Great West Life & Annuity Insurance 10-Q 2011 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2011

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 o

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 o

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 o	Accelerated filer o
Non-accelerated filer x	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Act.  Yes o  No x

As of November 1, 2011, 7,032,000 shares of the registrant’s common stock were outstanding, all of which were owned by the registrant’s parent company.

Table of Contents

			Page
			Number
Part I	Financial Information		3
	Item 1	Interim Financial Statements	3
		Condensed Consolidated Balance Sheets at September 30, 2011 (Unaudited) and December 31, 2010	3
		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)	5
		Condensed Consolidated Statements of Stockholder’s Equity for the Year Ended December 31, 2010 and for the Nine Months Ended September 30, 2011 (Unaudited)	6
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)	7
		Notes to Condensed Consolidated Financial Statements (Unaudited)	9
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	63
	Item 4	Controls and Procedures	64
Part II	Other Information		64
	Item 1	Legal Proceedings	64
	Item 1A	Risk Factors	64
	Item 6	Exhibits	65
		Signature	65

2

Part IFinancial Information

Item 1.Interim Financial Statements

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Balance Sheets

September 30, 2011 (Unaudited) and December 31, 2010

(In Thousands, Except Share Amounts)

	September 30,		December 31,
	2011		2010
Assets
Investments:
Fixed maturities, available-for-sale, at fair value (amortized cost $15,544,598 and $15,382,402, respectively)	$	16,561,815	$	15,943,057
Fixed maturities, held for trading, at fair value (amortized cost $163,466 and $134,587, respectively)	178,770		144,174
Mortgage loans on real estate (net of allowances of $21,130 and $16,300, respectively)	2,199,621		1,722,422
Equity investments, available-for-sale, at fair value (cost $2,196 and $1,313, respectively)	2,009		1,888
Policy loans	4,125,093		4,059,640
Short-term investments, available-for-sale (cost approximates fair value)	1,347,633		964,507
Limited partnership and other corporation interests	178,796		210,146
Other investments	22,205		22,762
Total investments	24,615,942		23,068,596
Other assets:
Cash	4,195		4,476
Reinsurance receivable	607,774		594,997
Deferred acquisition costs and value of business acquired	363,407		306,948
Investment income due and accrued	271,783		239,345
Premiums in course of collection	2,404		15,421
Collateral under securities lending agreements	5,411		51,749
Due from parent and affiliates	128,751		203,231
Goodwill	105,255		105,255
Other intangible assets	22,801		25,642
Other assets	524,284		460,573
Assets of discontinued operations	46,350		62,091
Separate account assets	21,362,101		22,489,038
Total assets	$	48,060,458	$	47,627,362

See notes to condensed consolidated financial statements.
	(Continued)

3

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Balance Sheets

September 30, 2011 (Unaudited) and December 31, 2010

(In Thousands, Except Share Amounts)

	September 30,		December 31,
	2011		2010
Liabilities and stockholder’s equity
Policy benefit liabilities:
Future policy benefits	$	21,386,087	$	20,420,875
Policy and contract claims	303,745		293,383
Policyholders’ funds	348,155		372,980
Provision for policyholders’ dividends	66,810		66,244
Undistributed earnings on participating business	9,618		6,803
Total policy benefit liabilities	22,114,415		21,160,285
General liabilities:
Due to parent and affiliates	544,026		537,474
Repurchase agreements	1,054,462		936,762
Commercial paper	95,945		91,681
Payable under securities lending agreements	5,411		51,749
Deferred income tax liabilities, net	232,595		57,798
Other liabilities	520,136		460,310
Liabilities of discontinued operations	46,345		62,042
Separate account liabilities	21,362,101		22,489,038
Total liabilities	45,975,436		45,847,139
Commitments and contingencies (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; 7,032,000 shares issued and outstanding	7,032		7,032
Additional paid-in capital	767,579		764,644
Accumulated other comprehensive income (loss)	511,518		242,516
Retained earnings	798,893		766,031
Total stockholder’s equity	2,085,022		1,780,223
Total liabilities and stockholder’s equity	$	48,060,458	$	47,627,362

See notes to condensed consolidated financial statements.
	(Concluded)

4

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Income

Three and Nine Months Ended September 30, 2011 and 2010

(In Thousands)

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Revenues:
Premium income, net of premiums ceded of $3,904, $5,408, $28,705 and $29,644	$	158,688		$	238,547		$	426,879		$	613,905
Fee income	120,100			112,077			363,482			332,644
Net investment income	287,250			295,366			867,803			863,466
Realized investment gains (losses), net:
Total other-than-temporary gains (losses)	(17,274		)	(1,093		)	(18,965		)	(75,016		)
Other-than-temporary losses transferred to other comprehensive income	10,004			3			10,004			15,707
Other realized investment gains, net	18,012			7,252			28,708			25,153
Total realized investment gains (losses), net	10,742			6,162			19,747			(34,156		)
Total revenues	576,780			652,152			1,677,911			1,775,859
Benefits and expenses:
Life and other policy benefits, net of reinsurance recoveries of $10,715, $10,472, $33,832 and $22,297	160,097			163,059			482,974			469,859
Increase (decrease) in future policy benefits	34,251			117,132			41,442			238,319
Interest paid or credited to contractholders	138,483			135,086			395,799			384,232
Provision for policyholders’ share of earnings on participating business	747			955			1,503			1,608
Dividends to policyholders	14,846			16,742			50,783			53,955
Total benefits	348,424			432,974			972,501			1,147,973
General insurance expenses	135,993			122,330			389,422			358,617
Amortization of deferred acquisition costs and value of business acquired	53			3,631			18,730			26,964
Interest expense	9,338			9,376			28,131			28,064
Total benefits and expenses, net	493,808			568,311			1,408,784			1,561,618
Income from continuing operations before income taxes	82,972			83,841			269,127			214,241
Income tax expense	26,024			16,356			82,915			62,609
Income from continuing operations	56,948			67,485			186,212			151,632
Loss from discontinued operations, net of income tax benefit of $ - , $900, $ - and $900	—			(1,600		)	—			(1,600		)
Net income	$	56,948		$	65,885		$	186,212		$	150,032

See notes to condensed consolidated financial statements.

5

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Stockholder’s Equity

Year Ended December 31, 2010 and Nine Months Ended September 30, 2011 (Unaudited)

(In Thousands)

					Accumulated Other
					Comprehensive Income (Loss)
			Additional		Unrealized			Employee
	Common		paid-in		gains (losses)			benefit plan			Retained
	stock		capital		on securities			adjustments			earnings			Total
Balances, January 1, 2010	$	7,032	$	761,330	$	(90,110	)	$	(42,611	)	$	724,193		$	1,359,834
Net income											202,755			202,755
Other comprehensive income (loss), net of income taxes:
Non-credit component of impaired losses on fixed maturities available-for sale					6,346									6,346
Net change in unrealized gains (losses)					372,233									372,233
Employee benefit plan adjustment								(3,342		)				(3,342		)
Total comprehensive income														577,992
Dividends											(160,917		)	(160,917		)
Capital contribution - stock-based compensation			1,855											1,855
Income tax benefit on stock-based compensation			1,459											1,459
Balances, December 31, 2010	7,032		764,644		288,469			(45,953		)	766,031			1,780,223
Net income											186,212			186,212
Other comprehensive income (loss), net of income taxes:
Non-credit component of impaired losses on fixed maturities available-for sale					14,670									14,670
Net change in unrealized gains (losses)					254,332									254,332
Total comprehensive income														455,214
Dividends											(153,350		)	(153,350		)
Capital contribution - stock-based compensation			1,289											1,289
Income tax benefit on stock option exercises			1,646											1,646
Balances, September 30, 2011	$	7,032	$	767,579	$	557,471		$	(45,953	)	$	798,893		$	2,085,022

See notes to condensed consolidated financial statements.

6

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2011 and 2010

(In Thousands)

(Unaudited)

	Nine months ended September 30,
	2011			2010
Cash flows from operating activities:
Net income	$	186,212		$	150,032
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Earnings allocated to participating policyholders	1,503			1,608
Amortization of premiums (accretion) of discounts on investments, net	(30,946		)	(30,517		)
Net realized (gains) losses on investments	(45,828		)	34,156
Net proceeds (purchases) of trading securities	(33,115		)	17,552
Interest credited to contractholders	392,714			380,516
Depreciation and amortization	29,929			38,673
Deferral of acquisition costs	(65,327		)	(64,818		)
Deferred income taxes	29,583			66,959
Other, net	(9,808		)	(23,301		)
Changes in assets and liabilities:
Policy benefit liabilities	(96,126		)	126,390
Reinsurance receivable	2,964			(7,623		)
Accrued interest and other receivables	(19,421		)	(35,133		)
Other assets	(6,894		)	(20,898		)
Other liabilities	13,585			(109,237		)
Net cash provided by operating activities	349,025			524,359
Cash flows from investing activities:
Proceeds from sales, maturities and redemptions of investments:
Fixed maturities, available-for-sale	4,581,017			3,238,262
Mortgage loans on real estate	63,755			114,729
Equity investments and other limited partnership interests	45,255			52,607
Purchases of investments:
Fixed maturities, available-for-sale	(4,526,471		)	(3,637,171		)
Mortgage loans on real estate	(551,951		)	(295,207		)
Equity investments and other limited partnership interests	(6,332		)	(17,491		)
Net change in short-term investments	(483,015		)	(865,902		)
Net change in repurchase agreements	117,700			410,318
Policy loans, net	(14,807		)	23,976
Other, net	921			1,334
Net cash used in investing activities	(773,928		)	(974,545		)

See notes to condensed consolidated financial statements.
	(Continued)

7

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2011 and 2010

(In Thousands)

(Unaudited)

	Nine months ended September 30,
	2011			2010
Cash flows from financing activities:
Contract deposits	$	1,872,213		$	1,556,709
Contract withdrawals	(1,348,054		)	(1,096,704		)
Change in due to parent and affiliates	79,607			(25,781		)
Dividends paid	(153,350		)	(147,917		)
Net commercial paper borrowings (repayments)	4,264			(1,062		)
Change in bank overdrafts	(31,704		)	(4		)
Income tax benefit of stock option exercises	1,646			1,181
Net cash provided by financing activities	424,622			286,422
Net decrease in cash	(281		)	(163,764		)
Cash, beginning of period	4,476			170,978
Cash, end of period	$	4,195		$	7,214
Supplemental disclosures of cash flow information:
Net cash paid (received) during the periods for:
Income taxes	$	(121,162	)	$	(1,056	)
Net income tax payments withheld and remitted to taxing authorities	41,105			41,617
Interest	18,873			18,805
Non-cash investing and financing transactions during the periods:
Share-based compensation expense	$	1,289		$	1,386
Fair value of assets acquired in settlement of fixed maturity investments	12,865			—
Real estate acquired in satisfaction of debt	2,140			—

See notes to condensed consolidated financial statements. (Concluded)

8

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(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. Inc. (“Lifeco U.S.”) and an indirect wholly-owned subsidiary of Great-West Lifeco Inc. (“Lifeco”).  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 preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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.  Significant estimates are required to account for valuation of investments and other-than-temporary impairments, valuation and accounting for derivative instruments, valuation of policy benefit liabilities, valuation of deferred acquisition costs and value of business acquired, accounting for employee benefits plans and accounting for taxes on income.  Actual results could differ from those estimates.  However, in the opinion of management, these condensed consolidated financial statements include normal recurring adjustments necessary for the fair presentation of the Company’s financial position and the results of its operations.  The condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  Intercompany transactions and balances have been eliminated in consolidation.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2010.  Operating results for the nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011.

2.  Application of Recent Accounting Pronouncements

Recently adopted accounting pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06 “Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements” (“ASU No. 2010-06”).  ASU No. 2010-06 provides for disclosure of significant transfers in and out of the fair value hierarchy Levels 1 and 2, and the reasons for these transfers.  In addition, ASU No. 2010-06 provides for separate disclosure about purchases, sales, issuances and settlements in the Level 3 hierarchy roll forward activity.  ASU No. 2010-06 is effective for interim and annual periods beginning after December 31, 2009 except for the provisions relating to purchases, sales, issuances and settlements of Level 3 investments, which are effective for fiscal years beginning after December 15, 2010.  The Company adopted the disclosure provisions of ASU 2010-06 for its fiscal year beginning January 1, 2010 and adopted the Level 3 purchase, sales, issuances and settlement provisions for its fiscal year beginning January 1, 2011.  The adoption ASU No. 2010-06 did not have an impact on the Company’s condensed consolidated financial position or the results of its operations.

In February 2010, the FASB issued ASU No. 2010-10 “Consolidation: Amendments for Certain Investment Funds” (“ASU No. 2010-10”).  ASU No. 2010-10 defers the effective date of the amendments to the consolidation requirements made by certain provisions of ASC topic 810 (formerly Statement of Financial Accounting Standards (SFAS) No. 167), specifically the evaluation of a company’s interests in mutual funds, private equity funds, hedge funds, real estate entities that measure their investments at fair value, real

9

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

estate investment trusts and venture capital funds.  The deferral provisions of ASU No. 2010-10 will continue indefinitely.  ASU No. 2010-10 was effective for interim and annual periods in fiscal years beginning after November 15, 2009.  The Company adopted ASU No. 2010-10 for its fiscal year beginning January 1, 2010.  The adoption of ASU No. 2010-10 did not have an impact on the Company’s condensed consolidated financial position or the results of its operations.

In April 2010, the FASB issued ASU No. 2010-15 “How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments” (“ASU No. 2010-15”).  ASU No. 2010-15 clarifies that an insurance company should not consider any separate account interests in an investment held for the benefit of policyholders to be its interests and that those interests should not be combined with interests of its general account in the same investment when assessing the investment for consolidation.  ASU No. 2010-15 also provides that an insurance company is required to consider a separate account as a subsidiary for purposes of evaluating whether the retention of specialized accounting for investments in consolidation is appropriate.  ASU No. 2010-15 is effective for fiscal years beginning after December 15, 2010.  The Company adopted ASU No. 2010-15 for its fiscal year beginning on January 1, 2011.  The adoption of ASU No. 2010-15 did not have an impact on the Company’s condensed consolidated financial position or the results of its operations.

In July 2010, the FASB issued ASU No. 2010-20 “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU No. 2010-20”).  ASU No. 2010-20 provides for entities to disclose credit quality indicators, aging of past due amounts, the nature and extent of troubled debt restructurings, modifications as a result of troubled debt restructurings and significant sales or purchases, by disaggregated class, for its financing receivables.  ASU No. 2010-20 is effective for fiscal periods ending after December 15, 2010.  The Company adopted ASU No. 2010-20 for its fiscal year ended December 31, 2010.  The provisions of ASU No. 2010-20 related to troubled debt restructurings have been clarified in ASU No. 2011-02, see below.  The provisions of ASU No. 2010-20 relate only to financial statement disclosures regarding financing receivables and, accordingly, its adoption did not have an impact on the Company’s condensed consolidated financial position or the results of its operations.

In April 2011, the FASB issued ASU No. 2011-02 “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” (“ASU No. 2011-02”).  ASU No. 2011-02 clarifies and defines the criteria to be met in a debt modification in order to be considered a troubled debt restructuring.  It also clarifies whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructures.  ASU No. 2011-02 is effective for the first interim or annual period beginning on or after June 15, 2011 with early adoption permitted and is to be applied retrospectively to the beginning of the annual period of adoption.  The Company adopted ASU No. 2011-02 for its fiscal period ended September 30, 2011.  The adoption of ASU No. 2011-02 did not have an impact on the Company’s condensed consolidated financial position or the results of operations.

Future adoption of new accounting pronouncements

In October 2010, the FASB issued ASU No. 2010-26 “Financial Services - Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts - a Consensus of the FASB Emerging Issues Task Force” (“ASU No. 2010-26”).  ASU No. 2010-26 provides guidance and modifies the definition of the types and nature of costs incurred by insurance enterprises that can be capitalized in connection with the acquisition of new or renewal insurance contracts.  Further, ASU No. 2010-26 clarifies which costs may not be capitalized as deferred acquisition costs.  ASU No. 2010-26 is effective for interim and annual periods in fiscal years beginning after December 15, 2011 with early adoption permitted.  The Company will adopt ASU No. 2010-26 for its fiscal year beginning January 1, 2012.  The Company is evaluating the impact of the adoption of ASU No. 2010-26.

10

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

In April 2011, the FASB issued ASU No. 2011-03 “Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements” (“ASU No. 2011-03”).  ASU No. 2011-03 removes from the assessment of effective control the criterion requiring a transferor to have the ability to repurchase or redeem the financial assets transferred in a repurchase arrangement.  This requirement was one of the criterions under ASC topic 860 that entities used to determine whether a transferor maintained effective control.  Entities are still required to consider all the effective control criterion under ASC topic 860; however, the elimination of this requirement may lead to more conclusions that a repurchase agreement should be accounted for as a secured borrowing rather than a sale.  ASU No. 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011.  The Company will adopt ASU No. 2011-03 for its fiscal year beginning January 1, 2012.  The Company is evaluating the impact of the adoption of ASU No. 2011-03.

In May 2011, the FASB issued ASU No. 2011-04 “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU No. 2011-04”).  ASU No. 2011-04 does not extend the use of the existing concept or guidance regarding fair value.  It results in common fair value measurements and disclosures between accounting principles generally accepted in the United States and those of International Financial Reporting Standards.  ASU No. 2011-04 expands disclosure requirements for Level 3 inputs to include a quantitative description of the unobservable inputs used, a description of the valuation process used and a qualitative description about the sensitivity of the fair value measurements.  ASU No. 2011-04 is effective for interim or annual periods beginning on or after December 15, 2011.  The Company will adopt ASU No. 2011-04 for its fiscal year beginning January 1, 2012.  The Company is evaluating the impact of the adoption of ASU No. 2011-04.

In June 2011, the FASB issued ASU No. 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU No. 2011-05”).  ASU No. 2011-05 provides that, upon adoption, entities must present the components of net income, the components of comprehensive income and the total of comprehensive income for all periods presented.  The option of presenting the components of comprehensive income in the statement of changes of equity has been eliminated.  ASU No. 2011-05 is effective for interim or annual periods beginning on or after December 15, 2011.  The Company will adopt ASU No. 2011-05 for its fiscal year beginning January 1, 2012.  The adoption of ASU No. 2011-05 will not have an impact on the Company’s consolidated financial position or the results of its operations.

In September 2011, the FASB issued ASU No. 2011-08 “Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (“ASU No. 2011-08”).  ASU No. 2011-08 provides that entities have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of recorded goodwill is less than its carrying value.  If an entity concludes that it is more likely than not that the fair value of recorded goodwill is less than its carrying value, it is then required to calculate the fair value of the recorded goodwill and to measure the amount of impairment loss, if any.  ASU No. 2011-08 is effective for annual and interim goodwill impairment tests for fiscal years beginning after December 15, 2011.  Earlier application is permitted.  The Company is evaluating the early application of the standard.  The adoption of ASU No. 2011-08 will not have an impact on the Company’s consolidated financial position or the results of its operations.

3.  Related Party Transactions

Included in the condensed consolidated balance sheets at September 30, 2011 and December 31, 2010 are the following related party amounts:

	September 30, 2011		December 31, 2010
Reinsurance receivable	$	503,081	$	483,564
Future policy benefits	2,095,144		2,183,167

11

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

Included in the condensed consolidated statements of income for the three and nine-month periods ended September 30, 2011 and 2010 are the following related party amounts:

	Three months ended September 30,					Nine months ended September 30,
	2011		2010			2011		2010
Premium income, net of related party premiums ceded of $1,264, $486, $4,315 and $3,770	$	39,784	$	32,012		$	103,751	$	98,777
Life and other policy benefits, net of reinsurance recoveries of $2,934, $289, $4,165 and $6,961	31,361		30,577			89,649		96,719
Increase (decrease) in future policy benefits	3,448		(20,878		)	54,554		(61,414		)

The Company’s wholly owned subsidiary, Great-West Life & Annuity Insurance Company of South Carolina (“GWSC”), and The Canada Life Assurance Company (“CLAC”), an affiliate, are parties to a reinsurance agreement pursuant to which GWSC assumes term life insurance from CLAC.  GWL&A Financial obtained two letters of credit for the benefit of GWSC as collateral under the reinsurance agreement for balance sheet policy liabilities and capital support.  The first letter of credit is for $1,114,700 and renews annually until it expires on December 31, 2025.  The second letter of credit is for $70,000 and renews annually for an indefinite period of time.  At September 30, 2011 and December 31, 2010, there were no outstanding amounts related to the letters of credit.

A subsidiary of the Company, GW Capital Management, LLC, serves as a Registered Investment Advisor to Maxim Series Fund, Inc., an affiliated open-end management investment company, and to several affiliated insurance company separate accounts.  A subsidiary of the Company, Orchard Trust, serves as trustee to Collective Investment Trusts, an affiliated entity.  Included in fee income in the condensed consolidated statements of income are $17,689 and $14,637 of advisory and management fee income from these affiliated entities for the three-month periods ended September 30, 2011 and 2010, respectively.  Included in fee income in the condensed consolidated statements of income are $51,089 and $43,069 of advisory and management fee income from these affiliated entities for the nine-month periods ended September 30, 2011 and 2010, respectively.

The Company’s separate accounts invest in shares of Maxim Series Fund, Inc. and Putnam Funds, which are affiliates of the Company, and shares of other non-affiliated mutual funds and government and corporate bonds.  The Company’s separate accounts invest in mutual funds or other investment options that purchase guaranteed interest annuity contracts issued by the Company.  During the three-month periods ended September 30, 2011 and 2010, these purchases totaled $20,072 and $28,128, respectively.  During the nine-month periods ended September 30, 2011 and 2010, these purchases totaled $88,407 and $132,346, respectively.  As the general account investment contracts are also included in the separate account balances in the accompanying condensed consolidated balance sheets, the Company has reduced the separate account assets and liabilities by $265,063 and $269,495 at September 30, 2011 and December 31, 2010, respectively, to eliminate these amounts in its consolidated balance sheets at those dates.

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 capital and 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 nine-month periods ended September 30, 2011 and 2010, the Company paid dividends of $153,350 and $147,917, respectively, to its parent, GWL&A Financial.

12

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

4.  Summary of Investments

The following tables summarize fixed maturity investments and equity securities classified as available-for-sale and the amount of other-than-temporary impairments (“OTTI”) classified as the non-credit-related component of previously impaired fixed maturity investments that the Company does not intend to sell included in accumulated other comprehensive income (loss) (“AOCI”) at September 30, 2011 and December 31, 2010:

	September 30, 2011
	Amortized		Gross unrealized		Gross unrealized		Estimated fair value		OTTI (gain) loss
	cost		gains		losses		and carrying value		included in AOCI (1)
Fixed maturities:
U.S. government direct obligations and U.S. agencies	$	2,289,211	$	111,533	$	2,840	$	2,397,904	$	—
Obligations of U.S. states and their subdivisions	1,784,866		300,269		—		2,085,135		—
Corporate debt securities	8,056,869		753,763		150,773		8,659,859		4,880
Asset-backed securities (2)	2,041,544		84,955		122,883		2,003,616		(23,391		)
Residential mortgage-backed securities	617,588		20,274		2,133		635,729		336
Commercial mortgage-backed securities	728,902		34,488		6,394		756,996		—
Collateralized debt obligations	25,618		2		3,044		22,576		—
Total fixed maturities	$	15,544,598	$	1,305,284	$	288,067	$	16,561,815	$	(18,175	)
Equity investments:
Financial services	$	1,610	$	112	$	280	$	1,442	$	—
Asset allocation mutual funds	586		24		43		567		—
Total equity investments	$	2,196	$	136	$	323	$	2,009	$	—

(1) Indicates the amount of any OTTI (gain) loss included in AOCI that is included in gross unrealized gains and losses.

(2) 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 that had previous non-credit impairment.  The non-credit loss component of OTTI (gain) loss for asset-backed securities was in an unrealized gain position of $23,391 at September 30, 2011 due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.

	December 31, 2010
	Amortized		Gross unrealized		Gross unrealized		Estimated fair value		OTTI (gain) loss
	cost		gains		losses		and carrying value		included in AOCI (1)
Fixed Maturities:
U.S. government direct obligations and U.S. agencies	$	2,289,010	$	96,924	$	14,784	$	2,371,150	$	—
Obligations of U.S. states and their subdivisions	1,784,299		173,567		15,603		1,942,263		—
Corporate debt securities	7,625,810		557,104		144,486		8,038,428		5,439
Asset-backed securities (2)	2,104,420		51,663		154,157		2,001,926		(22,284		)
Residential mortgage-backed securities	730,293		20,888		12,119		739,062		505
Commercial mortgage-backed securities	812,915		28,049		20,615		820,349		—
Collateralized debt obligations	35,655		5		5,781		29,879		—
Total fixed maturities	$	15,382,402	$	928,200	$	367,545	$	15,943,057	$	(16,340	)
Equity investments:
Financial services	$	192	$	533	$	—	$	725	$	—
Equity mutual funds	432		119		—		551		—
Airline industry	689		—		77		612		—
Total equity investments	$	1,313	$	652	$	77	$	1,888	$	—

(1) Indicates the amount of any OTTI (gain) loss included in AOCI that is included in gross unrealized gains and losses.

(2) 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 that had previous non-credit impairment.  The non-credit loss component of OTTI (gain)

13

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

loss for asset-backed securities was in an unrealized gain position of $22,284 at December 31, 2010 due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.

See Note 6 for additional information on policies regarding estimated fair value of fixed maturity and equity investments.

The amortized cost and estimated fair value of fixed maturity investments classified as available-for-sale at September 30, 2011, based on estimated cash flows, are shown in the table below.  Actual maturities will likely differ from these projections because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2011
	Amortized cost		Estimated fair value
Maturing in one year or less	$	459,612	$	491,731
Maturing after one year through five years	2,970,792		3,220,499
Maturing after five years through ten years	3,547,597		3,961,987
Maturing after ten years	2,981,056		3,207,749
Mortgage-backed and asset-backed securities	5,585,541		5,679,849
	$	15,544,598	$	16,561,815

Mortgage-backed (commercial and residential) and asset-backed securities, including those issued by U.S. government and U.S. agencies, include collateralized mortgage obligations that consist primarily of sequential and planned amortization classes with legal final stated maturities of up to thirty years and expected average lives of up to eighteen years.

The following table summarizes information regarding the sales of fixed maturity investments classified as available-for-sale for the three and nine-month periods ended September 30, 2011 and 2010:

	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010
Proceeds from sales	$	991,790	$	670,774	$	3,563,490	$	2,342,438
Gross realized gains from sales	41,893		21,044		89,130		42,251
Gross realized losses from sales	122		2		21,696		19

Gross realized gains and losses from sales were primarily attributable to changes in interest rates and gains and losses on repurchase agreement transactions.

Included in net investment income are unrealized gains of $15,304 and $9,587 on held-for-trading fixed maturity investments still held at September 30, 2011 and December 31, 2010, respectively.

The Company has a corporate fixed maturity security with a fair value of $9,210 and $8,845 that has been non-income producing for the twelve months preceding September 30, 2011 and December 31, 2010, respectively. This security was written down to its fair value in the period it was deemed to be other-than-temporarily impaired.  No additional impairment has been recognized since the period in which it was deemed impaired.

The Company holds certain performing securities subject to deferred coupons in which the issuer has exercised its contractual right to defer the payment of the coupons.  At September 30, 2011 and December 31, 2010, the Company had total coupon payment receivables of $763 and $457, respectively.  The Company expects to receive these payments in 2012.  Based on the information presently available, management believes there is reasonable assurance of collection of the deferred coupons at the end of the deferral period.

14

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

Mortgage loans on real estate - The Company’s mortgage loans on real estate are comprised exclusively of domestic commercial collateralized real estate loans.  The following table summarizes the carry value of the mortgage loan portfolio by component as of September 30, 2011 and December 31, 2010:

	September 30, 2011			December 31, 2010
Principal	$	2,196,152		$	1,709,075
Unamortized premium (discount)	24,599			29,647
Allowance for credit loss	(21,130		)	(16,300		)
Total mortgage loans	$	2,199,621		$	1,722,422

Of the total principal balance in the mortgage loan portfolio, $2,067 and $8,470 related to impaired loans at September 30, 2011 and December 31, 2010, respectively.  The change in the impaired loans balance was due to four loans that were foreclosed upon, one loan that was paid in full, and one loan that was deemed non-performing during the nine months ended September 30, 2011.

The Company uses an internal risk assessment process as a primary credit quality indicator, which is updated quarterly, with regard to impairment review and credit loss calculations.  The Company follows a comprehensive approach with the management of mortgage loans that includes ongoing analysis of factors such as debt service coverage ratios, loan-to-value ratios, payment status, default or legal status, annual collateral property evaluations and general market conditions.  Management’s risk assessment process is subjective and includes the categorization of all loans, based on the above mentioned credit quality indicators, into one of the following categories:

·    Performing - generally indicates the loan has standard market risk and is within its original underwriting guidelines.

·    Non-performing - generally indicates that there is a potential for loss due to the deterioration of financial/monetary default indicators or potential foreclosure.  Due to the potential for loss, these loans are disclosed as impaired.

The Company’s allowance for credit loss is reviewed quarterly.  The determination of the calculation and the adequacy of the mortgage credit loss allowance and mortgage impairments involve judgments that incorporate qualitative and quantitative Company and industry mortgage performance data.  Management’s periodic evaluation and assessment of the adequacy of the allowance for credit losses and the need for mortgage impairments is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the fair value of the underlying collateral, composition of the loan portfolio, current economic conditions, loss experience and other relevant factors.  Loans that meet the non-performing category and other loans with certain substandard credit quality indicators are individually reviewed to determine if a specific impairment is required.  Loans reviewed for specific impairment are excluded from the analysis to estimate the credit loss allowance for the loans categorized as performing in the portfolio.

The recorded investment in impaired mortgage loans was $2,067 and $9,576 at September 30, 2011 and December 31, 2010, respectively.  The Company estimated no loss and therefore no specific allowance was recorded at September 30, 2011 or 2010.

15

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

The table below summarizes the average recorded investment, interest income earned and recognized and interest income collected for the impaired commercial mortgage loans for the three and nine-month periods ended September 30, 2011 and 2010:

	Three months ended September 30,					Nine months ended September 30,
	2011		2010			2011		2010
Impaired commercial mortgage loans:
Average recorded investment	$	4,624	$	9,822		$	5,822	$	5,197
Interest income earned and recognized	41		(63		)	113		35
Interest income collected	33		—			105		223

The following table summarizes the recorded investment of the mortgage loan portfolio by risk assessment category as of September 30, 2011 and December 31, 2010:

	September 30, 2011		December 31, 2010
Performing	$	2,218,684	$	1,729,146
Non-performing	2,067		9,576
Total	$	2,220,751	$	1,738,722

The following table summarizes activity in the allowance for mortgage loan credit losses for the nine months ended September 30, 2011 and the year ended December 31, 2010:

	Nine months ended		Year ended
	September 30, 2011		December 31, 2010
	Commercial mortgages		Commercial mortgages
Beginning balance	$	16,300	$	14,854
Provision increases	4,830		1,446
Ending balance	$	21,130	$	16,300
Allowance ending balance by basis of impairment method:
Collectively evaluated for impairment	$	21,130	$	16,300
Recorded investment balance in the mortgage loan portfolio, gross of allowance, by basis of impairment method:	$	2,220,751	$	1,738,722
Individually evaluated for impairment	21,337		27,250
Collectively evaluated for impairment	2,199,414		1,711,472

16

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

The tables below summarize the recorded investment of the mortgage loan portfolio by aging category as of September 30, 2011 and December 31, 2010:

	September 30, 2011
	Current		Loan balances 31-60 days past due		Loan balances 61-89 days past due		Loan balances greater than 90 days past due or in process of foreclosure		Total portfolio balance
Commercial mortgages	$	2,220,751	$	—	$	—	$	—	$	2,220,751

	December 31, 2010
	Current		Loan balances 31-60 days past due		Loan balances 61-89 days past due		Loan balances greater than 90 days past due or in process of foreclosure (1)		Total portfolio balance
Commercial mortgages	$	1,733,922	$	2,642	$	—	$	2,158	$	1,738,722

(1) Includes four loans in the amount of $2,158 in process of foreclosure.

Loan balances are considered past due when payment has not been received based on contractually agreed upon terms.  For loan balances greater than 90 days past due or in the process of foreclosure, all accrual of interest was discontinued.  There were no loans greater than 90 days past due and accruing interest at September 30, 2011 or at December 31, 2010.  The Company resumes interest accrual on loans when a loan returns to current status.  Interest accrual may also resume under new terms when loans are restructured or modified.

Occasionally, the Company elects to grant a concession to a debtor with financial difficulties in an attempt to protect as much of its investment as possible.  At September 30, 2011, the Company had no loans classified as troubled debt restructurings.  At December 31, 2010, the Company had one loan, with a principal balance of $6,355, classified as a troubled debt restructuring with loan modifications which primarily reduced the interest rate for the life of the loan, but did not extend the maturity date or forgive any principal.  The Company did not create a specific allowance for the restructured loan.  As of December 31, 2010, the Company had no commitments to lend additional funds to the debtors with loans modified as troubled debt restructurings.

Equity investments - The carrying value of the Company’s equity investments was $2,009 and $1,888 at September 30, 2011 and December 31, 2010, respectively.

Limited partnership and other corporation interests - The Company invests in limited partnership interests, which include limited partnerships established for the purpose of investing in low-income housing that qualify for federal and state tax credits, and other corporation interests.  At September 30, 2011 and December 31, 2010, the Company had $178,796 and $210,146, respectively, invested in limited partnership and other corporation interests.

In the normal course of its activities, the Company is involved with other entities that are considered variable interest entities (“VIE”).  An entity would be determined to be a primary beneficiary, and thus consolidated when the entity has both (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.  When the Company becomes involved with a VIE and when the nature of the Company’s involvement with the entity changes, in order to determine if the Company is the primary beneficiary and must consolidate the entity, it evaluates:

·The structure and purpose of the entity;

·The risks and rewards created by and shared through the entity and

·The entity’s participants’ ability to direct the activities, receive its benefits and absorb its losses.

17

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

Accordingly, the Company has determined its investment in low-income housing limited partnerships (“LIHLP”) to be considered a VIE.  The purpose of an LIHLP is to provide financing of affordable housing by making certain tax credits available to investors.  Beginning in 2002, the Company made initial cash investments for the various tax credits.  The Company is a 99% limited partner in various upper-tier LIHLPs.  The general partner is most closely involved in the development and management of the LIHLP project.  As limited partner, the Company has few or no voting rights, but expects to receive the tax credits allocated to the partnership and operating losses from depreciation and interest expense.  The Company is only an equity investor and views the LIHLP as a single investment.   The general partner has a small ownership of the partnership, which requires a de minimus capital contribution.  This equity investment is reduced based on fees paid at inception by the limited partner; therefore, the general partner does not qualify as having an equity investment at risk in the LIHLP project.  However, the limited partner does not have the direct or indirect ability through voting rights or similar rights to make decisions about the general partner’s activities that have a significant effect on the success of the partnership.

Although the Company is involved with the VIE, it determined that consolidation was not required because it has no power to direct the activities that most significantly impact the entities’ economic performance (exert influence over the entity’s operations).

The Company performs ongoing qualitative analyses of its involvement with VIEs to determine if consolidation is required.

The following tables present information about the nature and activities of the VIEs and the effect on the Company’s financial statements as of September 30, 2011 and December 31, 2010 as follows:

September 30, 2011
Limited partnership and
other corporation interests		Liabilities		Maximum exposure to loss
$	119,696	$	—	$	119,696

December 31, 2010
Limited partnership and
other corporation interests		Liabilities		Maximum exposure to loss
$	151,158	$	—	$	151,158

All of the Company’s investments in LIHLPs are guaranteed by third parties.  One of the guarantors, guaranteeing 6% and 7% of the LIHLPs at September 30, 2011 and December 31, 2010, respectively, filed for bankruptcy protection in 2009; however, the bankruptcy does not currently impact the guarantee.  At September 30, 2011, $99,766 of the interests, or 83%, are backed by third party guarantors with an investment grade rating.  At December 31, 2010, $123,853 of the interests, or 82%, are backed by third party guarantors with an investment grade rating.

The Company is not required to provide any additional funding to the LIHLPs unless the investment exceeds the minimum yield guarantee.  During the nine months ended September 30, 2011 and the year ended December 31, 2010, the Company did not provide any additional financial or other support that it was not previously contractually required to provide.

Securities pledged, special deposits and securities lending - The Company pledges investment securities it owns to unaffiliated parties to meet initial margin requirements for exchange-traded futures contracts.  The fair value of margin deposits related to futures contracts was approximately $5,265 and $5,979 at September 30, 2011 and December 31, 2010, respectively.  These pledged securities are included in short-term investments in the accompanying condensed consolidated balance sheets.

18

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

The Company had securities on deposit with governmental authorities as required by certain insurance laws with fair values in the amounts of $16,586 and $14,144 at September 30, 2011 and December 31, 2010, respectively.  These deposits are included in short-term and fixed maturity investments classified as available-for-sale in the accompanying condensed consolidated balance sheets.

The Company participates in a securities lending program whereby securities, which are included in fixed maturity investments in the accompanying condensed consolidated balance sheets, are loaned to third parties.  Securities with a cost or amortized cost in the amounts of $5,105 and $45,000 and estimated fair values in the amounts of $5,209 and $50,807 were on loan under the program at September 30, 2011 and December 31, 2010, respectively.  The Company received restricted cash collateral in the amounts of $5,411 and $51,749 at September 30, 2011 and December 31, 2010, respectively.

Impairment of fixed maturity and equity investments classified as available-for-sale - The Company classifies the majority of its fixed maturity investments and all of its equity investments as available-for-sale and records them at fair value with the related net unrealized gain or loss, net of policyholder related amounts and deferred taxes, in accumulated other comprehensive income (loss) in the stockholder’s equity section in the accompanying condensed consolidated balance sheets.  All available-for-sale securities with gross unrealized losses at the condensed consolidated balance sheet date are subjected to the Company’s process for the identification and evaluation of other-than-temporary impairments.

The assessment of whether an other-than-temporary impairment has occurred on fixed maturity investments where management does not intend to sell the fixed maturity investment and it is not more likely than not the Company will be required to sell the fixed maturity investment before recovery of its amortized cost basis, is based upon management’s case-by-case evaluation of the underlying reasons for the decline in fair value.  Management considers a wide range of factors, as described below, regarding the security issuer and uses its best judgment in evaluating the cause of the decline in its estimated fair value and in assessing the prospects for near-term recovery.  Inherent in management’s evaluation of the security are assumptions and estimates about the issuer’s operations and ability to generate future cash flows.  While all available information is taken into account, it is difficult to predict the ultimate recoverable amount from a distressed or impaired security.

Considerations used by the Company in the impairment evaluation process include, but are not limited to, the following:

·Fair value is below cost;

·The decline in fair value is attributable to specific adverse conditions affecting a particular instrument, its issuer, an industry or geographic area;

·The decline in fair value has existed for an extended period of time;

·A fixed maturity investment has been downgraded by a credit rating agency;

·The financial condition of the issuer has deteriorated;

·The payment structure of the fixed maturity investment and the likelihood of the issuer being able to make payments in the future and

·Dividends have been reduced or eliminated or scheduled interest payments have not been made.

19

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

Unrealized losses on fixed maturity and equity investments classified as available-for-sale

The following tables summarize unrealized investment losses, including the non-credit-related portion of other-than-temporary impairment losses reported in accumulated other comprehensive income (loss), by class of investment at September 30, 2011 and December 31, 2010:

	September 30, 2011
	Less than twelve months				Twelve months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	fair value		loss and OTTI		fair value		loss and OTTI		fair value		loss and OTTI
Fixed maturities:
U.S. government direct obligations and U.S. agencies	749,379		2,468		18,013		372		$	767,392	$	2,840
Corporate debt securities	523,391		24,760		425,341		126,013		948,732		150,773
Asset-backed securities	294,974		10,138		720,474		112,745		1,015,448		122,883
Residential mortgage-backed securities	3,786		58		104,431		2,075		108,217		2,133
Commercial mortgage-backed securities	45,582		178		70,281		6,216		115,863		6,394
Collateralized debt obligations	22,556		3,043		—		1		22,556		3,044
Total fixed maturities	$	1,639,668	$	40,645	$	1,338,540	$	247,422	$	2,978,208	$	288,067
Equity investments:
Financial services	$	1,264	$	280	$	—	$	—	$	1,264	$	280
Asset allocation mutual funds	441		43		—		—		441		43
Total equity investments	$	1,705	$	323	$	—	$	—	$	1,705	$	323
Total number of securities in an unrealized loss position			166				149				315

	December 31, 2010
	Less than twelve months				Twelve months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	fair value		loss and OTTI		fair value		loss and OTTI		fair value		loss and OTTI
Fixed maturities:
U.S. government direct obligations and U.S. agencies	$	892,025	$	14,551	$	22,471	$	233	$	914,496	$	14,784
Obligations of U.S. states and their subdivisions	391,101		11,332		99,720		4,271		490,821		15,603
Corporate debt securities	477,059		15,486		819,627		129,000		1,296,686		144,486
Asset-backed securities	52,814		1,505		1,071,557		152,652		1,124,371		154,157
Residential mortgage-backed securities	26,142		509		146,532		11,610		172,674		12,119
Commercial mortgage-backed securities	53,462		2,086		79,429		18,529		132,891		20,615
Collateralized debt obligations	5,745		29		23,112		5,752		28,857		5,781
Total fixed maturities	$	1,898,348	$	45,498	$	2,262,448	$	322,047	$	4,160,796	$	367,545
Equity investments:
Equity mutual funds	$	6	$	—	$	3	$	—	$	9	$	—
Airline industry	612		77		—		—		612		77
Total equity investments	$	618	$	77	$	3	$	—	$	621	$	77
Total number of securities in an unrealized loss position			183				237				420

Fixed maturity investments - Total unrealized losses and other-than-temporary impairment losses decreased by $79,478, or 22%, from December 31, 2010 to September 30, 2011.  This decrease in unrealized losses was across most asset classes and reflects recovery in market liquidity and lower interest rates, although the economic uncertainty in certain asset classes still remains.

20

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

Unrealized losses on corporate debt securities increased by $6,287 from December 31, 2010 to September 30, 2011.  The valuation of these securities has been influenced by market conditions with widening credit spreads in the finance sector resulting in generally lower valuations of these fixed income securities.  Management has classified the losses on these corporate debt securities by sector, calculated as a percentage of total unrealized losses, as follows:

Sector	September 30, 2011		December 31, 2010
Finance	89	%	78	%
Utility	3	%	8	%
Natural resources	2	%	4	%
Consumer	3	%	4	%
Transportation	1	%	1	%
Other	2	%	5	%
	100	%	100	%

Unrealized losses on asset-backed and residential mortgage-backed securities decreased by $31,274, and $9,986, respectively, since December 31, 2010, generally due to lower interest rates, increased market liquidity and other-than-temporary impairments recognized during the period.

Asset-backed securities account for 46% of the unrealized losses and OTTI greater than twelve months.  Of the $112,745 of unrealized losses and OTTI over twelve months on asset-backed securities, 72% of the losses are on securities which continue to be rated investment grade.  Of the securities which are not rated investment grade, 84% of the losses are on securities guaranteed by monoline insurers.  The present value of the cash flows expected to be collected is not less than amortized cost.  Management does not have the intent to sell these assets prior to a full recovery; therefore, an OTTI was not recognized in earnings.  Accordingly, unless otherwise noted below in the other-than-temporary impairment recognition section, the underlying collateral on the asset-backed securities within the portfolio along with credit enhancement is sufficient to expect full repayment of the principal.

Of the $126,013 of unrealized losses and OTTI over twelve months on corporate debt securities, 60% are on securities which continue to be rated investment grade.  Of the $49,847 of unrealized losses and OTTI greater than twelve months on non-investment grade corporate debt securities, $37,823 of the losses are on investments held in banks in the United Kingdom.  The prices of securities held in foreign banks have been impacted by their long duration combined with widening spreads and the low London Interbank Offering Rate (“LIBOR”) based floating rates.  Although foreign banks have suffered from the weak credit and economic environment, they benefit from central bank support.  Management does not have the intent to sell these assets prior to a full recovery; therefore, an OTTI was not recognized in earnings.

See Note 6 for additional discussion regarding fair value measurements.

21

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

Other-than-temporary impairment recognition - The Company recorded other-than-temporary impairments on fixed maturities, equity investments and limited partnership investments for the three and nine-month periods ended September 30, 2011 and 2010 as follows:

	Three months ended September 30, 2011
	OTTI recognized in realized gains/(losses)				OTTI recognized in AOCI (2)
	Credit related (1)		Non-credit related		Non-credit related		Total
Fixed maturities:
Asset-backed securities	$	6,264	$	—	$	10,004	$	16,268
Limited partnership investments:
Limited partnership interests	$	1,006	$	—	$	—	$	1,006
Total OTTI impairments	$	7,270	$	—	$	10,004	$	17,274

(1) Of the $6,264 in total fixed maturities, all is bifurcated credit loss recognized on securities.

(2) Amounts are recognized in AOCI in the period incurred.

	Nine months ended September 30, 2011
	OTTI recognized in realized gains/(losses)				OTTI recognized in AOCI (2)
	Credit related (1)		Non-credit related		Non-credit related		Total
Fixed maturities:
Asset-backed securities	$	6,264	$	—	$	10,004	$	16,268
Equity investments:
Airline industry	$	287	$	—	$	—	$	287
Limited partnership investments:
Limited partnership interests	$	2,410	$	—	$	—	$	2,410
Total OTTI impairments	$	8,961	$	—	$	10,004	$	18,965

(1) Of the $6,264 in total fixed maturities, all is bifurcated credit loss recognized on securities.

(2) Amounts are recognized in AOCI in the period incurred.

22

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

	Three months ended September 30, 2010
	OTTI recognized in realized gains/(losses)				OTTI recognized in AOCI (2)
	Credit related (1)		Non-credit related		Non-credit related		Total
Fixed maturities:
U.S. government direct obligations and U.S. agencies	$	—	$	444	$	—	$	444
Asset-backed securities	646		—		3		649
Total OTTI impairments	$	646	$	444	$	3	$	1,093

(1) Of the $646 in total fixed maturities, all is bifurcated credit loss recognized on securities.

(2) Amounts are recognized in AOCI in the period incurred.

	Nine months ended September 30, 2010
	OTTI recognized in realized gains/(losses)				OTTI recognized in AOCI (2)
	Credit related (1)		Non-credit related		Non-credit related		Total
Fixed maturities:
U.S. government direct obligations and U.S. agencies	$	—	$	2,527	$	—	$	2,527
Corporate debt securities	—		1,410		—		1,410
Asset-backed securities	54,006		—		15,707		69,713
Residential mortgage-backed securities	876		—		—		876
Total fixed maturities	$	54,882	$	3,937	$	15,707	$	74,526
Equity investments:
Financial services	$	490	$	—	$	—	$	490
Total OTTI impairments	$	55,372	$	3,937	$	15,707	$	75,016

(1) Of the credit-related other-than-temporary impairment on asset-backed securities, $53,327 was related to Ambac Financial Group, Inc. for the nine months ended September 30, 2010.  Of the $54,882 in total fixed maturities, $54,849 is the bifurcated credit loss recognized on securities.

(2) Amounts are recognized in AOCI in the period incurred.

23

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

The other-than-temporary impairments of fixed maturity securities where the loss portion is bifurcated and the credit related component is recognized in realized investment gains (losses) is summarized as follows:

	Three months ended September 30,					Nine months ended September 30,
	2011			2010		2011			2010
Bifurcated credit loss:
Beginning balance	$	181,611		$	169,528	$	181,611		$	115,325
Additions:
Initial impairments - credit loss on securities not previously impaired	6,264			646		6,264			54,849
Reductions:
Due to sales, maturities, or payoffs during the period	(876		)	—		(876		)	—
Ending balance	$	186,999		$	170,174	$	186,999		$	170,174

The credit loss portion on fixed maturities was determined as the difference between the securities’ amortized cost and the present value of expected future cash flows.  These expected cash flows were determined using judgment and the best information available to the Company and were discounted at the securities’ original effective interest rate.  Inputs used to derive expected cash flows included default rates, credit ratings, collateral characteristics and current levels of subordination.

5.  Derivative Financial Instruments

The Company uses derivative financial instruments for risk management purposes associated with certain invested assets and policy liabilities.  Derivatives are not used for speculative purposes.  As detailed below, derivatives are used to (a) hedge the economic effects of interest rate and stock market movements on the Company’s guaranteed minimum withdrawal benefit, also referred to as guaranteed lifetime withdrawal benefit, (“GMWB”) liabilities, (b) hedge the economic effect of a large increase in interest rates on the Company’s general account life insurance, group pension liabilities and separate account life insurance liabilities, (c) hedge the economic risks of other transactions such as future asset acquisitions or dispositions, the timing of liability pricing, currency risks on non-US dollar denominated assets, and fee revenue based on equity market performance, and (d) convert floating rate assets to fixed rate assets for asset/liability management purposes.

Derivative transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one party to the other on a daily basis, periodic payment dates, or at the due date, expiration or termination of the agreement.

The Company controls the credit risk of its derivative contracts through credit approvals, limits, monitoring procedures, and in many cases, requiring collateral.  The Company’s exposure is 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.  The Company incorporates the market’s perception of its own and the counterparty’s non-performance risk through review of credit spreads in determining the fair value of the portion of its over-the-counter (“OTC”) derivative assets and liabilities that are uncollateralized.  Fair values were adjusted accordingly based on an internal carry value adjustment model at September 30, 2011 and December 31, 2010.  No losses have been incurred due to non-performance by any of the counterparties.

Collateral agreements are regularly entered into as part of the underlying agreements with counterparties to mitigate counterparty credit risk.  Certain of these arrangements require collateral when the fair value exceeds certain thresholds and also include credit contingent provisions that provide for a reduction of these thresholds in the event of downgrade in the credit ratings of the Company and/or the counterparty.

At September 30, 2011 and December 31, 2010, the Company was not obligated to pledge unrestricted cash collateral to any counterparty in the normal course of business.  The Company received $4,165 and

24

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

$7,790 of unrestricted cash collateral from derivative counterparties to satisfy collateral netting agreements at September 30, 2011 and December 31, 2010, respectively.

Cash collateral received is included in other assets and the obligation to return is included in other liabilities.  The cash collateral is reinvested in a government money market fund.

Cash flow hedges - Interest rate swap agreements are used to convert the interest rate on certain debt securities from a floating rate to a fixed rate.  Foreign currency exchange contracts are used to manage the foreign exchange rate risk associated with bonds denominated in other than U.S. dollars.  Interest rate futures are used to manage the interest rate risks of forecasted acquisitions of fixed rate maturity investments.  These derivatives are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities.  The Company’s derivatives treated as cash flow hedges are eligible for hedge accounting.

At September 30, 2011, the Company estimates that $7,971 of net derivative gains included in accumulated other comprehensive income (loss) will be reclassified into net income within the next twelve months.

Fair value hedges - Interest rate futures are used to manage the risk of the change in the fair value of certain fixed rate maturity investments.  The Company’s derivatives treated as fair value hedges are eligible for hedge accounting.

Derivatives not designated as hedging instruments

GMWB Derivative Instruments - The Company introduced a variable annuity product with a GMWB during 2010.  This product utilizes an investment risk hedging program including purchases of the following derivative instruments: exchange-traded interest rate swap futures and exchange-traded equity index futures on certain indices.  The Company anticipates adding OTC interest rate swaps as the product sales volume grows.  While these derivatives are economic hedges and used to manage risk, the Company will not elect hedge accounting on these transactions.  Although the hedge program is actively managed, it may not exactly offset changes in the GMWB liability due to, among other things, divergence between the performance of the underlying investments and the hedge instruments, high levels of volatility in the equity and interest rate markets and differences between actual contractholder behavior and what is assumed.  The performance of the underlying investments compared to the hedge instruments is further impacted by a time lag, since the data is not reported and incorporated into the required hedge position on a real time basis.

Interest Rate Risk Derivative Instruments - Interest rate risk derivative instruments are used to hedge the economic effect of a large increase in interest rates on the Company’s general account life insurance and group pension liabilities as well as certain separate account life insurance liabilities.  While these derivatives are economic hedges and used to manage risk, the Company did not elect hedge accounting on these transactions.

The hedging program for the general account life insurance and group pension liabilities incorporates a combination of static hedges and dynamic (i.e. frequently re-balanced based on interest rate movements) hedges. These hedges are used to 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. The Company has purchased the following derivative instruments: (a) OTC interest rate swaptions as static hedges and (b) OTC interest rate swaps, exchange-traded interest rate swap futures, and exchange-traded Eurodollar interest rate futures as dynamic hedges.

The hedging program for certain separate account life insurance liabilities is also a combination of static and dynamic hedges using OTC interest rate swaptions, OTC interest rate swaps, exchange-traded interest rate swap futures, and exchange-traded Eurodollar interest rate futures. These hedges are used to manage the

25

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

potential change of cash flows due to increased surrenders. The costs and performance of these hedges are passed directly to the associated separate account liabilities through an adjustment to the liability credited rates.  The notional amount of the Company’s swaptions associated with the separate account liabilities was approximately 30% and 28% of the total swaption notional amount at September 30, 2011 and December 31, 2010, respectively. The notional amount of the derivatives used in the dynamic hedging program associated with separate account liabilities was approximately 3% and 5% of the total notional within that program at September 30, 2011 and December 31, 2010, respectively.

Other Derivative Instruments - Interest rate futures are used to manage the interest rate risks of forecasted acquisitions of fixed rate maturity investments and forecasted liability pricing.  The Company utilizes futures on equity indices to hedge its equity based fee income.  Although these derivatives are economic hedges and are used to manage risk, the Company did not elect hedge accounting on these transactions.

26

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

The following tables summarize derivative financial instruments at September 30, 2011 and December 31, 2010:

	September 30, 2011
			Net derivatives			Asset derivatives		Liability derivatives
	Notional amount		Fair value			Fair value (1)		Fair value (1)
Hedge designation/derivative type:
Derivatives designated as hedges:
Cash flow hedges:
Interest rate swaps	$	184,200	$	20,542		$	20,542	$	—
Foreign currency exchange contracts	30,000		(638		)	—		638
Total cash flow hedges	214,200		19,904			20,542		638
Fair value hedges:
Interest rate futures	43,300		—			—		—
Total fair value hedges	43,300		—			—		—
Total derivatives designated as hedges	257,500		19,904			20,542		638
Derivatives not designated as hedges:
GMWB derivative instruments:
Interest rate swap futures	10,900		—			—		—
Futures on equity indices	4,014		—			—		—
Total GMWB derivative instruments	14,914		—			—		—
Interest rate risk derivative instruments:
Interest rate swaps	307,135		(10,652		)	4,604		15,256
Interest rate futures	355		—			—		—
Interest rate swap futures	32,800		—			—		—
Interest rate swaptions	941,850		1,415			1,415		—
Total interest rate risk derivative instruments	1,282,140		(9,237		)	6,019		15,256
Other derivative instruments:
Interest rate futures	15,900		—			—		—
Total other derivative instruments	15,900		—			—		—
Total derivatives not designated as hedges	1,312,954		(9,237		)	6,019		15,256
Total cash flow hedges, fair value hedges and derivatives not designated as hedges	$	1,570,454	$	10,667		$	26,561	$	15,894

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

27

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

	December 31, 2010
			Net derivatives			Asset derivatives		Liability derivatives
	Notional amount		Fair value			Fair value (1)		Fair value (1)
Hedge designation/derivative type:
Derivatives designated as hedges:
Cash flow hedges:
Interest rate swaps	$	90,700	$	10,255		$	10,386	$	131
Foreign currency exchange contracts	30,000		(252		)	—		252
Interest rate futures	80,700		—			—		—
Total cash flow hedges	201,400		10,003			10,386		383
Fair value hedges:
Interest rate futures	128,900		—			—		—
Total fair value hedges	128,900		—			—		—
Total derivatives designated as hedges	330,300		10,003			10,386		383
Derivatives not designated as hedges:
GMWB derivative instruments:
Interest rate swap futures	5,300		—			—		—
Futures on equity indices	680		—			—		—
Total GMWB derivative instruments	5,980		—			—		—
Interest rate risk derivative instruments:
Interest rate swaps	612,902		4,036			9,484		5,448
Interest rate futures	2,460		—			—		—
Interest rate swap futures	44,600		—			—		—
Interest rate swaptions	1,083,000		4,956			4,956		—
Total interest rate risk derivative instruments	1,742,962		8,992			14,440		5,448
Total derivatives not designated as hedges	1,748,942		8,992			14,440		5,448
Total cash flow hedges, fair value hedges and derivatives not designated as hedges	$	2,079,242	$	18,995		$	24,826	$	5,831

(1) The estimated fair value of all derivatives in an asset position are reported within other assets and the estimated fair value of all derivatives in a liability position are 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.  Notional amounts are not paid or received.

The Company had 117 swap transactions during the nine months ended September 30, 2011 and the year ended December 31, 2010. The average notional amount on these swap transactions were $16,066 and $19,745 during the nine months ended September 30, 2011 and the year ended December 31, 2010, respectively.  The Company had 1,207 and 979 futures transactions with an average number of contracts per transaction of 20 and 26 during the nine months ended September 30, 2011 and the year ended December 31, 2010, respectively.  The Company had 31 swaption transactions with an average notional amount of $6,479 during the nine months ended September 30, 2011.  During the year ended December 31, 2010, the Company had three swaptions expire.

28

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

The change in notional amount of derivatives since December 31, 2010 was primarily due to the following:

·The decrease of $305,767 in interest rate swaps was the result of an overall reduction in the interest rate risk hedging program as part of an ongoing review of liability risks and projected hedge gains, as well as a decrease in interest rates.

·The decrease of $141,150 in interest rate swaptions in the interest rate risk hedging program was due to expiring swaptions replaced by other interest rate derivatives.

The Company recognized total derivative gains (losses) in net investment income of ($9,761) and ($2,476) for the three-month periods ended September 30, 2011 and 2010, respectively.  The Company recognized total derivative gains (losses) in net investment income of ($13,413) and ($15,352) for the nine-month periods ended September 30, 2011 and 2010, respectively.  The Company realized net investment gains (losses) on closed derivative positions of ($23,877) and ($15,664) for the three-month periods ended September 30, 2011 and 2010, respectively.  The Company realized net investment gains (losses) on closed derivative positions of ($32,189) and ($22,078) for the nine-month periods ended September 30, 2011 and 2010, respectively.  The preceding amounts are all shown net of any gains (losses) on the hedged assets in a fair value hedge that has been recorded in net investment income.

The following six tables present the effect of derivative instruments in the condensed consolidated statement of income for the three and nine-month periods ended September 30, 2011 and 2010 reported by cash flow hedges, fair value hedges and economic hedges:

	Gain (loss) recognized										Gain (loss) recognized in net income on
	in AOCI on derivatives					Gain (loss) reclassified from AOCI					derivatives (Ineffective portion and amount
	(Effective portion)					into net income (Effective portion)					excluded from effectiveness testing)
										Income							Income
	Three months ended September 30,					Three months ended September 30,				statement	Three months ended September 30,						statement
	2011		2010			2011		2010		location	2011			2010			location
Cash flow hedges:
Interest rate swaps	$	17,720	$	7,743		$	702	$	350	(A)	$	(2	)	$	24		(A)
Foreign currency exchange contracts	2,347		(3,026		)	—		—			—			—
Interest rate futures	—		—			—		—			(49		)	176			(A)
Interest rate futures	—		14			10		26		(A)	3,976			(650		)	(B)
Total cash flow hedges	$	20,067	$	4,731		$	712	$	376		$	3,925		$	(450	)

(A)  Net investment income.

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

	Gain (loss) recognized											Gain (loss) recognized in net income on
	in AOCI on derivatives						Gain (loss) reclassified from AOCI					derivatives (Ineffective portion and amount
	(Effective portion)						into net income (Effective portion)					excluded from effectiveness testing)
											Income						Income
	Nine months ended September 30,						Nine months ended September 30,				statement	Nine months ended September 30,					statement
	2011			2010			2011		2010		location	2011			2010		location
Cash flow hedges:
Interest rate swaps	$	20,974		$	22,941		$	1,995	$	977	(A)	$	5		$	7	(A)
Foreign currency exchange contracts	(386		)	1,949			—		—			—			—
Interest rate futures	—			—			—		—			(84		)	176		(A)
Interest rate futures	(1,431		)	(466		)	32		80		(A)	6			7		(B)
Total cash flow hedges	$	19,157		$	24,424		$	2,027	$	1,057		$	(73	)	$	190

(A)  Net investment income.

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

29

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

	Gain (loss) on derivatives							Gain (loss) on hedged assets
	recognized in net income							recognized in net income
							Income					Income
	Three months ended September 30,						statement	Three months ended September 30,				statement
	2011			2010			location	2011		2010		location
Fair value hedges:
Interest rate futures	$	(1,276	)	$	(505	)	(A)	$	—	$	—
Interest rate futures	(5,478		)	(3,087		)	(B)	—		—
Items hedged in interest rate futures	—			—				3,756		2,141		(A)
Items hedged in interest rate futures	—			—				1,926		—		(B)
Total fair value hedges (1)	$	(6,754	)	$	(3,592	)		$	5,682	$	2,141

(1)   Hedge ineffectiveness of ($1,072) and ($1,451) for the three months ended September 30, 2011 and 2010, respectively, was recognized.

(A)  Net investment income.

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

	Gain (loss) on derivatives							Gain (loss) on hedged assets
	recognized in net income							recognized in net income
							Income					Income
	Nine months ended September 30,						statement	Nine months ended September 30,				statement
	2011			2010			location	2011		2010		location
Fair value hedges:
Interest rate futures	$	(516	)	$	(2,861	)	(A)	$	—	$	—
Interest rate futures	(7,362		)	(5,417		)	(B)	—		—
Items hedged in interest rate futures	—			—				2,699		7,210		(A)
Items hedged in interest rate futures	—			—				3,563		—		(B)
Total fair value hedges (1)	$	(7,878	)	$	(8,278	)		$	6,262	$	7,210

(1)   Hedge ineffectiveness of ($1,616) and ($1,068) for the nine months ended September 30, 2011 and 2010, respectively, was recognized.

(A)  Net investment income.

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

	Gain (loss) on derivatives recognized in				Gain (loss) on derivatives recognized in
	net income				net income
	Three months ended			Income statement	Three months ended			Income statement
	September 30, 2011			location	September 30, 2010			location
Derivatives not designated as hedging instruments:
GMWB derivative instruments:
Interest rate swap futures	$	753		(A)	$	(44	)	(A)
Interest rate swap futures	1,650			(B)	185			(B)
Futures on equity indices	150			(A)	(25		)	(A)
Futures on equity indices	75			(B)	(12		)	(B)
Total GMWB derivative instruments	2,628				104
Interest rate risk derivative instruments:
Interest rate swaps	(12,671		)	(A)	(5,991		)	(A)
Interest rate swaps	(23,727		)	(B)	(5,013		)	(B)
Interest rate futures	(478		)	(A)	(7		)	(A)
Interest rate futures	4,827			(B)	(165		)	(B)
Interest rate swaptions	(677		)	(A)	(439		)	(A)
Interest rate swaptions	(202		)	(B)	—
Total interest rate risk derivative instruments	(32,928		)		(11,615		)
Other derivative instruments:
Interest rate futures	21			(A)	1,818			(A)
Interest rate futures	(6,924		)	(B)	(6,922		)	(B)
Total other derivative instruments	(6,903		)		(5,104		)
Total derivatives not designated as hedging instruments	$	(37,203	)		$	(16,615	)

(A)  Net investment income

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

30

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

	Gain (loss) on derivatives recognized in				Gain (loss) on derivatives recognized in
	net income				net income
	Nine months ended			Income statement	Nine months ended			Income statement
	September 30, 2011			location	September 30, 2010			location
Derivatives not designated as hedging instruments:
GMWB derivative instruments:
Interest rate swap futures	$	547		(A)	$	(6	)	(A)
Interest rate swap futures	1,852			(B)	185			(B)
Futures on equity indices	126			(A)	(17		)	(A)
Futures on equity indices	41			(B)	(12		)	(B)
Total GMWB derivative instruments	2,566				150
Interest rate risk derivative instruments:
Interest rate swaps	(14,688		)	(A)	(10,489		)	(A)
Interest rate swaps	(27,767		)	(B)	(5,013		)	(B)
Interest rate futures	(35		)	(A)	(9		)	(A)
Interest rate futures	4,488			(B)	(165		)	(B)
Interest rate swaptions	(3,515		)	(A)	(5,984		)	(A)
Interest rate swaptions	(431		)	(B)	—
Total interest rate risk derivative instruments	(41,948		)		(21,660		)
Other derivative instruments:
Interest rate futures	21			(A)	(4,436		)	(A)
Interest rate futures	(6,924		)	(B)	(11,663		)	(B)
Futures on equity indices	345			(B)	—
Total other derivative instruments	(6,558		)		(16,099		)
Total derivatives not designated as hedging instruments	$	(45,940	)		$	(37,609	)

(A)  Net investment income

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

31

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

6.  Fair Value Measurements

The following tables summarize the carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2011 and December 31, 2010:

	September 30, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value
Assets
Fixed maturities and short-term investments	$	18,088,218	$	18,088,218	$	17,051,738	$	17,051,738
Mortgage loans on real estate	2,199,621		2,385,359		1,722,422		1,809,356
Equity investments	2,009		2,009		1,888		1,888
Policy loans	4,125,093		4,125,093		4,059,640		4,059,640
Other investments	22,205		54,347		22,762		46,608
Collateral under securities lending agreements	5,411		5,411		51,749		51,749
Collateral under derivative counterparty collateral agreements	4,165		4,165		7,790		7,790
Derivative instruments	26,561		26,561		24,826		24,826
Separate account assets	21,362,101		21,362,101		22,489,038		22,489,038

	September 30, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value
Liabilities
Annuity contract benefits without life contingencies	$	8,501,240	$	8,809,187	$	7,976,954	$	7,912,850
Policyholders’ funds	348,155		348,155		372,980		372,980
Repurchase agreements	1,054,462		1,054,462		936,762		936,762
Commercial paper	95,945		95,945		91,681		91,681
Payable under securities lending agreements	5,411		5,411		51,749		51,749
Payable under derivative counterparty collateral agreements	4,165		4,165		7,790		7,790
Derivative instruments	15,894		15,894		5,831		5,831
Notes payable	541,714		516,718		532,332		532,332

Fixed maturity and equity investments

The fair values for fixed maturity and equity securities are based upon quoted market prices or estimates from independent pricing services.  However, in cases where quoted market prices are not readily available, such as for private fixed maturity investments, fair values are estimated.  To determine estimated fair value for these instruments, the Company generally utilizes discounted cash flows calculated at current market rates on investments of similar quality and term.  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.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts of the Company’s financial instruments.

32

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

Short-term investments, securities lending agreements, repurchase agreements and commercial paper

The carrying value of short-term investments, collateral and payable under securities lending agreements, repurchase agreements and commercial paper is a reasonable estimate of fair value due to their short-term nature.

Mortgage loans on real estate

Mortgage loan fair value estimates are generally based on discounted cash flows.  A discount rate matrix is incorporated whereby the discount rate used in valuing a specific mortgage generally corresponds to that mortgage’s remaining term and credit quality.  Management believes the discount rate used is commensurate with 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.

Policy loans

Policy loans accrue interest at variable rates with no fixed maturity dates; therefore, estimated fair values approximate carrying values.

Other investments

Other investments include the Company’s percentage ownership of foreclosed lease interests in aircraft.  The estimated fair value is based on the present value of anticipated lease payments plus the residual value of the aircraft.  Also included in other investments is real estate held for investment.  The estimated fair value is based on appraised value.

Derivative counterparty collateral agreements

Included in other assets and other liabilities is cash collateral received from derivative counterparties and the obligation to return the cash collateral to the counterparties.  The carrying value of the collateral approximates 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 interest rate swaps and interest rate swaptions which are held for other than trading purposes, 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, counterparty credit risk and other relevant factors.

Separate account assets

Separate account assets 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.

Annuity contract benefits without life contingencies

The estimated fair values of annuity contract benefits without life contingencies are 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.

33

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

Policyholders’ funds

The estimated fair values of policyholders’ funds are the same as the carrying amounts since the Company can change the interest crediting rates with thirty days notice.

Notes payable

The estimated fair values of the notes payable to GWL&A Financial are based upon quoted market prices from independent pricing services of securities with characteristics similar to those of the notes payable.

Fair value hierarchy

The Company’s assets and liabilities recorded at fair value have been categorized based upon the following fair value hierarchy:

·Level 1 inputs, which are utilized for general and separate account assets and liabilities, utilize observable, quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.  Financial assets and liabilities utilizing Level 1 inputs include actively exchange-traded equity securities.

·Level 2 inputs utilize other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs, which are utilized for general and separate account assets and liabilities, include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.  The fair values for some Level 2 securities were obtained from pricing services.  The inputs used by the pricing services are reviewed at least quarterly or when the pricing vendor issues updates to its pricing methodology.  For fixed maturity securities and separate account assets and liabilities, inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, evaluated bids, offers and reference data including market research publications.  Additional inputs utilized for assets and liabilities classified as Level 2 are:

·Asset-backed, residential mortgage-backed, commercial mortgage-backed securities and collateralized debt obligations - new issue data, monthly payment information, collateral performance and third party real estate analysis.

·U.S. states and their subdivisions - material event notices.

·Equity investments - exchange rates, various index data and news sources.

·Short-term investments - valued at amortized cost, which approximates fair value.

·Derivative instruments - reported trades, swap curves, credit spreads, recovery rates, restructuring, currency volatility, net present value of cash flows and news sources.

·Separate account assets and liabilities - exchange rates, various index data and news sources, amortized cost (which approximates fair value), reported trades, swap curves, credit spreads, recovery rates, restructuring, currency volatility, net present value of cash flows and quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

34

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

·Level 3 inputs are unobservable and include situations where there is little, if any, market activity for the asset or liability.  In general, the prices of Level 3 securities, which include both general and separate account assets and liabilities, were obtained from single broker quotes and internal pricing models.  If the broker’s inputs are largely unobservable, the valuation is classified as a Level 3.  Broker quotes are validated through an internal analyst review process, which includes validation through known market conditions and other relevant data.  Internal models are usually cash flow based utilizing characteristics of the underlying collateral of the security such as default rate and other relevant data.  Inputs utilized for securities classified as Level 3 are as follows:

·Corporate debt securities - single broker quotes which may be in an illiquid market or otherwise deemed unobservable.

·Asset-backed securities - internal models utilizing asset-backed securities index spreads.

·Separate account assets - single broker quotes which may be in an illiquid market or otherwise deemed unobservable or net asset value per share of the underlying investments.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The following tables present information about the Company’s financial assets and liabilities carried at fair value on a recurring basis as of September 30, 2011 and December 31, 2010 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

35

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

	Assets and liabilities measured at
	fair value on a recurring basis
	September 30, 2011
	Quoted prices		Significant
	in active		other		Significant
	markets for		observable		unobservable
	identical assets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets
Fixed maturities available-for-sale:
U.S. government direct obligations and U.S. agencies	$	—	$	2,397,904	$	—	$	2,397,904
Obligations of U.S. states and their subdivisions	—		2,085,135		—		2,085,135
Corporate debt securities	—		8,615,086		44,773		8,659,859
Asset-backed securities	—		1,720,466		283,150		2,003,616
Residential mortgage-backed securities	—		635,729		—		635,729
Commercial mortgage-backed securities	—		756,996		—		756,996
Collateralized debt obligations	—		22,555		21		22,576
Total fixed maturities available- for-sale	—		16,233,871		327,944		16,561,815
Fixed maturities held for trading:
U.S. government direct obligations and U.S. agencies	—		47,259		—		47,259
Corporate debt securities	—		79,152		—		79,152
Asset-backed securities	—		44,381		—		44,381
Commercial mortgage-backed securities	—		7,978		—		7,978
Total fixed maturities held for trading	—		178,770		—		178,770
Equity investments available-for-sale:
Financial services	1,264		178		—		1,442
Asset allocation mutual funds	567		—		—		567
Total equity investments	1,831		178		—		2,009
Short-term investments available-for-sale	82,218		1,265,415		—		1,347,633
Collateral under securities lending agreements	5,411		—		—		5,411
Collateral under derivative counterparty collateral agreements	4,165		—		—		4,165
Derivative instruments designated as hedges:
Interest rate swaps	—		20,542		—		20,542
Derivative instruments not designated as hedges:
Interest rate swaps	—		4,604		—		4,604
Interest rate swaptions	—		1,415		—		1,415
Total derivative instruments	—		26,561		—		26,561
Separate account assets (1)	10,014,259		10,971,596		50,984		21,036,839
Total assets	$	10,107,884	$	28,676,391	$	378,928	$	39,163,203
Liabilities
Collateral under securities lending agreements	$	5,411	$	—	$	—	$	5,411
Collateral under derivative counterparty collateral agreements	4,165		—		—		4,165
Derivative instruments designated as hedges:
Foreign currency exchange contracts	—		638		—		638
Derivative instruments not designated as hedges:
Interest rate swaps	—		15,256		—		15,256
Total derivative instruments	—		15,894		—		15,894
Separate account liabilities (1)	258		401,039		—		401,297
Total liabilities	$	9,834	$	416,933	$	—	$	426,767

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

36

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

	Assets and liabilities measured at
	fair value on a recurring basis
	December 31, 2010
	Quoted prices		Significant
	in active		other		Significant
	markets for		observable		unobservable
	identical assets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets
Fixed maturities available-for-sale:
U.S. government direct obligations and U.S. agencies	$	—	$	2,371,150	$	—	$	2,371,150
Obligations of U.S. states and their subdivisions	—		1,942,263		—		1,942,263
Corporate debt securities	—		7,979,736		58,692		8,038,428
Asset-backed securities	—		1,711,438		290,488		2,001,926
Residential mortgage-backed securities	—		739,062		—		739,062
Commercial mortgage-backed securities	—		820,349		—		820,349
Collateralized debt obligations	—		29,865		14		29,879
Total fixed maturities available- for-sale	—		15,593,863		349,194		15,943,057
Fixed maturities held for trading:
U.S. government direct obligations and U.S. agencies	—		41,834		—		41,834
Corporate debt securities	—		49,961		—		49,961
Asset-backed securities	—		44,060		—		44,060
Commercial mortgage-backed securities	—		8,319		—		8,319
Total fixed maturities held for trading	—		144,174		—		144,174
Equity investments available-for-sale:
Financial services	—		725		—		725
Equity mutual funds	551		—		—		551
Airline industry	612		—		—		612
Total equity investments	1,163		725		—		1,888
Short-term investments available-for-sale	140,922		823,585		—		964,507
Collateral under securities lending agreements	51,749		—		—		51,749
Collateral under derivative counterparty collateral agreements	7,790		—		—		7,790
Derivative instruments designated as hedges:
Interest rate swaps	—		10,386		—		10,386
Derivative instruments not designated as hedges:
Interest rate swaps	—		9,484		—		9,484
Interest rate swaptions	—		4,956		—		4,956
Total derivative instruments	—		24,826		—		24,826
Separate account assets (1)	11,222,384		10,838,983		4,278		22,065,645
Total assets	$	11,424,008	$	27,426,156	$	353,472	$	39,203,636
Liabilities
Derivative instruments designated as hedges:
Interest rate swaps	$	—	$	131	$	—	$	131
Foreign currency exchange contracts	—		252		—		252
Derivative instruments not designated as hedges:
Interest rate swaps	—		5,448		—		5,448
Total derivative instruments	—		5,831		—		5,831
Separate account liabilities (1)	93		301,108		—		301,201
Total liabilities	$	93	$	306,939	$	—	$	307,032

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

37

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

All transfers between levels are recognized at the beginning of the reporting period in which the transfer occurred.  There were no significant transfers between Level 1 and Level 2 during the nine months ended September 30, 2011 or during the year ended December 31, 2010.

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

	Recurring Level 3 financial assets and liabilities
	Three months ended September 30, 2011
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized		Separate
	debt securities			securities			debt obligations		accounts			Total
Balance, July 1, 2011	$	49,376		$	285,399		$	21	$	10,124		$	344,920
Realized and unrealized gains (losses) included in:
Net income	416			(192		)	—		(133		)	261
Other comprehensive income (loss)	(1,274		)	5,585			—		(14,302		)	(10,160		)
Purchases	—			—			—		—			3,871
Sales	(2,924		)	—			—		(1,845		)	(4,803		)
Settlements	(821		)	(7,642		)	—		(3,114		)	(11,543		)
Transfers into Level 3 (1)	—			—			—		67,328			63,456
Transfers out of Level 3 (1)	—			—			—		(7,074		)	(7,074		)
Balance, September 30, 2011	$	44,773		$	283,150		$	21	$	50,984		$	378,928
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at September 30, 2011	$	—		$	—		$	—	$	—		$	—

(1)   Transfers into Level 3 are due primarily to decreased observability of inputs in valuation methodologies.  Transfers out of Level 3 are due primarily to increased observability of inputs in valuation methodologies as evidenced by corroboration of market prices with multiple pricing vendors.

	Recurring Level 3 financial assets and liabilities
	Three months ended September 30, 2010
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized		Other assets			Separate
	debt securities			securities			debt obligations		and liabilities (1)			accounts		Total
Balance, July 1, 2010	$	59,649		$	319,157		$	699	$	1,658		$	4,359	$	385,522
Realized and unrealized gains (losses) included in:
Net income	—			—			—		—			—		—
Other comprehensive income (loss)	1,257			6,149			—		(3,026		)	132		4,512
Purchases, issuances and settlements	(1,657		)	(9,246		)	—		—			162		(10,741		)
Transfers in (out) of Level 3 (2)	1,987			—			—		—			—		1,987
Balance, September 30, 2010	$	61,236		$	316,060		$	699	$	(1,368	)	$	4,653	$	381,280
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at September 30, 2010	$	—		$	—		$	—	$	—		$	—	$	—

(1)   Includes derivative financial instruments.

(2)   Transfers in and out of Level 3 are from and to Level 2 and are due primarily to the ability or inability to corroborate market prices with multiple pricing vendors.

38

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

	Recurring Level 3 financial assets and liabilities
	Nine months ended September 30, 2011
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized		Separate
	debt securities			securities			debt obligations		accounts			Total
Balance, January 1, 2011	$	58,692		$	290,488		$	14	$	4,278		$	353,472
Realized and unrealized gains (losses) included in:
Net income	3,666			(192		)	—		(133		)	3,511
Other comprehensive income (loss)	(740		)	17,612			7		(13,868		)	2,994
Purchases	—			—			—		—			7,843
Sales	(4,816		)	—			—		(1,847		)	(6,959		)
Settlements	(16,983		)	(24,758		)	—		(4,674		)	(44,835		)
Transfers into Level 3 (1)	7,333			—			—		67,328			74,356
Transfers out of Level 3 (1)	(2,379		)	—			—		(100		)	(11,454		)
Balance, September 30, 2011	$	44,773		$	283,150		$	21	$	50,984		$	378,928
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at September 30, 2011	$	—		$	—		$	—	$	—		$	—

(1)   Transfers into Level 3 are due primarily to decreased observability of inputs in valuation methodologies.  Transfers out of Level 3 are due primarily to increased observability of inputs in valuation methodologies as evidenced by corroboration of market prices with multiple pricing vendors.

	Recurring Level 3 financial assets and liabilities
	Nine months ended September 30, 2010
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Commercial			Collateralized			Other assets			Separate
	debt securities			securities			mortgage-backed securities			debt obligations			and liabilities (1)			accounts			Total
Balance, January 1, 2010	$	188,936		$	392,365		$	58,270		$	1,729		$	(3,317	)	$	9,960		$	647,943
Realized and unrealized gains (losses) included in:
Net income	475			(41,225		)	—			—			—			—			(40,750		)
Other comprehensive income (loss)	5,842			73,680			—			142			1,949			536			82,149
Purchases, issuances and settlements	(30,602		)	(89,202		)	—			(1,172		)	—			(1,605		)	(122,581		)
Transfers in (out) of Level 3 (2)	(103,415		)	(19,558		)	(58,270		)	—			—			(4,238		)	(185,481		)
Balance, September 30, 2010	$	61,236		$	316,060		$	—		$	699		$	(1,368	)	$	4,653		$	381,280
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at September 30, 2010	$	—		$	—		$	—		$	—		$	—		$	—		$	—

(1)   Includes derivative financial instruments.

(2)   Transfers in and out of Level 3 are from and to Level 2 and are due primarily to the ability or inability to corroborate market prices with multiple pricing vendors.

Non-recurring fair value measurements - The Company held $19,745 and $980 of adjusted cost basis limited partnership interests which were impaired at September 30, 2011 and at December 31, 2010, respectively, based on the fair value disclosed in the limited partnership financial statements.  These limited partnership interests were recorded at estimated fair value and represent a non-recurring fair value measurement.  The estimated fair value was categorized as Level 3.  The Company had no liabilities measured at fair value on a non-recurring basis at September 30, 2011 or December 31, 2010.

7.  Goodwill and Other Intangible Assets

At September 30, 2011 and December 31, 2010, the balance of goodwill, all of which is within the Retirement Services segment, was $105,255.

39

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

The following tables summarize other intangible assets, all of which are within the Retirement Services segment, as of September 30, 2011 and December 31, 2010:

	September 30, 2011
	Gross carrying		Accumulated
	amount		amortization			Net book value
Customer relationships	$	36,314	$	(14,601	)	$	21,713
Preferred provider agreements	7,970		(6,882		)	1,088
Total	$	44,284	$	(21,483	)	$	22,801

	December 31, 2010
	Gross carrying		Accumulated
	amount		amortization			Net book value
Customer relationships	$	36,314	$	(12,701	)	$	23,613
Preferred provider agreements	7,970		(5,941		)	2,029
Total	$	44,284	$	(18,642	)	$	25,642

Amortization expense of other intangible assets included in general insurance expenses was $947 and $998 for the three-month periods ended September 30, 2011 and 2010, respectively.  Amortization expense of other intangible assets was $2,841 and $2,993 for the nine-month periods ended September 30, 2011 and 2010, respectively.  Except for goodwill, the Company has no intangible assets with indefinite lives.  The Company did not incur costs to renew or extend the term of acquired intangible assets during the nine months ended September 30, 2011.

The estimated future amortization of other intangible assets using current assumptions, which are subject to change, for the years ended December 31, 2011 through December 31, 2015 is as follows:

Year ended December 31,	Amount
2011	$	3,793
2012	3,590
2013	3,410
2014	3,215
2015	3,012

40

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

8.  Other Comprehensive Income

The following tables present the composition of other comprehensive income (loss) for the three and nine-month periods ended September 30, 2011 and 2010:

	Three months ended September 30, 2011
	Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount
Unrealized holding gains (losses) arising during the period on available-for-sale fixed maturity investments	$	369,310		$	(129,259	)	$	240,051
Net changes during the period related to cash flow hedges	20,067			(7,023		)	13,044
Reclassification adjustment for (gains) losses realized in net income	(39,153		)	13,704			(25,449		)
Net unrealized gains (losses)	350,224			(122,578		)	227,646
Future policy benefits, deferred acquisition costs and value of business acquired adjustments	(22,389		)	7,836			(14,553		)
Other comprehensive income (loss)	$	327,835		$	(114,742	)	$	213,093

	Three months ended September 30, 2010
	Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount
Unrealized holding gains (losses) arising during the period on available-for-sale fixed maturity investments	$	395,395		$	(138,388	)	$	257,007
Net changes during the period related to cash flow hedges	4,731			(1,655		)	3,076
Reclassification adjustment for (gains) losses realized in net income	(3,255		)	1,140			(2,115		)
Net unrealized gains (losses)	396,871			(138,903		)	257,968
Future policy benefits, deferred acquisition costs and value of business acquired adjustments	(98,554		)	34,493			(64,061		)
Net unrealized gains (losses)	298,317			(104,410		)	193,907
Employee benefit plan adjustment	—			—			—
Other comprehensive income (loss)	$	298,317		$	(104,410	)	$	193,907

41

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

	Nine months ended September 30, 2011
	Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount
Unrealized holding gains (losses) arising during the period on available-for-sale fixed maturity investments	$	512,257		$	(179,290	)	$	332,967
Net changes during the period related to cash flow hedges	19,157			(6,705		)	12,452
Reclassification adjustment for (gains) losses realized in net income	(63,200		)	22,120			(41,080		)
Net unrealized gains (losses)	468,214			(163,875		)	304,339
Future policy benefits, deferred acquisition costs and value of business acquired adjustments	(54,365		)	19,028			(35,337		)
Other comprehensive income (loss)	$	413,849		$	(144,847	)	$	269,002

	Nine months ended September 30, 2010
	Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount
Unrealized holding gains (losses) arising during the period on available-for-sale fixed maturity investments	$	1,130,629		$	(395,720	)	$	734,909
Net changes during the period related to cash flow hedges	24,424			(8,548		)	15,876
Reclassification adjustment for (gains) losses realized in net income	30,041			(10,514		)	19,527
Net unrealized gains (losses)	1,185,094			(414,782		)	770,312
Future policy benefits, deferred acquisition costs and value of business acquired adjustments	(289,224		)	101,228			(187,996		)
Net unrealized gains (losses)	895,870			(313,554		)	582,316
Employee benefit plan adjustment	(317		)	111			(206		)
Other comprehensive income (loss)	$	895,553		$	(313,443	)	$	582,110

42

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

9.  Components of Net Periodic (Benefit) Cost

Net periodic (benefit) cost of the Defined Benefit Pension Plan and the Post-Retirement Medical Plan included in general insurance expenses in the accompanying condensed consolidated statements of income for the three and nine-month periods ended September 30, 2011 and 2010 include the following components:

	Three months ended September 30,
	2011			2010			2011			2010
	Defined benefit pension plan						Post-retirement medical plan
Components of periodic (benefit) cost:
Service cost	$	1,008		$	935		$	160		$	182
Interest cost	4,996			4,895			146			178
Expected return on plan assets	(5,245		)	(4,655		)	—			—
Amortization of transition obligation	(347		)	(379		)	—			—
Amortization of unrecognized prior service cost (benefit)	12			21			(413		)	(413		)
Amortization of loss (gain) from earlier periods	1,162			1,273			(157		)	(115		)
Net periodic (benefit) cost	$	1,586		$	2,090		$	(264	)	$	(168	)

	Nine months ended September 30,
	2011			2010			2011			2010
	Defined benefit pension plan						Post-retirement medical plan
Components of periodic (benefit) cost:
Service cost	$	2,951		$	2,878		$	466		$	540
Interest cost	15,215			14,873			439			547
Expected return on plan assets	(15,820		)	(14,256		)	—			—
Amortization of transition obligation	(1,041		)	(1,136		)	—			—
Amortization of unrecognized prior service cost (benefit)	38			63			(1,238		)	(1,238		)
Amortization of loss (gain) from earlier periods	3,836			4,117			(458		)	(332		)
Net periodic (benefit) cost	$	5,179		$	6,539		$	(791	)	$	(483	)

The Company will make a contribution at least equal to the minimum contribution of $12,000 to its Defined Benefit Pension Plan during the year ended December 31, 2011.  The Company expects to contribute approximately $706 to its Post-Retirement Medical Plan during the year ended December 31, 2011.

43

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

10.   Federal Income Taxes

The provision for income taxes from continuing operations for the three and nine-month periods ended September 30, 2011 and 2010 is comprised of the following:

	Three months ended					Nine months ended
	September 30,					September 30,
	2011		2010			2011		2010
Current	$	7,814	$	(22,543	)	$	53,332	$	(5,250	)
Deferred	18,210		38,899			29,583		67,859
Total income tax provision	$	26,024	$	16,356		$	82,915	$	62,609

The following table presents a reconciliation between the statutory federal income tax rate and the Company’s effective federal income tax rate from continuing operations for the nine months ended September 30, 2011 and 2010:

	Nine months ended September 30,
	2011		2010
Statutory federal income tax rate	35.0	%	35.0	%
Income tax effect of:
Investment income not subject to federal tax	(2.3	)%	(2.2	)%
Tax credits	(1.9	)%	(3.3	)%
State income taxes, net of federal benefit	1.2	%	0.9	%
Income tax contingency provisions	(1.0	)%	(2.8	)%
Prior period adjustments	0.0	%	2.0	%
Other, net	(0.2	)%	(0.4	)%
Effective federal income tax rate	30.8	%	29.2	%

During the nine months ended September 30, 2011, the Company recorded a decrease in unrecognized tax benefits in the amount of $2,409.  The Company anticipates an increase in the range of $2,000 to $4,000 to unrecognized tax benefits within the next twelve months due to changes in the composition of the consolidated group.  Due to the impact of deferred tax accounting, the majority of the increase in unrecognized tax benefits does not affect the effective tax rate.

The Company files income tax returns in the U.S. federal jurisdiction and with various states.  With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by taxing authorities for years 2007 and prior.  Tax years 2008, 2009 and 2010 are open to federal examination by the Internal Revenue Service.  The Company does not expect significant increases or decreases to unrecognized tax benefits relating to federal, state or local audits.

11.  Segment Information

The Company has three reportable segments: Individual Markets, Retirement Services and Other.  The Individual Markets segment distributes life insurance and individual annuity products to both individuals and businesses through various distribution channels.  Life insurance products in-force includes participating and non-participating term life, whole life, universal life and variable universal life.  The Retirement Services segment provides retirement plan enrollment services, communication materials, various retirement plan investment options and educational services to employer-sponsored defined contribution/defined benefit plans and 401(k) and 403(b) plans, as well as comprehensive administrative and record-keeping services for financial institutions and employers.  The Company’s Other segment includes corporate items not directly allocated to any of its other business segments, interest expense on long-term debt and the

44

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

activities of a wholly-owned subsidiary whose sole business is the assumption of a certain block of term life insurance from an affiliated company.

The following table summarizes the financial results of the Company’s Individual Markets segment for the three and nine-month periods ended September 30, 2011 and 2010:

	Three months ended				Nine months ended
	September 30,				September 30,
	2011		2010		2011		2010
Revenues:
Premium income	$	120,409	$	208,114	$	323,126	$	517,129
Fee income	15,580		13,925		48,019		41,544
Net investment income	178,131		185,060		534,568		539,981
Net realized gains (losses) on investments	10,762		4,250		16,570		(9,773		)
Total revenues	324,882		411,349		922,283		1,088,881
Benefits and expenses:
Policyholder benefits	262,973		355,774		731,455		918,576
Operating expenses	19,507		29,722		64,620		80,945
Total benefits and expenses	282,480		385,496		796,075		999,521
Income from continuing operations before income taxes	42,402		25,853		126,208		89,360
Income tax expense	14,937		4,189		39,610		26,745
Income from continuing operations	$	27,465	$	21,664	$	86,598	$	62,615

The following table summarizes the financial results of the Company’s Retirement Services segment for the three and nine-month periods ended September 30, 2011 and 2010:

	Three months ended					Nine months ended
	September 30,					September 30,
	2011			2010		2011		2010
Revenues:
Premium income	$	—		$	797	$	3,569	$	2,356
Fee income	103,298			96,984		311,780		287,646
Net investment income	97,284			99,072		297,644		289,974
Net realized gains (losses) on investments	(633		)	1,902		2,540		(24,734		)
Total revenues	199,949			198,755		615,533		555,242
Benefits and expenses:
Policyholder benefits	60,431			56,543		169,870		162,373
Operating expenses	97,022			90,011		303,641		285,495
Total benefits and expenses	157,453			146,554		473,511		447,868
Income from continuing operations before income taxes	42,496			52,201		142,022		107,374
Income tax expense	12,523			10,140		43,094		29,049
Income from continuing operations	$	29,973		$	42,061	$	98,928	$	78,325

45

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

The following table summarizes the financial results of the Company’s Other segment for the three and nine-month periods ended September 30, 2011 and 2010:

	Three months ended					Nine months ended
	September 30,					September 30,
	2011			2010		2011		2010
Revenues:
Premium income	$	38,279		$	29,636	$	100,184	$	94,420
Fee income	1,222			1,168		3,683		3,454
Net investment income	11,835			11,234		35,591		33,511
Net realized gains (losses) on investments	613			9		637		351
Total revenues	51,949			42,047		140,095		131,736
Benefits and expenses:
Policyholder benefits	25,020			20,658		71,176		67,024
Operating expenses	28,855			15,602		68,022		47,205
Total benefits and expenses	53,875			36,260		139,198		114,229
Income (loss) from continuing operations before income taxes	(1,926		)	5,787		897		17,507
Income tax expense (benefit)	(1,436		)	2,027		211		6,815
Income from continuing operations	$	(490	)	$	3,760	$	686	$	10,692

12.  Share-Based Compensation

Lifeco, of which the Company is an indirect wholly-owned subsidiary, has a stock option plan that provides for the granting of options on its common shares to certain of its officers and employees and those of its subsidiaries, including the Company.  During the three-month periods ended September 30, 2011 and 2010, the Company recognized $506 and $492, respectively, in its condensed consolidated statements of income related to share-based compensation expense under the Lifeco stock option plan.  During the nine-month periods ended September 30, 2011 and 2010, the Company recognized $1,289 and $1,386, respectively, related to share-based compensation expense.

During the nine months ended September 30, 2011, Lifeco granted 550,700 stock options to employees of the Company.  The stock options vest evenly over a five-year period from the date of the grant.  Compensation expense of $2,472, computed using the accelerated method of recognition, will be recognized in the Company’s financial statements over the vesting period of these stock option grants.

13.  Commitments and Contingencies

The Company is involved in various legal proceedings that arise in the ordinary course of its business.  In the opinion of management, after consultation with counsel, the resolutions of these proceedings are not expected to have a material adverse effect on the Company’s condensed consolidated financial position, results of its operations or cash flows.

The Company has commenced searching the U.S. Social Security Administration’s Death Master File to determine if unclaimed death benefits may be payable under life insurance and similar products.  The Company has not completed its work in estimating the amount of additional benefits that may be payable to beneficiaries or escheated under state unclaimed property laws.  Based on available information, management believes that such amount will not have a material effect on the financial position of the Company.

46

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2011 and 2010

(Dollars in Thousands)

(Unaudited)

The Company has a revolving credit facility agreement in the amount of $50,000 for general corporate purposes.  The credit facility matures on May 26, 2013.  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, as defined, of $1,000,000 plus 50% of its net income, if positive and as defined in the credit facility agreement (both compiled on the unconsolidated statutory accounting basis prescribed by the National Association of Insurance Commissioners), for each quarter ending after March 31, 2010.  The Company had no borrowings under the credit facility at September 30, 2011 or December 31, 2010 and was in compliance with all covenants.

The Company makes commitments to fund partnership interests and mortgage loans on real estate investments in the normal course of its business.  The amounts of these unfunded commitments at September 30, 2011 and December 31, 2010 were $296,064 and $95,688, respectively, all of which is due within one year from the dates indicated.

14.  Subsequent Event

On November 4, 2011, the Company’s Board of Directors declared a dividend of $53,000 to be paid to its sole shareholder, GWL&A Financial, during the fourth quarter of 2011.

47

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

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 verbs such as “expect,” “anticipate,” “believe,” or words of similar import generally involve forward-looking statements.  Without limiting the foregoing, forward-looking statements include statements which 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 its 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.  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 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 rating, 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.

Company Results of Operations

The following discussion addresses the Company’s results of operations for the three and nine-month periods ended September 30, 2011, compared with the same periods in 2010.  The discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” to which the reader is directed for additional information.

Three months ended September 30, 2011 compared with the three months ended September 30, 2010

	Three months ended September 30,
Income statement data (In millions)	2011		2010
Premium income	$	159	$	239
Fee income	120		112
Net investment income	287		295
Net realized investment gains (losses)	11		6
Total revenues	577		652
Policyholder benefits	348		433
Operating expenses	146		135
Total benefits and expenses	494		568
Income from continuing operations before income taxes	83		84
Income tax expense	26		16
Income from continuing operations	$	57	$	68

The Company’s consolidated income from continuing operations decreased by $11 million, or 16%, to $57 million for the three months ended September 30, 2011 when compared to 2010. Income from continuing operations before income taxes remained relatively stable for the three months ended September 30, 2011 when compared to 2010.  As such, the decrease is primarily related to the $10 million increase in income tax expense.

48

Premium income decreased by $80 million, or 33%, to $159 million for the three months ended September 30, 2011 when compared to 2010.  This decrease is primarily related to an $86 million decrease in sales of the single premium whole life product in the Company’s Individual Markets segment.

Fee income increased by $8 million, or 7%, to $120 million for the three months ended September 30, 2011 when compared to 2010.  The increase is primarily related to higher variable fee income in the Company’s Retirement Services segment as a result of higher average account balances due to the performance of the U.S. equities market as evidenced by the higher S&P 500 index average in 2011 compared to 2010.

Net investment income decreased by $8 million, or 3%, to $287 million for the three months ended September 30, 2011 when compared to 2010.  The decrease is primarily due to increased unrealized losses on derivatives and held for trading assets of $7 million, as well as a decrease in interest income of $1 million.

Net realized investment gains (losses) increased by $5 million, or 83%, to $11 million in the three months ended September 30, 2011 compared to 2010.  The $11 million gain in 2011 is due to $18 million of net realized gains from the sale of investments offset by $7 million of credit related other-than-temporary impairments (“OTTI”) losses primarily on fixed maturity securities.  The $6 million gain in 2010 is due $7 million of net realized gains from the sale of investments offset by $1 million of OTTI losses primarily on fixed maturity securities.

Total benefits and expenses decreased by $74 million, or 13%, to $494 million for the three months ended September 30, 2011 when compared to 2010.  The decrease is attributable to a reduction of $102 million in the Company’s Individual Markets segment which is primarily due to the decreased sales premium mentioned above and a $17 million release of future policy benefits in 2010 due to the refinement in the calculation methodology as a result of additional information on the assumed reinsurance individual life block of business.  This decrease is partially offset by increases of $10 million and $18 million in benefits and expenses in the Company’s Retirement Services and Other segments, respectively.

Income tax expense increased by $10 million, or 63%, to $26 million for the three months ended September 30, 2011 when compared to 2010.  This increase is primarily due to an $8 million tax benefit in 2010 related to the closing of Internal Revenue Services (“IRS”) examinations.

Nine months ended September 30, 2011 compared with the nine months ended September 30, 2010

	Nine months ended September 30,
Income statement data (In millions)	2011		2010
Premium income	$	427	$	614
Fee income	364		333
Net investment income	867		863
Net realized investment gains (losses)	20		(34		)
Total revenues	1,678		1,776
Policyholder benefits	973		1,148
Operating expenses	436		414
Total benefits and expenses	1,409		1,562
Income from continuing operations before income taxes	269		214
Income tax expense	83		62
Income from continuing operations	$	186	$	152

The Company’s consolidated income from continuing operations increased by $34 million, or 22%, to $186 million for the nine months ended September 30, 2011 when compared to 2010.  The increase is primarily related to a $31 million increase in fee income primarily from the Company’s Retirement Services segment, a $27 million increase in net realized and unrealized investment gains (losses), net of policyholder related amounts, a decrease of $23 million in acquisition expenses, net of deferrals, on the single premium whole life product due to decreased sales in 2011, improved mortality and interest credit results of $14 million and $8 million, respectively, and a $4 million increase in investment income.  These increases are offset by a

49

$19 million increase in operating expenses primarily from the Company’s Retirement Services segment, a $17 million decrease in income from continuing operations before income taxes from the Company’s Other segment, as well as the impact of a $17 million release of future policy benefits in the Company’s Individual Markets segment in 2010, and an increase of $21 million in income tax expense.

Premium income decreased by $187 million, or 30%, to $427 million for the nine months ended September 30, 2011 when compared to 2010.  This decrease is primarily related to a $194 million decrease in sales of the single premium whole life product in the Company’s Individual Markets segment.

Fee income increased by $31 million, or 9%, to $364 million for the nine months ended September 30, 2011 when compared to 2010.  The increase is primarily related to higher variable fee income as a result of higher average account balances due to the performance of the U.S. equities market as evidenced by the higher S&P 500 index average in 2011 compared to 2010.

Net investment income remained relatively constant, increasing by $4 million, or less than 1%, to $867 million for the nine months ended September 30, 2011 when compared to 2010.  The increase is primarily due to increased interest income of $6 million due to an increase in invested assets offset by $2 million higher net unrealized (losses) on derivatives and held for trading assets.

Net realized investment gains (losses) increased by $54 million from a loss of $34 million in the nine months ended September 30, 2010 to a gain of $20 million in 2011.  The $20 million gain in 2011 is due to $34 million of net realized gains on the sale of investments offset by a $5 million increase in the allowance for mortgage loan credit losses, due to the increase in mortgage loans, and $9 million of credit related OTTI losses primarily on fixed maturity securities.  The $34 million loss in 2010 is due to $59 million of OTTI losses primarily on fixed maturity securities guaranteed by Ambac Financial Group, Inc. (“Ambac”) (See discussion under Fixed Maturity Investments below) offset by $25 million of net realized gains on the sale of investments.

Total benefits and expenses decreased by $153 million, or 10%, to $1,409 million for the nine months ended September 30, 2011 when compared to 2010.  The decrease is attributable to a reduction of $204 million in the Company’s Individual Markets segment which is primarily due to the decreased sales premium mentioned above offset by the release of future policy benefits in 2010 due to the refinement in the calculation methodology as a result of additional information on the assumed reinsurance individual life block of business.  This decrease is partially offset by a $26 million increase in benefits and expenses in the Company’s Retirement Services segment and a $25 million increase in benefits and expenses in the Other segment.

Income tax expense increased by $21 million, or 34%, to $83 million for the nine months ended September 30, 2011 when compared to 2010.  This increase is primarily due to a $55 million, or 26%, increase in income from continuing operations before income taxes, as well as an $8 million tax benefit in 2010 related to the closing of IRS examinations.

The segment information below discusses the reasons for these changes.

Segment Results of Operations

The Company has three reportable segments: Individual Markets, Retirement Services and Other.  The Individual Markets segment distributes life insurance and individual annuity products to both individuals and businesses through various distribution channels.  Life insurance products in-force includes participating and non-participating term life, whole life, universal life and variable universal life.  The Retirement Services segment provides retirement plan enrollment services, communication materials, various retirement plan investment options and educational services to employer-sponsored defined contribution/defined benefit plans and 401(k) and 403(b) plans, as well as comprehensive administrative and record-keeping services for financial institutions and employers.  The Company’s Other segment includes corporate items not directly allocated to any of its other business segments, interest expense on long-term debt and the activities of a wholly-owned subsidiary whose sole business is the assumption of a certain block of term life insurance from an affiliated company.

50

Individual Markets Results of Operations

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

Three months ended September 30, 2011 compared with the three months ended September 30, 2010

	Three months ended September 30,
Income statement data (In millions)	2011		2010
Premium income	$	120	$	208
Fee income	16		14
Net investment income	178		185
Net realized investment gains (losses)	11		4
Total revenues	325		411
Policyholder benefits	263		355
Operating expenses	20		30
Total benefits and expenses	283		385
Income from continuing operations before income taxes	42		26
Income tax expense	15		4
Income from continuing operations	$	27	$	22

Individual markets segment:

The following is a summary of the Individual Markets segment participant accounts at September 30, 2011 and June 30, 2011:

(In thousands)	September 30, 2011	June 30, 2011
Participant accounts	517	516

Income from continuing operations for the Individual Markets segment increased by $5 million, or 23%, to $27 million for the three months ended September 30, 2011 when compared to 2010.  The increase is primarily related to a $10 million decrease in operating expense and a $92 million decrease in policyholder benefits offset by an $88 million decrease in premiums.  Additionally, income tax expense increased $11 million.

Premium income decreased by $88 million, or 42%, to $120 million for the three months ended September 30, 2011 when compared to 2010.  The decrease is primarily related to sales in the single premium whole life product marketed through banks which decreased by $86 million.  In 2011, the Company began replacing the single premium whole life product with a single premium universal life product which had deposits of $56 million for the three months ended September 30, 2011.

Fee income increased by $2 million, or 14%, to $16 million for the three months ended September 30, 2011 when compared to 2010.  The increase is primarily related to higher account balances as a result of sales since September 30, 2010 on the BOLI product.

Net investment income decreased by $7 million, or 4%, to $178 million, for the three months ended September 30, 2011 when compared to 2010.  The decrease is primarily due to $1 million higher unrealized losses on derivatives and held for trading assets, as well as a decrease in interest income of $6 million.

Net realized investment gains (losses) increased by $7 million, or 175%, to a gain of $11 million for the three months ended September 30, 2011 compared to 2010.  The $11 million gain in 2011 is due to $14 million of net realized gains on the sale of investments offset by a $3 million increase related to OTTI losses primarily on fixed maturity securities.  The $4 million gain in 2010 is due to $5 million of net realized gains on the sale of investments offset by $1 million of write-downs.

Total benefits and expenses decreased by $102 million, or 26%, to $283 million for the three months ended September 30, 2011 when compared to 2010.  Approximately $92 million of the decrease is primarily attributable to a reduction in future policy benefits and expenses related to the decreased sales premium

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mentioned above offset by a release of future policy benefits in 2010 due to the refinement in the calculation methodology as a result of additional information on the assumed reinsurance individual life block of business.  The remaining $10 million is primarily due to a decrease in general insurance expense from premium tax expense and commissions also as a result of the decrease in sales premium mentioned above.

Income tax expense increased by $11 million, or 275% to $15 million for the three months ended September 30, 2011 when compared to 2010.  The increase is partially due to a $16 million, or 62% increase in income from continuing operations before income taxes, as well as a $3 million tax benefit in 2010 related to the closing of IRS examinations.

Nine months ended September 30, 2011 compared with the nine months ended September 30, 2010

	Nine months ended September 30,
Income statement data (In millions)	2011		2010
Premium income	$	323	$	517
Fee income	48		42
Net investment income	535		540
Net realized investment gains (losses)	16		(10		)
Total revenues	922		1,089
Policyholder benefits	731		919
Operating expenses	65		81
Total benefits and expenses	796		1,000
Income from continuing operations before income taxes	126		89
Income tax expense	39		26
Income from continuing operations	$	87	$	63

The following is a summary of the Individual Markets segment participant accounts at September 30, 2011 and 2010:

	September 30,
(In thousands)	2011	2010
Participant accounts	517	517

Income from continuing operations for the Individual Markets segment increased by $24 million, or 38%, to $87 million for the nine months ended September 30, 2011 when compared to 2010.  The increase is primarily related to a $11 million increase in net realized and unrealized investment gains (losses), net of policyholder related amounts, a decrease of $23 million in acquisition expenses, net of deferrals, on the single premium whole life product due to decreased sales in 2011, improved mortality and interest credit results of $14 million and $8 million, respectively, and a $6 million increase in fee income.  These increases are offset by an $8 million decrease in investment income, as well as the impact of a $17 million release of future policy benefits in the Company’s Individual Markets segment in 2010, and an increase of $13 million in income tax expense.

Premium income decreased by $194 million, or 38%, to $323 million for the nine months ended September 30, 2011 when compared to 2010.  The decrease is primarily related to sales in the single premium whole life product marketed through banks which decreased by $194 million.  In 2011, the Company began replacing the single premium whole life product with a single premium universal life product which had deposits of $135 million for the nine months ended September 30, 2011.

Fee income increased by $6 million, or 14%, to $48 million for the nine months ended September 30, 2011 when compared to 2010.  The increase is primarily related to higher account balances as a result of sales since September 30, 2010 on the BOLI product.

Net investment income remained relatively constant, decreasing by $5 million, or 1% to $535 million during the nine months ended September 30, 2011 compared to 2010.  The decrease is primarily due to a

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decrease in interest income of $8 million offset by an increase in unrealized gains on derivatives and held for trading assets of $3 million.

Net realized investment gains (losses) increased by $26 million from a loss of $10 million for the nine months ended September 30, 2010 to a gain of $16 million in 2011.  The $16 million gain in 2011 is due to $22 million of net realized gains on the sale of investments offset by a $2 million increase in the allowance for mortgage loan credit losses, due to the increase in mortgage loans, and $4 million of credit related OTTI losses primarily on fixed maturity securities.  The $10 million loss in 2010 is due to $25 million of OTTI losses primarily on fixed maturity securities guaranteed by Ambac offset by $15 million of net realized gains on the sale of investments.

Total benefits and expenses decreased by $204 million, or 20%, to $796 million for the nine months ended September 30, 2011 when compared to 2010.  Approximately $188 million of the decrease is primarily attributable to a reduction in future policy benefits and expenses related to the decreased sales premium mentioned above offset by a release of future policy benefits in 2010 due to the refinement in the calculation methodology as a result of additional information on the assumed reinsurance individual life block of business.  The remaining $16 million is primarily due to a decrease in general insurance expense from premium tax expense and commissions also as a result of the decrease in sales premium mentioned above.

Income tax expense increased by $13 million, or 50%, to $39 million for the nine months ended September 30, 2011 when compared to 2010.  The increase is primarily due to a $37 million, or 42%. increase in income from continuing operations before income taxes, as well as a $3 million tax benefit in 2010 related to the closing of IRS examinations.

Retirement Services Results of Operations

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

Three months ended September 30, 2011 compared with the three months ended September 30, 2010

	Three months ended September 30,
Income statement data (In millions)	2011		2010
Premium income	$	—	$	1
Fee income	103		97
Net investment income	97		99
Net realized investment gains (losses)	—		2
Total revenues	200		199
Policyholder benefits	60		57
Operating expenses	97		90
Total benefits and expenses	157		147
Income from continuing operations before income taxes	43		52
Income tax expense	13		10
Income from continuing operations	$	30	$	42

The following is a summary of the Retirement Services segment participant accounts at September 30, 2011 and June 30, 2011:

(In thousands)	September 30, 2011	June 30, 2011
Participant accounts	4,479	4,466

Income from continuing operations for the Retirement Services segment decreased by $12 million, or 29%, to $30 million during the three months ended September 30, 2011 when compared to 2010.  The decrease is primarily related to an $11 million decrease in net realized and unrealized investment gains (losses), net of policyholder related amounts, as well as an $8 million increase in total benefits and expenses, net of

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policyholder related amounts previously discussed and a $3 million increase in income tax expense.  These decreases are partially offset by increased interest income of $4 million due to higher invested asset balances and increased fee income of $6 million.

Fee income increased by $6 million, or 6%, to $103 million for the three months ended September 30, 2011 when compared to 2010.  The increase is primarily related to higher variable fee income as a result of higher average account balances due to the performance of the U.S. equities market as evidenced by the higher S&P 500 index average during the three months ended September 30, 2011 when compared to the three months ended September 30, 2010.

Net investment income decreased by $2 million, or 2%, to $97 million for the three months ended September 30, 2011 when compared to 2010.  The slight decrease is due to increased unrealized losses on derivatives and held for trading assets of $6 million offset by increased interest income of $4 million due to higher invested asset balances.

Total benefits and expenses increased by $10 million, or 7%, to $157 million for the three months ended September 30, 2011 when compared to 2010.  This increase is primarily due to a $7 million increase in general insurance expenses as a result of higher asset based commissions due to increased participant account values and higher operating expenses due to strategic initiatives in 2011.

Income tax expense increased by $3 million, or 30%, to $13 million for the three months ended September 30, 2011 when compared to 2010. The increase is partially due a $5 million tax benefit in 2010 related to the closing of IRS examinations offset by a $9 million, or 17%, decrease in income from continuing operations before income taxes.

Nine months ended September 30, 2011 compared with the nine months ended September 30, 2010

	Nine months ended September 30,
Income statement data (In millions)	2011		2010
Premium income	$	4	$	2
Fee income	312		288
Net investment income	298		290
Net realized investment gains (losses)	2		(25		)
Total revenues	616		555
Policyholder benefits	170		162
Operating expenses	304		286
Total benefits and expenses	474		448
Income from continuing operations before income taxes	142		107
Income tax expense	43		29
Income from continuing operations	$	99	$	78

The following is a summary of the Retirement Services segment participant accounts at September 30, 2011 and 2010:

	September 30,
(In thousands)	2011	2010
Participant accounts	4,479	4,435

Income from continuing operations for the Retirement Services segment increased by $21 million, or 27%, to $99 million during the nine months ended September 30, 2011 when compared to 2010.  The increase is primarily related to a $16 million increase in net realized and unrealized investment gains (losses), net of policyholder related amounts, increased interest income of $12 million due to higher invested asset balances and a $24 million increase in fee income, which are partially offset by an increase in operating expenses and income tax expense.

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Fee income increased by $24 million, or 8%, to $312 million for the nine months ended September 30, 2011 when compared to 2010.  The increase is primarily related to higher variable fee income as a result of higher average account balances due to the performance of the U.S. equities market as evidenced by the higher S&P 500 index average in 2011 compared to 2010.

Net investment income increased slightly by $8 million, or 3%, to $298 million for the nine months ended September 30, 2011 when compared to 2010.  The increase is due to increased interest income of $12 million due to higher invested asset balances offset by $4 million of unrealized loss on derivatives and held for trading assets.

Net realized investment gains (losses) increased by $27 million from a loss of $25 million during the nine months ended September 30, 2010 to a gain of $2 million in 2011.  The $2 million gain in 2011 is due to $11 million of net realized gains on the sale of investments offset by a $3 million increase in the allowance for mortgage loan credit losses, due to the increase in mortgage loans, and $5 million of credit related OTTI losses primarily on fixed maturity securities.  The $25 million loss in 2010 is due to $35 million of OTTI losses primarily on fixed maturity securities guaranteed by Ambac offset by $10 million of net realized gains on the sale of investments.

Total benefits and expenses increased by $26 million, or 6%, to $474 million for the nine months ended September 30, 2011 when compared to 2010.  The increase is primarily due to a $25 million increase in general insurance expenses as a result of higher asset based commissions due to increased participant account values and higher operating expenses due to strategic initiatives in 2011.

Income tax expense increased by $14 million, or 48%, to $43 million for the nine months ended September 30, 2011 when compared to 2010.  The increase is primarily due to a $35 million, or 33%, increase in income from continuing operations before income taxes, as well as a $5 million tax benefit in 2010 related to the closing of IRS examinations.

The following table provides information for the Retirement Services’ segment participant account values at September 30, 2011 and 2010:

	September 30,
(In millions)	2011		2010
General account - Fixed options:
Public / Non-profit	$	3,620	$	3,560
401(k)	4,718		4,066
	$	8,338	$	7,626
Separate account -Variable options:
Public / Non-profit	$	8,841	$	8,646
401(k)	6,370		6,485
	$	15,211	$	15,131
Proprietary mutual funds/Collective trust funds:
Public / Non-profit	$	338	$	668
401(k)	2,065		1,527
Institutional	50		44
	$	2,453	$	2,239
Retail investment options and administrative services only:
Public / Non-profit	$	55,005	$	54,552
401(k)	20,874		21,043
Institutional	39,625		37,967
	$	115,504	$	113,562

Account values invested in the general account fixed investment options have increased by $712 million, or 9%, at September 30, 2011 compared to September 30, 2010 primarily due to an increase in new participant contributions and interest credited to existing account balances.

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Account values invested in the separate account variable investment options have increased by $80 million, or less than 1%, at September 30, 2011 compared to September 30, 2010.  The increase is primarily due to new sales and an overall increase in the U.S. equity markets.

Account values invested in the proprietary mutual fund investment options have increased by $214 million, or 10%, at September 30, 2011 compared to September 30, 2010.  The increase is primarily due to new sales and an overall increase in the U.S. equity markets.

Participant account values invested in unaffiliated retail investment options and participant account values where only administrative services and recordkeeping functions are provided have increased by $1,942 million, or 2%, at September 30, 2011 compared to September 30, 2010.  The increase is primarily due to new sales and an overall increase in the U.S. equity markets.

Other Results of Operations

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

Three months ended September 30, 2011 compared with the three months ended September 30, 2010

	Three months ended September 30,
Income statement data (In millions)	2011			2010
Premium income	$	38		$	30
Fee income	1			1
Net investment income	12			11
Net realized investment gains (losses)	1			—
Total revenues	52			42
Policyholder benefits	25			21
Operating expenses	29			15
Total benefits and expenses	54			36
Income (loss) from continuing operations before income taxes	(2		)	6
Income tax expense (benefit)	(2		)	2
Income from continuing operations	$	—		$	4

Income from continuing operations and its components for the Company’s Other segment remained stable for the three months ended September 30, 2011 when compared to 2010.

Nine months ended September 30, 2011 compared with the nine months ended September 30, 2010

	Nine months ended September 30,
Income statement data (In millions)	2011		2010
Premium income	$	100	$	94
Fee income	4		4
Net investment income	35		34
Net realized investment gains (losses)	1		—
Total revenues	140		132
Policyholder benefits	71		67
Operating expenses	68		47
Total benefits and expenses	139		114
Income from continuing operations before income taxes	1		18
Income tax expense	—		7
Income from continuing operations	$	1	$	11

Income from continuing operations for the Company’s Other segment decreased by $10 million or 91% to $1 million during the nine months ended September 30, 2011 compared to 2010.  The decrease is primarily

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due to a $13 million increase in operating expenses primarily related to increased guarantee fund assessments and consulting expenses on special initiatives.

General Account Investments

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.

A summary of the Company’s general account investment assets and assets as a percentage of total general account investments at September 30, 2011 and December 31, 2010 is as follows:

(In millions)	September 30, 2011				December 31, 2010
Fixed maturities, available-for-sale	$	16,562	67.3	%	$	15,943	69.1	%
Fixed maturities, held for trading	179		0.7	%	144		0.6	%
Mortgage loans on real estate	2,200		8.9	%	1,722		7.5	%
Equity investments, available-for-sale	2		0.0	%	2		0.0	%
Policy loans	4,125		16.8	%	4,060		17.6	%
Short-term investments, available-for-sale	1,348		5.5	%	965		4.2	%
Limited partnership and other corporation interests	178		0.7	%	210		0.9	%
Other investments	22		0.1	%	23		0.1	%
Total investment assets	$	24,616	100.0	%	$	23,069	100.0	%

Fixed Maturity Investments

Fixed maturity investments include public and privately placed corporate bonds, government bonds and mortgage-backed and asset-backed securities.  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.  The Company does not invest in higher-risk collateralized mortgage obligations such as interest-only and principal-only strips, and currently has no plans to invest in such securities.

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.

The National Association of Insurance Commissioners (the “NAIC”) adopted a revised rating methodology for non-agency residential mortgage-backed securities (“RMBS”) that became effective December 31, 2009 and commercial mortgage-backed securities (“CMBS”) and all other structured securities that became effective December 31, 2010.  The NAIC’s objective with the rating methodology for non-agency RMBS, CMBS and all other structured securities was to increase the accuracy in assessing expected losses, and to use the improved assessment to determine a more appropriate capital requirement for non-agency structured securities.  The revised methodology reduces regulatory reliance on rating agencies and allows for greater regulatory input into the assumptions used to estimate expected losses from non-agency RMBS, CMBS and all other structured securities.

One of the Company’s primary objectives is to ensure that its fixed maturity portfolio is maintained at a high average quality to limit credit risk.  If not externally rated, the securities are rated by the Company on a basis intended to be similar to that of the rating agencies.  The Company’s internal rating methodology generally takes into account ratings from Standard & Poor’s Ratings Services and Moody’s Investor Services, Inc. However, ratings presented for non-agency RMBS are based on final ratings from the revised NAIC rating

57

methodology as discussed above.  The Company’s CMBS and all other structured securities ratings were not affected by the revised NAIC rating methodology.

The distribution of the Company’s fixed maturity portfolio by the Company’s internal credit rating at September 30, 2011 and December 31, 2010 is summarized as follows:

Credit Rating	September 30, 2011		December 31, 2010
AAA	35.5	%	38.5	%
AA	14.4	%	14.0	%
A	23.8	%	21.9	%
BBB	24.5	%	23.3	%
BB and below (Non-investment grade)	1.8	%	2.3	%
Total	100.0	%	100.0	%

The following table contains the sector distribution of the Company’s corporate fixed maturity investment portfolio, calculated as a percentage of fixed maturities at September 30, 2011 and December 31, 2010:

Sector	September 30, 2011		December 31, 2010
Utility	15.6	%	15.3	%
Finance	9.8	%	10.0	%
Consumer	9.7	%	8.7	%
Natural resources (1)	4.5	%	4.8	%
Transportation	2.4	%	2.6	%
Other	9.6	%	8.4	%

(1) Exposure of 2.7% and 2.9% to the oil and gas sector is included in natural resources at September 30, 2011 and December 31, 2010, respectively.

The Company holds fixed maturity investments guaranteed by monoline insurers.  Monoline insurers provide guarantees on debt for issuers, often in the form of credit wraps, which enhance the credit of the issuer.  Monoline insurers guarantee the timely repayment of bond principal and interest when a bond issuer defaults and generally provide credit enhancement for certain securities.  During 2009, Financial Guaranty Insurance Company (“FGIC”), a monoline insurer, was ordered to suspend all claims payments by the New York Insurance Department.  During the first quarter of 2010, Ambac, a monoline insurer, was ordered to suspend claims payments on residential mortgage-backed securities by the State of Wisconsin Insurance Department.  On January 25, 2011, a Plan of Rehabilitation supported by Ambac’s regulator was approved by a Wisconsin state court judge.  The Company is not yet certain of the amount or timing of recoveries under the Plan.  The Company assesses OTTI on a regular basis on these securities.  The financial health of several other monoline insurers has been in question recently and several insurers have experienced ratings downgrades.  See Note 4 to the accompanying condensed consolidated financial statements for further discussion of OTTI related to these monoline insurers.

The Company does not have any direct bond holdings of the actual monoline insurers.  Excluding FGIC and Ambac holdings where the insurer has been ordered to suspend claims as discussed above, the Company’s insured holdings at September 30, 2011 and December 31, 2010 are as follows:

			Indirect		Indirect
			exposure		exposure
	Guarantor quality rating		September 30,		December 31,
Guarantor (In millions)	S&P	Moody’s	2011		2010
MBIA Inc.	B	B3	$	210	$	211
Assured Guaranty Corp. (formerly Financial Security Assurance, Inc.)	AA+	Aa3	122		129
Berkshire Hathaway Assurance Corporation	AA+	Aa1	38		34
National Public Finance Guaranty Corporation	BBB	Baa1	178		156
			$	548	$	530

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At September 30, 2011 and December 31, 2010, the Company had $428 million and $418 million of asset-backed securities, respectively, insured by monolines other than FGIC and Ambac.  At September 30, 2011 and December 31, 2010, the overall credit quality of the Company’s monoline-insured asset-backed securities, including the benefits of monoline insurance, was A- and A, respectively.  At September 30, 2011 and December 31, 2010, the Company had other insured securities with a fair value of $120 million and $112 million, respectively, primarily exposed to state/municipal bond authorities, utilities, and financial services companies.

The Company had exposure to the subprime market in the form of home equity loan asset-backed securities of $887 million, or 4% of total invested assets of $24,616 million as of September 30, 2011 and $949 million, or 4% of total investments of $23,069 million as of December 31, 2010.  The majority of the securities held at September 30, 2011 were investment grade rated, 72% of which had a rating of AAA.  The majority of the mortgages backing these securities are fixed rate loans, which typically have lower default and loss rates than adjustable rate loans.  Of these pools, 50% were originated before 2005, which is associated with lower default and loss rates compared to pools that were originated from 2005 through 2008.  The weighted average credit enhancement level for these securities was 37% (excluding any monoline guarantees) as of September 30, 2011.  This credit enhancement represents subordinated securities or surplus collateral that would absorb losses prior to losses being allocated to the Company’s securities.

The Company has no exposure to sub-prime collateralized debt obligations, asset-backed commercial paper or structured investment vehicles.  The Company’s exposure to Alt A mortgage-backed securities at September 30, 2011 was approximately $1 million.  The underlying mortgages of Alt A securities have a risk potential that is greater than prime but less than sub-prime.  The borrowers behind these mortgages typically have clean credit histories, but the mortgage itself will generally have some issues that increase its risk profile.  These issues may include higher loan-to-value and debt-to-income ratios or inadequate documentation of the borrower’s income.

Fair Value Measurements and Impairment of Fixed Maturity and Equity Investments Classified as Available-for-Sale

Security valuation methods can be subjective.  Each fixed maturity and equity investment is categorized in a hierarchy based on the observability of inputs into the valuation methodology with Level 3 being the least observable.  Total assets and liabilities measured using significant unobservable inputs (Level 3) increased by $26 million at September 30, 2011 from December 31, 2010.  Net Level 3 assets and liabilities at September 30, 2011 were $379 million or 1% of total assets and liabilities compared to net Level 3 assets and liabilities of $353 million or 1% at December 31, 2010.  The use of internal models for Level 3 assets and liabilities did not affect the Company’s operations, liquidity or capital resources during the period.

Due to market conditions beginning in 2008 which have continued into 2011, the Company used internal models to determine fair value for asset-backed securities backed by home improvement loans.  Using these models instead of an external source resulted in a decrease to unrealized losses of $24 million and $58 million at September 30, 2011 and December 31, 2010, respectively.  The internal models utilized asset-backed index spread assumptions versus credit default spread assumptions used by the external pricing source.

The Company classifies substantially all of its fixed maturity and all of its equity investments as available-for-sale and records them at fair value with the related net gain or loss, net of policyholder related amounts and deferred taxes, being recorded in accumulated other comprehensive income (loss) in the stockholder’s equity section in the accompanying condensed consolidated balance sheets.  The Company recorded an increase in gross unrealized losses and an increase in gross unrealized gains of $3 million and $338 million, respectively, during the three months ended September 30, 2011.  This resulted in a $214 million increase to accumulated other comprehensive income (loss), net of policyholder related amounts and deferred taxes during the three months ended September 30, 2011.  The Company recorded a decrease in gross unrealized losses of $88 million and an increase in gross unrealized gains of $308 million during the three months ended September 30, 2010.  This resulted in a $189 million increase to accumulated other comprehensive income (loss), net of policyholder related amounts and deferred taxes during the three months ended September 30, 2010.  The Company recorded a decrease in gross unrealized losses of $79 million and an increase in gross unrealized gains of $376 million during the nine months ended September

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30, 2011.  This resulted in a $254 million increase to accumulated other comprehensive income (loss), net of policyholder related amounts and deferred taxes during the nine months ended September 30, 2011.  The Company recorded a decrease in gross unrealized losses of $422 million and an increase in gross unrealized gains of $750 million during the nine months ended September 30, 2010.  This resulted in a $563 million increase to accumulated other comprehensive income (loss), net of policyholder related amounts and deferred taxes during the nine months ended September 30, 2010.  All available-for-sale securities with gross unrealized losses at the balance sheet date are subjected to the Company’s process for identification and evaluation of other-than-temporary impairments.

While many unrealized losses have now existed for longer than twelve months, the Company believes this is attributable to general market conditions related to changes in interest rates and credit spreads and not reflective of the financial condition of the issuer or collateral backing the securities.  The continued decrease in unrealized losses and increase in unrealized gains reflects recovery in market liquidity and lower interest rates, although the economic uncertainty in certain asset classes still remains.  The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before the recovery of their amortized cost basis, which may be maturity; therefore, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2011.

During the three and nine-month periods ended September 30, 2011, the Company recorded net other-than-temporary losses recognized in earnings of $6 million on its fixed maturity investments.  During the three and nine-month periods ended September 30, 2010, the Company recorded net other-than-temporary losses recognized in earnings of $1 million and $59 million, respectively, on its fixed maturity investments.

Following the recognition of the other-than-temporary impairment for fixed maturities, the Company accretes the new cost basis to estimated future value over the remaining life of the security based on the future estimated cash flows by adjusting the security’s yields.  See Note 4 to the accompanying condensed consolidated financial statements for a further discussion of impaired fixed maturity investments.

Securities Lending and Cash Collateral Reinvestment Practices

All cash collateral related to the securities lending program, repurchase agreements and dollar repurchase agreement practices is invested in U.S. Government or U.S. Government Agency securities.  Some cash collateral may be invested in short-term repurchase agreements which are also collateralized by U.S. Government or U.S. Government Agency securities.  In addition, the securities lending agent indemnifies the Company against borrower risk, meaning that the lending agent agrees contractually to replace securities not returned due to a borrower default.  As of September 30, 2011 and December 31, 2010, the Company had $5 million and $51 million, respectively, of securities out on loan, $720 million and $657 million, respectively, in short-term repurchase agreements and $1,054 million and $937 million, respectively, in dollar repurchase agreements, all of which are fully collateralized as described above.  The Company does not enter into these types of transactions for liquidity purposes, but rather for yield enhancement on its investment portfolio.

Derivative Counterparty Collateral

At September 30, 2011 and December 31, 2010, the Company received $4 million and $8 million of unrestricted cash collateral, respectively, from derivative counterparties to satisfy collateral netting agreements.  Cash collateral received is included in other assets and the obligation to return is included in other liabilities.  The cash collateral is reinvested in a government money market fund.

Mortgage Loans on Real Estate

The Company’s mortgage loans on real estate are comprised exclusively of domestic commercial collateralized real estate loans.  The mortgage loan portfolio is diversified with regard to geographical markets and commercial real estate property types within the United States.  The Company originates, directly or through correspondents, real estate mortgages with the intent to hold to maturity.  The Company does not generally purchase or sell mortgage loans.  The Company’s portfolio includes loans which are fully

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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.

The weighted average loan-to-value ratio for the Company’s mortgage loans on real estate was 55% and 53% at September 30, 2011 and December 31, 2010, respectively.  The debt service coverage ratio was 2.06 and 2.00 times at September 30, 2011 and December 31, 2010, respectively.  During the nine months ended September 30, 2011 and the year ended December 31, 2010, the Company originated 49 and 29 new loans with aggregate principal balances of $548 million and $345 million, respectively.  At origination, the weighted average loan-to-value ratio was 55% and 50% and the debt service coverage ratio was 2.18 and 2.43 times at September 30, 2011 and December 31, 2010, respectively.

The Company originates interest only and amortizing commercial mortgage loans.  During the nine months ended September 30, 2011 and the year ended December 31, 2010, the Company originated mortgage loans structured with an interest only component in the amount of $297 million and $212 million, respectively, compared to a total mortgage loan portfolio at September 30, 2011 and December 31, 2010 of $2,200 million and $1,722 million, respectively.  The weighted average loan-to-value ratio of the interest only loans originated in 2011 and 2010 was 56% and 48%, respectively.

See Note 4 to the accompanying condensed consolidated financial statements for a further discussion of mortgage loans.

Other Investments

Other investments consist primarily of equity investments, policy loans, short-term investments, limited partnerships and investment in real estate.  The Company anticipates limited participation in equity and real estate markets during 2011.

Derivatives

The Company introduced a guaranteed minimum withdrawal benefit, also referred to as guaranteed lifetime withdrawal benefit, (“GMWB”) product, Great-West® SecureFoundationSM, into the 401(k) markets in 2010.  In the past, the Company had limited use of derivatives; however, with the introduction of the GMWB product combined with the interest rate risk hedging program introduced during 2009, the Company’s use of derivatives has increased with additional usage expected. The Company uses certain derivatives, such as futures, swaps and interest rate swaptions for purposes of managing interest rate, equity, foreign currency exchange risks and fee revenue.  These derivatives, when taken alone, may subject the Company to varying degrees of market and credit risk; however, when used for hedging purposes, these instruments typically reduce risk.  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 which exceeds the value of the collateral held and not to the notional or contractual amounts of the derivatives.  The Company also controls credit risk by entering into derivative transactions only with counterparties with investment grade ratings at the time of the transaction.

See Note 5 to the accompanying condensed consolidated financial statements for a further discussion of the Company’s derivative position.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 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.

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Critical accounting policies are those that management believes are important to the portrayal of the Company’s results of operations and financial condition and which require management to make difficult, subjective and/or complex judgments.  Critical accounting estimates cover accounting and actuarial matters that are inherently uncertain because the future resolution of such matters is unknown.  Many of these policies, estimates and related judgments are common in the insurance and financial services industries.  The Company believes that its most critical accounting estimates include the following:

·Valuation of investments and other-than-temporary impairments.

·Valuation and accounting for derivative instruments.

·Valuation of policy benefit liabilities.

·    Valuation of deferred acquisition costs and value of business acquired.

·    Accounting for employee benefit plans.

·    Accounting for taxes on income.

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, 2010 under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

New Accounting Pronouncements

See Note 2 to the accompanying condensed consolidated financial statements for a discussion of new accounting pronouncements that the Company has recently adopted or will adopt in the future.

Liquidity and Capital Resources

Liquidity refers to a company’s ability to generate sufficient cash flows to meet the 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 risks of defaults and market volatilities.  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 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.  Included in cash flows from operating activities are net sales (purchases) of trading securities of $(33) million and $18 million for the nine-month periods ended September 30, 2011 and 2010, respectively.  The Company intends to reinvest these securities in higher yielding permanent investments.  Liquidity for the Company has remained strong, as evidenced by the amounts of short-term investments and cash that totaled $1,352 million and $969 million as of September 30, 2011 and December 31, 2010, respectively.  In addition, 98% of the bond portfolio carried an investment grade rating at September 30, 2011 and December 31, 2010, thereby providing significant liquidity to the Company’s overall investment portfolio.

The Company continues to be well capitalized, with sufficient borrowing capacity to meet the anticipated needs of its business.  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 $96 million and $92 million of commercial paper outstanding at September 30, 2011 and December 31, 2010, 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

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recent financial market volatility, the Company continued to have the ability to access the capital markets for funds.  The loss of this access in the future would not have a significant impact to the Company’s liquidity as the commercial paper is not used to fund daily operations and is an insignificant amount in relation to total invested assets.

The Company also has available a revolving credit facility agreement, which expires on May 26, 2013, in the amount of $50 million for general corporate purposes.  The Company had no borrowings under this credit facility at September 30, 2011.  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.

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 obligor’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, 2010 under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”.

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Item 4.  Controls and Procedures

(a)As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Accounting Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934).  Based on that evaluation, the Chief Executive Officer and the Chief Accounting Officer have concluded that the Company’s current disclosure controls and procedures are effective in facilitating timely decisions regarding required disclosure of any material information relating to the Company that is required to be disclosed by it in the reports that are filed or submitted under the Securities Exchange Act of 1934.

(b)There have been no changes in the Company’s internal control over financial reporting that occurred during the nine months ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Part II - Other Information

Item 1.  Legal Proceedings

There are no material pending legal proceedings to which the Company or any of its subsidiaries are a party or of which any of their property is the subject.

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 deferred acquisition costs or valuation of business acquired, or recognize impairment in the value of goodwill, 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 and

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

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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, 2010 under Item 1A, “Risk Factors”.  There are no material changes from Risk Factors as previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2010 under Item 1A, “Risk Factors”.

Item 6.  Exhibits

Index to Exhibits

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

Signature

Pursuant to the requirements of the Securities 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/ James H. Van Harmelen	Date:	November 14, 2011
	James H. Van Harmelen, Senior Vice President and Controller
	(Duly authorized Officer and Chief Accounting Officer)

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