10,349
 40,613
 3 11,507
 41,588
 3
            
Liabilities 
  
    
  
  
Annuity contract benefits without life contingencies$12,804,896
 $12,484,424
 2 $12,704,401
 $12,647,309
 2
Policyholders’ funds247,781
 247,781
 2 280,578
 280,578
 2
Commercial paper85,882
 85,882
 2 99,886
 99,886
 2
Notes payable546,806
 589,700
 2 543,338
 581,097
 2
 March 31, 2017 December 31, 2016
 Carrying Estimated Carrying Estimated
 amount fair value amount fair value
Assets 
  
  
  
Mortgage loans on real estate$3,844,931
 $3,915,687
 $3,558,826
 $3,574,240
Policy loans4,016,844
 4,016,844
 4,019,648
 4,019,648
Limited partnership interests32,579
 31,947
 29,345
 29,822
Other investments13,935
 44,243
 14,382
 44,687
        
Liabilities 
  
  
  
Annuity contract benefits without life contingencies$12,383,984
 $12,249,498
 $12,291,378
 $12,129,631
Policyholders’ funds241,167
 241,167
 285,554
 285,554
Commercial paper98,645
 98,645
 99,049
 99,049
Notes payable534,339
 528,415
 531,092
 495,004
(1)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 foras of December 31, 2017 is estimated 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 classifiedper unit as Level 3.



a practical expedient.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



Other investments
Other investments primarily include real estate held for investment.  The estimated fair value for real estate is based on the unadjusted 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.

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. 

8.  Other Comprehensive Income
 
The following tables presenttable presents the accumulated balances for each classification of other comprehensive income (loss):
  Three Months Ended March 31, 2018

 
Unrealized holding gains (losses) arising on
fixed maturities, available-for-sale
(1)
 
Unrealized holding gains (losses) arising on cash flow hedges (2)
 Future policy benefits, DAC and VOBA adjustments 
Employee benefit plan adjustment (3)
 Total
Balances, January 1, 2018 $544,887
 $103,529
 $(116,267) $(91,192) $440,957
Change in estimate of tax reform impact 108,846
 (83,806) (25,040) 
 
           
OCI before reclassifications (459,680) (6,496) 87,408
 
 (378,768)
Deferred income tax benefit (expense) 96,534
 1,364
 (18,356) 
 79,542
AOCI before reclassification, net of tax (363,146) (5,132) 69,052
 
 (299,226)
Amounts reclassified from AOCI (5,440) (147) 
 580
 (5,007)
Deferred income tax benefit (expense) 1,142
 31
 
 (122) 1,051
Amounts reclassified from AOCI, net of tax (4,298) (116) 
 458
 (3,956)
Balances, March 31, 2018 $286,289
 $14,475
 $(72,255) $(90,734) $137,775
(1) Reclassifications affect investment gains (losses), net on the consolidated statements of income.
(2) Reclassifications affect net investment income on the consolidated statements of income, except for $255 (before tax) which affected interest expense for the three months ended March 31, 2018.
(3) The adjustments for defined benefit plans are included in the computation of net periodic (benefit) cost of employee benefit plans (see note 10 for additional details).

The following table presents the accumulated balances for each classification of other comprehensive income (loss):
Three Months Ended March 31, 2017 Three Months Ended March 31, 2017
Unrealized
holding gains
/ losses
arising on
fixed
maturities,
available-for-
sale
 Unrealized
holding gains
/ losses
arising on
cash flow
hedges
 Future policy
benefits, DAC
and VOBA
adjustments
 Employee
benefit plan
adjustment
 Total 
Unrealized holding gains (losses) arising on
fixed maturities, available-for-sale
(1)
 
Unrealized holding gains (losses) arising on cash flow hedges (2)
 Future policy benefits, DAC and VOBA adjustments 
Employee benefit plan adjustment (3)
 Total
Balances, January 1, 2017$311,748
 $67,076
 $(58,646) $(84,303) $235,875
 $311,748
 $67,076
 $(58,646) $(84,303) $235,875
Other comprehensive income (loss) before reclassifications84,649
 (4,521) (18,503) 
 61,625
OCI before reclassifications 130,229
 (6,955) (28,466) 
 94,808
Deferred income tax benefit (expense) (45,580) 2,434
 9,963
 
 (33,183)
AOCI before reclassification, net of tax 84,649
 (4,521) (18,503) 
 61,625
Amounts reclassified from AOCI1,896
 (937) 
 1,395
 2,354
 2,917
 (1,442) 
 2,146
 3,621
Net current period other comprehensive income (loss)86,545
 (5,458) (18,503) 1,395
 63,979
Deferred income tax benefit (expense) (1,021) 505
 
 (751) (1,267)
Amounts reclassified from AOCI, net of tax 1,896
 (937) 
 1,395
 2,354
Balances, March 31, 2017$398,293
 $61,618
 $(77,149) $(82,908) $299,854
 $398,293
 $61,618
 $(77,149) $(82,908) $299,854
(1) Reclassifications affect investment gains(losses), net on the consolidated statements of income.
(2) Reclassifications affect net investment income on the consolidated statements of income, except for $880 (before tax) which affected interest expense for the three months ended March 31, 2017.
(3) The adjustments for defined benefit plans are included in the computation of net periodic (benefit) cost of employee benefit plans (see note 10 for additional details).


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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



 Three Months Ended March 31, 2016
 Unrealized
holding gains
/ losses
arising on
fixed
maturities,
available-for-
sale
 Unrealized
holding gains
/ losses
arising on
cash flow
hedges
 Future policy
benefits, DAC
and VOBA
adjustments
 Employee
benefit plan
adjustment
 Total
Balances, January 1, 2016$339,520
 $45,284
 $(65,785) $(85,581) $233,438
Other comprehensive income (loss) before reclassifications290,296
 (1,043) (49,556) 
 239,697
Amounts reclassified from AOCI(12,980) (1,616) 
 1,452
 (13,144)
Net current period other comprehensive income (loss)277,316
 (2,659) (49,556) 1,452
 226,553
Balances, March 31, 2016$616,836
 $42,625
 $(115,341) $(84,129) $459,991
The following tables present the composition of other comprehensive income (loss):
 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
9.  Revenues

Fee Income Revenue Recognition

Fee income is recognized upon transfer of control of promised services when provided to customers in an amount that reflects the consideration expected to be received in exchange for those services. Fee income can be based on a rate per plan or per participant, percentage of assets under management or administration, or rate based on the services provided.

Certain recordkeeping and administrative contracts include non-performance penalties if certain customer satisfaction metrics are not met. The Company estimates a reduction in fee income for non-performance penalties based on an analysis of historical loss.

The sources of fee income from contracts with customers include:

Administration, Recordkeeping, Servicing, and Distribution Fees

Fees charged for providing recordkeeping, shareholder servicing and distribution of funds, administrative, trustee, and custodial services for retirement plan sponsors, plan participants, insurance policy holders and IRA account holders. Recordkeeping contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for the individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. These fees are primarily earned over time (i.e. services are rendered daily) and are calculated as a percentage of assets under administration or as a rate per plan or per participants in a plan. These fees also include service revenues that are recognized as services are rendered and are based upon established billing rates. Such services include loan processing and postage fees. Fees are generally invoiced quarterly and are either deducted directly from plan or participant assets or due within 30 days.

Investment Advisory and Asset Management Fees

Fees charged for investment advisory and asset management and administrative services to retirement plan sponsors, plan participants, insurance policyholders and IRA accountholders, and affiliates of the Company. These fees are primarily earned over time (i.e. services are rendered daily) and are calculated as a percentage of average daily net assets under management or are based upon established billing rates. Fees are generally invoiced quarterly and due within 30 days or are deducted directly from plan, participant, or other investment accounts.

Other Fees

Other fees includes insurance product related fees earned under the guidance of Topic 944, Financial Services - Insurance such as fees for certain variable annuity guaranteed death benefits and insurance risk charges.
The following table presents fee income disaggregated by type of services and segment:
 Three Months Ended March 31, 2016
 Before-tax Tax (expense) Net-of-tax
 amount benefit amount
Unrealized holding gains (losses), net, arising on fixed maturities, available-for-sale$446,610
 $(156,314) $290,296
Unrealized holding gains (losses), net, arising on cash flow hedges(1,604) 561
 (1,043)
Reclassification adjustment for (gains) losses, net, realized in net income(22,456) 7,860
 (14,596)
Net unrealized gains (losses) related to investments422,550
 (147,893) 274,657
Future policy benefits, DAC and VOBA adjustments(76,240) 26,684
 (49,556)
Net unrealized gains (losses)346,310
 (121,209) 225,101
Employee benefit plan adjustment2,234
 (782) 1,452
Other comprehensive income (loss)$348,544
 $(121,991) $226,553
  Three months ended March 31, 2018
  Individual Markets Empower Retirement Other Total
Administration, recordkeeping and servicing fees $1,140
 $157,851
 $
 $158,991
Investment advisory and asset management fees 3,255
 68,290
 1,879
 73,424
Other fee income 27,233
 16,316
 
 43,549
Total Fee Income $31,628
 $242,457
 $1,879
 $275,964
At March 31, 2018, included in other assets are customer contract receivables of $238,142. The Company did not have material bad debt expense during the three months ended March 31, 2018.



28

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



The following tables presentsAssets Recognized from the reclassifications out of accumulated other comprehensive income (loss):Costs to Obtain and Fulfill a Contract

  Three Months Ended March 31,  
  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
Unrealized holding (gains) losses, net, arising on fixed maturities, available-for-sale $2,917
 $(19,970) Other realized investment (gains) losses, net
  2,917
 (19,970) Total before tax
  1,021
 (6,990) Tax expense or benefit
  $1,896
 $(12,980) Net of tax
       
Unrealized holding (gains) losses, net, arising on cash flow hedges $(2,322) $(2,486) Net investment income
  880
 
 Interest Expense
  (1,442) (2,486) Total before tax
  (505) (870) Tax expense or benefit
  $(937) $(1,616) Net of tax
       
Amortization of employee benefit plan items      
Prior service (benefits) $73
(1) 
$(151)
(1) 
 
Actuarial (gains) 2,073
(1) 
2,385
(1) 
 
  2,146
 2,234
 Total before tax
  751
 782
 Tax expense or benefit
  $1,395
 $1,452
 Net of tax
       
Total reclassification $2,354
 $(13,144) Net of tax
(1) These accumulated other comprehensive income componentsThe Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it is expected that the costs are recoverable and the benefit of those costs will be longer than one year. The Company also recognizes an asset for costs that relate directly to fulfilling a contract that are expected to be recovered. At March 31, 2018, the Company included deferred contract costs related to ASC 606 of $43,999 in the computation of net periodic (benefit) cost of employee benefit plans (see Note 9 for additional details).DAC and VOBA balance in the condensed consolidated balance sheet.

9.10.  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 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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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



 Three Months Ended March 31,
 
Defined Benefit 
Pension Plan
 
Post-Retirement 
Medical Plan
 Supplemental Executive
Retirement Plan
 Total
 2018 2017 2018 2017 2018 2017 2018 2017
Components of net periodic cost (benefit): 
  
  
  
  
  
    
Service cost$
 $(2,067) $376
 $357
 $
 $(4) $376
 $(1,714)
Interest cost5,709
 6,121
 172
 188
 339
 405
 6,220
 6,714
Expected return on plan assets(5,331) (5,118) 
 
 
 
 (5,331) (5,118)
Amortization of unrecognized prior service costs (benefits)
 
 (69) (52) 81
 125
 12
 73
Amortization of losses (gains) from earlier periods584
 2,199
 (5) (113) (11) (13) 568
 2,073
Net periodic cost (benefit)$962
 $1,135
 $474
 $380
 $409
 $513
 $1,845
 $2,028
                
The Company expects to make payments of approximately $678$329 with respect to its Post-Retirement Medical Plan and $3,336$2,398 with respect to its Supplemental Executive Retirement Plan during the year ended December 31, 2017.2018.  The Company expectsdoes not expect to make contributions of zero to its Defined Benefit Pension Plan during the year ended December 31, 2017.2018.  A December 31 measurement date is used for the employee benefit plans.
 
The following table summarizes contributions to the Defined Benefit Pension Plan and payments made to the Post-Retirement Medical Plan and the Supplemental Executive Retirement Plan:
 Three Months Ended March 31, Three Months Ended March 31,
 2017 2016 2018 2017
Payments to the Post-Retirement Medical Plan 169
 204
 $82
 $169
Payments to the Supplemental Executive Retirement Plan 834
 834
 599
 834

10.11.  Income Taxes
 
The provision for income taxes is comprised of the following:
 Three Months Ended March 31, Three Months Ended March 31,
 2017 2016 2018 2017
Current expense $12,959

$10,640
Current (benefit) expense $(15,771)
$12,959
Deferred expense 4,158
 13,398
 29,324
 4,158
Total income tax provision $17,117
 $24,038
 $13,553
 $17,117


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



The following table presents a reconciliation between the statutory federal income tax rate and the Company’s effective income tax rate:
 Three Months Ended March 31, Three Months Ended March 31,
 2017 2016 2018 2017
Statutory federal income tax rate 35.0 % 35.0 % 21.0 % 35.0 %
Income tax effect of:  
  
  
  
Investment income not subject to federal tax (3.3)% (2.3)% (2.2)% (3.3)%
Tax credits (0.8)% (16.3)% (0.6)% (0.8)%
State income taxes, net of federal benefit 1.8 % 2.3 % 2.8 % 1.8 %
Other, net 0.3 % 0.9 % 0.8 % 0.3 %
Effective income tax rate 33.0 % 19.6 % 21.8 % 33.0 %

DuringThe effective income tax rate from continuing operations was 21.8 percent for the three months ended March 31, 2018, compared with 33 percent for the same period in 2017. The decrease in effective income tax rate for the three months ended March 31, 2018, compared with the same period in 2017, and 2016,was primarily the result of the passage of the Tax Reconciliation Act, which reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent effective January 1, 2018.

The Company recorded an increase of $962 and an increase of $1,994 in unrecognized tax benefits induring the amount of $1,994three months ended March 31, 2018, and $1,8432017, respectively. The Company anticipates additional decreasesincreases to its unrecognized tax benefits of $7,000$3,000 to $9,000$4,000 in the next twelve months. The Company expects that the majority of the decreaseincrease 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 20122013 and prior.  Tax years 20132014 through 20152016 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.
 
11.12.  Segment Information
 
The Chief Operating Decision Maker (“CODM”) of the Company is also the Chief Executive Officer (“CEO”) of the Company and Lifeco U.S. The CODM reviews the financial information for the purposes of assessing performance and allocating

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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, and Other. 

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

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)



Other
 
The Company’s Other reporting segment is substantially comprised of activity under the assumption of reinsurance between Great-West Life & Annuity Insurance Company of South Carolina (“GWSC”), a wholly owned subsidiary, and The Canada Life Assurance Company (“CLAC”) (“the GWSC operating segment”), corporate items not directly allocated to the other operating segments, and interest expense on long-term debt.
 
The accounting principles used to determine segment results are the same as those used in the consolidated financial statements.  The Company evaluates performance of its reportable segments based on their profitability from operations after income taxes. Inter-segment transactions and balances have been eliminated in consolidation.  The Company’s operations are not materially dependent on one or a few customers, brokers, or agents. The following tables summarize segment financial information:
  Three Months Ended March 31, 2018
  Individual Empower    
  Markets Retirement Other Total
Revenue:  
  
  
  
Premium income $123,586
 $589
 $20,507
 $144,682
Fee income 31,628
 242,457
 1,879
 275,964
Other revenue 
 2,985
 
 2,985
Net investment income 197,329
 129,009
 11,803
 338,141
Investment (losses) gains, net (16,670) (27,122) 49
 (43,743)
Total revenues 335,873
 347,918
 34,238
 718,029
Benefits and expenses:  
  
  
  
Policyholder benefits 272,010
 51,279
 15,296
 338,585
Operating expenses 42,602
 259,881
 14,750
 317,233
Total benefits and expenses 314,612
 311,160
 30,046
 655,818
Income before income taxes 21,261
 36,758
 4,192
 62,211
Income tax expense 3,897
 8,768
 888
 13,553
Net income $17,364
 $27,990
 $3,304
 $48,658
  Three Months Ended March 31, 2017
  Individual Empower    
  Markets Retirement Other Total
Revenue:  
  
  
  
Premium income $131,559
 $91
 $20,591
 $152,241
Fee income 25,981
 227,320
 1,815
 255,116
Other revenue 
 2,384
 
 2,384
Net investment income 184,205
 117,620
 11,646
 313,471
Realized investment gains (losses), net 584
 (12,316) (22) (11,754)
Total revenues 342,329
 335,099
 34,030
 711,458
Benefits and expenses:  
  
  
  
Policyholder benefits 270,088
 47,629
 21,711
 339,428
Operating expenses 38,386
 255,764
 25,933
 320,083
Total benefits and expenses 308,474
 303,393
 47,644
 659,511
Income (loss) before income taxes 33,855
 31,706
 (13,614) 51,947
Income tax expense (benefit) 11,650
 10,426
 (4,959) 17,117
Net income (loss) $22,205
 $21,280
 $(8,655) $34,830

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



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

The Company has a revolving credit facility agreement in the amount of $50,000 for general corporate purposes.  The credit facility expires on March 1, 2018.2023.  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,$1,022,680, as defined in the credit facility agreement (compiled on the statutory accounting basis prescribed by the National Association of Insurance

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



Commissioners), at anytime.  The Company was in compliance with all covenants at March 31, 2017,2018 and December 31, 2016.2017.  At March 31, 2017,2018 and December 31, 2016,2017, 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 lettershas a letter of credit for the benefit of GWSC for capital support in the Company as collateral under the GWSCamount of $70,000 and CLAC reinsurance agreement for policy liabilities and capital support.  The first letter of credit is for $1,154,380 and which
renews annually until the Company terminates 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.under the provisions specified in the agreement. At March 31, 2017,2018 and December 31, 2016,2017, there were no outstanding amounts related to the lettersletter of credit.

In addition, the Company has other letters of credit with a total amount of $9,095, renewable annually for an indefinite period of time. At March 31, 2017,2018 and December 31, 2016,2017, there were no outstanding amounts related to those letters of credit.

The Company makes commitments to fund partnership interests, mortgage loans on real estate, and other investments in the normal course of its business.  The amounts of these unfunded commitments at March 31, 2017,2018 and December 31, 2016,2017, were $550,139as follows:
 March 31, 2018 December 31, 2017
Due in less than one year$368,500
 $312,152
Due within one to three years
 1,090
Total$368,500
 $313,242

Included in the total unfunded commitments at March 31, 2018 and $438,458, of which $88,903December 31, 2017, is $107,001 and $93,440 were$114,726, respectively, 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, 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.

13.14.  Subsequent Events

On April 26, 2017,25, 2018, the Company’s Board of Directors declared a dividenddividends of $60,301 payable$20,000, paid on June 15, 2017,May 1, 2018, 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, 2016.2017.  These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company.  Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments, some of which may be global or national in scope, such as general economic conditions and interest rates, some of which may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation, and others of which may relate to the Company specifically, such as credit, volatility, and other risks associated with its investment portfolio and other factors. 

Readers should also consider other matters, including any risks and uncertainties, discussed in documents filed by the Company and certain of its subsidiaries with the Securities and Exchange Commission. The following discussion addresses the Company’s results of operations for the three months ended March 31, 2017,2018, compared with the same period in 2016.2017.  This discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2017, 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 has completed its program activities relatedThe Tax Reconciliation Act, which was signed in December 2017, among other changes, lowered the U.S. corporate tax rate from 35% to integrating the J.P. Morgan Retirement Plan Services business, improving the client-facing experience as well as streamlining the back-office processing. The Company expects that these enhancements will increase market share by driving future sales and improving the retention of participants and assets. Empower Retirement participant accounts have grown to approximately 8.2 million at March 31, 2017 from over 8 million at December 31, 2016.

Synergies have been achieved through efficiencies from the conversion of business onto21% effective on January 1, 2018.  As a single back-office platform, increased utilization of Great West Global, which launchedresult, net earnings in the thirdfirst quarter of 2015, with over 600 professionals based2018 reflect net income, tax effected at the lower 21% rate.  Other provisions of the tax bill did not have a material effect on taxable income in India, as well as scale-driven cost improvements. The impactthe first quarter of these synergies has been mostly offset by the reinvestment in ongoing development as well as customer acquisition and retention.2018.

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. ComplianceThe DOL issued an 18-month delay for full compliance with the rule was generally required by April 10, 2017 (certain parts by Januaryto July 1, 2018). On April 4, 2017,2019. However, on March 15, 2018, the United States Court of Appeals for the Fifth Circuit released an opinion vacating the rule in its entirety. If the DOL extendeddoes not request a rehearing or an appeal to the general compliance date forU.S. Supreme Court, the rule from April 10, 2017 to June 9, 2017 (with no extension ofwill be vacated and the January 1, 2018 date). The Company has analyzed theDOL’s prior five-part test rule against current business practices.will be restored.   The rule requires changes to certain aspects of product and service delivery but management does not expectremains in effect until the Fifth Circuit issues its mandate.  On May 7, 2018, the DOL issued a non-enforcement policy that it will preventallows the Company from executing on its overall business strategyto continue to provide IRA and growth objectives. The Company is continuing with its implementation plan for compliance withrollover counseling as an ERISA fiduciary until the new June 9, 2017 compliance date.

DOL issues further guidance. The Company continues to monitor any developments or proposed revisions.

On April 18, 2018, the potential for significant policy changes following the 2016 U.S. elections, including corporate tax reform which would have an impactSecurities and Exchange Commission released its proposal on the Company’s deferred tax assetsstandards applicable to brokers and liabilities as well asadvisors. The proposal will have a 90 day comment period and would be applicable to all retail investors. The Company will monitor any developments or proposed revisions and is preparing to comply with the effective tax rate in subsequent periods.

new standards if and when implemented.


Current Market Conditions
 
The S&P 500 index at March 31, 2018 was down by 1% compared to January 1, 2018. The S&P 500 index at March 31, 2017 was up by 6% compared to January 1, 2017.  The S&P 500 index at March 31, 2016 was up by less than 1% compared to January 1, 2016.  The average of the S&P 500 index was up by 19%18% during the three months ended March 31, 2017,2018, when compared to the same period in 2016.2017.
 2017 2016 2018 2017
S&P 500 Index Close Average in Quarter Close Average in Quarter Close Average in Quarter Close Average in Quarter
March 31 2,363
 2,324
 2,060
 1,952
 2,641
 2,733
 2,363
 2,324
January 1 2,239
   2,044
   2,674
   2,239
  

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 months ended March 31, 2017,2018, when compared to the same period in 2016.2017. For the three months ended March 31, 2017,2018, 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.flows.
 
The 10-year U.S. Treasury rate at March 31, 2018, was up by 33 basis points as compared to January 1, 2018. The rate at March 31, 2017 was down by 10 basis points as compared to January 1, 2017. The rate at March 31, 2016 was down by 49 basis points as compared to January 1, 2016. The average of the 10-year U.S. Treasury rate during the three months ended March 31, 2017,2018, was up by 5431 basis points when compared to 2016.2017.
 2017 2016 2018 2017
10-Year Treasury Rate Close Average in Quarter Close Average in Quarter Close Average in Quarter Close Average in Quarter
March 31 2.35% 2.45% 1.78% 1.91% 2.74% 2.76% 2.35% 2.45%
January 1 2.45%   2.27%   2.40%   2.45%  

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.increase, and vice-versa. The Company has recorded in other comprehensive income favorableunfavorable changes in unrealized gains (losses), net, on fixed maturity investments, of $468 million for the three months ended March 31, 2018, compared to favorable changes 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, 2016.2017. This resulted in an increasea decrease 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 some derivative instruments, hedge accounting is not 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 net income. For the three months ended March 31, 2017,2018, the Company recorded realized losses on forward settling to be announced (“TBA”) securities of $6$20 million, compared to gains of $3$6 million in 2016.2017. For the three months ended March 31, 2017,2018, the Company recorded losses in net investment income on cross-currency swaps of $14 million,zero compared to gains of $12$14 million in 2016.2017.



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. Adjusted operating income should not be viewed as a substitute for net income prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP). In addition, the Company’s adjusted operating income measures may not be comparable to similarly titled measures reported by other companies.


Three months ended March 31, 20172018 compared with the three months ended March 31, 20162017
 
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. Adjusted operating income should not be viewed as a substitute for U.S. GAAP net income. The following is a summary of the contributions of each segment to net income and a reconciliation of net income to adjusted operating income:
  Three Months Ended March 31, Increase Percentage
Income statement data (In millions) 2017 2016 (decrease) change
Net (loss) income        
Individual Markets segment $22
 $47
 $(25) (53)%
Empower Retirement segment 21
 52
 (31) (60)%
Other segment (8) (1) (7) 700 %
Total net (loss) income 35
 98
 (63) (64)%
Adjustments to net (loss) income        
Unrealized investment gains (losses), net (3) 28
 (31) (111)%
Realized investment gains (losses), net (12) 31
 (43) (139)%
Pro-rata tax (expense) benefit (1)
 5
 (21) 26
 (124)%
Adjusted operating income (loss) $45
 $60
 $(15) (25)%
  Three Months Ended March 31, Increase Percentage
Income statement data (In millions) 2018 2017 (decrease) change
Net income (loss)        
Individual Markets segment $18
 $22
 $(4)��(18)%
Empower Retirement segment 28
 21
 7
 33 %
Other segment 3
 (8) 11
 138 %
Total net income 49
 35
 14
 40 %
Adjustments to net income (loss)        
Investment (losses) gains, net (44) (15) (29) (193)%
Pro-rata tax benefit (1)
 9
 5
 4
 80 %
Adjusted operating income $84
 $45
 $39
 87 %

(1) CalculatedCurrent year calculated utilizing estimated tax rate of 21%. Prior year estimated tax rate of 35%.

Unrealized investmentInvestment gains (losses), net, had an unfavorable change of $31$29 million, or 111%193%, from a gainloss of $28$15 million in 20162017 to a loss of $3$44 million in 2017.2018. The change was primarily due to a $29 million unfavorable change from derivatives in addition to an unfavorable change of $6 million from bonds, partially offset by a favorable change of $4 million from forward settling TBA securities.

Realized investment gains (losses), net, had an unfavorable change of $43 million, or 139%, from a gain of $31 million in 2016 to a loss of $12 million in 2017. The change was due to a $36 million unfavorable change from bonds, a $9 million unfavorable changevariances from forward settling TBA securities and cross currency swaps partially offset by a $2 million favorable change from mortgages.equity gains.

Pro-rataThe pro-rata tax expensebenefit changed by $26$4 million, to a benefit ofor 80%, from $5 million in 2017 primarilyto $9 million in 2018, due to the impact of the U.S. corporate tax rate changes for $2 million and the tax benefit from the unfavorable change in total unrealized and realized investment gains (losses), net.



         



Company Results of Operations
 
Three months ended March 31, 20172018 compared with the three months ended March 31, 20162017
The following is a summary of certain financial data of the Company:
  Three Months Ended March 31, Increase Percentage
Income statement data (In millions) 2018 2017 (decrease) change
Premium income $145
 $153
 $(8) (5)%
Fee income 276
 255
 21
 8 %
Other revenue 3
 2
 1
 50 %
Adjusted net investment income 338
 316
 22
 7 %
Total adjusted operating revenues 762
 726
 36
 5 %
Policyholder benefits 339
 339
 
  %
Operating expenses 317
 320
 (3) (1)%
Total benefits and expenses 656
 659
 (3)  %
Adjusted operating income before income taxes 106
 67
 39
 58 %
Adjusted income tax expense 22
 22
 
  %
Adjusted operating income $84
 $45
 $39
 87 %

The Company’s consolidated adjusted operating income had a favorable change of $39 million, or 87%, to $84 million for the three months ended March 31, 2018, when compared to the same period in 2017. The increase was primarily due to increased adjusted net investment income and higher fee income, offset by lower premium income.

Premium income had an unfavorable change of $8 million, or 5%, to $145 million for the three months ended March 31, 2018, when compared to the same period in 2017 primarily related to lower net premiums collected on group health and disability policies.

Fee income had a favorable change of $21 million, or 8%, to $276 million for the three months ended March 31, 2018, when
compared to the same period in 2017. This increase was primarily due to higher asset-based fees, driven by growth in these assets.

Adjusted net investment income had a favorable change of $22 million, or 7%, to $338 million. The increase was primarily related to higher investment income earned on bonds, mortgages, and policy loans primarily as a result of higher invested asset balances and partial recoveries of impairments taken in prior years.

















Individual Markets Segment Results of Operations
Three months ended March 31, 2018 compared with the three months ended March 31, 2017
 
The following is a summary of certain financial data of the Company:
Individual Markets segment:
 Three Months Ended March 31, Increase Percentage Three Months Ended March 31, Increase Percentage
Income statement data (In millions) 2017 2016 (decrease) change 2018 2017 (decrease) change
Premium income $153
 $155
 $(2) (1)% $124
 $132
 $(8) (6)%
Fee income 255
 225
 30
 13 % 32
 26
 6
 23 %
Other revenue 2
 3
 (1) (33)%
Adjusted net investment income 316
 304
 12
 4 % 197
 190
 7
 4 %
Total adjusted operating revenues 726
 687
 39
 6 % 353
 348
 5
 1 %
Policyholder benefits 339
 337
 2
 1 % 273
 270
 3
 1 %
Operating expenses 320
 287
 33
 11 % 42
 38
 4
 11 %
Total benefits and expenses 659
 624
 35
 6 % 315
 308
 7
 2 %
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)%
Adjusted operating income before income taxes 38
 40
 (2) (5)%
Adjusted income tax expense 7
 14
 (7) (50)%
Adjusted operating income $31
 $26
 $5
 19 %
Adjusted operating income for the Individual Markets segment had a favorable change of $5 million, or 19%, to $31 million during the three months ended March 31, 2018, when compared to the same period in 2017. The increase was primarily due to higher adjusted net investment income and fee income, and a decrease in adjusted income tax expense partially offset by lower premium income and higher operating expenses.

The Company’s consolidated adjusted operatingPremium income decreased by $15had an unfavorable change of $8 million, or 25%6%, to $45$124 million for the three months ended March 31, 2017,2018, when compared to the same period in 2016. The decrease was2017 primarily duerelated to increased operating expenseslower net premiums collected on group health and adjusted income tax expense, partially offset by higher fee income and favorable changes in adjusted net investment income.disability policies.

Fee income increased by $30had a favorable change of $6 million, or 13%23%, to $255$32 million for the three months ended March 31, 2017,2018, when compared to the same period in 2016.2017. This increase was primarily related to an increase in asset-based variable fee income resulting from increased average asset levels driven by sales and higher average equity market levels.the individual annuity line of business.

Adjusted net investment income increased by $12had a favorable change of $7 million, or 4%, to $316$197 million. The increase was primarily 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.balances.

Operating expenses increased by $33had an unfavorable change of $4 million, or 11%, to $320$42 million for the three months ended March 31, 2017,2018, when compared to the same period in 2016 primarily due to2017. The primary driver of this increase is higher salariesDAC amortization and benefits and deferred acquisition costs (“DAC”) amortization.lower commission deferrals net of expense.

Adjusted income tax expense increaseddecreased by $19$7 million, from an expense of $3 million in 2016 to $22$14 million in 2017 to $7 million in 2018 primarily due to a management election to claim foreignthe impact of the U.S. corporate tax credits during 2016.



rate changes for $6 million.

         




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 adjusted income tax expense.

Adjusted net investment income had a favorable change of $4 million, or 2%, to $190 million for the three months ended March 31, 2017, when compared to the same period in 2016. The primary driver of the change was higher investment income on bonds and mortgages as a result of higher invested asset balances, partially offset by lower yields.

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


��




Empower Retirement Segment Results of Operations
 
Three months ended March 31, 20172018 compared with the three months ended March 31, 20162017
 
The following is a summary of certain financial data of the Empower Retirement segment:
 
 Three Months Ended March 31, Increase Percentage Three Months Ended March 31, Increase Percentage
Income statement data (In millions) 2017 2016 (decrease) change 2018 2017 (decrease) change
Premium income $1
 $
 $1
 100%
Fee income $227
 $201
 $26
 13 % 242
 $227
 15
 7%
Other revenue 2
 3
 (1) (33)% 3
 2
 1
 50%
Adjusted net investment income 115
 104
 11
 11 % 129
 115
 14
 12%
Total adjusted operating revenues 344
 308
 36
 12 % 375
 344
 31
 9%
Policyholder benefits 48
 50
 (2) (4)% 51
 48
 3
 6%
Operating expenses 256
 232
 24
 10 % 260
 256
 4
 2%
Total benefits and expenses 304
 282
 22
 8 % 311
 304
 7
 2%
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)%
Adjusted operating income before income taxes 64
 40
 24
 60%
Adjusted income tax expense 14
 13
 1
 8%
Adjusted operating income $50
 $27
 $23
 85%
  
Adjusted operating income for the Empower Retirement segment decreasedincreased by $7$23 million, or 21%85%, to $27$50 million for the three months ended March 31, 2017,2018, when compared to the same period in 2016.2017. The change was primarily due to higher operating expenses and adjusted income tax expense, partially offset by favorable fee income, andhigher adjusted net investment income.income, offset by higher policyholder benefits and higher operating expenses.

Fee income increased by $26$15 million, or 13%7%, to $227$242 million for the three months ended March 31, 2017,2018, when compared to the same period in 2016.2017. This increase was primarily related to higher asset-based variable fee income. This was driven by growth in these assets and an increase in asset-based variable fee income resulting from increased average asset levels driven by sales and higher average equity market levels.participants.

Adjusted net investment income had a favorable change of $11$14 million, or 11%12%, to $115$129 million for the three months ended March 31, 2017,2018, when compared to the same period in 2016.2017. The primary driver of the change was higher investment income on bonds and mortgages as a resultpartial recoveries of higher invested asset balances, partially offset by lower yields.impairments taken in prior years.

Operating expenses increased by $24had an unfavorable change of $4 million, or 10%2%, to $256$260 million for the three months ended March 31, 2017,2018, when compared to the same period in 2016.2017. The primary driver of this increase was primarily due tois higher salaries and benefits and DACVOBA amortization.

Adjusted income tax expensePolicyholder benefits had an unfavorable change of $21$3 million, or 263%6%, to $13$51 million for the three months ended March 31, 2017,2018, when compared to the same period in 2016. The increased tax expense is primarily2017 due to a management electionhigher interest paid to claim foreign tax credits in addition to a decrease in adjusted operating income before tax during 2016.participants.



         
  




Other Segment Results of Operations
 
Three months ended March 31, 20172018 compared with the three months ended March 31, 20162017
 
The following is a summary of certain financial data of the Company’s Other segment:
 Three Months Ended March 31, Increase Percentage Three Months Ended March 31, Increase Percentage
Income statement data (In millions) 2017 2016 (decrease) change 2018 2017 (decrease) change
Premium income $21
 $21
 $
  % $20
 $21
 $(1) (5)%
Fee income 2
 1
 1
 100 % 2
 2
 
  %
Adjusted net investment income 11
 14
 (3) (21)% 12
 11
 1
 9 %
Total adjusted operating revenues 34
 36
 (2) (6)% 34
 34
 
  %
Policyholder benefits 21
 19
 2
 11 % 15
 21
 (6) (29)%
Operating expenses 26
 18
 8
 44 % 15
 26
 (11) (42)%
Total benefits and expenses 47
 37
 10
 27 % 30
 47
 (17) (36)%
Adjusted operating income (loss) before income taxes (13) (1) (12) 1,200 % 4
 (13) 17
 131 %
Adjusted income tax (benefit) expense (5) 
 (5) 100 %
Adjusted income tax expense (benefit) 1
 (5) 6
 120 %
Adjusted operating income (loss) $(8) $(1) $(7) 700 % $3
 $(8) $11
 138 %
  
Adjusted operating lossincome for the Company’s Other segment increased by $7$11 million, or 700%138%, to a lossan income of $8$3 million for the three months ended March 31, 20172018 compared to a loss of $1$8 million in 2016.2017. The increase in adjusted operating lossincome was primarily due to higherlower operating expenses partiallyand policyholder benefits, offset by an increase in thehigher adjusted income tax benefit.expense.

Operating expenses increasedPolicyholder benefits expense decreased by $8$6 million, or 44%29%, to $26$15 million for the three months ended March 31, 20172018 primarily due to restructuring costs.a release of reserves on a closed block of business.

Adjusted income tax benefit increasedOperating expense decreased by $5$11 million, or 100%42%, to a benefit of $7$15 million for the three months ended March 31, 2018 primarily due to restructuring costs paid in first quarter 2017.

Adjusted income tax benefit decreased by $6 million, or 120%, to an expense of $1 million for the three months ended March 31, 2018 primarily due to a higher adjusted operating lossincome before tax.

income taxes and the impact of the U.S. corporate tax rate changes for $2 million.

         




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

The Company follows rigorous procedures to control interest rate risk and observes strict asset and liability matching guidelines.  These guidelines ensure that even under changing market conditions, the Company’s assets should meet the cash flow and income requirements of its liabilities. Using dynamic modeling to analyze the effects of a range of possible market changes upon investments and policyholder benefits, the Company works to ensure that its investment portfolio is appropriately structured to fulfill financial obligations to its policyholders.
 
The following table presents the percentage distribution of the carrying values of the Company’s general account investment portfolio: 
(In millions)
March 31, 2017
December 31, 2016
March 31, 2018
December 31, 2017
Fixed maturities, available-for-sale
$22,042

71.4%
$22,154

72.4%
$23,184

72.9%
$23,593

73.4%
Fixed maturities, held-for-trading
186

0.6%
515

1.7%
20

0.1%
21

0.1%
Mortgage loans on real estate
3,845

12.4%
3,559

11.6%
4,152

13.0%
4,005

12.4%
Policy loans
4,017

13.0%
4,020

13.1%
4,068

12.8%
4,104

12.8%
Short-term investments
743

2.4%
303

1.0%
297

0.9%
350

1.1%
Limited partnership and other corporation interests
38

0.1%
35

0.1%
Limited partnership interests
53

0.2%
46

0.1%
Other investments
15

0.1%
15

0.1%
18

0.1%
18

0.1%
Total investments
$30,886

100.0%
$30,601

100.0%
$31,792

100.0%
$32,137

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 Company generally considers ratings from several of these major ratings agencies to develop its internal rating. In addition, the National Association of Insurance Commissioners (“NAIC”) implemented a ratings methodology for residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”), and other structured securities.  The Company may also utilize inputs from this ratings process to develop its internal rating.

The percentage distribution of the estimated fair value of the Company’s fixed maturity portfolio by the Company’s internal credit rating is summarized as follows:
Credit Rating March 31, 2017 December 31, 2016 March 31, 2018 December 31, 2017
AAA 23.4% 27.3% 21.6% 22.7%
AA 14.7% 13.9% 15.3% 14.9%
A 32.3% 30.8% 33.6% 33.8%
BBB 28.4% 26.8% 28.7% 27.7%
BB and below (Non-investment grade) 1.2% 1.2% 0.8% 0.9%
Total 100.0% 100.0% 100.0% 100.0%
 


The March 31, 2017,2018, AAA rating percentage decreased as compared to December 31, 2016,2017, as the Company sold AAA-rated government agency MBS pools to enter into forward settling TBA contracts which are treated as derivatives.

The percentage distribution of the estimated fair value of the corporate sector fixed maturity portfolio, calculated as a percentage of fixed maturities, is summarized as follows:
Sector March 31, 2017 December 31, 2016 March 31, 2018 December 31, 2017
Utility 18.6% 18.1% 17.5% 17.8%
Finance 11.9% 10.8% 15.5% 14.8%
Consumer 10.3% 9.7% 11.0% 11.0%
Natural resources 6.6% 6.3% 6.8% 6.1%
Transportation 4.1% 3.6% 4.6% 4.2%
Other 14.2% 13.3% 12.2% 12.6%
 
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.  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, 2016,2017, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Application of Recent Accounting Pronouncements
 
See Note 2 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 $279$288 million and $322$367 million as of March 31, 2017,2018 and December 31, 2016,2017, respectively.  The March 31, 2017,2018 and December 31, 2016,2017, short-term investments included above exclude any amounts held to settle TBA forward contracts.  In addition, 99% of the fixed maturity portfolio carried an investment grade rating at March 31, 2017,2018 and December 31, 2016,2017, which provides significant liquidity to the Company’s overall investment portfolio.
 
The Company continues to be well capitalized, with sufficient borrowing capacity.  Additionally, the Company anticipates that cash on hand and expected net cash generated by operating activities will exceed the forecasted needs of the business over the next 12 months.  The Company’s financial strength provides the capacity and flexibility to enable it to raise funds in the capital


markets through the issuance of commercial paper.  The Company had $99$86 million and $99$100 million of commercial paper outstanding as of March 31, 2017,2018 and December 31, 2016,2017, 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 lossCompany’s issuance 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.does not have a significant impact on the Company’s liquidity.
 
The Company also has available a revolving credit facility agreement with U.S. Bank, which expires on March 1, 2018,2023, in the amount of $50 million for general corporate purposes.  The Company had no borrowings under this credit facility as of or during the three months ended March 31, 2017.2018.  The Company does not anticipate the need for borrowings under this facility and the loss of its availability would not significantly impact its liquidity.
 
Capital resources provide protection for policyholders and financial strength to support the underwriting of insurance risks and allow for continued business growth.  The amount of capital resources that may be needed is determined by the Company’s senior management and Board of Directors, as well as by regulatory requirements.  The allocation of resources to new long-term business commitments is designed to achieve an attractive return, tempered by considerations of risk and the need to support the Company’s existing business.
 
Off-Balance Sheet Arrangements
 
The Company makes commitments to fund partnership interests, mortgage loans on real estate, and other investments in the normal course of its business.  The amounts of these unfunded commitments at March 31, 2017,2018 and December 31, 2016,2017, were $550$369 million and $438$313 million, respectively.  The precise timing of the fulfillment of the commitment cannot be predicted; however, these amountsall $369 million of the March 31, 2018 balance, and $312 million of the December 31, 2017 balance are due within one year of the dates indicated. The remaining $1 million of the December 31, 2017 balance is due within one to three years. 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 counterparty financial institutions put non-cash collateral on deposit with a third-party custodian on behalf of the Company.  The amount of securities purchased in connection with these transactions was $35$16 million and zero$23 million at March 31, 2017,2018 and December 31, 2016,2017, respectively.  Non-cash collateral on deposit with the third-party custodian on the Company’s behalf was $35$16 million and zero$24 million at March 31, 2017,2018 and December 31, 2016,2017, 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 $71$31 million as collateral at March 31, 2017,2018, which have not been recorded on the condensed consolidated balance sheets as the Company does not have effective control. There were no securities on loan and therefore no securities were received as collateral at December 31, 2016.2017.

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, 2016,2017, 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 March 31, 2017.2018.

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, 2016,2017, management concluded that the Company maintained effective internal control over financial reporting. There has been no significant change in the control environment for the three months ended March 31, 2017.2018. 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, 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
Bylaws of Great-West Life & Annuity Insurance Company
Rule 13a-14(a)/15-d14(a) Certification
Rule 13a-14(a)/15-d14(a) Certification
18 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:May 12, 20175/14/2018
  Kara Roe   
  Vice President, Controller, and Principal Accounting Officer   


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