Great West Life & Annuity Insurance 10-K 2012 FY Annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2012

OR

o  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)

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o  No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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 June 30, 2012, the aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant was $0.

As of February 1, 2013, 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	Item 1	Business	3
	Item 1A	Risk Factors	13
	Item 1B	Unresolved Staff Comments	18
	Item 2	Properties	18
	Item 3	Legal Proceedings	18
	Item 4	Mine Safety Disclosures	18
Part II	Item 5	Market for Registrant’s Common Equity and Related Stockholder Matters	18
	Item 6	Selected Financial Data	18
	Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 7A	Quantitative and Qualitative Disclosure About Market Risk	37
	Item 8	Financial Statements and Supplementary Data	42
	Item 9	Changes in and Disagreements With Accountants on Accounting and Financial Disclosures	107
	Item 9A	Controls and Procedures	107
	Item 9B	Other Information	107
Part III	Item 10	Directors, Executive Officers and Corporate Governance	107
	Item 11	Executive Compensation	114
	Item 12	Security Ownership of Certain Owners and Management	127
	Item 13	Transactions with Related Persons, Promoters and Certain Control Persons	129
	Item 14	Principal Accounting Fees and Services	130
Part IV	Item 15	Exhibits and Financial Statement Schedules	131
		Signatures	134

2

Part I

Item 1.

Business

As used in this Form 10-K, the “Company” refers to Great-West Life & Annuity Insurance Company, a stock life insurance company originally organized on March 28, 1907 and domiciled in the state of Colorado, and its subsidiaries.

This Form 10-K contains forward-looking statements.  Forward-looking statements are statements not based on historical information and that relate to future operations, strategies, financial results, or other developments.  In particular, statements using words such as “may,” “would,” “could,” “should,” “estimates,” “expected,” “anticipate,” “believe,” or words of similar import generally involve forward-looking statements.  Without limiting the foregoing, forward-looking statements include statements that represent the Company’s beliefs concerning future or projected levels of sales of its products, investment spreads or yields, or the earnings or profitability of the Company’s activities.

Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control and many of which, with respect to future business decisions, are subject to change.  Some of these risks are described in “Risk Factors” in Item 1A of this report.  These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company.  Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments, some of which may be global or national in scope, such as general economic conditions and interest rates, some of which may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation and others of which may relate to the Company specifically, such as credit, volatility and other risks associated with its investment portfolio and other factors.

Readers should also consider other matters, including any risks and uncertainties, discussed in documents filed by the Company and certain of its subsidiaries with the Securities and Exchange Commission.  This discussion should be read in conjunction with, and is qualified by reference to the Company’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report as well as the consolidated financial statements and notes thereto in Item 8, “Financial Statements and Supplementary Data.”

1.1Organization and Corporate Structure

The Company is a direct wholly-owned subsidiary of GWL&A Financial Inc. (“GWL&A Financial”), a Delaware holding company.  The Company is indirectly owned by Great-West Lifeco Inc. (“Lifeco”), a Canadian holding company.  Lifeco operates in the United States primarily through the Company and through Putnam Investments, LLC, and in Canada and Europe through The Great-West Life Assurance Company (“Great-West Life”) and its subsidiaries, London Life Insurance Company (“London Life”) and The Canada Life Assurance Company (“CLAC”).  Lifeco is a subsidiary of Power Financial Corporation (“Power Financial”), a Canadian holding company with substantial interests in the financial services industry.  Power Corporation of Canada (“Power Corporation”), a Canadian holding and management company, has voting control of Power Financial.  Mr. Paul Desmarais, through a group of private holding companies that he controls, has voting control of Power Corporation.

The shares of Lifeco, Power Financial and Power Corporation are traded publicly in Canada on the Toronto Stock Exchange.

1.2Business of the Company

The Company offers life insurance and retirement and investment products to individuals, businesses and other private and public organizations throughout the United States, Puerto Rico, Guam and the United States Virgin Islands.  Through its Individual Markets segment, the Company offers various forms of life insurance, annuity and retirement products.  Through its Retirement Services segment, the

3

Company provides various retirement plan products and investment options as well as comprehensive administrative and record-keeping services for financial institutions and employers which include educational, advisory, enrollment and communication services for employer-sponsored defined contribution plans and associated defined benefit plans.

No customer accounted for 10% or more of the Company’s consolidated revenues during the years 2012, 2011 or 2010.  In addition, no segment of the Company’s business is dependent upon a single customer or a few customers, the loss of which would have a significant effect on it or its business segments’ operations.  The loss of business from any one, or a few, independent brokers or agents would not have a material adverse effect on the Company or its business segments.

During 2010, the Company completed comprehensive planning for its five-year strategic plan.  The five-year strategic plan encompasses nine key initiatives across the organization to accelerate the growth of its business and retain customers.  The implementation of the five-year strategic plan started in 2011 and has continued throughout 2012.

On April 1, 2008, the Company and certain of its subsidiaries completed the sale of substantially all of their healthcare insurance business to a subsidiary of CIGNA Corporation (“CIGNA”).  The Company recognized a gain in the amount of $697 million, net of income taxes, upon completion of the transaction.  The business that was sold, formerly reported as the Company’s Healthcare segment, was the vehicle through which it marketed and administered group life and health insurance to small, mid-sized and national employers.

Individual Markets Segment Principal Products

The Company’s Individual Markets segment distributes life insurance, annuity and retirement products (including individual retirement accounts (“IRAs”)) to both individuals and businesses through various distribution channels. Life insurance products in-force include participating and non-participating term life, whole life, universal life and variable universal life.

IRAs — The Company offers an IRA product as a distribution option for employees terminated from employers sponsoring defined contribution plans.  The Company earns asset-based fees and per account fees for providing administrative and record-keeping services for IRA accounts. For those IRAs invested in external mutual funds, the Company is reimbursed by the external mutual funds for marketing, sales and service costs under various revenue sharing agreements.  For those IRAs invested in proprietary mutual funds, the Company, through its wholly-owned subsidiary Great-West Capital Management, LLC (“Great-West Capital Management”) (formerly known as GW Capital Management LLC), earns an asset-based management fee.

Participating life insurance - Participating policyholders share in the financial results of the participating business in the form of policyholder dividends that reflect the difference between the assumptions used in the premium charged and the actual experience on those policies.  The policyholder dividends can be distributed directly to the policyholders in the form of cash or through an increase in benefits such as paid-up additions.  The Company no longer actively markets participating products.  The participating policyholder earnings that cannot be distributed to the shareholder are not included in the Company’s consolidated net income and are reflected in liabilities in undistributed earnings on participating business in the Company’s consolidated balance sheets.

Term life - Term life insurance products provide coverage for a stated period and generally do not include the accumulation of cash values.  Term life insurance products pay a guaranteed death benefit only if the insured dies within the coverage period.

Whole life - Whole life insurance products provide guaranteed death benefits in exchange for level premium payments for the life of the insured.  Whole life insurance products include the accumulation of cash values.  The policyholder can receive the accumulated cash value as a payment by surrendering the insurance policy before the death of the insured.

Universal life - Universal life insurance products include a cash value component that is credited with interest at regular intervals.  The account balance for the universal life products are held in the

4

Company’s general account.  The Company’s universal life insurance earnings result from the difference between the investment income and interest credited on customer cash values and from differences between charges for mortality and actual death claims.  Universal life cash values are charged for the cost of insurance coverage and for administrative expenses.

Variable universal life - Variable universal life products provide insurance coverage on the same basis as universal life, except that the account balance is directed by the policyholder into either separate account investment options or into the Company’s general account as a fixed option within the variable product.  In the separate account investment options, the policyholder bears the entire risk of the investment results.  The Company’s variable universal life insurance earnings result from asset-based fees, as well as from the difference between fees collected for mortality as compared to actual death claims paid.

Sales of life insurance products typically have initial contract acquisition expenses which are deferred.  These expenses are shown as deferred acquisition costs (“DAC”) in the Company’s consolidated balance sheets and are amortized over the life of the contracts in proportion to the emergence of gross profits or premium revenues recognized.  Therefore, retention is an important factor in profitability and is encouraged through product features.  For example, the Company’s life insurance contracts may impose a surrender charge on policyholder balances withdrawn within the first ten years of the contract’s inception.  The period of time and level of the charge vary by product.

One of the principal markets for the Individual Markets segment is the executive benefits market.  The primary executive benefits products are single premium universal life insurance, registered variable universal life insurance, private placement variable universal life insurance (“PPVUL”) and PPVUL with a stable value guarantee feature.  These executive benefits life insurance policies indirectly fund employee post-retirement benefits and non-qualified benefit plans for executives.

Corporations and community banks are the primary purchasers of the universal life product, while regional and national banks typically purchase the PPVUL product with the stable value guarantee feature.  The single premium universal life insurance, which combines both general account and separate account product features, is being marketed to community and regional banks.  Corporations indirectly funding executive benefits also purchase the registered variable universal life insurance and PPVUL product.  The PPVUL products offer a wide array of equity and bond fund investment options.

Another principal market for the Individual Markets segment is the financial institutions market, which is a partnership between the Company and retail financial institutions to distribute individual life, annuity and retirement products.  Through its institutional partners, the Company has in excess of 17,500 individual branch and brokerage sales representatives who sell its products, as well as direct exposure to online banking customers.  During 2012 and 2011, management focused on meeting the insurance related needs of the growing retiree marketplace by providing wealth transfer solutions to their bank partners’ customers via single premium whole life insurance (“SPWL”) and single premium universal life insurance (“SPUL”).  Additionally, the Company continued its efforts to partner with large financial institutions to provide individual term life insurance.

Retirement Services Segment Principal Products

Through its Retirement Services segment, the Company provides various retirement plan products and investment options as well as comprehensive administrative and record-keeping services for financial institutions and employers, which include educational, advisory, enrollment and communication services for employer-sponsored defined contribution plans and associated defined benefit plans.  Defined contribution plans provide for benefits based upon the value of contributions to, and investment returns on, an individual’s account.  This has been a rapidly growing portion of the retirement marketplace in recent years.

The retirement plan products and investment options offered by the Company include mutual funds and collective trusts, guaranteed interest rate investment products and variable annuity products designed to meet the specific needs of the customer.  In addition, the Company offers both customized annuity and non-annuity products.

5

Mutual funds and collective trusts - The Company earns administration fees under various revenue sharing agreements from external mutual funds and collective trusts for marketing, sales and service costs incurred while providing services to individuals and institutional clients on behalf of the funds.  On proprietary mutual funds and collective trusts, the Company, through its wholly-owned subsidiary Great-West Capital Management, earns an asset-based management fee.

Guaranteed interest rate investment products - On its guaranteed interest rate investment products, the Company earns investment margins on the difference between the income earned on investments in its general account and the interest credited to the participant’s account balance.  The Company’s general account assets support the guaranteed investment products.  The Company also manages separate account fixed interest rate products known as a stable value fund and pooled collective trusts for which it is paid a management fee which is earned by the Company either directly or through its wholly-owned subsidiary Great-West Capital Management.

Variable annuity products - The Company’s variable annuity products provide the opportunity for participants to assume the risks of, and receive the benefits from, the investment of retirement assets.  The variable product assets are invested, as designated by the participant, in separate accounts that in turn invest in shares of underlying funds managed by the Company or its affiliates and by selected external fund managers.  The Company earns fees from the separate account for mortality and expense risks pertaining to the variable annuity contract and/or for providing administrative services.

Administrative and record-keeping services - The Company receives asset-based and/or participant-based fees for providing third-party administrative and record-keeping services to financial institutions and employer-sponsored retirement plans.

Sales of annuity products typically have initial contract acquisition expenses which are deferred.  These expenses are shown as DAC in the Company’s consolidated balance sheets and are amortized over the life of the contracts in proportion to the emergence of gross profits.

The Company’s marketing focus is directed toward providing investment management, advisory services and record-keeping services under Internal Revenue Code Sections 401(a), 401(k), 403(b), 408 and 457 to private corporations, state and local governments, hospitals, non-profit organizations and public school districts.  Through the Company’s wholly-owned, registered subsidiaries, Great-West Capital Management and Advised Assets Group, LLC, the Company provides investment management and advisory services.  Through the Company’s wholly-owned subsidiary FASCore, LLC, the Company targets and partners with other large financial institutions to provide third-party record-keeping and administration services.

Future Policy Benefit Liabilities and Life Insurance In-Force

The amount of fixed annuity products in-force is measured by future policy benefits.  The following table shows group and individual annuity policy benefits supported by the Company’s general account as well as the annuity balances in Retirement Services and Individual Markets separate accounts for the years indicated:

	(In millions)
			Retirement Services		Individual Markets
Year ended	General account		annuity		annuity
December 31,	annuity benefits		separate accounts		separate accounts
2012	$	11,110	$	18,242	$	1,382
2011	10,290		16,447		1,290
2010	9,637		16,225		1,381
2009	8,874		14,288		1,262
2008	8,598		10,403		1,144

6

For most of the general account annuities and for all of the Retirement Services and Individual Markets separate account annuities, policy benefit liabilities are established at the contractholder’s account value, which is equal to cumulative deposits and credited interest, less withdrawals and mortality and expense and/or administrative service charges.

The general account also has some immediate annuities.  The policy benefit liabilities for the immediate annuities are computed on the basis of assumed investment yield, mortality (where payouts are contingent on survivorship) and expenses.  These assumptions generally vary by plan, year of issue and policy duration.  Policy benefit liabilities for immediate annuities without life contingent payouts are computed on the basis of assumed investment yield and expenses.

The following table summarizes individual life insurance future policy benefits, Individual Markets life insurance separate account balances and life insurance in-force prior to reinsurance ceded for the years indicated:

	(In millions)
	Life insurance		Individual Markets
Year ended	future policy		life insurance		Life insurance
December 31,	benefits		separate accounts		in-force
2012	$	12,001	$	4,981	$	123,904
2011	11,182		4,594		127,815
2010	10,432		4,883		131,595
2009	9,756		3,337		137,049
2008	9,183		3,575		142,177

For both the life insurance future policy benefits and the Individual Markets life insurance separate accounts, the future policy benefits are computed on the basis of assumed investment yield, mortality, morbidity and expenses, including a margin for adverse deviation.  These future policy benefits are calculated as the present value of future benefits (including dividends) and expenses less the present value of future net premiums.  The assumptions used in calculating the future policy benefits generally vary by plan, year of issue and policy duration.

Additionally, for both the life insurance future policy benefits and the Individual Markets life insurance separate accounts, policy and contract claim liabilities are established for claims that have been incurred but not reported based on factors derived from past experience.

The aforementioned policy benefit liabilities are computed amounts that, with additions from premiums and deposits to be received and with interest on such liabilities, are expected to be sufficient to meet the Company’s policy obligations (such as paying expected death or retirement benefits or surrender requests) and to generate profits.

Reinsurance

The Company enters into reinsurance transactions as a purchaser of reinsurance for its various insurance products and as a provider of reinsurance for some insurance products.  Reinsurance transactions are assumed from and ceded to affiliated entities and third parties.  When purchasing reinsurance, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding risks to other insurance enterprises under excess coverage, quota share, yearly renewable term, coinsurance and modified coinsurance contracts.  Under the terms of these contracts, the reinsurer agrees to reimburse the Company for the ceded amount in the event a claim is paid.  However, the Company remains liable to its policyholders with respect to the ceded insurance if a reinsurer fails to meet the obligations it assumed.  Accordingly, the Company strives to cede risks to highly rated, well-capitalized companies.  The Company retains an initial maximum of $3.5 million of coverage per individual life. This initial retention limit of $3.5 million may increase due to automatic policy increases in coverage at a maximum rate of $175,000 per annum, with an overall maximum increase in coverage of $1.0 million.  The Company assumes risk from approximately forty insurers and reinsurers by participating in yearly renewable term and coinsurance pool agreements.

7

When assuming risk, the Company seeks to generate revenue while maintaining reciprocal working relationships with these partners as they also seek to limit their exposure to loss on any single life.  Maximum capacity to be accepted or retained by the Company is dictated at the treaty level and is monitored annually to ensure the total risk acquired or retained on any one life is limited to a maximum retention of $4.5 million.

Method of Distribution of Products Within the Individual Markets and Retirement Services Segments

The Individual Markets segment distributes individual life insurance through wholesale and retail sales force, banks, broker-dealers and investment advisors.  It markets IRAs through retail sales staff supported by website and service staff.  Executive benefits products are distributed through wholesalers and specialized benefit consulting organizations.

The Retirement Services segment distributes products to plan sponsors through a subsidiary, GWFS Equities, Inc., as well as through brokers, consultants, advisors, third-party administrators and banks.  Record-keeping and administrative services are distributed through institutional clients.

Competition Within the Individual Markets and Retirement Services Segments

The life insurance, savings and investment marketplaces are highly competitive.  The Company’s competitors include insurance companies, banks, investment advisors, mutual fund companies and certain service and professional organizations.  No individual competitor or small group of competitors is dominant.  Competition focuses on name recognition, service, technology, cost, variety of investment options, investment performance, product features and price and financial strength as indicated by ratings issued by nationally recognized agencies.

Company Outlook

A single brand identity, “Great West Financial,” was introduced across all lines of business.  The clarity of one brand with a focused and well-positioned message will help build name recognition and create stronger brand equity in all Great-West Financial markets.

The nine business initiatives that make up an aggressive five-year strategic plan were implemented in 2012.  These projects include strategies that will increase sales, improve retention and boost assets under management.

Individual Markets Outlook

The Company introduced two retail retirement income products in late 2011 to address the growing demand for guaranteed lifetime income options.  New selling agreements with five distribution partners will expand the reach of these products to new financial institutions market customers.

New brokers were also added to the distribution base for the community bank market, where sales of business-owned life insurance were strong in 2012.  Gains in distributor market share are anticipated to continue this momentum into the future.

During 2012, the Company completed the full implementation of the policy administration system for the executive benefits market.  The new system brings flexibility, enhanced reporting capabilities, streamlined processes, and cost efficiencies, positioning the Company for future success on strategic plan objectives.

The IRA rollover initiative introduced in 2011 to increase asset rollovers by terminated group plan participants gained momentum in 2012 and is expected to continue growth in assets under administration (“AUA”) in the future.

8

Retirement Services Outlook

The Company launched new tools in 2011 and 2012 designed to improve productivity.  New tools better equipped 401(k) sales employees with knowledge and services to enhance their effectiveness with advisors, third-party administrators, and prospects.

To enhance clients’ experience and ultimately increase retention, service functions were re-engineered in 2012 to speed responsiveness.  A new client relationship management system was rolled out, providing a 360-degree view of Great-West Financial’s clients, advancing the client experience.  The new tools are expected to further contribute to sales and growth in the Retirement Services market.

In 2012, the U.S. Conference of Mayors, representing 4,000 municipalities with $6 billion in retirement plan assets, selected Great-West Financial as its preferred retirement plan provider, creating a high-potential channel for new government market business.

An initiative to increase participant account balances boosted roll-ins to existing plans during 2012 and is expected to continue growth in AUA in the future.

Other Segment

The Company’s Other reporting segment is substantially comprised of activity under the assumption reinsurance agreement between Great-West Life & Annuity Insurance Company of South Carolina (“GWSC”) and CLAC (“the GWSC operating segment”), corporate items not directly allocated to the other operating segments and interest expense on long-term debt.

The following table shows future policy benefits and life insurance in-force in the Other segment for the years indicated:

	December 31,
(In millions)	2012		2011		2010		2009		2008
Future policy benefits	$	369	$	356	$	352	$	342	$	321
Life insurance in-force	63,918		68,204		72,581		76,768		80,992

Future policy benefits for the policies in the Other segment are calculated as the present value of future benefits (including dividends) and expenses less the present value of future net premiums.  The assumptions used in calculating the future policy benefits generally vary by plan, year of issue and policy duration. Future policy benefits are also established for claims that have been incurred but not reported based on factors derived from past experience.

1.3Investment Operations

The Company’s investment division manages and administers the investments of its general and separate accounts in support of the cash and liquidity requirements of its insurance and investment products.

The Company’s principal general account investments are in fixed maturities and mortgage loans on real estate, all of which are exposed to three primary sources of investment risk: credit, interest rate and market valuation.  Total investments at December 31, 2012 of $51 billion were comprised of general account investment assets of $26 billion and separate account assets of $25 billion.  Total investments at December 31, 2011 of $46 billion were comprised of general account investment assets of $24 billion and separate account assets of $22 billion.

The Company’s general account investments are in a broad range of asset classes but consist primarily of domestic fixed maturities.  Fixed maturity investments include public and privately placed corporate bonds, government bonds and mortgage-backed and asset-backed securities.  The Company’s mortgage loans on real estate are comprised exclusively of domestic commercial collateralized real

9

estate loans diversified with regard to geographical markets and commercial real estate property types within the United States.

The Company manages the characteristics of its investment assets, such as liquidity, currency, yield and duration, to reflect the underlying characteristics of related insurance and policyholder liabilities that vary among its principal product lines.  The Company observes strict asset and liability matching guidelines designed to ensure that the investment portfolio will appropriately meet the cash flow requirements of its liabilities.  The Company uses derivative financial instruments for risk management purposes associated with certain invested assets and policy liabilities, not for speculative purposes.

The Company routinely monitors and evaluates the status of its investments in light of current economic conditions, trends in capital markets and other factors.  These other factors include investment size, quality, concentration by issuer and industry and other diversification considerations relevant to the Company’s fixed maturity investments.

The Company reduces credit risk for the portfolio as a whole by investing primarily in investment grade fixed maturities.  At December 31, 2012 and 2011, 98% and 99%, respectively, of the Company’s fixed maturity portfolio carried an investment grade rating.

1.4  Regulation

Insurance Regulation

The Company and its insurance subsidiaries are licensed in and regulated by all 50 states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands to transact life insurance business, accident and health insurance business and annuity business.  The extent of such regulation varies, but most jurisdictions have laws and regulations governing the business conduct of insurers as well as the financial aspects of insurers, including standards of solvency, statutory reserves, reinsurance and capital adequacy. In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and certain other related materials and, for certain lines of insurance, the approval of rates.  Such statutes and regulations also prescribe the permitted types and concentration of investments.

The Company and certain of its subsidiaries are subject to, and comply with, insurance holding company regulations in applicable states.  The Company’s insurance subsidiaries are each required to file reports, generally including detailed annual financial statements, with insurance regulatory authorities in each of the jurisdictions in which they do business, and their operations and accounts are subject to periodic examination by such authorities.  These subsidiaries must also file, and in many jurisdictions and in some lines of insurance, obtain regulatory approval for rules, rates and forms relating to the insurance written in the jurisdictions in which they operate.

The National Association of Insurance Commissioners (the “NAIC”) has established a program of accrediting state insurance departments.  NAIC accreditation permits accredited states to conduct periodic examinations of insurers domiciled in such states.  NAIC-accredited states will not accept reports of examination of insurers from unaccredited states, except under limited circumstances. As a direct result, insurers domiciled in unaccredited states may be subject to financial examination by accredited states in which they are licensed, in addition to any examinations conducted by their domiciliary states.  The Colorado Department of Insurance, the Company’s principal insurance regulator, has received this NAIC accreditation.

State and federal insurance and securities regulatory authorities and other state law enforcement agencies and attorneys general from time to time make inquiries regarding compliance by the Company and its insurance subsidiaries with insurance, securities and other laws and regulations regarding the conduct of the Company’s insurance and securities business.

10

A discussion of certain regulations the Company is subjected to follows:

·Insurance Company Regulation - The Company and its insurance subsidiaries are subject to regulation under the insurance company laws of various jurisdictions.  The insurance company laws and regulations vary from jurisdiction to jurisdiction, but generally require an insurance company that is a member of an insurance holding company system (two or more affiliated persons, one or more of which is an insurer) to register with state regulatory authorities and to file with those authorities certain reports, including information concerning their capital structure, ownership, financial condition, certain intercompany transactions and general business operations.  In addition, various state jurisdictions have broad administrative powers with respect to such matters as admittance of assets, premium rating methodology, policy forms, establishing reserve requirements and solvency standards, maximum interest rates on life insurance policy loans and minimum rates for accumulation of surrender values, the type and amounts and valuation of investments permitted.  State insurance statutes also typically place restrictions and limitations on the amount of dividends or other distributions payable by insurance companies to their parent companies, as well as on transactions between an insurer and its affiliates.

·Guaranty Associations and Similar Arrangements - Most of the jurisdictions in which the Company and its insurance subsidiaries are permitted to transact business require life insurers doing business within their jurisdiction to participate in guaranty associations, which are organized to pay certain contractual insurance benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers.  These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged.  Some states permit member insurers to recover assessments paid through full or partial premium tax offsets.  The Company has historically recovered more than half of the guaranty assessments through these offsets.

·Statutory Insurance Examinations - As part of their regulatory oversight process, state insurance departments conduct periodic detailed examinations of the books, records, accounts and business practices of insurers domiciled in their states.  During the three-year period ended December 31, 2012, these examinations produced no significant adverse findings regarding the operations or accounts of the Company and its insurance subsidiaries.

·Policy and Contract Reserve Sufficiency Analysis - Annually, the Company and its insurance subsidiaries are required to conduct an analysis of the sufficiency of all statutory reserves.  In each case, a qualified actuary must submit an opinion which states that the statutory reserves, when considered in light of the assets held with respect to such reserves, make good and sufficient provision for the associated contractual obligations and related expenses of the insurer. If such an opinion cannot be provided, the insurer must set up additional reserves by moving funds from surplus.  Since inception of this requirement, the Company and its insurance subsidiaries, which are required by their states of domicile to provide these opinions, have provided such opinions without qualification.

·Surplus and Capital - The Company and its insurance subsidiaries are subject to the supervision of the regulators in each jurisdiction in which they are licensed to transact business.  Regulators have discretionary authority, in connection with the continued licensing of these insurance subsidiaries, to limit or prohibit sales to policyholders if, in their judgment, the regulators determine that such insurer has not maintained the minimum surplus or capital or that the further transaction of business will be hazardous to policyholders.  As of December 31, 2012, the Company and its insurance subsidiaries have surplus and capital in excess of that required by the regulators.

·Risk-Based Capital (“RBC”) - The Company and its insurance subsidiaries are subject to certain RBC requirements and report their RBC based on a formula calculated by applying factors to various asset, premium and statutory reserve items.  The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk and business risk.  The formula is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action and not as a means to rank insurers generally.  As of the date of the most recent statutory financial statements filed with insurance regulators, the total adjusted capital of the Company and its insurance subsidiaries was in excess of the RBC Company Action Level amount.

11

·Regulation of Investments - The Company and its insurance subsidiaries are subject to state laws and regulations that require diversification of its investment portfolios and limit the amount of investments in certain asset categories, such as below investment grade fixed income securities, other equity investments and derivatives.  Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of measuring statutory surplus and, in some instances, would require divestiture of such non-qualifying investments. As of the date of the most recent statutory financial statements filed with insurance regulators, the Company did not have any non-admitted assets as a result of investments exceeding regulatory limitations.

·Federal Initiatives - Although the federal government generally does not directly regulate the insurance business, federal initiatives often have an impact on the Company’s business in a variety of ways.  From time to time, federal measures are proposed that may significantly affect the Company’s business.  At the present time, management is not aware of any federal legislative initiatives that, if enacted, would materially impact the Company’s business, results of operations or financial condition.

·Broker-Dealer and Securities Regulation - One of the Company’s subsidiaries, GWFS Equities, Inc., is a non-clearing broker-dealer and subject to certain regulatory provisions by the U.S. Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”).  This subsidiary acts as the underwriter and distributor for variable annuity contracts and variable life insurance policies issued by the Company and for Great-West Funds, Inc. (formerly known as Maxim Series Funds, Inc.), an affiliated open-end management investment company.

ERISA and Other Considerations

The Company provides products and services to certain employee benefit plans that are subject to the Employee Retirement Income Security Act (“ERISA”), or the Internal Revenue Code of 1986, as amended (the “Code”).  As such, the Company’s activities are subject to the restrictions imposed by ERISA and the Code, including the requirement under ERISA that fiduciaries must perform their duties solely in the interests of ERISA plan participants and beneficiaries and the requirement under ERISA and the Code that fiduciaries may not cause a covered plan to engage in prohibited transactions with persons who have certain relationships with respect to such plans. The applicable provisions of ERISA and the Code are subject to enforcement by the Department of Labor, the Internal Revenue Service and the Pension Benefit Guaranty Corporation.

1.5  Ratings

The Company is rated by a number of nationally recognized rating agencies.  The ratings represent the opinion of the rating agencies regarding the financial strength of the Company and its ability to meet ongoing obligations to policyholders.  The Company’s financial strength ratings as of the date of this filing are as follows:

Rating agency	Measurement	Current rating
A.M. Best, Inc.	Financial strength, operating performance and business profile	A+ (1)
Fitch Ratings	Financial strength	AA (2)
Moody’s Investor Service, Inc.	Financial strength	Aa3 (3)
Standard & Poor’s Rating Services	Financial strength	AA (2)

(1)  Superior (highest category out of ten categories).

(2)  Very Strong (second highest category out of nine categories).

(3)  Excellent (second highest category out of nine categories).

12

1.6 Employees

The Company had approximately 3,300 and 3,200 employees at December 31, 2012 and 2011, respectively.

1.7 Available Information

The Company files periodic reports and other information with the SEC.  Such reports and other information may be obtained by visiting the Public Reference Room of the SEC at its Headquarters Office, 100 F Street, N.E., Room 1580, Washington D.C. 20549 or by calling the SEC at 1-202-551-8090 (Public Reference Room) or 1-800-SEC-0330 (Office of Investor Education and Advocacy).  In addition, the SEC maintains an Internet website (www.sec.gov) that contains reports and other information regarding issuers that file electronically with the SEC, including the Company.

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 industry in which the Company operates is highly competitive.  The Company’s competitors include insurance companies, mutual fund companies, banks, investment advisors and certain service and professional organizations.  Although there has been consolidation in some sectors, no one competitor is dominant.  Customer retention is a key factor for continued profitability.  Management cannot be certain that the Company will be able to maintain its current competitive position in the markets in which it operates, or that it will be able to expand its operations into new markets.  If the Company fails to do so, its business, results of operations and financial condition could be materially and adversely affected.

The insurance and financial services industries are heavily regulated and changes in regulation may reduce profitability.

Federal and state regulatory reform that increases the compliance requirements imposed on the Company or that changes the way that the Company is able to do business may significantly harm its business or adversely impact the results of operations in the future.  It is not possible to predict whether future legislation or regulation adversely affecting the Company’s business will be enacted and, if enacted, the extent to which such legislation will have an effect on the Company or its competitors.  Furthermore, there can be no assurance as to which of the Company’s specific products would be impacted by any such legislative or regulatory reform.

The Company’s operations and accounts are subject to examination by the Colorado Department of Insurance and other regulators at specified intervals.  The NAIC has also prescribed RBC rules and other financial ratios for life insurance companies.  The calculations set forth in these rules are used by regulators to assess the sufficiency of an insurer’s capital and measure the risk characteristics of an insurer’s assets, liabilities and certain off-balance sheet items.  RBC is calculated by applying factors to various asset, premium and liability items.  Although the Company has risk-based capital levels well in excess of those required by its regulators, there can be no assurances made that it will continue to maintain these levels.

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.

The Company is rated by a number of nationally recognized rating agencies.  The ratings represent the opinion of the rating agencies regarding the Company’s financial strength and its ability to meet ongoing obligations to policyholders.  Claims paying ability and financial strength ratings are factors in

13

establishing the competitive position of insurers.  A rating downgrade, or the potential for such a downgrade, of the Company or any of its rated insurance subsidiaries could, among other things, materially increase the number of policy surrenders and withdrawals by policyholders of cash values from their policies, adversely affecting relationships with broker-dealers, banks, agents, wholesalers and other distributors of its products and services.  This may result in cash payments requiring the Company to sell invested assets, including illiquid assets such as privately placed fixed maturity investments and mortgage loans on real estate, at a price that may result in realized investment losses.  These cash payments to policyholders result in a decrease in total invested assets and a decrease in net income.  Among other things, early withdrawals may also cause the Company to accelerate amortization of DAC and value of business acquired (“VOBA”), reducing net income.  In addition, a significant downgrade may negatively impact new sales and adversely affect the Company’s ability to compete and thereby have a material effect on its business, results of operations and financial condition.  Negative changes in credit ratings may also increase the Company’s cost of funding.

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 establishes and carries, as a liability, reserves based on estimates of how much it will need to pay for future benefits and claims.  Future policy benefits do not represent an exact calculation of liability.  Rather, future policy benefits represent an estimate of what management expects the ultimate settlement and administration of benefits will cost.  These estimates, which generally involve actuarial projections, are based upon management’s assessment of facts and circumstances then known, as well as estimates of future trends in persistency (how long a contract stays with the Company), mortality, judicial theories of liability, interest rates and other factors.  These variables are affected by both internal and external events, such as changes in market and interest rate conditions, catastrophic events, inflation, judicial trends and legislative changes.  Many of these items are not directly quantifiable in advance.  The Company’s life insurance products are exposed to the risk of catastrophic events, such as a pandemic, terrorism, or other such events that cause a large number of deaths.  Additionally, there may be a significant reporting delay between the occurrence of an insured event and the date it is reported to the Company.

The inherent uncertainties of estimating policy and contract claim liabilities are greater for certain types of liabilities, particularly those in which the various considerations affecting the type of claim are subject to change and in which long periods of time may elapse before a definitive determination of liability is made.  Liability estimates including estimated premiums the Company will receive over the assumed life of the policy are continually refined in a regular and ongoing process as experience develops and further claims are reported and settled.  Adjustments to policy benefit liabilities are reflected in the Company’s consolidated statement of income in the period in which adjustments are determined.  Because setting policy benefit liabilities is inherently uncertain, there can be no assurance that current liabilities will prove to be adequate in light of subsequent events.

The Company may be required to accelerate the amortization of DAC or VOBA, or recognize impairment in the value of goodwill, which could adversely affect its results of operations and financial condition.

DAC represents the costs that vary with and are related primarily to the successful acquisition of new insurance and annuity contracts and are amortized over the expected lives of the related contracts based upon the level and timing of either gross profits or gross premiums.  VOBA represents the present value of future profits associated with acquired insurance, annuity and investment-type contracts and is amortized over the expected lives of the related contracts based upon the level and timing of either gross profits or gross premiums.  Goodwill represents the excess of the amounts the Company paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition.  The Company, on an ongoing basis, tests the DAC and VOBA recorded on the consolidated balance sheets to determine if these amounts are recoverable under current assumptions.  In addition, management regularly reviews the estimates and assumptions underlying DAC and VOBA for those products for which DAC and VOBA are amortized in proportion to gross profits or gross premiums.  The Company tests goodwill for impairment at least annually based upon estimates of the

14

fair value of the reporting unit to which the goodwill relates.  Given changes in facts and circumstances, these tests and reviews could lead to reductions in DAC, VOBA and/or goodwill that could have an adverse effect on the 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.

The Company purchases reinsurance by transferring, or ceding, part of the risk it assumes to a reinsurance company in exchange for part of the premium it receives in connection with the risk.  The part of the risk the Company retains for its own account is known as the retention.  Through reinsurance, the Company has the contractual right to collect the amount above its retention from its reinsurers.  Although reinsurance makes the reinsurer liable to the Company to the extent the risk is transferred or ceded to the reinsurer, it does not relieve it of its liability to its policyholders.  Accordingly, the Company bears credit risk with respect to its reinsurers.  Management cannot make assurances that the Company’s reinsurers will pay all of their reinsurance claims, or that they will pay claims on a timely basis.  If the Company’s reinsurers cease to meet their obligations, whether because they are in a weakened position as a result of incurred losses or otherwise, the Company’s results of operations, financial position and cash flows could be materially adversely affected.

As related to the Company’s reinsurance facilities, there are no assurances that the Company can maintain its current reinsurance facilities or that it can obtain other reinsurance facilities in adequate amounts and at favorable rates.  If the Company is unable to obtain new reinsurance facilities, either its net exposures would increase or, if it is unwilling to bear an increase in net exposures, it would have to reduce the level of its underwriting commitments.  Either of these potential developments could have a material adverse effect on the Company’s business, results of operations and financial position.

Interest rate fluctuations could have a negative impact on results of operations and financial condition.

In periods of rapidly increasing interest rates, policy surrenders and withdrawals may increase.  Premiums in flexible premium policies may decrease as policyholders seek investments with higher perceived returns.  This activity may result in the Company’s making cash payments, requiring that it sell invested assets at a time when the prices of those assets are adversely affected by the increase in market interest rates.  Among other things, early withdrawals may also cause the Company to accelerate the amortization of DAC and VOBA, reducing net income.

During periods of sustained low interest rates, life insurance and annuity products may be affected by increased premium payments on products with flexible premium features and a higher percentage of insurance policies remaining in-force from year to year.  During such a period, investment earnings may be lower because the interest earnings on new fixed income investments will likely have declined with the market interest rates.  Although the Company invests in a broad range of asset classes, it is primarily invested in domestic fixed income securities.  Accordingly, during periods of sustained low interest rates, net income may decline as a result of a decrease in the spread between the earned rate on the Company’s assets and either the interest rates credited to policyholders or the rates assumed in reserve calculations.  Several products are at or approaching their minimum guaranteed credited rate, which could have a negative effect on net income due to spread compression.

The Company began an interest rate risk hedging program during the fourth quarter of 2009 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.  In February 2012, the Company significantly decreased its interest rate risk hedging program.  Although the Company engages in hedging activities including investing in interest rate derivatives, there can be no assurance that it would be fully insulated from realizing any losses on sales of securities.  In addition, regardless of whether the Company realized an investment loss, potential withdrawals would produce a decrease in invested assets, with an adverse effect on future earnings.

15

Market fluctuations and general economic conditions may adversely affect results of operations and financial condition.

The risk of fluctuations in market value of substantially all of the separate account assets is borne by the policyholders.  The Company’s fee income for administering separate account assets, however, is generally set as a percentage of those assets.  Accordingly, fluctuations in the market value of separate account assets may result in fluctuations in revenue from policy charges.

The Company manages or administers its general and separate accounts in support of cash and liquidity requirements of its insurance and investment products.  The Company’s general account investment portfolio is diversified over a broad range of asset classes but consists primarily of domestic fixed income investments.  The fair value of these and other general account invested assets fluctuate depending upon, among other factors, general economic and market conditions.  In general, the market value of the Company’s general account fixed maturity securities portfolio increases or decreases in inverse relationship with fluctuations in interest rates.

The occurrence of a major economic downturn, acts of corporate malfeasance or other events that adversely affect the issuers of the Company’s investment securities could cause the value of these securities and net income to decline and the default rate of the fixed maturity securities to increase.  A ratings downgrade affecting particular issuers or securities could have a similar effect.  Any event reducing the value of these securities other than on a temporary basis could have an adverse effect on the results of operations and financial condition.

Additionally, the Company may, from time to time, for business, regulatory, or other reasons, elect or be required to sell certain of its general account invested assets at a time when their fair values are less than their original cost, resulting in realized capital losses, which would reduce net income.

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.

Changes in U.S. federal income tax law could make some of the Company’s products less attractive to consumers.  For example, the following events could adversely affect the Company’s business:

·Changes in tax laws that would reduce or eliminate tax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance products;

·Reductions in the federal income tax that investors are required to pay on long-term capital gains and on some dividends paid on stock may provide an incentive for some of the Company’s customers and potential customers to shift assets into mutual funds and away from products, including life insurance and annuities, designed to defer taxes payable on investment returns;

·Changes in applicable regulations that could restrict the ability of some companies to purchase certain business-owned products;

·Changes in the availability of, or rules concerning the establishment, operation and taxation of, Section 401, 403(b), 408 and 457 plans; and

·Repeal of the federal estate tax.

The Company cannot predict whether any other legislation will be enacted, what the specific terms of any such legislation will be or how, if at all, this legislation or any other legislation could have an adverse effect on its results of operations or financial condition.

Congress, as well as state and local governments, also considers from time to time legislation that could increase the Company’s tax costs.  If such legislation is adopted, the results of operations could be adversely impacted.

16

The Company may be subject to litigation resulting in substantial awards or settlements and this may adversely affect its reputation and results of operations.

In recent years, life and accident insurance and financial service companies have been named as defendants in lawsuits, including class actions.  A number of these lawsuits have resulted in substantial jury awards and settlements.  There can be no assurance that any future litigation relating to matters such as the provision of insurance coverage or pricing and sales practices will not have a material adverse affect on the Company’s results of operations or financial position.

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.

Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events. Management has devoted significant resources to develop the Company’s risk management and disaster recovery policies and procedures.  However, policies and procedures may not be fully effective and may leave the Company exposed to unidentified and unanticipated risks.  The Company may be subject to disruptions of its operating systems or its ability to conduct business from events that are wholly or partially beyond its control such as a natural catastrophe, act of terrorism, pandemic, or electrical/telecommunications outage.  A failure of the computer systems or a compromise of their security could also subject the Company to regulatory sanctions or other claims, harm its reputation, interrupt operations and adversely affect its business, results of operations and financial condition.

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

The Company distributes its life and savings products through a variety of distribution channels, including brokers, independent agents, consultants, retail financial institutions and its own internal sales force. In some areas the Company generates a significant portion of its business through third-party arrangements.  Management periodically negotiates provisions and renewals of these relationships and there can be no assurance that such terms will remain acceptable to either party.  An interruption in the continuing relationship with certain of these third parties could materially affect the Company’s ability to market its products.  The Company must attract and retain productive internal sales representatives to sell its products.  If the Company is unsuccessful in attracting and retaining sales representatives with demonstrated abilities, its results of operations and financial condition could be adversely affected.

A failure in cyber or information security systems could result in a loss or disclosure of confidential information, damage the Company’s reputation and could impair its ability to conduct business effectively.

The Company depends heavily upon computer systems to provide reliable service, as a significant portion of the Company’s operations relies on the secure processing, storage and transmission of confidential or proprietary information and complex transactions.  Despite the implementation of a variety of security measures, the Company’s computer systems could be subject to physical and electronic break-ins, cyber attacks and similar disruptions from unauthorized tampering, including threats that may come from external factors, such as governments, organized crime, hackers and other third parties, or may originate internally from within the Company.

If one or more of these events occurs, it could potentially jeopardize the confidential or proprietary information, including personally identifiable non-public information, processed and stored in, and transmitted through, the computer systems and networks.  It could also potentially cause interruptions or malfunctions in the operations of the Company, its customers, or other third parties.  This could result in damage to the Company’s reputation, financial losses, litigation, increased costs, regulatory penalties and/or customer dissatisfaction or loss.  Although steps have been taken to prevent and detect such attacks, it is possible that the Company may not become aware of a cyber incident for some time after it occurs, which could increase its exposure to these consequences.

17

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

The Company’s corporate office facility is comprised of an 882,000 square foot complex located in Greenwood Village, Colorado.  The Company owns its corporate office facilities.   At December 31, 2012, the Company leased approximately 188,000 square feet of the complex to CIGNA for a lease period expiring on March 31, 2018.  The Company also leases sales and administrative offices throughout the United States.  Management believes that the Company’s properties are suitable and adequate for its current and anticipated business operations.

Item 3.

Legal Proceedings

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

Item 4.

Mine Safety Disclosures

Not applicable.

Part II

Item 5.

Market for Registrant’s Common Equity and Related Stockholder Matters

5.1Equity Security Holders and Market Information

There is no established public trading market for the Company’s common equity.  GWL&A Financial is the sole shareholder of the Company’s common equity securities.

5.2Dividends

In the three most recent fiscal years, the Company has paid dividends on its common shares.  Dividends paid on the Company’s common stock were $184 million, $206 million and $161 million during the years ended December 31, 2012, 2011 and 2010, respectively.

On February 1, 2013, the Board of Directors declared a quarterly dividend for the first quarter of 2013 of $44 million to be paid to the Company’s sole shareholder, GWL&A Financial. The dividend is payable on March 29, 2013.

Under Colorado law, the Company cannot, without the approval of the Colorado Commissioner of Insurance, pay a dividend if as a result of such payment, the total of that dividend and all dividends paid in the preceding twelve months, would exceed the greater of (i) 10% of the Company’s statutory surplus as regards policyholders as of the preceding year ended December 31; or (ii) the Company’s statutory net gain, not including realized capital gains, for the twelve-month period ending the preceding December 31 not including pro rata distributions of the Company’s own securities.

Item 6.

Selected Financial Data

The following is a summary of selected consolidated financial information for the Company.  The information should be read in conjunction with and is qualified in its entirety by the information contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”

18

and the consolidated financial statements and notes thereto appearing in Item 8, “Financial Statement and Supplementary Data.”

The selected consolidated financial information for the years ended December 31, 2012, 2011 and 2010 and at December 31, 2012 and 2011 has been derived in part from the Company’s audited consolidated financial statements included in Item 8.  The selected consolidated income statement data for the years ended December 31, 2009 and 2008 and the selected consolidated balance sheet data at December 31, 2010, 2009 and 2008 have been derived in part from the Company’s consolidated financial statements not included elsewhere herein.

In October 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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 provided guidance and modifies the definition of the types and nature of costs incurred by insurance enterprises that can be capitalized in connection with the successful acquisition of new or renewal insurance contracts.  Further, ASU No. 2010-26 clarified which costs may not be capitalized as deferred acquisition costs (“DAC”).  ASU No. 2010-26 was effective for interim and annual periods in fiscal years beginning after December 15, 2011 with early adoption permitted.  The Company adopted ASU No. 2010-26 for its fiscal year beginning January 1, 2012 and applied the retrospective method of adoption to year-end 2004.  Any adjustment prior to 2004 was impracticable.

	As of and for the year ended December 31,
(In millions)	2012		2011(2)		2010 (2)			2009 (2)		2008 (2)
Total revenues	$	2,266	$	2,193	$	2,404		$	2,028	$	2,011
Total benefits and expenses (2)	1,893		1,897		2,138			1,882		1,502
Income from continuing operations (2)	373		296		266			146		509
Provision for income taxes (2)	135		94		68			34		74
Income (loss) from discontinued operations (1)	—		—		(2		)	—		668
Net income (2)	$	238	$	202	$	196		$	112	$	1,103
Dividends declared	$	184	$	206	$	161		$	25	$	1,772
Investment assets	$	26,110	$	23,995	$	23,069		$	20,376	$	18,082
Separate account assets	24,606		22,331		22,489			18,887		15,122
Total assets (2)	52,819		48,212		47,525			41,715		36,044
Due to parent and affiliates	544		539		537			538		534
Total stockholder’s equity (2)	2,136		1,914		1,714			1,267		477

(1) See Item 1.2, “Business of the Company” for a discussion of the Company’s discontinued operations.

(2) As adjusted for the retrospective adoption of ASU No. 2010-26. A summary of the effects of the adoption of ASU No. 2010-26 on the Company’s consolidated financial statements is in Note 1 in Item 8

Item  7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of financial condition and results of operations of the Company for the three years ended December 31, 2012 follows.  This management discussion and analysis should be read in conjunction with the financial data contained in Item 6, “Selected Financial Data,” and in Item 8, “Financial Statements and Supplementary Data.”

Certain statements in this report constitute forward-looking statements. See “Business” in Item 1 of this report for additional factors relating to these statements, and see “Risk Factors” in Item 1A of this report for a discussion of certain risk factors applicable to the business and its financial condition and results of operations.

19

7.1  Executive Summary

The Company and its subsidiaries are providers of insurance and other financial service products to individual, corporate, institutional and government customers.

The Company’s operations are organized into three reporting segments: Individual Markets, Retirement Services and Other.  Management considers the ability to continue to expand its presence in the United States defined contribution and institutional insurance markets to be its primary points of focus.  The life insurance, savings and investments marketplace is also highly competitive.  Competitors include insurance companies, banks, investment advisors, mutual fund companies and certain service and professional organizations.

The amounts presented in the “Company Results of Operations” for the years ended December 31, 2011 and prior have been adjusted for the retrospective adoption of ASU No. 2010-26.  A summary of the effects of the adoption of ASU No. 2010-26 on the Company’s consolidated financial statements is in Note 1 in Item 8, “Financial Statements and Supplementary Data.”

During 2011, the Company introduced a single premium universal life (“SPUL”) product as an alternative to the single premium whole life (“SPWL”) product previously offered.  The decision to introduce the SPUL product was based on market conditions including prevailing interest rates.  The SPWL product is considered an insurance contract, and SPWL sales are recognized as premium income.  Conversely, the SPUL product is considered an investment contract, and SPUL sales are recognized as deposits rather than as premium income.  Due to the change in product mix sold in 2012, premium income decreased as sales of the SPWL product marketed through banks decreased by $88 million and were replaced by sales of the SPUL product, which recorded deposits due to sales of $451 million for the year ended December 31, 2012, as compared $196 million for the year ended December 31, 2011.

Current Market Conditions

During 2012, the financial markets continued to show improvement and recovery from the severe market downturn experienced in the latter part of 2008 and 2009.  As a result, the S&P 500 index ended 2012 up by 13% as compared to 2011 and 2011 was flat when compared to 2010.  The average of the S&P 500 index during the year ended December 31, 2012 was up by 9% when compared to the average for the year ended December 31, 2011 and the average was up by 11% for the year ended December 31, 2011 when compared to the average for the year ended December 31, 2010.

	Years ended December 31,
S&P 500 Index	2012	2011	2010	2009	2008	2007
Index Close	1,426	1,258	1,258	1,115	903	1,468
Index Average	1,379	1,268	1,140	948	1,220	1,477

Variable asset-based fees earned by the Company fluctuate with changes in participant account balances.  Participant account balances change due to cash flow and unrealized market gains and losses, which are primarily associated with changes in the United States equities market.  Fee income increased by $49 million, or 10%, to $536 million for the year ended December 31, 2012 when compared to 2011.  The increase is primarily related to higher variable fee income as a result of higher average account balances due to the improved average performance of the U.S. equities market.

During the year ended December 31, 2012, the Company recorded net other-than-temporary losses recognized in earnings of $5 million on its available-for-sale fixed maturity investments primarily related to asset-backed investments secured by home equity loans.  A continued recovery in market liquidity and lower interest rates have resulted in improved market values for the Company’s fixed maturity investments.  The Company has recorded a decrease in gross unrealized losses of $121 million and an increase in gross unrealized gains of $308 million during the year ended December 31, 2012.  This resulted in an increase to accumulated other comprehensive income (loss), net of policyholder related amounts and deferred taxes.

20

7.2  Summary of Critical Accounting 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.

Critical accounting estimates are those that management believes are important to the portrayal of the Company’s results of operations and financial condition and which require them 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 derivatives in the absence of quoted market values;

·Impairment of investments;

·Valuation of policy benefit liabilities; and

·Valuation of DAC and VOBA

Valuation of investments and derivatives in the absence of quoted market values

The Company’s investments are in fixed maturity investments, mortgage loans on real estate, policy loans and limited partnership interests and other investments. The Company’s investments are exposed to three primary sources of risk: credit, interest rate and market valuation. The financial statement risks, stemming from such investment risks, are those associated with the determination of fair values.

The fair values for fixed maturity investments are based upon market prices from independent pricing services.  In cases where market prices are not readily available, such as for private fixed maturity investments, fair values are estimated by the Company.  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.

The fair value of derivatives is determined by quoted market prices or through the use of pricing models.  The determination of fair value, when quoted market values are not available, is based on valuation methodologies and assumptions deemed appropriate under the circumstances.  Essential to the analysis of fair value is the risk of counterparty default.  Values can also be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, market volatility and liquidity.

Impairment of investments

Assumptions and estimates about the issuer’s operations and ability to generate future cash flows are inherent in management’s evaluation of investments for other-than-temporary impairments (“OTTI”).  The assessment of whether an OTTI has occurred on securities where management does not intend to sell the investment and it is not more likely than not the Company will be required to sell the 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 of each individual security.  Management considers a wide range of factors 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.  While all available information is taken into account, it is difficult to predict the ultimate recoverable amount from a

21

distressed or impaired security.  The evaluation of impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings.  The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition or near term recovery prospects, the effects of changes in interest rates or credit spreads and the recovery period.

If an OTTI has occurred, the impairment amount is bifurcated into two components: the amount related to the credit loss and the amount attributed to other factors (referred to as the non-credit portion).  The calculation of expected cash flows utilized during the impairment evaluation and bifurcation process is determined using judgment and the best information available to the Company including default rates, credit ratings, collateral characteristics and current levels of subordination.

The determination of the calculation and the adequacy of the mortgage provision 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 mortgage provision allowance 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.

Valuation of policy benefit liabilities

The Company establishes liabilities for amounts payable under insurance policies and annuity contracts.  Generally, amounts are payable over an extended period of time and related liabilities are calculated as the present value of future expected benefits to be paid, reduced by the present value of future expected premiums.  Such liabilities are established based upon methods and underlying assumptions in accordance with GAAP and applicable actuarial standards.  Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, policy lapse, renewal, retirement, investment returns, inflation, expenses and other contingent events as appropriate to the respective product type.  These assumptions are established at the time the policy is issued and are intended to estimate the experience for the period the policy benefits are payable.  Utilizing these assumptions, liabilities are established on a block of business basis.  If experience is less favorable than the assumptions employed, additional liabilities may be required, resulting in a charge to current period earnings.

Valuation of DAC and VOBA

The Company incurs significant costs in connection with acquiring new and renewal insurance business.  DAC varies with and relates to costs that consist primarily of commissions and agency and policy issue expenses.  VOBA is an intangible asset that reflects the estimated fair value of in-force life insurance contracts acquired and represents the portion of the purchase price allocated to the value of the right to receive future cash flows from the acquired business.  VOBA is based upon actuarially determined projections, by block of business, of future policy and contract charges, premiums, mortality and morbidity, performance, surrenders, operating expenses, investment returns and other factors.  DAC and VOBA are amortized over the expected lives of the related contracts based upon the level and timing of either gross profits or gross premiums, depending upon the type of contract as discussed below.  The recovery of both DAC and VOBA is dependent upon the future profitability of the related business.

DAC and VOBA associated with annuity and investment-type products are being amortized over the life of the contracts in proportion to the emergence of estimated gross profits.  DAC and VOBA associated with traditional life insurance products are amortized over the premium-paying period of the related policies in proportion to the present value of estimated premium revenues recognized.

Quarterly, the Company updates the estimated present values of gross profits.  On an annual basis, the actual gross profits are compared to the estimated gross profits.  When the actual gross profits change from previous estimates, the cumulative DAC and VOBA amortization is re-estimated and adjusted by the cumulative charge or credit to current period earnings.  When actual gross profits exceed those

22

previously estimated, the DAC and VOBA amortization will increase, resulting in a current period charge to earnings.  The opposite result occurs when the actual gross profits are below those previously estimated.  These adjustments are made when the Company revises its estimates for such factors as investment yield, realized investment gains and losses and policyholder retention.

DAC and VOBA, for applicable products, are adjusted for the impact of unrealized gains or losses on investments as if these gains or losses had been realized, with corresponding credits or charges included in accumulated other comprehensive income (loss) in the stockholder’s equity section in its consolidated balance sheets.

7.3  Company Results of Operations

The Company has three reportable segments: Individual Markets, Retirement Services and Other.  The Individual Markets segment distributes life insurance, annuity and retirement products (including IRAs) to both individuals and businesses through various distribution channels.  Life insurance products in-force include participating and non-participating term life, whole life, universal life and variable universal life.  The Retirement Services segment provides various retirement plan products and investment options as well as comprehensive administrative and record-keeping services for financial institutions and employers, which include educational, advisory, enrollment and communication services to employer-sponsored defined contribution plans and associated defined benefit plans.  Defined contribution plans provide for benefits based upon the value of contributions to, and investment returns on, an individual’s account.  The Company’s Other reporting segment is substantially comprised of activity under the reinsurance agreement between GWSC and CLAC (“the GWSC operating segment”), corporate items not directly allocated to the other operating segments and interest expense on long-term debt.

Year ended December 31, 2012 compared with the year ended December 31, 2011

The following is a summary of certain financial data of the Company for the years ended December 31, 2012 and 2011:

	Year ended December 31,
Income statement data (In millions)	2012		2011
Premium income	$	422	$	523
Fee income	536		487
Net investment income	1,191		1,159
Net realized investment gains (losses)	117		24
Total revenues	2,266		2,193
Policyholder benefits	1,198		1,264
Operating expenses	695		633
Total benefits and expenses	1,893		1,897
Income before income taxes	373		296
Income tax expense	135		94
Income from continuing operations	$	238	$	202

The Company’s consolidated income from continuing operations increased by $36 million, or 18%, to $238 million for the year ended December 31, 2012 when compared to 2011.  The improvement in earnings is due to increases in fees, net investment income, and net realized gains (losses) on investments.  Partially offsetting these increases are lower mortality gains and higher operating expenses.

Premium income decreased by $101 million, or 19%, to $422 million for the year ended December 31, 2012 when compared to 2011.  This decrease is primarily related to the $82 million decrease in the Company’s Individual Markets segment which is driven by an $88 million decline in sales of the SPWL product marketed through banks.  In 2011, the Company began replacing the SPWL product with a SPUL product, which recorded deposits due to sales of $451 million for the year ended December 31,

23

2012, as compared to $196 million for the year ended December 31, 2011.  Additionally, there is a $21 million decrease in the Other segment primarily due to run-off in the closed block of business.

Fee income increased by $49 million, or 10%, to $536 million for the year ended December 31, 2012 when compared to 2011.  The increase is primarily related to improved variable fee income resulting from higher average account balances generated by sales growth and the elevated performance of the U.S. equities market.  The equities market performance is evidenced by the 9% increase in the average S&P 500 index during the year ended December 31, 2012 as compared to 2011.

Net investment income increased by $32 million, or 3%, to $1,191 million for the year ended December 31, 2012 when compared to 2011.  The primary drivers of the change are a $23 million increase in unrealized gains primarily generated by derivative and hedging activities and a $10 million increase in investment income due to a higher invested assets balance partially offset by lower yields.

Net realized investment gains (losses) increased by $93 million to $117 million during the year ended December 31, 2012 when compared to 2011.  Of the increase, $9 million was due to dollar rolls, $37 million resulted from derivative and hedging activities and $18 million resulted from increased realized gains on sales of investments.  Additionally, there was a net $17 million decrease in the mortgage provision allowance in 2012 as compared to a $5 million increase in the mortgage provision allowance in 2011.  The mortgage provision allowance decrease resulted from revised assumptions primarily related to the improvement in general economic conditions, the stability of loss levels within the commercial real estate market and the stability of the Company’s own commercial mortgage portfolio.

Total benefits and expenses decreased by $4 million to $1,893 million for the year ended December 31, 2012 when compared to 2011.  The decrease in benefits and expense is attributable to a $27 million decrease in the Company’s Individual Markets segment, which is primarily driven by a reduction in policyholder benefits reflecting the change in mix of sales mentioned in premiums above.  Offsetting that decrease are higher mortality losses and operating expenses primarily resulting from an increase in the amortization of deferred acquisition expenses.  Additionally, the Other segment had a decrease in benefits and expense of $16 million primarily due to lower operating expenses.  These decreases in the Individual Markets and Other segments are partially offset by a $39 million increase in the Retirement Services segment, primarily driven by higher asset based commission expense and other general operating expense due to segment growth in 2012.  Partially offsetting the increase in Retirement Services expense is a decline in policyholder benefits primarily driven by a decrease in interest paid to policyholders due to reduced crediting rates.

Income tax expense increased by $41 million, or 44%, to $135 million for the year ended December 31, 2012 when compared to 2011 primarily due to an increase in net income before tax.  Additionally, there was an increase in the effective tax rate from 32% to 36% primarily due to an $11 million adjustment to prior year income taxes included in the 2012 expense related to the 2008 tax year Internal Revenue Services (“IRS”) examination.

24

Year ended December 31, 2011 compared with the year ended December 31, 2010

The following is a summary of certain financial data of the Company for the years ended December 31, 2011 and 2010:

	Year ended December 31,
Income statement data (In millions)	2011		2010
Premium income	$	523	$	806
Fee income	487		447
Net investment income	1,159		1,175
Net realized investment gains (losses)	24		(24		)
Total revenues	2,193		2,404
Policyholder benefits	1,264		1,541
Operating expenses	633		597
Total benefits and expenses	1,897		2,138
Income before income taxes	296		266
Income tax expense	94		69
Income from continuing operations	$	202	$	197

The Company’s consolidated income from continuing operations increased by $5 million, or 3%, to $202 million for the year ended December 31, 2011 when compared to 2010.  The increase is primarily due to a decrease in policyholder benefits of $277 million offset partially by a decrease in revenues of $211 million and an increase in expenses of $36 million.  Income tax expense increased by $25 million primarily as a result of an increase of $30 million in income before taxes.  Additionally, the Company had a $13 million tax benefit in 2010 related to the closing of IRS examinations.

Premium income decreased by $283 million, or 35%, to $523 million for the year ended December 31, 2011 when compared to 2010.  This decrease is primarily related to a $280 million decrease in the sales of the SPWL product in the Company’s Individual Markets segment. In 2011, the Company began replacing the SPWL product with a SPUL product which had deposits of $196 million for the year ended December 31, 2011.

Fee income increased by $40 million, or 9%, to $487 million for the year ended December 31, 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.  The equities market performance is evidenced by an 11 % increase in the average S&P 500 index in 2011 as compared to 2010.

Net investment income remained relatively constant, decreasing by $16 million, or 1%, to $1,159 million for the year ended December 31, 2011 when compared to 2010.  The decrease is primarily due to an increase in unrealized loss of $18 million on derivatives and held for trading assets offset by an increase in interest income of $2 million.

Net realized investment gains (losses) increased by $48 million from a loss of $24 million during the year ended December 31, 2010 to a gain of $24 million during the year ended December 31, 2011. The $24 million gain in 2011 is due to $38 million of net realized gains on the sale of investments, including dollar rolls, offset by a $5 million increase in the mortgage provision allowance due to the increase in mortgage loans and $9 million of credit related OTTI losses primarily on fixed maturity investments.  The $24 million loss in 2010 is primarily due to $81 million of write-downs primarily on fixed maturity securities guaranteed by Ambac Financial Group, Inc. (“Ambac”) offset by $57 million of net realized gains on the sale of investments.

Total benefits and expenses decreased by $241 million, or 11%, to $1,897 million for the year ended December 31, 2011 when compared to 2010.  The decrease is attributable to a reduction of $306 million in the Company’s Individual Markets segment which is primarily due to a reduction in future policyholder benefits and expenses related to the change in mix of sales mentioned in premiums above.  This

25

decrease is partially offset by a $35 million increase in benefits and expense in the Company’s Retirement Services segment and a $31 million increase in benefits and expense in the Other segment.

Income tax expense increased by $25 million, or 36%, to $94 million for the year ended December 31, 2011 when compared to 2010.  The increase is primarily due to a $30 million, or 11%, increase in income before income taxes.  Additionally, the Company had a $13 million tax benefit in 2010 related to the closing of IRS examinations.

7.4  Individual Markets Segment Results of Operations

Year ended December 31, 2012 compared with the year ended December 31, 2011

The following is a summary of certain financial data of the Individual Markets segment for the years ended December 31, 2012 and 2011:

	Year ended December 31,
Income statement data (In millions)	2012		2011
Premium income	$	314	$	396
Fee income	75		65
Net investment income	730		714
Net realized investment gains (losses)	56		21
Total revenues	1,175		1,196
Policyholder benefits	883		938
Operating expenses	137		109
Total benefits and expenses	1,020		1,047
Income before income taxes	155		149
Income tax expense	51		49
Income from continuing operations	$	104	$	100

Income from continuing operations for the Individual Markets segment increased by $4 million, or 4%, to $104 million for the year ended December 31, 2012 when compared to 2011.  The increase in earnings is primarily due to increases in net investment income and net realized gains (losses) on investments.  Partially offsetting these increases are an increase in mortality losses in the closed blocks and higher operating expenses.

Premium income decreased by $82 million, or 21%, to $314 million for the year ended December 31, 2012 when compared to 2011.  The decrease is primarily related to an $88 million decrease in sales of the SPWL product marketed through banks.  In 2011, the Company began replacing the SPWL product with a SPUL product, which recorded deposits due to sales of $451 million for the year ended December 31, 2012, as compared to $196 million for the year ended December 31, 2011.

Fee income increased by $10 million, or 15%, to $75 million for the year ended December 31, 2012 when compared to 2011.  The increase is primarily related to an increase in fees on the executive benefits and IRA products reflecting higher variable policy balances and an overall increase in the size of the block of business.

Net investment income increased by $16 million, or 2%, to $730 million for the year ended December 31, 2012 when compared to 2011.  The primary drivers of the change are an $11 million increase in unrealized gains primarily generated by derivative and hedging activities and a $5 million increase in investment income due to the strengthening of the invested assets balance partially offset by lower yields.

Net realized investment gains (losses) increased by $35 million to $56 million during the year ended December 31, 2012 when compared to 2011.  Of the increase, $13 million resulted from derivative and hedging activities and $12 million resulted from increased realized gains on sales of investments offset by a $2 million decrease due to dollar rolls.  Additionally, there was a net $8 million decrease in the mortgage provision allowance in 2012 as compared to a $2 million increase in the mortgage provision

26

allowance in 2011.  The mortgage provision allowance decrease resulted from revised assumptions primarily related to the improvement in general economic conditions, the stability of loss levels within the commercial real estate market and the stability of the Company’s own commercial mortgage portfolio.

Total benefits and expenses decreased by $27 million, or 3%, to $1,020 million for the year ended December 31, 2012 when compared to 2011.  The benefit and expense improvement is attributable to a $55 million, or 6%, decrease in policyholder benefits which primarily reflects the change in the mix of sales mentioned in premiums above offset by higher mortality losses.  Partially offsetting this decrease is a $28 million increase in operating expenses primarily related to an increase in the amortization of deferred acquisition expenses as a result of actual gross profits exceeding those previously estimated gross profits.

Income tax expense increased by $2 million, or 4%, to $51 million during the year ended December 31, 2012 when compared to 2011, primarily due to the increase in earnings before taxes.

Year ended December 31, 2011 compared with the year ended December 31, 2010

The following is a summary of certain financial data of the Individual Markets segment for the years ended December 31, 2011 and 2010:

	Year ended December 31,
Income statement data (In millions)	2011		2010
Premium income	$	396	$	676
Fee income	65		56
Net investment income	714		731
Net realized investment gains (losses)	21		(1		)
Total revenues	1,196		1,462
Policyholder benefits	938		1,219
Operating expenses	109		134
Total benefits and expenses	1,047		1,353
Income before income taxes	149		109
Income tax expense	49		30
Income from continuing operations	$	100	$	79

Income from continuing operations for the Individual Markets segment increased by $21 million, or 27%, to $100 million for the year ended December 31, 2011 when compared to 2010.  The increase is primarily related to a decrease in benefits and expenses of $306 million partially offset by a decrease in revenues of $266 million.  Income tax expense has increased by $19 million primarily as a result of an increase of $40 million in income before taxes.  Additionally, the Company had a $3 million tax benefit in 2010 related to the closing of IRS examinations.

Premium income decreased by $280 million, or 41%, to $396 million for the year ended December 31, 2011 when compared to 2010.  The decrease is primarily related to sales in the SPWL product marketed through banks which decreased by $280 million.  In 2011, the Company began replacing the SPWL product with a SPUL product which had deposits of $196 million for the year ended December 31, 2011.

Fee income increased by $9 million, or 16%, to $65 million for the year ended December 31, 2011 when compared to 2010.  The increase is primarily related to an overall increase in the size of the block of business.

Net investment income decreased by $17 million, or 2%, to $714 million for the year ended December 31, 2011 when compared to 2010.  The decrease is primarily due to a decrease in interest income of $11 million and an increase in unrealized loss of $6 million on derivatives and held for trading assets.

Net realized investment gains (losses) increased by $22 million from a loss of $1 million during the year ended December 31, 2010 to a gain of $21 million during the year ended December 31, 2011.  The $21

27

million gain in 2011 is due to $26 million of net realized gains on the sale of investments offset by a $2 million increase in the mortgage provision allowance due to the increase in mortgage loans and $3 million of credit related OTTI losses primarily on fixed maturity investments.  The $1 million loss in 2010 is due to $34 million of write-downs primarily on fixed maturity securities guaranteed by Ambac offset by $33 million of net realized gains on the sale of investments.

Total benefits and expenses decreased by $306 million, or 23%, to $1,047 million for the year ended December 31, 2011 when compared to 2010.  Approximately $281 million of the decrease is primarily attributable to a reduction in future policyholder benefits and expenses related to the change in mix of sales mentioned in premiums 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 $25 million is primarily due to a $28 million decrease in commissions and premium tax expense, net of the deferral of acquisition costs, also as a result of the change in sales mix discussed in premiums above as the Company replaces its SPWL product with a SPUL product.

Income tax expense increased by $19 million, or 63%, to $49 million during the year ended December 31, 2011 when compared to 2010.  The increase is primarily due to a $40 million, or 37% increase in income before income taxes, as well as a $3 million tax benefit in 2010 related to the closing of IRS examinations.

7.5  Retirement Services Segment Results of Operations

Year ended December 31, 2012 compared with the year ended December 31, 2011

The following is a summary of certain financial data of the Retirement Services segment for the years ended December 31, 2012 and 2011:

	Year ended December 31,
Income statement data (In millions)	2012		2011
Premium income	$	4	$	2
Fee income	456		417
Net investment income	414		399
Net realized investment gains (losses)	61		3
Total revenues	935		821
Policyholder benefits	204		223
Operating expenses	493		435
Total benefits and expenses	697		658
Income before income taxes	238		163
Income tax expense	78		51
Income from continuing operations	$	160	$	112

Income from continuing operations for the Retirement Services segment increased by $48 million, or 43%, to $160 million for the year ended December 31, 2012 when compared to 2011.  The increase is due to higher net realized gains on investments of $58 million and higher fee income of $39 million when compared to the prior year.  Partially offsetting these increases was higher operating expenses of $58 million when compared to the prior year primarily due to growth in the segment from sales.

Fee income increased by $39 million, or 9%, to $456 million for the year ended December 31, 2012 when compared to 2011.  The increase is primarily related to improved variable fee income resulting from higher average account balances attributable to sales growth and the improved performance of the U.S. equities market.  The equities market performance is evidenced by a 9% increase in the average S&P 500 index during the year ended December 31, 2012 as compared to 2011.

Net investment income increased by $15 million, or 4%, to $414 million for the year ended December 31, 2012 when compared to 2011.  The primary drivers of the change are a $13 million increase in

28

unrealized gains primarily generated by derivative and hedging activities and a $2 million increase due to a higher invested assets balance partially offset by lower yields.

Net realized investment gains (losses) increased by $58 million to $61 million during the year ended December 31, 2012 when compared to 2011.  Of the increase, $11 million was due to dollar rolls, $25 million resulted from derivative and hedging activities and $6 million resulted from increased realized gains on sales of investments.  Additionally, there was a net $9 million decrease in the mortgage provision allowance in 2012 as compared to a $3 million increase in the mortgage provision allowance in 2011.  The mortgage provision allowance decrease resulted from revised assumptions primarily related to the improvement in general economic conditions, the stability of loss levels within the commercial real estate market and the stability of the Company’s own commercial mortgage portfolio.

Total benefits and expenses increased by $39 million, or 6%, to $697 million for the year ended December 31, 2012 when compared to 2011.  The increase in benefits and expense is primarily attributable to a $58 million, or 13%, increase in operating expenses driven by higher asset based commission expense reflecting sales growth in the block of business and improved performance of the U.S. equities market.  The higher operating expenses are also due to an increase in other general operating expense due to segment growth in 2012.  Offsetting the increase in operating expenses is a $19 million, or 9%, decline in policyholder benefits primarily driven by a decrease in interest paid to policyholders due to reduced crediting rates.

Income tax expense increased by $27 million, or 53%, to $78 million during the year ended December 31, 2012 when compared to 2011.  The increase is primarily due to the increase in income before income taxes.

Year ended December 31, 2011 compared with the year ended December 31, 2010

The following is a summary of certain financial data of the Retirement Services segment for the years ended December 31, 2011 and 2010:

	Year ended December 31,
Income statement data (In millions)	2011		2010
Premium income	$	2	$	6
Fee income	417		387
Net investment income	399		399
Net realized investment gains (losses)	3		(23		)
Total revenues	821		769
Policyholder benefits	223		222
Operating expenses	435		401
Total benefits and expenses	658		623
Income before income taxes	163		146
Income tax expense	51		35
Income from continuing operations	$	112	$	111

Income from continuing operations for the Retirement Services segment remained relatively flat, increasing by $1 million, or less than 1%, to $112 million during the year ended December 31, 2011 when compared to 2010.  Total revenues increased by $52 million which is offset by an increase in benefits and expenses of $35 million.  Income tax expense increased by $16 million primarily as a result of a $17 million increase in income before taxes.  Additionally, the Company had a $5 million tax benefit in 2010 related to the closing of IRS examinations.

Fee income increased by $30 million, or 8%, to $417 million for the year ended December 31, 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.  The equities market performance is evidenced by an 11% increase in the average S&P 500 index in 2011 as compared to 2010.

29

Net investment income remained unchanged at $399 million during the years ended December 31, 2011 and 2010.  This is primarily related to increased interest income of $12 million due to higher invested asset balances offset by a $12 million increase in unrealized losses on derivatives and held for trading assets.

Net realized investment gains (losses) increased by $26 million from a loss of $23 million during the year ended December 31, 2010 to a gain of $3 million during the year ended December 31, 2011.  The $3 million gain in 2011 is due to $12 million of net realized gains on the sale of investments offset by a $3 million increase in the mortgage provision allowance, due to the increase in mortgage loans and $6 million of credit related OTTI losses primarily on fixed maturity securities.  The $23 million loss in 2010 is due to $47 million of write-downs primarily on fixed maturity securities guaranteed by Ambac offset by $24 million of net realized gains on the sale of investments.

Total benefits and expenses increased by $35 million, or 6%, to $658 million for the year ended December 31, 2011 when compared to 2010.  The increase is primarily related to an $11 million increase in asset based commission expense and a $23 million increase in other general operating expense due to segment growth in 2011.

Income tax expense increased by $16 million, or 46%, to $51 million during the year ended December 31, 2011 when compared to 2010.  The increase is primarily due to a $17 million, or 12% increase in income before income taxes.  Additionally, the Company had a $5 million tax benefit in 2010 related to the closing of IRS examinations.

7.6 Other Segment Results of Operations

Year ended December 31, 2012 compared with the year ended December 31, 2011

The following is a summary of certain financial data of the Company’s Other segment for the years ended December 31, 2012 and 2011:

	Year ended December 31,
Income statement data (In millions)	2012			2011
Premium income	$	104		$	125
Fee income	5			5
Net investment income	47			46
Total revenues	156			176
Policyholder benefits	111			103
Operating expenses	65			89
Total benefits and expenses	176			192
Income (loss) before income taxes	(20		)	(16		)
Income tax expense (benefit)	6			(6		)
Income (loss) from continuing operations	$	(26	)	$	(10	)

The Company’s Other reporting segment is substantially comprised of activity of the GWSC operating segment, corporate items not directly allocated to the other operating segments and interest expense on long-term debt.

Net loss for the Company’s Other segment increased by $16 million from a loss of $10 million to a loss of $26 million during the year ended December 31, 2012 when compared to 2011.  The loss is primarily due to a $21 million decrease in premiums as a result of run-off in the closed block of business, along with an $8 million increase in policyholder benefits resulting from an unfavorable change in lapse rate experience.  Partially offsetting the decrease is a $24 million decline in operating expenses resulting from lower commission expense attributable to a decrease in premium income, lower consulting expenses on strategic initiatives and lower guarantee fund assessments.  Additionally, the Company had increased tax expense of $12 million.  The increase in income taxes is the result of an $11 million adjustment to prior year taxes included in the 2012 expense related to the 2008 tax year IRS examination.

30

Year ended December 31, 2011 compared with the year ended December 31, 2010

The following is a summary of certain financial data of the Company’s Other segment for the years ended December 31, 2011 and 2010:

	Year ended December 31,
Income statement data (In millions)	2011			2010
Premium income	$	125		$	124
Fee income	5			4
Net investment income	46			45
Total revenues	176			173
Policyholder benefits	103			99
Operating expenses	89			62
Total benefits and expenses	192			161
Income (loss) before income taxes	(16		)	12
Income tax expense (benefit)	(6		)	5
Income (loss) from continuing operations	$	(10	)	$	7

Income (loss) from continuing operations for the Company’s Other segment decreased by $17 million from a gain of $7 million during the year ended December 31, 2010 to a loss of $10 million during the year ended December 31, 2011.  The decrease of $17 million is primarily due to an increase in operating expenses of $27 million caused by an $8 million increase in commissions expense at GWSC, a $2 million increase in guarantee fund assessments, an $11 million increase in expenses on strategic initiatives, and a $6 million increase in other operating expenses.  This increase in operating expense was partially offset by a decrease in income tax expense of $11 million which is due to the decrease in income before income taxes.

7.7  Investment Operations

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

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

A summary of the Company’s general account investment assets and the assets as a percentage of total general account investments at December 31, 2012 and 2011 follows:

	December 31,
(In millions)	2012				2011
Fixed maturities, available-for-sale	$	18,188	69.7	%	$	16,590	69.1	%
Fixed maturities, held for trading	368		1.4	%	147		0.6	%
Mortgage loans on real estate	2,882		11.0	%	2,513		10.5	%
Policy loans	4,260		16.3	%	4,220		17.6	%
Short-term investments, available-for-sale	266		1.0	%	333		1.4	%
Limited partnership and other corporation interests	125		0.5	%	169		0.7	%
Other investments	21		0.1	%	23		0.1	%
Total investments	$	26,110	100.0	%	$	23,995	100.0	%

31

Fixed Maturity Investments

Fixed maturity investments include public and privately placed corporate bonds, government bonds and mortgage-backed and asset-backed securities.  Included in available-for-sale fixed maturities are perpetual debt investments which primarily consist of junior subordinated debt instruments that have no stated maturity date but pay fixed or floating interest in perpetuity.  The Company’s strategy related to mortgage-backed and asset-backed securities is to focus on those investments with low prepayment risk and minimal credit risk.

Private placement investments are generally less marketable than publicly traded assets, yet they typically offer enhanced covenant protection that allows the Company, if necessary, to take appropriate action to protect its investment.  The Company believes that the cost of the additional monitoring and analysis required by private placement investments is more than offset by their enhanced yield.

One of the Company’s primary objectives is to ensure that its fixed maturity portfolio is maintained at a high average credit quality to limit credit risk.  All securities are internally rated by the Company on a basis intended to be similar to that of the rating agencies.  The Company’s internal rating methodology generally takes into account ratings from Standard & Poor’s Ratings Services, Fitch Ratings and Moody’s Investor Services, Inc.  In addition, the National Association of Insurance Commissioners (“NAIC”) implemented a ratings methodology for RMBS, CMBS and other structured securities.  The Company may also utilize inputs from this ratings process to develop its internal rating.

The distribution of the Company’s fixed maturity portfolio by the Company’s internal credit rating at December 31, 2012 and 2011 is summarized as follows:

	December 31,
Credit Rating	2012		2011
AAA	30.0	%	33.0	%
AA	14.4	%	14.7	%
A	23.9	%	25.0	%
BBB	30.1	%	25.9	%
BB and below (Non-investment grade)	1.6	%	1.4	%
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 December 31, 2012 and 2011:

	December 31,
Sector	2012		2011
Utility	17.9	%	15.8	%
Finance	10.4	%	10.5	%
Consumer	10.1	%	9.6	%
Natural resources	5.1	%	4.7	%
Transportation	2.7	%	2.4	%
Other	10.1	%	10.0	%

Fair Value Measurement of Fixed Maturity Investments Classified as Available-for-Sale

Each fixed maturity investment is categorized in a hierarchy based on the observability of inputs into the valuation methodology with Level 3 being the least observable.  Management uses some judgment in determining the observability of valuation inputs.  Total assets measured using significant unobservable inputs (Level 3) decreased by $51 million at December 31, 2012 from December 31, 2011.  Level 3 assets at December 31, 2012 were $267 million or 1% of total net assets and liabilities carried at fair value compared to Level 3 assets of $318 million or 1% at December 31, 2011.  The decrease in Level 3 assets is due primarily to transfers out of Level 3 as a result of increased observability of inputs in

32

valuation methodologies as evidenced by corroboration of market prices with multiple pricing vendors and internal models.

Securities Lending, Repurchase Agreements 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 December 31, 2012 and 2011, the Company had $138 million and $7 million, respectively, of securities out on loan and $4 million and $2 million, respectively, in short-term repurchase agreements, all of which are fully collateralized as described above.  Although there were no dollar repurchase agreements open at December 31, 2012 and 2011, the Company had average balances during the years of $1,023 million and $742 million, respectively.  The change in dollar repurchase agreements during the years was due to the Company’s review and management of capital resources.  The Company does not enter into these types of transactions for liquidity purposes, but rather for yield enhancement on its investment portfolio.

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’s portfolio includes loans which are fully amortizing, amortizing with a balloon balance at maturity, interest only to maturity and interest only for a number of years followed by an amortizing period.  During the years ended December 31, 2012 and 2011, the Company originated 36 and 69 new loans with aggregate principal balances of $525 million and $900 million, respectively.

During the year ended December 31, 2012, the Company had an $18 million decrease in the general mortgage provision allowance as a result of revised assumptions primarily related to the improvement in general economic conditions, the stability of loss levels within the commercial real estate market and the stability of the Company’s own commercial mortgage portfolio.

Derivatives

The Company uses certain derivatives, such as futures, swaps and interest rate swaptions for purposes of managing the interest rate, foreign currency exchange rate and equity market risks impacting the Company’s business.  These derivatives, when taken alone, may subject the Company to varying degrees of market and credit risk; however, since used for hedging purposes, these instruments are intended to reduce risk.  The Company controls the credit risk of its over-the-counter derivative contracts through credit approvals, limits, monitoring procedures and in most cases, requiring collateral.  Risk of loss is generally limited to the portion of the fair value of derivative instruments that exceeds the value of the collateral held and not to the notional or contractual amounts of the derivatives.

33

Investment Yield

Net investment income performance is analyzed excluding derivative income and interest on funds withheld balances under reinsurance agreements in order to assess underlying profitability and results from ongoing operations.  Net investment income performance is summarized as follows:

	Years ended December 31,
	2012			2011			2010
Net investment income	$	1,156		$	1,152		$	1,151
Average invested assets, at amortized cost	23,753			22,267			20,918
Yield on average invested assets	4.87		%	5.17		%	5.50		%

The yield on average invested assets decreased in 2012 compared to 2011 and 2011 compared to 2010 primarily due to the Company earning lower yields on new investments as the U.S. Treasury curve shifted lower during the years in conjunction with charging lower interest rates on policy loans.

7.8  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.  Liquidity for the Company has remained strong, as evidenced by the amounts of short-term investments and cash that totaled $278 million and $340 million as of December 31, 2012 and 2011, respectively.  In addition, 98% and 99% of the fixed maturity portfolio carried an investment grade rating at December 31, 2012 and 2011, respectively, thereby providing significant liquidity to the Company’s overall investment portfolio.

The Company continues to be well capitalized, with sufficient borrowing capacity.  Additionally, the Company anticipates that cash on hand and expected net cash generated by operating activities will exceed the forecasted needs of the business over the next 12 months.  The Company’s financial strength provides the capacity and flexibility to enable it to raise funds in the capital markets through the issuance of commercial paper.  The Company had $98 million of commercial paper outstanding at December 31, 2012 and 2011.  The commercial paper has been given a rating of A-1+ by Standard & Poor’s Ratings Services and a rating of P-1 by Moody’s Investors Service, each being the highest rating available.  Through the recent financial market volatility, the Company continued to have the ability to access the capital markets for funds.  The loss of this access in the future would not have a significant impact to the Company’s liquidity as commercial paper is not used to fund daily operations and is an insignificant amount in relation to total invested assets.

The Company also has available a revolving credit facility agreement, 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 as of or during the year ended December 31, 2012.  The Company does not anticipate the

34

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.

7.9  Off-Balance Sheet Arrangements

The Company makes commitments to fund partnership interests, mortgage loans on real estate and other investments in the normal course of its business.  The amounts of these unfunded commitments at December 31, 2012 and 2011 were $127 million and $98 million, respectively.  The precise timing of the fulfillment of the commitment cannot be predicted, however, these amounts are due within one year of the dates indicated.  There are no other obligations or liabilities arising from such arrangements that are reasonably likely to become material.

The Company, as lessee, has entered into various lease and sublease agreements primarily for the rental of office space.

The Company maintains a corporate credit facility agreement in the amount of $50 million for general corporate purposes.  The Company had no borrowings under the credit facility either at or during the years ended December 31, 2012 or 2011.

GWL&A Financial obtained two letters of credit for the benefit of the Company as collateral under a reinsurance agreement for policy liabilities and capital support.  The first letter of credit is for $1,139 million and renews annually until it expires on December 31, 2025.  The second letter of credit is for $70 million and renews annually for an indefinite period of time.

7.10Contractual Obligations

The following table summarizes the Company’s major contractual obligations at December 31, 2012:

	Payment due by period
	Less than		One to		Three to		More than
(in thousands)	one year		three years		five years		five years		Total
Future policy benefits (1)	$	1,573,228	$	3,033,002	$	2,978,656	$	45,044,824	$	52,629,710
Policy and contract claims (2)	180,451		31,602		24,833		91,247		328,133
Policyholders’ funds (3)	374,821		—		—		—		374,821
Provision for policyholder dividends (4)	63,102		—		—		—		63,102
Undistributed earnings on participating business (5)	—		—		—		10,393		10,393
Related party long-term debt - principal (6)	—		—		—		528,400		528,400
Related party long-term debt - interest (7)	37,031		74,062		74,062		901,069		1,086,224
Commercial paper (8)	97,987		—		—		—		97,987
Payable under securities lending agreements (9)	142,022		—		—		—		142,022
Investment purchase obligations (10)	127,255		—		—		—		127,255
Operating leases (11)	4,404		5,683		607		—		10,694
Other liabilities (12)	236,526		53,044		72,146		66,792		428,508
Total	$	2,836,827	$	3,197,393	$	3,150,304	$	46,642,725	$	55,827,249

(1),(2)Future policy benefits and policy and contract claims - The Company has estimated payments to be made to policy and contractholders for future policy benefits.  Insurance and investment contract liabilities include various investment-type products with contractually scheduled maturities, including periodic payments of a term certain nature.  However, a significant portion of policy benefits and claims

35

to be paid do not have stated contractual maturity dates and ultimately may not result in any payment obligation.

Estimated future policyholder obligations have been developed in accordance with industry accepted actuarial standards based upon the estimated timing of cash flows related to the policies or contracts, the Company’s historical experience and its expectation of future payment patterns.  Management has incorporated significant assumptions in developing these estimates, many of which are outside of the Company’s control and include assumptions relating to mortality, morbidity, policy renewals and terminations, retirement, inflation, disability recovery rates, investment returns, future interest crediting levels, policy loans, future premium receipts on current policies in-force and other contingent events as may be appropriate to the respective product type.  Due to the significance of the assumptions used, the amounts presented could materially differ from actual results.

The amounts presented in the table above are undiscounted as to interest.  Accordingly, the sum of the estimated cash payment presented significantly exceeds the liability amount on the Company’s consolidated balance sheet principally due to the time value of money.

Separate account liabilities have been excluded from the table above.  Separate account obligations are legally insulated from general account assets.  Separate account liabilities represent funds maintained by the Company to meet the specific investment objectives of the contractholders who bear the related investment risk.  It is generally expected that the separate account liabilities will be fully funded by the separate account assets.

Policy and contract claims consist of liabilities associated with installment claims on certain long-term disability policies.  Because the timing of the payment of these obligations is based upon assumptions of disability recovery rates, the amounts presented could differ from actual results.

(3)Policyholders’ funds - Policyholders’ funds consist primarily of future policy benefits associated with policyholder deposits, participating policy dividends left on deposit and provisions for experience rating refunds.  Because the timing of the payment of some of these obligations is unknown and beyond the control of the Company, the obligations related to these liabilities are presented in the table above in the less than one year category in the amounts of the liabilities presented in the Company’s consolidated balance sheet.

(4)Provision for policyholder dividends - The provision for policyholders’ dividends payable represents the liabilities related to dividends payable in the following year on participating policies.  As such, the obligations related to these liabilities are presented in the table above in the less than one year category in the amounts of the liabilities presented in the Company’s consolidated balance sheet.

(5)Undistributed earnings on participating business — The dividend scale for the undistributed earnings on participating business is determined annually.  As such, the timing of the payment of the liability for undistributed earnings on participating business is unknown by its nature and subject to significant long-term uncertainty.  Due to this uncertainty, the obligation related to this liability is presented in the table above in the more than five year category in the amount of the liability presented in the Company’s consolidated balance sheet.

(6)Related party long-term debt principal - Represents contractual maturities of principal due to the Company’s parent, GWL&A Financial, under the terms of two long-term surplus notes.  The amounts shown in this table differ from the amounts included in the Company’s consolidated balance sheet because the amounts shown above do not consider the discount upon the issuance of one of the surplus notes.

(7)Related party long-term debt interest - One long-term surplus note bears interest at a fixed rate through maturity.  The second surplus note bears interest initially at a fixed rate that will change in the future based upon the then current three-month London Interbank Offering Rate.  The interest payments shown in this table are calculated based upon the contractual rates in effect on December 31, 2012 and do not consider the impact of future interest rate changes.

36

(8)Commercial paper - The Company’s obligations under its commercial paper program are short-term in nature.  The amount presented represents the amount due upon maturity of the instrument.  The obligation related to this liability is presented in the table above in the less than one year category as presented in the Company’s consolidated balance sheet.

(9)Payable under securities lending agreements - The Company accepts both cash and non-cash collateral in connection with its securities lending program.  Since the securities lending transactions generally terminate within one year or the timing of the return of the collateral is uncertain, the obligations related to these liabilities are presented in the table above in the less than one year category in the amounts of the liabilities presented in the Company’s consolidated balance sheet.

(10)Investment purchase obligations - The Company commits to fund limited partnership interests, mortgage loans on real estate and other investments in the normal course of its business.  As the timing of the fulfillment of the commitment to fund partnership interests cannot be predicted, such obligations are presented in the less than one year category.  The timing of the funding of mortgage loans on real estate is based on the expiration date of the commitment.

(11)Operating leases - The Company is obligated to make payments under various non-cancelable operating leases, primarily for office space.  Contractual provisions exist that could increase the lease obligations presented, including operating expense escalation clauses.  Management does not consider the impact of any such clauses to be material to the Company’s operating lease obligations.

From time to time, the Company enters into agreements or contracts, including capital leases, to purchase goods or services in the normal course of its business.  However, these agreements and contracts are not material and are excluded from the table above.

(12)Other liabilities - Other liabilities include those other liabilities which represent contractual obligations not included elsewhere in the table above.  If the timing of the payment of any other liabilities was sufficiently uncertain, the amounts were included in the less than one year category.  Other liabilities presented in the table above include:

·Liabilities under reinsurance arrangements

·Liabilities related to securities purchased but not yet settled

·Liabilities related to derivative obligations

·Liabilities related to derivative counterparty collateral

·Statutory state escheat liabilities

·Expected contributions to the Company’s defined benefit pension plan and benefit payments for the post-retirement medical plan and supplemental executive retirement plan through 2022

·Unrecognized tax benefits

·Miscellaneous purchase obligations to acquire goods and services

7.11Application of Recent Accounting Pronouncements

See Note 2 to the accompanying consolidated financial statements for a further discussion of the application of recent accounting pronouncements.

Item 7A.  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.

37

The major risks to which the Company is exposed include the following:

·Market risk - the potential of loss arising from adverse fluctuations in interest rates and equity market    prices and the levels of their volatility.

·Insurance risk - the potential of loss resulting from claims, persistency and expense experience exceeding that assumed in the liabilities held.

·Credit risk - the potential of loss arising from an obligator’s inability or unwillingness to meet its obligations to the Company.

·Operational and corporate risk - the potential of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from other external events.

Market risk

The Company’s exposure to interest rate changes results from its significant holdings of fixed maturity investments, mortgage loans on real estate and interest rate sensitive liabilities.  The fixed maturity investments primarily consist of direct obligations of the U.S. government and its agencies, direct obligations of U.S. states and their subdivisions, corporate debt securities and asset-backed and mortgage-backed securities.  All of these investments are exposed to changes in medium and long-term interest rates.  Interest rate sensitive product liabilities, primarily those liabilities associated with universal life insurance contracts and annuity contracts, have the same type of interest rate risk exposure as fixed maturity securities and mortgage loans on real estate.

To reduce interest rate risk, the Company performs periodic projections of asset and liability cash flows in order to evaluate the interest rate sensitivity of its fixed maturity securities and its product liabilities to interest rate movements.  For determinate liabilities, i.e. liabilities with stable, predictable cash flows on products that can’t be repriced (for example, certificate annuities and payout annuities), asset/liability cash flow mismatches are monitored and the asset portfolios are rebalanced as necessary to keep the mismatches within tolerance limits.  For these determinate liabilities, the investment policy predominantly requires assets with stable, predictable cash flows so that changes in interest rates will not cause changes in the timing of asset cash flows resulting in mismatches.  For indeterminate liabilities, i.e. liabilities that have less predictable cash flows but that can be repriced (for example, portfolio annuities and universal life insurance), the potential mismatch of assets and liabilities is tested under a wide variety of interest scenarios.  The potential cost of this mismatch is calculated.  If the potential cost is considered to be too high, actions considered would include rebalancing the asset portfolio and/or purchasing derivatives that reduce the risk as part of the hedging strategy program discussed below.  For each major block of indeterminate liabilities, the asset and liability positions are reviewed in senior management meetings to proactively recommend changes in the current investment strategy and/or a rebalance of the asset portfolio.

The Company supports a hedging strategy program that consists of the use of various derivative instruments including futures, interest rate swaps and options such as interest rate swaptions.  The Company has strict operating policies which prohibit the use of derivative instruments for speculative purposes, permit derivative transactions only with approved counterparties, specify limits on concentration of risk and provide requirements of reporting and monitoring systems.

·Futures are commitments to either purchase or sell designated financial instruments at a future date for a specified price.

·Interest rate swaps involve the periodic exchange of cash flows with third parties at specified intervals calculated using agreed upon rates or other financial variables.

·Option contracts grant the purchaser, in consideration for the payment of a premium, the right to either purchase from or sell to the issuer a financial instrument at a specified price within a specified time period or on a stated date.  Interest rate swaptions grant the purchaser the right to enter into a swap with predetermined fixed-rate payments over a predetermined time period on the exercise date.

The Company has estimated the possible effects of interest rate changes at December 31, 2012.  If interest rates increased by 100 basis points (1.00%), the December 31, 2012 fair value of the fixed

38

income assets in the general account would decrease by approximately $1,205 million.  This calculation uses projected asset cash flows, discounted back to December 31, 2012.  The cash flow projections are shown in the table below.  The table below shows cash flows rather than expected maturity dates because many of the Company’s assets have substantial expected principal payments prior to the final maturity date.  The fair value shown in the table below was calculated using spot discount interest rates that varied by the year in which the cash flows are expected to be received.  The spot rates in the benchmark calculation range from 0.137% to 4.703%.

Projected cash flows by			Interest rate
calendar years (In millions)	Benchmark		increase one percent
2013	$	2,883	$	2,806
2014	2,624		2,628
2015	2,508		2,484
2016	2,430		2,446
2017	2,040		2,046
Thereafter	14,262		14,505
Undiscounted total	$	26,747	$	26,915
Fair value	$	22,461	$	21,221

The Company administers separate account variable annuities and provides other investment and retirement services where fee income is earned and profitability is determined based upon a percentage of account balances or assets under management (“AUM”).  Fluctuations in fund asset levels occur as a result of both changes in cash flow and general market conditions.  There is a market risk of reduced fee income if equity markets decline.  If equity markets were to decline by 10%, the Company’s associated net fee income after subadvisor fees in 2013 would decline by approximately $16 million.

The Company’s surplus assets include equity investments.  There is a market risk of reduced asset values if equity markets decline.  If equity markets were to decline by 10%, the Company would have an unrealized loss of approximately $5.8 million on equity investments in non-affiliates.  This unrealized loss would not impact net income but would reduce stockholder’s equity.

The Company has sold variable annuities with various forms of guaranteed minimum death benefits and guaranteed minimum withdrawal benefits.  The Company is required to hold future policy benefit liabilities for these guaranteed benefits.  If equity markets were to decline by 10%, the liability for these benefits would increase by approximately $0.8 million.  The Company’s dynamic hedging program for the guaranteed minimum withdrawal benefit product would be expected to offset changes in the guaranteed minimum withdrawal benefit liability.

The Company has exposure to foreign currency exchange rate fluctuations.  To manage foreign currency exchange risk, the Company uses currency swaps to convert foreign currency back to United States dollars.  These swaps are entered into each time a foreign currency denominated asset is purchased.

Insurance risk

The Company manages the risks associated with its insurance and other contractual liabilities through the use of actuarial modeling techniques.  These techniques utilize significant assumptions including morbidity, mortality, persistency, expenses and the cash flow stream of benefit payments.  Through these techniques, the Company attempts to match the anticipated cash flow streams of its invested assets with the anticipated cash flow streams of its insurance and other contractual obligations.  The cash flows associated with determinate policy liabilities are not interest rate sensitive but will vary based upon the timing and amount of benefit payments.  The primary risks associated with these liabilities are that the benefits will exceed those anticipated in the actuarial modeling or that the actual timing of the payment of benefits will differ from what was anticipated.

39

The Company utilizes reinsurance programs to control its exposure to general insurance risks.  Reinsurance agreements do not relieve the Company from its direct obligations to its insureds.  However, an effective reinsurance program limits the Company’s exposure to potentially large losses.  The failure of reinsurers to honor their obligations could result in losses to the Company.  To manage this risk, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk relative to the reinsurers in order to minimize its exposure to significant losses from reinsurer insolvencies.  The Company retains an initial maximum of $3.5 million of coverage per individual life. This initial retention limit of $3.5 million may increase due to automatic policy increases in coverage at a maximum rate of $175,000 per annum, with an overall maximum increase in coverage of $1.0 million.  Maximum capacity to be accepted or retained by the Company is dictated at the treaty level and is monitored annually to ensure the total risk acquired or retained on any one life is limited to a maximum retention of $4.5 million.

Credit risk

Credit risk is the risk the Company assumes if its debtors, customers or other counterparties and intermediaries may be unable or unwilling to pay their contractual obligations when they come due and may manifest itself through the downgrading of credit ratings of counterparties.  It is the Company’s policy to acquire only investment grade assets to enable it to provide for future policy obligations and to minimize undue concentrations of assets in any single geographic area, industry or entity.  To minimize this risk, management regularly reviews the credit ratings of the entities in which the Company invests.  These credit ratings are obtained from recognized external credit rating agencies and/or by internal credit review.

Operational and corporate risk

The Company manages and mitigates internal operational risk through integrated and complementary policies, procedures, processes and practices.  Human Resource hiring practices, performance evaluations and promotion and compensation practices are designed to attract, retain and develop the skilled personnel required.  A comprehensive job evaluation process is in place and training and development programs are supported.  Each business area provides training designed for their specific needs and has developed internal controls for significant processes.  Processes and controls are monitored and redefined by the business areas and subject to review by the Company’s internal audit staff.  The Company applies a robust project management discipline to all significant initiatives.

Appropriate security measures protect premises and information.  The Company has emergency procedures in place for short-term incidents and is committed to maintaining business continuity and disaster recovery plans at every business location for the recovery of critical functions in the event of a disaster, including offsite data backup and work area facilities.  The Company maintains various corporate insurance coverages such as property, general liability, excess liability, automobile liability, workers’ compensation, financial institution bonds, other regulatory bonds and professional liability insurance to protect its owned property assets and to insure against certain third-party liabilities.

The Company’s businesses are subject to various regulatory requirements imposed by regulation or legislation applicable to insurance companies and companies providing financial services.  These regulations are primarily intended to protect policyholders and beneficiaries.  Material changes in the regulatory framework or the failure to comply with legal and regulatory requirements could have a material adverse effect on the Company.  The Company monitors compliance with the legal and regulatory requirements in all jurisdictions in which it conducts business and assesses trends in legal and regulatory change to keep business areas current and responsive.

In the course of its business activities, the Company may be exposed to the risk that some actions may lead to damaging its reputation and hence damage its future business prospects.  These actions may include unauthorized activities of employees or others associated with the Company, inadvertent actions of the Company that become publicized and damage its reputation, regular or past business activities of the Company that become the subject of regulatory or media scrutiny or litigation and, due to a change of public perception, cause damage to the Company.  To manage or mitigate this risk, the Company has ongoing controls to limit the unauthorized activities of people associated with it.  The Company has

40

adopted a Code of Business Conduct and Ethics which sets out the standards of business conduct to be followed by all of its directors, officers and employees.

41

Item 8.   Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholder of

Great-West Life & Annuity Insurance Company

Greenwood Village, Colorado

We have audited the accompanying consolidated balance sheets of Great-West Life & Annuity Insurance Company and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, stockholder’s equity, and cash flows for each of the three years in the period ended December 31, 2012.  Our audits also included the financial statement schedule listed in the Index at Item 15.  These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Great-West Life & Annuity Insurance Company and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the accompanying consolidated financial statements have been retrospectively adjusted for the Company’s adoption of a change in accounting for costs associated with acquiring or renewing insurance contracts.

/s/ DELOITTE & TOUCHE LLP

Denver, Colorado

February 28, 2013

42

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Consolidated Balance Sheets

December 31, 2012 and 2011

(In Thousands, Except Share Amounts)

	December 31,
	2012		2011
			As adjusted
			See Note 1
Assets
Investments:
Fixed maturities, available-for-sale, at fair value (amortized cost $16,756,216 and $15,586,970)	$	18,188,344	$	16,589,783
Fixed maturities, held for trading, at fair value (amortized cost $356,012 and $134,591)	367,600		147,526
Mortgage loans on real estate (net of allowances of $2,890 and $21,130)	2,881,758		2,513,087
Policy loans	4,260,200		4,219,849
Short-term investments, available-for-sale (amortized cost $266,332 and $332,764)	266,332		332,764
Limited partnership and other corporation interests	124,814		169,233
Other investments	21,328		22,990
Total investments	26,110,376		23,995,232
Other assets:
Cash	11,387		7,593
Reinsurance receivable	638,797		616,336
Deferred acquisition costs and value of business acquired	204,461		219,833
Investment income due and accrued	257,028		248,114
Collateral under securities lending agreements	142,022		7,099
Due from parent and affiliates	82,828		114,697
Goodwill	105,255		105,255
Other intangible assets	18,249		21,855
Other assets	609,623		505,401
Assets of discontinued operations	33,053		39,621
Separate account assets	24,605,526		22,331,391
Total assets	$	52,818,605	$	48,212,427

See notes to consolidated financial statements. (Continued)

43

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Consolidated Balance Sheets

December 31, 2012 and 2011

(In Thousands, Except Share Amounts)

	December 31,
	2012		2011
			As adjusted
			See Note 1
Liabilities and stockholder’s equity
Policy benefit liabilities:
Future policy benefits	$	23,480,618	$	21,828,274
Policy and contract claims	321,375		310,455
Policyholders’ funds	374,821		382,816
Provision for policyholders’ dividends	63,102		64,710
Undistributed earnings on participating business	10,393		11,105
Total policy benefit liabilities	24,250,309		22,597,360
General liabilities:
Due to parent and affiliates	544,447		538,561
Commercial paper	97,987		97,536
Payable under securities lending agreements	142,022		7,099
Deferred income tax liabilities, net	288,995		154,464
Other liabilities	719,969		532,327
Liabilities of discontinued operations	33,053		39,616
Separate account liabilities	24,605,526		22,331,391
Total liabilities	50,682,308		46,298,354
Commitments and contingencies
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	771,041		768,247
Accumulated other comprehensive income	635,699		469,982
Retained earnings	722,525		668,812
Total stockholder’s equity	2,136,297		1,914,073
Total liabilities and stockholder’s equity	$	52,818,605	$	48,212,427

See notes to consolidated financial statements. (Concluded)

44

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Consolidated Statements of Income

Years Ended December 31, 2012, 2011 and 2010

(In Thousands)

	Year ended December 31,
	2012			2011			2010
				As adjusted			As adjusted
				See Note 1			See Note 1
Revenues:
Premium income, net of premiums ceded of $50,303, $40,720 and $41,474	$	422,153		$	523,216		$	805,622
Fee income	535,823			486,795			447,954
Net investment income	1,191,551			1,158,486			1,174,744
Realized investment gains (losses), net:
Total other-than-temporary losses	(5,138		)	(19,467		)	(96,648		)
Other-than-temporary (gains) losses transferred to other comprehensive income	(61		)	10,005			16,747
Other realized investment gains, net	121,916			33,957			55,406
Total realized investment gains (losses), net	116,717			24,495			(24,495		)
Total revenues	2,266,244			2,192,992			2,403,825
Benefits and expenses:
Life and other policy benefits, net of reinsurance recoveries of $46,492, $36,876 and $30,678	682,088			645,567			628,895
Increase (decrease) in future policy benefits	(66,697		)	18,828			320,167
Interest paid or credited to contractholders	519,499			529,349			518,918
Provision for policyholders’ share of earnings on participating business	(580		)	2,884			2,197
Dividends to policyholders	64,000			67,334			70,230
Total benefits	1,198,310			1,263,962			1,540,407
General insurance expenses	596,649			566,693			530,893
Amortization of deferred acquisition costs and value of business acquired	60,479			28,820			29,343
Interest expense	37,387			37,462			37,421
Total benefits and expenses, net	1,892,825			1,896,937			2,138,064
Income from continuing operations before income taxes	373,419			296,055			265,761
Income tax expense	135,305			93,818			68,627
Income from continuing operations	238,114			202,237			197,134
(Loss) from discontinued operations, net of income tax (expense) benefit of $ - , $ - and $900	—			—			(1,600		)
Net income	$	238,114		$	202,237		$	195,534

See notes to consolidated financial statements.

45

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2012, 2011 and 2010

(In Thousands)

	Year ended December 31,
	2012			2011			2010
				As adjusted			As adjusted
				See Note 1			See Note 1
Net Income	$	238,114		$	202,237		$	195,534
Components of other comprehensive income
Unrealized holding gains arising on available-for-sale fixed maturity investments (1)	534,028			511,663			724,296
Net change during the period related to cash flow hedges	(18,881		)	21,014			17,293
Reclassification adjustment for (gains) losses realized in net income	(107,713		)	(74,165		)	23,198
Net unrealized gains related to investments	407,434			458,512			764,787
Future policy benefits, deferred acquisition costs and value of business acquired adjustments	(83,835		)	(100,216		)	(129,715		)
Employee benefit plan adjustment	(68,650		)	(49,566		)	(5,142		)
Other, net	(152,485		)	(149,782		)	(134,857		)
Other comprehensive income before income taxes	254,949			308,730			629,930
Income tax expense related to items of other comprehensive income	89,232			108,056			220,476
Other comprehensive income	165,717			200,674			409,454
Total comprehensive income	$	403,831		$	402,911		$	604,988

(1) Other comprehensive income includes the non-credit component of impaired losses on fixed maturities available-for-sale in the amounts of $26,583, $13,590 and $6,346 for the years ended December 31, 2012, 2011 and 2010, respectively.

See notes to consolidated financial statements.

46

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Consolidated Statements of Stockholder’s Equity

Years ended December 31, 2012, 2011 and 2010

(In Thousands)

					Accumulated
			Additional		other
	Common		paid-in		comprehensive			Retained
	stock		capital		income (loss)			earnings			Total
Balances, January 1, 2010 (1)	$	7,032	$	761,330	$	(140,146	)	$	638,311		$	1,266,527
Net income (1)								195,534			195,534
Other comprehensive income (loss), net of income taxes (1)					409,454						409,454
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 (1)	7,032		764,644		269,308			672,928			1,713,912
Net income (1)								202,237			202,237
Other comprehensive income (loss), net of income taxes (1)					200,674						200,674
Dividends								(206,353		)	(206,353		)
Capital contribution - stock-based compensation			1,786								1,786
Income tax benefit on stock-based compensation			1,817								1,817
Balances, December 31, 2011 (1)	7,032		768,247		469,982			668,812			1,914,073
Net income								238,114			238,114
Other comprehensive income (loss), net of income taxes					165,717						165,717
Dividends								(184,401		)	(184,401		)
Capital contribution - stock-based compensation			2,314								2,314
Income tax benefit on stock-based compensation			480								480
Balances, December 31, 2012	$	7,032	$	771,041	$	635,699		$	722,525		$	2,136,297

(1)  As adjusted; See Note 1

See notes to consolidated financial statements.

47

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Consolidated Statements of Cash Flows

Years ended December 31, 2012, 2011 and 2010

(In Thousands)

	Year ended December 31,
	2012			2011			2010
				As adjusted			As adjusted
				See Note 1			See Note 1
Cash flows from operating activities:
Net income	$	238,114		$	202,237		$	195,534
Adjustments to reconcile net income to net cash provided by operating activities:
Earnings allocated to participating policyholders	(580		)	2,884			2,197
Amortization of premiums (accretion of discounts) on investments, net	(28,495		)	(41,220		)	(44,096		)
Net realized (gains) losses on investments	(126,938		)	(62,088		)	26,665
Net proceeds (purchases) of trading securities	(220,646		)	3,597			901
Interest credited to contractholders	515,356			525,347			514,002
Depreciation and amortization	82,595			48,094			44,540
Deferral of acquisition costs	(94,826		)	(57,108		)	(47,513		)
Deferred income taxes	45,371			23,617			33,636
Other, net	(2,681		)	(4,037		)	(9,834		)
Changes in assets and liabilities:
Policy benefit liabilities	(192,755		)	(148,298		)	135,731
Reinsurance receivable	(15,893		)	1,131			4,594
Investment income due and accrued	(8,654		)	(8,769		)	(13,896		)
Other assets	(98,042		)	(8,176		)	9,256
Other liabilities	31,380			45,515			(112,002		)
Net cash provided by operating activities	123,306			522,726			739,715
Cash flows from investing activities:
Proceeds from sales, maturities and redemptions of investments:
Fixed maturities, available-for-sale	8,432,248			5,373,914			4,515,507
Mortgage loans on real estate	172,950			96,848			158,246
Limited partnership interests, other corporation interests and other investments	52,151			58,872			90,235
Purchases of investments:
Fixed maturities, available-for-sale	(9,407,969		)	(6,405,522		)	(5,355,943		)
Mortgage loans on real estate	(524,396		)	(899,234		)	(331,843		)
Limited partnership interests, other corporation interests and other investments	(5,577		)	(7,874		)	(19,528		)
Net change in short-term investments	81,058			1,576,779			(919,023		)
Net change in repurchase agreements	—			(936,762		)	445,424
Policy loans, net	4,983			(41,408		)	24,257
Purchases of furniture, equipment and software	(23,525		)	(19,990		)	—
Net cash used in investing activities	(1,218,077		)	(1,204,377		)	(1,392,668		)

See notes to consolidated financial statements. (Continued)

48

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Consolidated Statements of Cash Flows

Years ended December 31, 2012, 2011 and 2010

(In Thousands)

	Year ended December 31,
	2012			2011			2010
				As adjusted			As adjusted
				See Note 1			See Note 1
Cash flows from financing activities:
Contract deposits	$	2,881,112		$	2,544,213		$	2,234,984
Contract withdrawals	(1,636,066		)	(1,716,544		)	(1,570,767		)
Change in due to/from parent and affiliates	37,598			87,743			(16,274		)
Dividends paid	(184,401		)	(206,353		)	(160,917		)
Net commercial paper borrowings	451			5,855			(5,932		)
Change in book overdrafts	(609		)	(31,963		)	3,898
Income tax benefit of stock option exercises	480			1,817			1,459
Net cash provided by financing activities	1,098,565			684,768			486,451
Net increase (decrease) in cash	3,794			3,117			(166,502		)
Cash, beginning of year	7,593			4,476			170,978
Cash, end of year	$	11,387		$	7,593		$	4,476
Supplemental disclosures of cash flow information:
Net cash paid (received) during the year for:
Income taxes	$	(102,213	)	$	(121,436	)	$	33
Income tax payments withheld and remitted to taxing authorities	48,932			53,630			56,664
Interest	37,387			37,463			37,421
Non-cash investing and financing transactions during the years:
Share-based compensation expense	$	2,314		$	1,786		$	1,855
Fair value of assets acquired in settlement of fixed maturity investments	1,125			13,021			—
Real estate acquired in satisfaction of debt	—			2,140			—

See notes to consolidated financial statements. (Concluded)

49

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

1.  Organization and Significant Accounting Policies

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”), a Canadian holding Company.  The Company offers a wide range of life insurance, retirement and investment products to individuals, businesses and other private and public organizations throughout the United States.  The Company is an insurance company domiciled in the State of Colorado and is subject to regulation by the Colorado Division of Insurance.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and the accounts of its subsidiaries over which it exercises control.  Intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  These accounting principles require 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 items and matters such as, but not limited to, the valuation of investments and derivatives in the absence of quoted market values, impairment of investments, valuation of policy benefit liabilities, valuation of deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”), employee benefits plans and income taxes and the valuation of deferred tax assets or liabilities, net.  Actual results could differ from those estimates.

During the year ended December 31, 2012, the Company had an $18,240 decrease in the general mortgage provision allowance as a result of revised assumptions primarily related to the improvement in general economic conditions, the stability of loss levels within the commercial real estate market and the stability of the Company’s own commercial mortgage portfolio.

Retrospective adoption of accounting pronouncement

In October 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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 provided guidance and modified the definition of the types and nature of costs incurred by insurance enterprises that can be capitalized in connection with the successful acquisition of new or renewal insurance contracts.  Further, ASU No. 2010-26 clarified which costs may not be capitalized as DAC.  Such costs include incremental costs related to unsuccessful attempts to acquire new or renewal insurance contracts in addition to certain administrative costs.  ASU No. 2010-26 was effective for interim and annual periods in fiscal years beginning after December 15, 2011.  The Company adopted ASU No. 2010-26 for its fiscal year beginning January 1, 2012, and applied the retrospective method of adoption to year-end 2004.  Any adjustment prior to 2004 was impracticable.

50

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

The following is a summary of the effects of the adoption of ASU No. 2010-26 on the Company’s condensed consolidated financial statements:

	As previously			Retrospective
	reported			adoption			As adjusted
Consolidated Balance Sheets
December 31, 2011
Deferred acquisition costs and value of business acquired	$	343,449		$	(123,616	)	$	219,833
Deferred income tax liabilities, net	197,729			(43,265		)	154,464
Accumulated other comprehensive income	445,372			24,610			469,982
Retained earnings	773,773			(104,961		)	668,812
Consolidated Statements of Income
December 31, 2011
General insurance expenses	535,636			31,057			566,693
Amortization of deferred acquistion costs and value of business acquired	41,634			(12,814		)	28,820
Income tax expense	100,203			(6,385		)	93,818
Net income	214,095			(11,858		)	202,237
December 31, 2010
General insurance expenses	498,386			32,507			530,893
Amortization of deferred acquistion costs and value of business acquired	50,741			(21,398		)	29,343
Income tax expense	72,515			(3,888		)	68,627
Net income	202,755			(7,221		)	195,534
Consolidated Statements of Comprehensive Income
December 31, 2011
Net income	214,095			(11,858		)	202,237
Future policy benefits, deferred acquistion costs and value of business acquired adjustments	(96,860		)	(3,356		)	(100,216		)
Income tax expense related to items of other comprehensive income	109,230			(1,174		)	108,056
December 31, 2010
Net income	202,755			(7,221		)	195,534
Future policy benefits, deferred acquistion costs and value of business acquired adjustments	(182,357		)	52,642			(129,715		)
Income tax expense related to items of other comprehensive income	202,051			18,425			220,476
Consolidated Statements of Stockholder’s Equity
Balances, January 1, 2010, Accumulated other comprehensive income (loss)	(132,721		)	(7,425		)	(140,146		)
Balances, January 1, 2010, Retained earnings	724,193			(85,882		)	638,311
Net income, 2010	202,755			(7,221		)	195,534
Other comprehensive income (loss), net of income taxes, 2010	375,237			34,217			409,454
Net income, 2011	214,095			(11,858		)	202,237
Other comprehensive income (loss), net of income taxes, 2011	202,856			(2,182		)	200,674

51

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

	As previously		Retrospective
	reported		adoption		As adjusted
Consolidated Statements of Cash Flows
December 31, 2011
Net income	214,095		(11,858	)	202,237
Depreciation and amortization	60,908		(12,814	)	48,094
Deferral of acquisition costs	(88,165	)	31,057		(57,108	)
Deferred income taxes	30,002		(6,385	)	23,617
December 31, 2010
Net income	202,755		(7,221	)	195,534
Depreciation and amortization	65,938		(21,398	)	44,540
Deferral of acquisition costs	(80,020	)	32,507		(47,513	)
Deferred income taxes	37,524		(3,888	)	33,636

Summary of Significant Accounting Policies

Investments

Investments are reported as follows:

1.The Company classifies the majority of its fixed maturity investments as available-for-sale.  Included in fixed maturities are perpetual debt investments which primarily consist of junior subordinated debt instruments that have no stated maturity date but pay fixed or floating interest in perpetuity.  All available-for-sale fixed maturity investments are recorded at fair value with the related net unrealized gain or loss, net of policyholder related amounts and deferred taxes, recorded in accumulated other comprehensive income (loss) (“AOCI”).  The Company recognizes the acquisition of its public fixed maturity investments on a trade date basis.  Net unrealized gains and losses related to participating contract policies that cannot be distributed are recorded as undistributed earnings on participating business.

Premiums and discounts are recognized as a component of net investment income using the scientific interest method, realized gains and losses are included in net realized investment gains (losses) and declines in value determined to be other-than-temporary are included in total other-than-temporary losses.

The Company purchases fixed maturity securities which are classified as held for trading.  Assets in the held for trading category are carried at fair value with changes in fair value reported in net investment income.

The recognition of income on certain investments (e.g. loan-backed securities, including mortgage-backed and asset-backed securities) is dependent upon market conditions, which may result in prepayments and changes in amounts to be earned.  Prepayments on all mortgage-backed and asset-backed securities are monitored monthly and amortization of the premium and/or the accretion of the discount associated with the purchase of such securities are adjusted by such prepayments.

2.Mortgage loans on real estate consist of domestic commercial collateralized loans and are carried at their unpaid principal balances adjusted for any unamortized premiums or discounts and mortgage provision allowances.  Interest income is accrued on the unpaid principal balance for all loans, except for loans on non-accrual status.  Premiums and discounts are amortized to net investment income using the scientific interest method.  Prepayment penalty fees are recognized in other realized investment gains upon receipt.

The Company actively manages its mortgage loan portfolio by completing ongoing comprehensive 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.  On a quarterly basis, the Company reviews the above primary credit quality indicators in its internal risk assessment of loan impairment and

52

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

credit loss.  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 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 mortgage provision allowance is reviewed quarterly.  The determination of the calculation and the adequacy of the mortgage provision 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 mortgage provision allowance 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 included in the non-performing category and other loans with certain substandard credit quality indicators are individually reviewed to determine if a specific impairment is required.  Risk is mitigated through first position collateralization, guarantees, loan covenants and borrower reporting requirements.  Since the Company does not originate or hold uncollateralized mortgages, loans are generally not deemed fully uncollectable.  Generally, unrecoverable amounts are written off during the final stage of the foreclosure process.

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 is discontinued.  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.

On a quarterly basis, any loans with terms that were modified during that period are reviewed to determine if the loan modifications constitute a troubled debt restructuring (“TDR”).  In evaluating whether a loan modification constitutes a TDR, it must be determined that the modification is a significant concession and the debtor is experiencing financial difficulties.

3.Limited partnership and other corporation interests are accounted for using either the cost or equity method of accounting.  The Company uses the cost method on investments where it has a minor equity interest and no significant influence over the entity’s operations.  The Company uses the equity method when it has a partnership interest that is considered more than minor, although the Company has no significant influence over the entity’s operations.  Also included in limited partnership interests are limited partnerships established for the purpose of investing in low-income housing that qualify for federal and state tax credits.  These interests are carried at amortized cost as determined using the effective yield method.

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.

53

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

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

4.Policy loans are carried at their unpaid balances.

5.Short-term investments include securities purchased with initial maturities of one year or less and are generally carried at fair value which is approximated from amortized cost.  The Company classifies its short-term investments as available-for-sale.

6.The Company enters into dollar repurchase agreements with third party broker-dealers.  The Company does not enter into these types of transactions for liquidity purposes, but rather for yield enhancements on its investment portfolio.  The dollar repurchase trading strategy involves the sale of securities with a simultaneous agreement to repurchase similar securities at a future date at an agreed-upon price.  Assets to be repurchased are the same, or substantially the same, as the assets transferred and are accounted for as secured borrowings.  Proceeds of the sale are reinvested in other securities and may enhance the current yield and total return.  The difference between the sales price and the future repurchase price is recorded as an adjustment to net investment income.  In connection with repurchase agreements transactions, it is the Company’s policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times.  During the period between the sale and repurchase, the Company will not be entitled to receive interest and principal payments on the securities sold.  Losses may arise from changes in the value of the securities or if the counterparty enters bankruptcy proceedings or becomes insolvent.  In such cases, the Company’s right to repurchase the security may be restricted.  Amounts owed to brokers under these arrangements are included in repurchase agreements.

7.The Company participates in a securities lending program in which the Company lends securities that are held as part of its general account investment portfolio to third parties.  The Company does not enter into these types of transactions for liquidity purposes, but rather for yield enhancements on its investment portfolio.  The borrower can return and the Company can request the loaned securities at any time.  The Company maintains ownership of the securities at all times and is entitled to receive from the borrower any payments for interest received on such securities during the loan term.  Securities lending transactions are accounted for as secured borrowings.  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.  The Company generally requires initial collateral in an amount greater than or equal to 102% of the fair value of domestic securities loaned and 105% of foreign securities loaned.  Such collateral is used to replace the securities loaned in event of default by the borrower.  Acceptable collateral is generally defined as government securities, letters of credit and/or cash collateral.  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.

8.The Company’s other-than-temporary impairments (“OTTI”) accounting policy requires that a decline in the value of a security below its cost or amortized cost basis be assessed to determine if the decline is other-than-temporary.  The assessment of whether an OTTI 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 of each individual security.  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.

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

·The extent to which estimated fair value is below cost;

54

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

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

·The length of time for which the estimated fair value has been below cost;

·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.

If either (a) management has the intent to sell a fixed maturity investment or (b) it is more likely than not the Company will be required to sell a fixed maturity investment before its anticipated recovery, a charge is recorded in net realized investment losses equal to the difference between the fair value and cost or amortized cost basis of the security.  If management does not intend to sell the security 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, but the present value of the cash flows expected to be collected (discounted at the effective interest rate implicit in the fixed maturity investment prior to impairment) is less than the amortized cost basis of the fixed maturity investment (referred to as the credit loss portion), an OTTI is considered to have occurred.  In this instance, total OTTI is bifurcated into two components: the amount related to the credit loss, which is recognized in current period earnings; and the amount attributed to other factors (referred to as the non-credit portion), which is recognized as a separate component in AOCI.  The expected cash flows utilized during the impairment evaluation process are determined using judgment and the best information available to the Company including default rates, credit ratings, collateral characteristics and current levels of subordination.  After the recognition of an OTTI, a fixed maturity investment is accounted for as if it had been purchased on the measurement date of the OTTI, with an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings.  The difference between the new amortized cost basis and the future cash flows is accreted into net investment income.  The Company continues to estimate the present value of cash flows expected to be collected over the life of the security.

Fair Value

Certain assets and liabilities are recorded at fair value on the Company’s consolidated balance sheets.  The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The Company categorizes its assets and liabilities measured at fair value on a recurring basis into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique.  The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).  The Company’s assets and liabilities recorded at fair value on a recurring basis have been categorized based upon the following fair value hierarchy:

·Level 1 inputs 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 certain money market funds.

·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 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 are 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

55

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

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.

·Short-term investments - valued based on amortized cost.

·Derivative instruments - trading activity, swap curves, credit spreads, 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), trading activity, 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.

·Common collective trusts — the net asset value based on the underlying trust investments.

·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 are 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, as noted below.  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 — unadjusted 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.

Overall, transfers between levels are attributable to a change in the observability of inputs.  Assets and liabilities are transferred to a lower level in the hierarchy when a significant input cannot be corroborated with market observable data.  This may occur when market activity decreases and underlying inputs cannot be observed, current prices are not available, and/or when there are significant variances in quoted prices, thereby affecting transparency.  Assets and liabilities are transferred to a higher level in the hierarchy when circumstances change such that a significant input can be corroborated with market observable data.  This may be due to a significant increase in market activity including recent trades, a specific event, or one or more significant input(s) becoming observable.  All transfers between levels are recognized at the beginning of the reporting period in which the transfer occurred.

The policies and procedures utilized to review, account for and report on the value and level of the Company’s securities were determined and implemented by the Finance division.  The Investments division is responsible for the processes related to security purchases and sales and provides valuation and leveling input to the Finance division when necessary.  Both divisions within the Company have worked in conjunction to establish thorough pricing, review, approval, accounting and reporting policies and procedures around the securities valuation process.

56

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

Internal pricing models may be used to value certain Level 3 securities.  These models have been created by the Company based on specific characteristics of the portfolio, such as the high level of illiquidity, the low level of market making and trading activity and the collateralized nature of certain securities.  These models are recalibrated monthly by adjusting the inputs based on current public security market conditions and how those conditions apply to the Company’s portfolio.  Internal model input assumptions may include: prepayment speeds, constant default rates and the Asset Backed Securities Index (“ABX Index”) spread adjusted by an internally calculated liquidity premium.  The primary inputs into the internal pricing models are the constant default rate and the internally adjusted ABX Index spread.  Additionally, a monthly comparison of the internally developed model prices to pricing vendor evaluations is performed and analyzed.  The Company determined the use of internal models was more accurate for certain securities categorized as Level 3 primarily due to the internally adjusted ABX Index spread being a better indication of fair value than spread assumptions used by external pricing models in illiquid markets.  The internally adjusted ABX Index spread captures exposure to similar cash flows as the Company’s portfolio in a liquid and actively traded market and includes additional spread assumptions for potential illiquidity of the underlying collateral.

In some instances, securities are priced using external broker quotes.  In most cases, when broker quotes are used as pricing inputs, more than one broker quote is obtained.  External broker quotes are reviewed internally by comparing the quotes to similar securities in the public market and/or to vendor pricing, if available.  Additionally, external broker quotes are compared to market reported trade activity to ascertain whether the price is reasonable, reflective of the current market prices and takes into account the characteristics of the Company’s securities.

Derivative financial instruments

The Company enters into derivative transactions which include the use of interest rate swaps, interest rate swaptions, cross-currency swaps, U.S. government treasury futures contracts, Eurodollar futures contracts, futures on equity indices and interest rate swap futures.  The Company uses these derivative instruments to manage various risks, including interest rate and foreign currency exchange rate risk associated with its invested assets and liabilities.  Derivative instruments are not used for speculative reasons.

All derivatives, regardless of hedge accounting treatment, are recorded in other assets and other liabilities at fair value.  Accounting for the ongoing changes in the fair value of a derivative depends upon the intended use of the derivative and its designation as determined when the derivative contract is entered into.  If the derivative is designated as a cash flow hedge, the effective portions of the changes in the fair value of the derivative are recorded in AOCI and are recognized in the consolidated income statements when the hedged item affects earnings.  If the derivative is designated as a fair value hedge, the changes in its fair value and of the fair value of the hedged item attributable to the hedged risk are recognized in earnings in net investment income.  Changes in the fair value of derivatives not qualifying for hedge accounting and the over effective portion of cash flow hedges are recognized in net investment income in the period of the change.  Investment gains and losses generally result from the termination of derivative contracts prior to expiration.

The Company uses derivative financial instruments for risk management purposes associated with certain invested assets and policy liabilities.  Derivatives are used to (a) hedge the economic effects of interest rate and stock market movements on the Company’s guaranteed minimum withdrawal benefit, (b) hedge the economic effect of a large increase in interest rates on the Company’s general account life insurance, group pension liabilities and certain 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-U.S. 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.

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

57

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

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.

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.

Derivatives in a net asset position may have cash or securities pledged as collateral to the Company in accordance with the collateral support agreements with the counterparty. This collateral is held in a custodial account for the benefit of the Company.  Unrestricted cash collateral is included in other assets and the obligation to return it is included in other liabilities.  The cash collateral is reinvested in a government money market fund.  Cash collateral pledged by the Company is included in other assets.

Cash

Cash includes only amounts in demand deposit accounts.

Book overdrafts occur when checks have been issued by the Company, but have not been presented to the Company’s disbursement bank accounts for payment.  These bank accounts allow the Company to delay funding of the issued checks until they are presented for payment.  This delay in funding results in a temporary source of financing.  The activity related to book overdrafts is included in the financing activities in the consolidated statement of cash flows.  The book overdrafts are included in other liabilities in the accompanying consolidated balance sheets.

Internal use software

Purchased software costs, as well as certain internal and external costs incurred to develop internal use computer software during the application development stage are capitalized and amortized using the straight-line method over its estimated useful life.  Capitalized internal use software development costs, net of accumulated amortization, in the amounts of $48,280 and $33,021, are included in other assets at December 31, 2012 and 2011, respectively.  The Company capitalized $17,593, $16,676 and $9,816 of internal use software development costs during the years ended December 31, 2012, 2011 and 2010, respectively.

Deferred acquisition costs and value of business acquired

The Company incurs costs in connection with the acquisition of new and renewal insurance business.  Costs that vary directly with and relate to the successful production of new business are deferred as DAC.  These costs consist primarily of commissions, costs associated with the Company’s sales representatives and policy issuance and underwriting expenses related to the production of successfully acquired new business or through the acquisition of insurance or annuity contracts.  A success factor is derived from actual contracts issued by the Company from requests for proposals or applications received.  VOBA represents the estimated fair value of insurance or annuity contracts acquired either directly through the acquisition of another insurance company or through the acquisition of insurance or annuity contracts through assumption reinsurance transactions.  The recoverability of such costs is dependent upon the future profitability of the related business.

DAC and VOBA associated with the annuity products and flexible premium universal life insurance products are being amortized over the life of the contracts in proportion to the emergence of gross profits.  Retrospective adjustments of these amounts are made when the Company revises its estimates of current or future gross profits.  DAC and VOBA associated with traditional life insurance are amortized over the premium-paying period of the related policies in proportion to premium revenues recognized.  DAC and VOBA, for applicable products, are adjusted for the impact of unrealized gains or losses on investments as if these gains or losses had been realized, with corresponding credits or charges included in AOCI.

58

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

Goodwill and other intangible assets

Goodwill is the excess of cost over the fair value of assets acquired and liabilities assumed in connection with an acquisition and is considered an indefinite lived asset and therefore is not amortized.  The Company tests goodwill for impairment annually or more frequently if events or circumstances indicate that there may be justification for conducting an interim test.  If the carrying value of goodwill exceeds its fair value, the excess is recognized as an impairment and recorded as a charge against net income in the period in which the impairment is identified.

Other intangible assets represent the estimated fair value of the portion of the purchase price that was allocated to the value of customer relationships and preferred provider relationships in various acquisitions.  These intangible assets have been assigned values using various methodologies, including present value of projected future cash flows, analysis of similar transactions that have occurred or could be expected to occur in the market and replacement or reproduction cost.  The initial valuations of these intangible assets were supported by an independent valuation study that was commissioned by the Company.  Other identified intangible assets with finite lives are amortized over their estimated useful lives, which initially ranged from 4 to 14 years (weighted average 13 years), primarily based upon the cash flows generated by these assets.

Separate accounts

Separate account assets and related liabilities are carried at fair value in the accompanying consolidated balance sheets.  The Company issues variable annuity contracts through separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholder and therefore, are not included in the Company’s consolidated statements of income.

Revenues to the Company from the separate accounts consist of contract maintenance fees, investment management fees, administrative fees and mortality and expense risk charges.

The Company’s separate accounts invest in shares of Great-West Funds, Inc. (“Great-West Funds”) (formerly known as Maxim Series Funds Inc.) and Putnam Funds, open-end management investment companies, which are affiliates of the Company, and shares of other non-affiliated mutual funds and government and corporate bonds.

Life insurance and annuity future benefits

Life insurance and annuity future benefits with life contingencies in the amounts of $13,808,516 and $13,051,532 at December 31, 2012 and 2011, respectively, are computed on the basis of estimated mortality, investment yield, withdrawals, future maintenance and settlement expenses and retrospective experience rating premium refunds.  Annuity contract benefits without life contingencies in the amounts of $9,622,357 and $8,727,286 at December 31, 2012 and 2011, respectively, are established at the contractholder’s account value.

Reinsurance Ceded

In the normal course of its business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding risks to other insurance enterprises under excess coverage and coinsurance contracts.  For each of its reinsurance agreements, the Company determines if the agreement provides indemnification against loss or liability relating to insurance risk in accordance with applicable accounting standards.  If the Company determines that a reinsurance agreement does not provide indemnification against loss or liability relating to insurance risk, the Company records the agreement using the deposit method of accounting.  The Company reviews all contractual features, particularly those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims.

59

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

Policy benefits and policy and contract claims ceded to other insurance companies are carried as a reinsurance receivable in the accompanying consolidated balance sheets.  The cost of reinsurance related to long duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies.

Policy and contract claims

Policy and contract claims include provisions for claims incurred but not reported and claims in the process of settlement.  The provision for claims incurred but not reported is valued based primarily on the Company’s prior experience.  The claims in the process of settlement are valued in accordance with the terms of the related policies and contracts.

Participating business

The Company has participating policies in which the policyholder shares in the Company’s earnings through policyholder dividends that reflect the difference between the assumptions used in the premium charged and the actual experience on those policies.  The amount of dividends to be paid is determined by the Board of Directors.

Participating life and annuity policy benefit liabilities are $6,748,375 and $6,705,462 at December 31, 2012 and 2011, respectively.  Participating business comprises approximately 9% and 8% of the Company’s individual life insurance in-force at December 31, 2012 and 2011, respectively, and 20%, 19% and 13% of individual life insurance premium income for the years ended December 31, 2012, 2011 and 2010, respectively.  The policyholder’s share of net income on participating policies is excluded from stockholder’s equity and recorded as undistributed earnings on participating business in the consolidated balance sheet.

Recognition of premium and fee income and benefits and expenses

Life insurance premiums are recognized when due.  Annuity contract premiums with life contingencies are recognized as received.    Revenues for annuity and other contracts without significant life contingencies consist of contract charges for the cost of insurance and contract administration and surrender fees that have been assessed against the contract account balance during the period and are recognized when earned.  Fees from assets under management, assets under administration, shareholder servicing, mortality and expense risk charges, administration and record-keeping services and investment advisory services are recognized when due.  Benefits and expenses on policies with life contingencies are associated with earned premiums so as to result in recognition of profits over the life of the contracts.   Premiums and policyholder benefits and expenses are presented net of reinsurance.

Net investment income

Interest income from fixed maturities and mortgage loans on real estate is recognized when earned.

Realized investment gains (losses) and derivative financial instruments

Realized investment gains and losses are reported as a component of revenues and are determined on a specific identification basis.  Realized investment gains and losses also result from the termination of derivative contracts prior to expiration that are not designated as hedges for accounting purposes and certain fair-value hedge relationships.

Income taxes

Income taxes are recorded using the asset and liability method in which deferred tax assets and liabilities are recorded for expected future tax consequences of events that have been recognized in either the Company’s consolidated financial statements or consolidated tax returns.  In estimating future tax consequences, all expected future events, other than the enactments or changes in the tax laws or rules, are considered.  A

60

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

valuation allowance is provided to the extent that it is more likely than not that deferred tax assets will not be realized. Although realization is not assured, management believes it is more likely than not that the deferred tax asset will be realized. The effect on deferred taxes from a change in tax rates is recognized in income in the period that includes the enactment date.

Share-based compensation

Lifeco maintains the Great-West Lifeco Inc. Stock Option Plan (the “Lifeco 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.  The Company uses the fair value method to recognize the cost of share-based employee compensation under the Lifeco plan.

In 2011, the Company implemented a Performance Share Unit Plan (“PSU plan”) for senior executives of the Company.  Under the PSU plan, performance share units are granted to certain senior executives of the Company having a value equal to the participants’ deferred incentive compensation for the period.  The Company uses the fair value method to recognize the cost of share-based employee compensation under the PSU plan.

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 rollforward 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 purchases, sales, issuances and settlements provisions for its fiscal year beginning January 1, 2011.  The provisions of ASU No. 2010-06 relate only to financial statement disclosures and, accordingly, did not have an impact on the Company’s 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 consolidated financial position or the results of its operations.

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 criteria 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 adopted ASU No. 2011-03 for its fiscal year beginning January 1,

61

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

2012.  The adoption of ASU No. 2011-03 did not have an impact on the Company’s consolidated financial position or the results of its operations.

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 concepts 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 adopted ASU No. 2011-04 for its fiscal year beginning January 1, 2012.  The provisions of ASU No. 2011-04 relate only to financial statement disclosures regarding fair value and, accordingly, its adoption did not have an impact on the Company’s consolidated financial position or the results of its operations.

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 adopted ASU No. 2011-05 for its fiscal year beginning January 1, 2012.  The provisions of ASU No. 2011-05 relate only to the presentation of other comprehensive income and, accordingly, its adoption did not have an impact on the Company’s consolidated financial position or the results of its operations.  ASU No. 2011-05 was subsequently amended by ASU No. 2011-12.

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.  The Company adopted the provisions of ASU No. 2011-08 for its fiscal year beginning January 1, 2012.  The adoption of ASU No. 2011-08 did not have an impact on the Company’s consolidated financial position or the results of its operations.

In December 2011, the FASB issued ASU No. 2011-12 Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU No. 2011-12”).  ASU No. 2011-12 indefinitely defers the requirement in ASU No. 2011-05 for entities to present reclassification adjustments out of AOCI by component in both the statement in which net income is presented and statement in which other comprehensive income is presented, for both interim and annual periods.  ASU No. 2011-12 does not affect any other provisions of ASU No. 2011-05.  ASU No. 2011-12 is effective for fiscal years and interim periods within those years ending after December 15, 2011.  The Company adopted the provisions of ASU No. 2011-12 for its fiscal year beginning January 1, 2012.  The provisions of ASU No. 2011-12 relate only to the indefinite deferral of the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income and, accordingly, its adoption did not have an impact on the Company’s consolidated financial position or the results of its operations.  ASU No. 2011-12 was subsequently amended by ASU No. 2013-02.

62

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

Future adoption of new accounting pronouncements

In December 2011, the FASB issued ASU No. 2011-11 Balance Sheet (Topic 210) Disclosures about Offsetting Assets and Liabilities (“ASU No. 2011-11”).  ASU No. 2011-11 provides for entities to disclose information about financial instruments and derivative instruments that are either offset in the balance sheet (presented on a net basis), or subject to an enforceable master netting arrangement or similar arrangement.  ASU No. 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013 and for interim periods within those annual periods.  The Company will adopt the provisions of ASU No. 2011-11 for its fiscal year beginning January 1, 2013.  The provisions of ASU No. 2011-11 relate only to financial statement disclosures regarding balance sheet offsetting and, accordingly, its adoption will not have an impact on the Company’s consolidated financial position or the results of its operations. ASU No. 2011-11 was subsequently amended by ASU No. 2013-01.

In January 2013, the FASB issued ASU No. 2013-01 Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU No. 2013-01”). ASU No. 2013-01 clarifies that the scope of ASU No. 2011-11 applies to derivatives, repurchase agreements, reverse repurchase agreements, securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. The Company will adopt the provisions of ASU No. 2013-01 for its fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The effective date is the same as the effective date of ASU No. 2011-11.

In February 2013, the FASB issued ASU No. 2013-02 Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU No. 2013-02”).  ASU No. 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income for each applicable component of net income on a prospective basis.  ASU No. 2013-02 supersedes the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU No. 2011-05 and ASU No. 2011-12, for all entities. The Company will adopt the provisions of ASU No. 2013-02 for its fiscal year beginning January 1, 2013. The provisions of ASU No. 2013-02 relate only to financial statement presentation of other comprehensive income and, accordingly, its adoption will not have an impact on the Company’s consolidated financial position or the results of its operations.

3.  Related Party Transactions

In the normal course of its business, the Company enters into reinsurance agreements with related parties. Included in the consolidated balance sheets at December 31, 2012 and 2011 are the following related party amounts:

	December 31,
	2012		2011
Reinsurance receivable	$	533,446	$	502,093
Future policy benefits	1,990,579		2,115,676

63

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

Included in the consolidated statements of income for the years ended December 31, 2012, 2011 and 2010 are the following related party amounts:

	Year ended December 31,
	2012			2011			2010
Premium income, net of related party premiums ceded of $18,112, $6,912, and $3,588	$	96,439		$	129,072		$	131,037
Life and other policy benefits, net of reinsurance recoveries of $12,562 $6,426 and $4,906	99,321			106,790			122,830
Decrease in future policy benefits	(39,439		)	(70,554		)	(65,778		)

The Company provides certain administrative and operational services and investment services for The Great-West Life Assurance Company (“GWL”) and The Canada Life Assurance Company (“CLAC”), wholly-owned subsidiaries of Lifeco.  Additionally, the Company receives payroll-related services from GWL.  The Company also provides investment services for London Reinsurance Group, an indirect subsidiary of GWL.  The following table presents revenue, expenses incurred and expense reimbursement from related parties for services provided pursuant to these service agreements for the years ended December 31, 2012, 2011 and 2010.  These amounts, in accordance with the terms of the various contracts, are based upon estimated costs incurred, including a profit charge, and resources expended based upon the number of policies, certificates in-force and/or administered assets.

	Year ended December 31,
	2012			2011		2010
Investment management and administrative revenue included in fee income and net investment income	$	7,770		$	7,492	$	7,505
Administrative and underwriting expense reimbursements included as a reduction to general insurance expense	1,698			3,629		988
Administrative and underwriting expense included in general insurance expense	(2,610		)	—		—
Total	$	6,858		$	11,121	$	8,493

The following table summarizes amounts due from parent and affiliates at December 31, 2012 and 2011:

			December 31,
Related party	Indebtedness	Due date	2012		2011
GWL&A Financial Inc.	On account	On demand	$	17,236	$	6,976
Great-West Lifeco U.S. Inc.	On account	On demand	62,350		105,614
Great-West Lifeco Finance LP	On account	On demand	695		716
Great-West Lifeco Finance LP II	On account	On demand	619		524
Other related party receivables	On account	On demand	1,928		867
Total			$	82,828	$	114,697

64

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

The following table summarizes amounts due to parent and affiliates at December 31, 2012 and 2011:

			December 31,
Related party	Indebtedness	Due date	2012		2011
GWL&A Financial Inc. (1)	Surplus note	November 2034	$	194,390	$	194,362
GWL&A Financial Inc. (2)	Surplus note	May 2046	333,400		333,400
GWL&A Financial Inc.	Note interest	May 2013	4,701		4,701
Great-West Life & Annuity Insurance Capital (Nova Scotia) Co. II	On account	On demand	—		140
London Life Financial Corporation	On account	On demand	1,735		1,715
The Great-West Life Assurance Company	On account	On demand	2,568		1,765
The Canada Life Assurance Company	On account	On demand	7,653		2,478
Total			$	544,447	$	538,561

(1) A note payable to GWL&A Financial was issued as a surplus note on November 15, 2004, with a face amount of $195,000 and carrying amounts of $194,390 and $194,362 at December 31, 2012 and 2011, respectively.  The surplus note bears interest at the rate of 6.675% per annum, payable in arrears on each May 14 and November 14.  The note matures on November 14, 2034.

(2) A note payable to GWL&A Financial was issued as a surplus note on May 19, 2006, with a face amount and carrying amount of $333,400.  The surplus note bears interest initially at the rate of 7.203% per annum, payable in arrears on each May 16 and November 16 until May 16, 2016.  After May 16, 2016, the surplus note bears an interest rate of 2.588% plus the then-current three-month London Interbank Offering Rate (“LIBOR”).  The surplus note is redeemable by the Company at the principal amount plus any accrued and unpaid interest after May 16, 2016.  The note matures on May 16, 2046.

Payments of principal and interest under the surplus notes shall be made only out of surplus funds of the Company and only with prior written approval of the Commissioner of Insurance of the State of Colorado when the Commissioner of Insurance is satisfied that the financial condition of the Company warrants such action pursuant to applicable Colorado law.  Payments of principal and interest on the surplus notes are payable only if at the time of such payment and after giving effect to the making thereof, the Company’s surplus would not fall below two and one half times the authorized control level as required by the most recent risk-based capital calculations.

Interest expense attributable to these related party debt obligations was $37,059 for the year ended December 31, 2012, $37,163 for the year ended December 31, 2011 and $37,042 for the year ended December 31, 2010.  Included in other liabilities on the consolidated balance sheets at December 31, 2012 and 2011 is $4,701 of interest payable attributable to these related party debt obligations.

The Company’s wholly owned subsidiary, Great-West Life & Annuity Insurance Company of South Carolina (“GWSC”) and CLAC are parties to a reinsurance agreement pursuant to which GWSC assumes term life insurance from CLAC.  GWL&A Financial obtained two letters of credit for the benefit of the Company as collateral under the GWSC and CLAC reinsurance agreement for policy liabilities and capital support.  The first letter of credit is for $1,138,500 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 December 31, 2012 and 2011 there were no outstanding amounts related to the letters of credit.

Included within reinsurance receivable in the consolidated balance sheets are $486,514 and $450,820 of funds withheld assets as of December 31, 2012 and 2011, respectively.  CLAC pays the Company on, a quarterly basis, interest on the funds withheld balance at a rate of 4.55% per annum.

A subsidiary of the Company, Great-West Capital Management, LLC, (formerly known as GW Capital Management LLC) serves as a Registered Investment Advisor to Great-West Funds, an affiliated open-end management investment company, to several affiliated insurance company separate accounts and to Great-

65

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

West Trust Company, LLC, (formerly known as Orchard Trust Company, LLC), an affiliated trust company. Great-West Trust Company, LLC, serves as trustee to several collective investment trusts.  Included in fee income on the consolidated statements of income is $84,137, $69,172 and $59,320 of advisory, management and trustee fee income from these affiliated entities for the years ended December 31, 2012, 2011 and 2010, respectively.

The Company’s separate accounts invest in shares of Great-West Funds 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 include mutual funds or other investment options that purchase guaranteed interest annuity contracts issued by the Company.  During the years ended December 31, 2012, 2011 and 2010, these purchases totaled $131,593, $112,117 and $162,504, respectively.  As the general account investment contracts are also included in the separate account balances in the accompanying consolidated balance sheets, the Company has reduced the separate account assets and liabilities by $289,730 and $266,340 at December 31, 2012 and 2011, respectively, to eliminate these amounts in its consolidated balance sheets at those dates.

4.  Summary of Investments

The following tables summarize fixed maturity investments classified as available-for-sale and the non-credit-related component of OTTI in AOCI at December 31, 2012 and 2011:

	December 31, 2012
	Amortized		Gross unrealized		Gross unrealized		Estimated fair value		OTTI (gain) loss
Fixed maturities:	cost		gains		losses		and carrying value		included in AOCI (1)
U.S. government direct obligations and U.S. agencies	$	2,735,917	$	101,568	$	3,411	$	2,834,074	$	—
Obligations of U.S. states and their subdivisions	1,676,289		342,445		229		2,018,505		—
Corporate debt securities (2)	9,511,411		974,231		111,551		10,374,091		(2,293		)
Asset-backed securities	1,795,122		120,471		54,454		1,861,139		(66,293		)
Residential mortgage-backed securities	407,715		17,900		30		425,585		(240		)
Commercial mortgage-backed securities	616,011		48,247		1,303		662,955		—
Collateralized debt obligations	13,751		14		1,770		11,995		—
Total fixed maturities	$	16,756,216	$	1,604,876	$	172,748	$	18,188,344	$	(68,826	)

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

(2) Includes perpetual debt investments with amortized cost of $226,069 and estimated fair value of $153,100 at December 31, 2012.

66

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

	December 31, 2011
	Amortized		Gross unrealized		Gross unrealized		Estimated fair value		OTTI (gain) loss
Fixed maturities:	cost		gains		losses		and carrying value		included in AOCI (1)
U.S. government direct obligations and U.S. agencies	$	2,209,420	$	107,363	$	1,112	$	2,315,671	$	—
Obligations of U.S. states and their subdivisions	1,773,687		297,488		5		2,071,170		—
Corporate debt securities (2)	8,287,960		762,045		154,259		8,895,746		3,672
Asset-backed securities (3)	2,006,544		70,117		125,217		1,951,444		(23,837		)
Residential mortgage-backed securities	578,046		17,461		3,965		591,542		1,409
Commercial mortgage-backed securities	712,831		42,538		7,572		747,797		—
Collateralized debt obligations	18,482		3		2,072		16,413		—
Total fixed maturities	$	15,586,970	$	1,297,015	$	294,202	$	16,589,783	$	(18,756	)

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

(2) Includes perpetual debt investments with amortized cost of $253,023 and estimated fair value of $166,284 at December 31, 2011.

(3) The non-credit loss component of OTTI (gain) loss for asset-backed securities was in an unrealized gain position due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.

See Note 6 for additional discussion regarding fair value measurements.

The amortized cost and estimated fair value of fixed maturity investments classified as available-for-sale at December 31, 2012, 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.

	December 31, 2012
	Amortized cost		Estimated fair value
Maturing in one year or less	$	672,982	$	711,671
Maturing after one year through five years	3,074,443		3,374,411
Maturing after five years through ten years	3,685,547		4,192,495
Maturing after ten years	3,895,658		4,271,934
Mortgage-backed and asset-backed securities	5,427,586		5,637,833
	$	16,756,216	$	18,188,344

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

The following table summarizes information regarding the sales of securities classified as available-for-sale for the years ended December 31, 2012, 2011 and 2010:

	Year ended December 31,
	2012		2011		2010
Proceeds from sales	$	6,821,092	$	3,958,589	$	3,222,700
Gross realized gains from sales	113,984		104,893		62,702
Gross realized losses from sales	4,371		23,138		26

The increase in proceeds from sales during the year ended December 31, 2012 was primarily due to sales of government agency securities to enter into dollar repurchase transactions.  Gross realized gains and losses

67

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

from sales during the year were primarily attributable to changes in interest rates and gains and losses on repurchase agreement transactions.

The Company had no fixed maturity securities that had been non-income producing for the twelve months preceding December 31, 2012. The Company had a corporate fixed maturity security with a fair value of $9,949 that had been non-income producing for the twelve months preceding December 31, 2011.

Mortgage loans on real estate - The following table summarizes the carrying value of the mortgage loan portfolio by component as of December 31, 2012 and 2011:

	December 31, 2012			December 31, 2011
Principal	$	2,866,411		$	2,510,949
Unamortized premium (discount)	18,237			23,268
Mortgage provision allowance	(2,890		)	(21,130		)
Total mortgage loans	$	2,881,758		$	2,513,087

The average recorded investment of impaired mortgage loans was $1,034, $5,822 and $5,101 for the years ended December 31, 2012, 2011 and 2010, respectively.

The following table summarizes the recorded investment of the mortgage loan portfolio by risk assessment category as of December 31, 2012 and 2011:

	December 31, 2012		December 31, 2011
Performing	$	2,884,648	$	2,532,150
Non-performing	—		2,067
Total	$	2,884,648	$	2,534,217

The following table summarizes activity in the mortgage provision allowance for the years ended December 31, 2012, 2011 and 2010:

	Year ended December, 31
	2012			2011		2010
	Commercial mortgages			Commercial mortgages		Commercial mortgages
Beginning balance	$	21,130		$	16,300	$	14,854
Provision increases	1,067			4,830		1,446
Charge-off	(992		)	—		—
Recovery	(75		)	—		—
Provision decreases	(18,240		)	—		—
Ending balance	$	2,890		$	21,130	$	16,300
Allowance ending balance by basis of impairment method:
Collectively evaluated for impairment	$	2,890		$	21,130	$	16,300
Recorded investment balance in the mortgage loan portfolio, gross of allowance, by basis of impairment method:	$	2,884,648		$	2,534,217	$	1,738,722
Individually evaluated for impairment	14,970			18,493		27,250
Collectively evaluated for impairment	2,869,678			2,515,724		1,711,472

Limited partnership and other corporation interests - At December 31, 2012 and 2011, the Company had $124,814 and $169,233, respectively, invested in limited partnership and other corporation interests, which include limited partnerships established for the purpose of investing in low-income housing that qualify for federal and state tax credits.

68

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

The Company has determined each investment in low-income housing limited partnerships (“LIHLP”) to be considered a VIE.  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.

As a 99% limited partner in various upper-tier LIHLPs, 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 of the LIHLPs is most closely involved in the development and management of the LIHLP project.  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.

The carrying value and maximum exposure to loss in relation to the activities of the VIEs was $71,370 and $111,631 at December 31, 2012 and 2011, respectively.

Special deposits and securities lending - The Company had securities on deposit with government authorities as required by certain insurance laws with fair values of $15,791 and $16,631 at December 31, 2012 and 2011, respectively.

The Company participates in a securities lending program whereby securities are loaned to third parties.  Securities with a cost or amortized cost of $138,654 and $7,266 and estimated fair values of $138,297 and $6,823 were on loan under the program at December 31, 2012 and 2011, respectively.  The Company received restricted cash collateral of $142,022 and $7,099 at December 31, 2012 and 2011, respectively.

Unrealized losses on fixed maturity investments classified as available-for-sale - The following tables summarize unrealized investment losses, including the non-credit-related portion of OTTI losses reported in AOCI, by class of investment at December 31, 2012 and 2011:

	December 31, 2012
	Less than twelve months				Twelve months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
Fixed maturities:	fair value		loss and OTTI		fair value		loss and OTTI		fair value		loss and OTTI
U.S. government direct obligations and U.S. agencies	$	538,612	$	3,270	$	7,252	$	141	$	545,864	$	3,411
Obligations of U.S. states and their subdivisions	25,679		229		—		—		25,679		229
Corporate debt securities	527,280		12,287		291,611		99,264		818,891		111,551
Asset-backed securities	30,810		97		647,715		54,357		678,525		54,454
Residential mortgage-backed securities	9,834		8		1,210		22		11,044		30
Commercial mortgage-backed securities	34,727		169		35,960		1,134		70,687		1,303
Collateralized debt obligations	—		—		11,963		1,770		11,963		1,770
Total fixed maturities	$	1,166,942	$	16,060	$	995,711	$	156,688	$	2,162,653	$	172,748
Total number of securities in an unrealized loss position			85				133				218

69

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

	December 31, 2011
	Less than twelve months				Twelve months or longer				Total
Fixed maturities:	Estimated fair value		Unrealized loss and OTTI		Estimated fair value		Unrealized loss and OTTI		Estimated fair value		Unrealized loss and OTTI
U.S. government direct obligations and U.S. agencies	$	297,410	$	913	$	17,531	$	199	$	314,941	$	1,112
Obligations of U.S. states and their subdivisions	1,557		5		—		—		1,557		5
Corporate debt securities	363,111		12,986		479,441		141,273		842,552		154,259
Asset-backed securities	218,850		10,365		841,415		114,852		1,060,265		125,217
Residential mortgage-backed securities	14,203		373		120,364		3,592		134,567		3,965
Commercial mortgage-backed securities	6,726		13		68,952		7,559		75,678		7,572
Collateralized debt obligations	—		—		16,392		2,072		16,392		2,072
Total fixed maturities	$	901,857	$	24,655	$	1,544,095	$	269,547	$	2,445,952	$	294,202
Total number of securities in an unrealized loss position			89				167				256

Fixed maturity investments - Total unrealized losses and OTTI decreased by $121,454, or 41%, from December 31, 2011 to December 31, 2012.  This decrease in unrealized losses was across most asset classes and reflects continued recovery in market liquidity and lower interest rates, although the economic uncertainty in certain asset classes still remains.

Unrealized losses on corporate debt securities decreased by $42,708 from December 31, 2011 to December 31, 2012.  The valuation of these securities has been influenced by market conditions with increased liquidity and lower interest rates in the finance sector resulting in generally higher valuations of these fixed income securities.  The finance sector accounts for 91% of the corporate debt securities’ unrealized loss at December 31, 2012.

Corporate debt securities account for 63% of the unrealized losses and OTTI greater than twelve months.  Of the $99,264 of unrealized losses and OTTI over twelve months on corporate debt securities, 55% are on securities which continue to be rated investment grade.  Of the $44,669 of unrealized losses and OTTI greater than twelve months on non-investment grade corporate debt securities, 98% of the losses are on perpetual debt investments issued by banks in the United Kingdom, which have bank ratings of A- or higher.  The Company determined the majority of the unrealized losses on perpetual securities were due to widening credit spreads and low LIBOR based coupon rates on the securities, which are not expected to compromise the issuers’ ability to service the investments.  Management does not have the intent to sell these assets prior to a full recovery; therefore, an OTTI was not recognized in earnings.

Asset-backed securities account for 35% of the unrealized losses and OTTI greater than twelve months.  Of    the $54,357 of unrealized losses and OTTI over twelve months on asset-backed securities, 63% of the losses are on securities which continue to be rated investment grade.  The present value of the cash flows expected to be collected is not less than amortized cost and management does not have the intent to sell these assets prior to a full recovery; therefore, an OTTI was not recognized in earnings.

See Note 6 for additional discussion regarding fair value measurements.

70

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

Other-than-temporary impairment recognition - The Company recorded OTTI on fixed maturity investments for the years ended December 31, 2012, 2011 and 2010 as follows:

	Year ended December 31, 2012
	OTTI recognized in realized gains/(losses)				OTTI recognized in OCI (2)
Fixed maturities:	Credit related (1)		Non-credit related		Non-credit related			Total
Corporate debt securities	$	254	$	—	$	—		$	254
Asset-backed securities	4,429		—		(61		)	4,368
Total fixed maturities	$	4,683	$	—	$	(61	)	$	4,622

(1) All of the $4,429 in credit related OTTI is bifurcated credit loss recognized on two asset-backed fixed maturities.

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

	Year ended December 31, 2011
	OTTI recognized in realized gains/(losses)				OTTI recognized in OCI (2)
Fixed maturities:	Credit related (1)		Non-credit related		Non-credit related		Total
Corporate debt securities	$	501	$	—	$	—	$	501
Asset-backed securities	6,264		—		10,005		16,269
Total fixed maturities	$	6,765	$	—	$	10,005	$	16,770

(1) All of the $6,264 in credit related OTTI is bifurcated credit loss recognized on one asset-backed fixed maturities.

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

	Year ended December 31, 2010
	OTTI recognized in realized gains/(losses)				OTTI recognized in OCI (2)
Fixed maturities:	Credit related (1)		Non-credit related		Non-credit related		Total
U.S. government direct obligations and U.S. agencies	$	750	$	10,035	$	—	$	10,785
Corporate debt securities	—		1,529		—		1,529
Asset-backed securities	64,896		—		16,242		81,138
Residential mortgage-backed securities	1,390		—		505		1,895
Collateralized debt obligations	34		—		—		34
Total fixed maturities	$	67,070	$	11,564	$	16,747	$	95,381

(1) Of the credit-related OTTI on asset-backed securities, $53,327 and $8,558 were related to Ambac Financial Group, Inc. and Financial Guaranty Insurance Company, respectively.  Of the $67,070 in total fixed maturities, $66,286 is the bifurcated credit loss recognized on securities.

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

71

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

The OTTI 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:

	Year ended December 31,
	2012			2011			2010
Bifurcated credit loss:
Beginning balance	$	186,999		$	181,611		$	115,325
Additions:
Initial impairments - credit loss on securities not previously impaired	4,429			6,264			66,286
Reductions:
Due to sales, maturities, or payoffs during the period	(23,640		)	(876		)	—
Ending balance	$	167,788		$	186,999		$	181,611

Net Investment Income

The following table summarizes net investment income for the years ended December 31, 2012, 2011 and 2010:

	Year ended December 31,
	2012			2011			2010
Investment income:
Fixed maturity and short-term investments	$	808,215		$	821,582		$	823,828
Mortgage loans on real estate	138,411			117,796			96,711
Policy loans	213,300			218,663			234,944
Limited partnership interests	7,566			6,915			5,767
Net interest on funds withheld balances under reinsurance agreements, related party	19,382			18,376			17,130
Derivative instruments (1)	16,008			(11,613		)	7,182
Other	5,222			3,113			5,079
	1,208,104			1,174,832			1,190,641
Investment expenses	(16,553		)	(16,346		)	(15,897		)
Net investment income	$	1,191,551		$	1,158,486		$	1,174,744

(1) Includes gains (losses) on the hedged asset for fair value hedges.

Realized Investment Gains (Losses)

The following table summarizes realized investment gains (losses) for the years ended December 31, 2012, 2011 and 2010:

	Year ended December 31,
	2012			2011			2010
Realized investment gains (losses):
Fixed maturity and short-term investments	$	105,675		$	78,637		$	(15,793	)
Derivative instruments	(10,221		)	(47,264		)	(17,076		)
Other	4,015			(2,048		)	9,820
Provision for mortgage impairments, net of recoveries	17,248			(4,830		)	(1,446		)
Realized investment gains (losses)	$	116,717		$	24,495		$	(24,495	)

Included in net investment income and realized investment gains (losses) are amounts allocable to the participating fund account.  This allocation is based upon the activity in a specific block of investments that are segmented for the benefit of the participating fund account.

72

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

5.             Derivative Financial Instruments

Derivative transactions are primarily entered into pursuant to master agreements and other contracts 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 aggregate fair value of derivative instruments with credit-risk-related contingent features where the Company is in a net liability position was $55,875 and zero as of December 31, 2012 and 2011, respectively.

At December 31, 2012 and 2011, the Company had pledged $54,400 and zero of unrestricted cash collateral to counterparties in the normal course of business, while other counterparties had pledged zero and $11,985 of unrestricted cash collateral to the Company to satisfy collateral netting agreements, respectively.

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. Cross-currency swaps are used to manage the foreign currency exchange rate risk associated with investments 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 December 31, 2012, the Company estimated that $7,916 of net derivative gains included in AOCI will be reclassified into net income within the next twelve months.

Fair value hedges - Interest rate swap agreements are used to convert the interest rate on certain debt securities from a fixed rate to a floating rate to manage the interest rate risk of the change in the fair value of certain fixed rate maturity investments.  Interest rate futures are used to manage the interest rate 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

The Company enters into certain transactions in which derivatives are hedging an economic risk but hedge accounting is not elected.  These derivative instruments include:  exchange-traded interest rate swap futures, exchange-traded equity index futures on certain indices, OTC interest rate swaptions, OTC interest rate swaps, exchange-traded Eurodollar interest rate futures and interest rate futures.

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

73

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

The following tables summarize derivative financial instruments at December 31, 2012 and 2011:

	December 31, 2012
			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	$	26,113		$	26,113	$	—
Cross-currency swaps	424,248		(81,109		)	4,643		85,752
Total cash flow hedges	608,448		(54,996		)	30,756		85,752
Fair value hedges:
Interest rate swaps	183,776		(1,391		)	258		1,649
Total fair value hedges	183,776		(1,391		)	258		1,649
Total derivatives designated as hedges	792,224		(56,387		)	31,014		87,401
Derivatives not designated as hedges:
Interest rate swaps	29,264		305			1,062		757
Futures on equity indices	3,133		—			—		—
Interest rate futures	80,550		—			—		—
Interest rate swaptions	688,674		342			342		—
Total derivatives not designated as hedges	801,621		647			1,404		757
Total cash flow hedges, fair value hedges and derivatives not designated as hedges	$	1,593,845	$	(55,740	)	$	32,418	$	88,158

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

74

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

	December 31, 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	$	20,894		$	20,894	$	—
Cross-currency swaps	69,030		6,241			6,241		—
Total cash flow hedges	253,230		27,135			27,135		—
Fair value hedges:
Interest rate swaps	35,800		(1,011		)	—		1,011
Total fair value hedges	35,800		(1,011		)	—		1,011
Total derivatives designated as hedges	289,030		26,124			27,135		1,011
Derivatives not designated as hedges:
Interest rate swaps	392,235		(8,316		)	4,687		13,003
Futures on equity indices	2,680		—			—		—
Interest rate futures	59,090		—			—		—
Interest rate swaptions	890,400		944			944		—
Total derivatives not designated as hedges	1,344,405		(7,372		)	5,631		13,003
Total cash flow hedges, fair value hedges and derivatives not designated as hedges	$	1,633,435	$	18,752		$	32,766	$	14,014

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

Notional amounts are used to express the extent of the Company’s involvement in derivative transactions and represent a standard measurement of the volume of its derivative activity.  Notional amounts represent those amounts used to calculate contractual flows to be exchanged and are not paid or received.

The Company had 75 and 143 swap transactions with an average notional amount of $8,685 and $16,361 during the years ended December 31, 2012 and 2011, respectively.  During the years ended December 31, 2012 and 2011, the Company had 23 and one cross-currency swap transaction(s) with an average notional amount of $12,710 and $39,030, respectively.  The Company had 931 and 1,678 futures transactions with an average number of contracts per transaction of 11 and 18 during the years ended December 31, 2012 and 2011, respectively.  The Company had 46 and 44 swaption transactions with an average notional amount of $5,528 and $5,986 during the years ended December 31, 2012 and 2011, respectively.

Significant changes in the derivative notional amount during the year ended December 31, 2012 were primarily due to the following:

·The net decrease of $394,808 in interest rate swaps, interest rate swaptions and futures was primarily due to a change in the Company’s interest rate risk hedging strategy.

·The increase of $355,218 in cross-currency swaps was due to additional swaps opened to hedge newly purchased assets denominated in British pounds and Euros.

The Company recognized total derivative gains (losses) in net investment income of $12,567, ($15,428) and $1,366 for the years ended December 31, 2012, 2011 and 2010, respectively.  The Company recognized net investment gains (losses) on closed derivative positions of ($10,221), ($38,794) and ($17,076) for the years ended December 31, 2012, 2011 and 2010, respectively.  The preceding amounts are shown net of any gains (losses) on the hedged assets in a fair value hedge that has been recorded in net investment income.

75

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

The following tables present the effect of derivative instruments in the consolidated statement of income for the years ended December 31, 2012, 2011 and 2010 reported by cash flow hedges, fair value hedges and economic hedges:

	Gain (loss) recognized in OCI on derivatives (Effective portion)								Gain (loss) reclassified from OCI into net income (Effective portion)							Gain (loss) recognized in net income on derivatives (Ineffective portion and amount excluded from effectiveness testing)
	Year ended December 31,								Year ended December 31,							Year ended December 31,
	2012			2011			2010		2012		2011		2010			2012		2011			2010
Cash flow hedges:
Interest rate swaps	$	5,220		$	21,322		$	13,896	$	2,856	$	2,820	$	1,582	(A)	$	—	$	9		$	—	(A)
Cross-currency swaps	(24,101		)	1,123			3,065		—		—		—			—		—
Interest rate futures	—			—			—		63		43		110		(A)	—		(92		)	92		(A)
Interest rate futures	—			(1,431		)	332		—		—		—			—		6			545		(B)
Total cash flow hedges	$	(18,881	)	$	21,014		$	17,293	$	2,919	$	2,863	$	1,691		$	—	$	(77	)	$	637

(A) Net investment income.

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

	Gain (loss) on derivatives recognized in net income									Gain (loss) on hedged assets recognized in net income
	Year ended December 31,									Year ended December 31,
	2012			2011			2010			2012		2011			2010
Fair value hedges:
Interest rate swaps	$	(380	)	$	(1,011	)	$	—	(A)	$	—	$	—		$	—
Interest rate futures	—			(285		)	(1,027		)(A)	—		—			—
Interest rate futures	—			(8,311		)	(1,088		)(B)	—		—			—
Items hedged in interest rate swaps	—			—			—			380		1,011			—		(A)
Items hedged in interest rate futures	—			—			—			—		(2,002		)	3,632		(A)
Items hedged in interest rate futures	—			—			—			—		8,470			—		(B)
Total fair value hedges (1)	$	(380	)	$	(9,607	)	$	(2,115	)	$	380	$	7,479		$	3,632

(1) Hedge ineffectiveness of zero, ($2,128) and $1,517 was recognized during the years ended December 31, 2012, 2011 and 2010, respectively.

(A) Net investment income.

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

	Gain (loss) on derivatives recognized in net income
	Year ended December 31,
	2012			2011			2010
Derivatives not designated as hedging instruments:
Futures on equity indices	2		(A)	(32		)(A)	(9		)(A)
Futures on equity indices	(774		)(B)	373		(B)	(363		)(B)
Interest rate swaps	8,620		(A)	(12,351		)(A)	4,036		(A)
Interest rate swaps	(4,979		)(B)	(38,377		)(B)	(4,476		)(B)
Interest rate futures	164		(A)	260		(A)	(3,600		)(A)
Interest rate futures	(2,641		)(B)	(251		)(B)	(11,640		)(B)
Interest rate swaptions	862		(A)	(3,798		)(A)	(3,450		)(A)
Interest rate swaptions	(1,827		)(B)	(704		)(B)	(54		)(B)
Total derivatives not designated as hedging instruments	$	(573	)	$	(54,880	)	$	(19,556	)

(A) Net investment income.

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

76

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

6.             Fair Value Measurements

Recurring fair value measurements

The following tables present the Company’s financial assets and liabilities carried at fair value on a recurring basis by fair value hierarchy category as of December 31, 2012 and 2011:

	Assets and liabilities measured at fair value on a recurring basis
	December 31, 2012
	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	$	—	$	2,834,074	$	—	$	2,834,074
Obligations of U.S. states and their subdivisions	—		2,018,505		—		2,018,505
Corporate debt securities	—		10,372,269		1,822		10,374,091
Asset-backed securities	—		1,595,601		265,538		1,861,139
Residential mortgage-backed securities	—		425,585		—		425,585
Commercial mortgage-backed securities	—		662,955		—		662,955
Collateralized debt obligations	—		11,963		32		11,995
Total fixed maturities available- for-sale	—		17,920,952		267,392		18,188,344
Fixed maturities held for trading:
U.S. government direct obligations and U.S. agencies	—		263,634		—		263,634
Corporate debt securities	—		61,336		—		61,336
Asset-backed securities	—		42,630		—		42,630
Total fixed maturities held for trading	—		367,600		—		367,600
Short-term investments available-for-sale	19,459		246,873		—		266,332
Collateral under securities lending agreements	142,022		—		—		142,022
Collateral under derivative counterparty collateral agreements	54,400		—		—		54,400
Derivative instruments designated as hedges:
Interest rate swaps	—		26,371		—		26,371
Cross-currency swaps	—		4,643		—		4,643
Derivative instruments not designated as hedges:
Interest rate swaps	—		1,062		—		1,062
Interest rate swaptions	—		342		—		342
Total derivative instruments	—		32,418		—		32,418
Separate account assets	12,171,024		12,434,502		—		24,605,526
Total assets	$	12,386,905	$	31,002,345	$	267,392	$	43,656,642
Liabilities
Payable under securities lending agreements	$	142,022	$	—	$	—	$	142,022
Derivative instruments designated as hedges:
Interest rate swaps	—		1,649		—		1,649
Cross-currency swaps	—		85,752		—		85,752
Derivative instruments not designated as hedges:
Interest rate swaps	—		757		—		757
Total derivative instruments	—		88,158		—		88,158
Separate account liabilities (1)	14		352,653		—		352,667
Total liabilities	$	142,036	$	440,811	$	—	$	582,847

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

77

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

	Assets and liabilities measured at fair value on a recurring basis
	December 31, 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	$	—	$	2,315,671	$	—	$	2,315,671
Obligations of U.S. states and their subdivisions	—		2,071,170		—		2,071,170
Corporate debt securities	—		8,859,250		36,496		8,895,746
Asset-backed securities	—		1,672,423		279,021		1,951,444
Residential mortgage-backed securities	—		591,542		—		591,542
Commercial mortgage-backed securities	—		747,797		—		747,797
Collateralized debt obligations	—		16,391		22		16,413
Total fixed maturities available- for-sale	—		16,274,244		315,539		16,589,783
Fixed maturities held for trading:
U.S. government direct obligations and U.S. agencies	—		36,352		—		36,352
Corporate debt securities	—		60,243		—		60,243
Asset-backed securities	—		43,905		—		43,905
Commercial mortgage-backed securities	—		7,026		—		7,026
Total fixed maturities held for trading	—		147,526		—		147,526
Short-term investments available-for-sale	45,869		286,895		—		332,764
Collateral under securities lending agreements	7,099		—		—		7,099
Collateral under derivative counterparty collateral agreements	11,985		—		—		11,985
Derivative instruments designated as hedges:
Interest rate swaps	—		20,894		—		20,894
Cross-currency swaps	—		6,241		—		6,241
Derivative instruments not designated as hedges:
Interest rate swaps	—		4,687		—		4,687
Interest rate swaptions	—		944		—		944
Total derivative instruments	—		32,766		—		32,766
Separate account assets (1)	10,646,426		11,568,489		2,118		22,217,033
Total assets	$	10,711,379	$	28,309,920	$	317,657	$	39,338,956
Liabilities
Payable under securities lending agreements	$	7,099	$	—	$	—	$	7,099
Payable under derivative counterparty collateral agreements	11,985		—		—		11,985
Derivative instruments designated as hedges:
Interest rate swaps	—		1,011		—		1,011
Derivative instruments not designated as hedges:
Interest rate swaps	—		13,003		—		13,003
Total derivative instruments	—		14,014		—		14,014
Separate account liabilities (1)	74		278,796		—		278,870
Total liabilities	$	19,158	$	292,810	$	—	$	311,968

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

78

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

The methods and assumptions used to estimate the fair value of the Company’s financial assets and liabilities carried at fair value on a recurring basis are as follows:

Fixed maturity investments

The fair values for fixed maturity investments are based upon market prices from independent pricing services.  In cases where market prices are not readily available, such as for private fixed maturity investments, fair values are estimated by the Company.  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.

Short-term investments and securities lending agreements

The amortized cost of short-term investments, collateral under securities lending agreements and payable under securities lending agreements is a reasonable estimate of fair value due to their short-term nature and high credit quality of the issuer.

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 is a reasonable estimate of fair value.

Derivative instruments

Included in other assets and other liabilities are derivative financial instruments.  The estimated fair values of OTC derivatives, primarily consisting of cross-currency swaps, interest rate swaps 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 primarily include investments in mutual fund, fixed maturity and short-term securities.  Mutual funds are recorded at net asset value, which approximates fair value, on a daily basis.  The fixed maturity and short-term investments are valued in the same manner, and using the same pricing sources and inputs as the fixed maturity and short-term investments of the Company.

79

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

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

	Recurring Level 3 financial assets and liabilities Year ended December 31, 2012
	Fixed maturities available-for-sale
	Corporate debt securities			Asset-backed securities			Collateralized debt obligations			Separate accounts			Total
Balance, January 1, 2012	$	36,496		$	279,021		$	22		$	2,118		$	317,657
Realized and unrealized gains (losses) included in:
Net income	(66		)	—			—			(3,692		)	(3,758		)
Other comprehensive income (loss)	102			33,346			11			3,604			37,063
Sales	(1,598		)	—			—			(1,997		)	(3,595		)
Settlements	(874		)	(41,809		)	(1		)	(33		)	(42,717		)
Transfers out of Level 3 (1)	(32,238		)	(5,020		)	—			—			(37,258		)
Balance, December 31, 2012	$	1,822		$	265,538		$	32		$	—		$	267,392
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at December 31, 2012	$	—		$	—		$	—		$	—		$	—

(1) 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 and internal models.

	Recurring Level 3 financial assets and liabilities Year ended December 31, 2011
	Fixed maturities available-for-sale
	Corporate debt securities			Asset-backed securities			Collateralized debt obligations		Separate accounts			Total
Balance, January 1, 2011	$	58,692		$	290,488		$	14	$	4,278		$	353,472
Realized and unrealized gains (losses) included in:
Net income	3,961			(192		)	—		37			3,806
Other comprehensive income (loss)	779			20,031			8		260			21,078
Sales	(14,430		)	—			—		(1,847		)	(16,277		)
Settlements	(17,460		)	(31,306		)	—		(158		)	(48,924		)
Transfers into Level 3 (1)	7,333			—			—		1,400			8,733
Transfers out of Level 3 (1)	(2,379		)	—			—		(1,852		)	(4,231		)
Balance, December 31, 2011	$	36,496		$	279,021		$	22	$	2,118		$	317,657
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at December 31, 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 Year ended December 31, 2010
	Fixed maturities available-for-sale
	Corporate debt securities			Asset-backed securities			Commercial mortgage-backed securities			Collateralized debt obligations			Derivative instruments			Separate 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			(49,393		)	—			(34		)	—			—			(48,952		)
Other comprehensive income (loss)	5,630			70,026			—			161			—			622			76,439
Purchases, issuances and settlements	(30,084		)	(98,807		)	—			(1,842		)	—			(1,700		)	(132,433		)
Transfers in (out) of Level 3 (1)	(106,265		)	(23,703		)	(58,270		)	—			3,317			(4,604		)	(189,525		)
Balance, December 31, 2010	$	58,692		$	290,488		$	—		$	14		$	—		$	4,278		$	353,472
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at December 31, 2010	$	—		$	—		$	—		$	—		$	—		$	—		$	—

(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.

80

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

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

	December 31, 2012
	Fair Value		Valuation Technique	Unobservable Input	Weighted Average
Fixed maturities available-for-sale:
Asset-backed securities(1)	$	265,470	Internal model pricing	Prepayment speed assumption	5
				Constant default rate assumption	5
				Adjusted ABX Index spread assumption (2)	655

(1)  Includes home improvement loans only.

(2)  Includes an internally calculated liquidity premium adjustment of 217.

After adjusting the ABX Index spread assumption by the liquidity premium, the overall discount rate ranged from 384 to 918 basis points.  The constant default rate assumption ranged from 1.2 to 7.9.

The significant unobservable inputs used in the fair value measurement of asset-backed securities are prepayment speed assumptions, constant default rate assumptions and the ABX Index spread adjusted by an internally calculated liquidity premium with the primary inputs being the constant default rate assumption and the adjusted ABX Index spread assumption.  As the constant default rate assumption or the adjusted ABX Index spread assumption increases, the price and therefore, the fair value, of the securities decreases.

Non-recurring fair value measurements - Certain assets are measured at estimated fair value on a non-recurring basis and are not included in the tables above.  The Company held $2,903 and $19,745 of adjusted cost basis limited partnership and other corporation interests which were impaired at December 31, 2012 and 2011, respectively, based on the fair value disclosed in the limited partnership financial statements or the estimated fair value of the underlying collateral.  The estimated fair value was categorized as Level 3.

81

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

Fair value of financial instruments

The following tables summarize the carrying amounts and estimated fair values of the Company’s financial instruments not carried at fair value on a recurring basis at December 31, 2012 and 2011:

	December 31, 2012				December 31, 2011
	Carrying amount		Estimated fair value		Carrying amount		Estimated fair value
Assets
Mortgage loans on real estate	$	2,881,758	$	3,114,796	$	2,513,087	$	2,679,474
Policy loans	4,260,200		4,260,200		4,219,849		4,219,849
Limited partnership interests	46,707		43,954		48,053		41,931
Other investments	18,890		45,050		22,990		47,915
Liabilities
Annuity contract benefits without life contingencies	$	9,622,357	$	9,731,734	$	8,727,286	$	8,888,585
Policyholders’ funds	374,821		374,821		382,816		382,816
Commercial paper	97,987		97,987		97,536		97,536
Notes payable	532,491		563,860		532,463		515,104

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

Mortgage loans on real estate

Mortgage loan fair value estimates are generally based on discounted cash flows.  A discount rate matrix is used where the discount rate valuing a specific mortgage generally corresponds to that mortgage’s remaining term and credit quality.  Management believes the discount rate used is comparable to the credit, interest rate, term, servicing costs and risks of loans similar to the portfolio loans that the Company would make today given its internal pricing strategy.  The estimated fair value was classified as Level 2.

Policy loans

The Company believes the fair value of policy loans approximates book value. Policy loans are funds provided to policy holders in return for a claim on the policy. The funds provided are limited to the cash surrender value of the underlying policy. The nature of policy loans is to have a negligible default risk as the loans are fully collateralized by the value of the policy. Policy loans do not have a stated maturity and the balances and accrued interest are repaid either by the policyholder or with proceeds from the policy. Due to the collateralized nature of policy loans and unpredictable timing of repayments, the Company believes the fair value of policy loans approximates carrying value.  The estimated fair value was classified as Level 2.

Limited partnership interests

Limited partnership interests, accounted for using the cost method, represent the Company’s minor ownership interests in pooled investment funds.  These funds employ varying investment strategies that principally make private equity investments across diverse industries and geographical focuses.  The estimated fair value was determined by using the partnership financial statement reported capital account or net asset value adjusted for other relevant information which may impact the exit value of the investments.  Distributions by these investments are generated from investment gains, from operating income generated by the underlying investments of the funds and from liquidation of the underlying assets of the funds which are estimated to be liquidated over the next one to ten years.  The estimated fair value was classified as Level 3.

82

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

Other investments

Other investments primarily include real estate held for investment.  The estimated fair value for real estate is based on the unadjusted annual appraised value which includes factors such as comparable property sales, property income analysis, and capitalization rates.  The estimated fair value was classified as Level 2.

Annuity contract benefits without life contingencies

The estimated fair value of annuity contract benefits without life contingencies is estimated by discounting the projected expected cash flows to the maturity of the contracts utilizing risk-free spot interest rates plus a provision for the Company’s credit risk.  The estimated fair value was classified as Level 2.

Policyholders’ funds

The carrying amount of policyholders’ funds approximates the fair value since the Company can change the interest crediting rates with 30 days notice. The estimated fair value was classified as Level 2.

Commercial paper

The amortized cost of commercial paper is a reasonable estimate of fair value due to their short-term nature and high credit quality of the obligor.  The estimated fair value was classified as Level 2.

Notes payable

The estimated fair value of the notes payable to GWL&A Financial is based upon quoted market prices from independent pricing services of securities with characteristics similar to those of the notes payable.  The estimated fair value was classified as Level 2.

7.  Reinsurance

In the normal course of its business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding risks to other insurance enterprises under excess coverage and coinsurance contracts.  The Company retains an initial maximum of $3,500 of coverage per individual life. This initial retention limit of $3,500 may increase due to automatic policy increases in coverage at a maximum rate of $175 per annum, with an overall maximum increase in coverage of $1,000.

Ceded reinsurance contracts do not relieve the Company from its obligations to policyholders.  The failure of reinsurers to honor their obligations could result in losses to the Company.  The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.  At December 31, 2012 and 2011, the reinsurance receivables had carrying values in the amounts of $638,797 and $616,336, respectively.  Included in these amounts are $533,446 and $502,093 at December 31, 2012 and 2011, respectively, associated with reinsurance agreements with related parties.  At December 31, 2012 and 2011, 83% and 81%, respectively, of the total reinsurance receivable was due from CLAC, a related party.

The Company assumes risk from approximately forty insurers and reinsurers by participating in yearly renewable term and coinsurance pool agreements.   When assuming risk, the Company seeks to generate revenue while maintaining reciprocal working relationships with these partners as they also seek to limit their exposure to loss on any single life.

Maximum capacity to be retained by the Company is dictated at the treaty level and is monitored annually to ensure the total risk retained on any one life is limited to a maximum retention of $4,500.

83

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

The following tables summarize life insurance in-force and total premium income at and for the year ended December 31, 2012:

	Life insurance in-force
	Individual			Group			Total
Written and earned direct	$	51,324,176		$	38,587,771		$	89,911,947
Reinsurance ceded	(11,138,163		)	—			(11,138,163		)
Reinsurance assumed	72,580,078			—			72,580,078
Net	$	112,766,091		$	38,587,771		$	151,353,862
Percentage of amount assumed to net	64.4		%	0.0		%	48.2		%

	Premium income
	Life insurance			Annuities		Total
Written and earned direct	$	323,236		$	3,712	$	326,948
Reinsurance ceded	(53,950		)	3,648		(50,302		)
Reinsurance assumed	145,507			—		145,507
Net	$	414,793		$	7,360	$	422,153

The following tables summarize life insurance in-force and total premium income at and for the year ended December 31, 2011:

	Life insurance in-force
	Individual			Group			Total
Written and earned direct	$	50,461,815		$	37,007,795		$	87,469,610
Reinsurance ceded	(11,157,504		)	—			(11,157,504		)
Reinsurance assumed	77,352,956			—			77,352,956
Net	$	116,657,267		$	37,007,795		$	153,665,062
Percentage of amount assumed to net	66.3		%	0.0		%	50.3		%

	Premium income
	Life insurance			Annuities			Total
Written and earned direct	$	395,419		$	1,960		$	397,379
Reinsurance ceded	(40,654		)	(66		)	(40,720		)
Reinsurance assumed	166,557			—			166,557
Net	$	521,322		$	1,894		$	523,216

The following tables summarize total premium income at and for the year ended December 31, 2010:

	Premium income
	Life insurance			Annuities			Total
Written and earned direct	$	674,726		$	5,665		$	680,391
Reinsurance ceded	(41,362		)	(112		)	(41,474		)
Reinsurance assumed	166,705			—			166,705
Net	$	800,069		$	5,553		$	805,622

84

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

8.             Deferred Acquisition Costs and Value of Business Acquired

The following table summarizes activity in DAC and VOBA for the years ended December 31, 2012, 2011 and 2010:

	DAC (1)			VOBA			Total (1)
Balance, January 1, 2010 (2)	$	253,038		$	48,669		$	301,707
Capitalized additions (1)	47,513			—			47,513
Amortization and writedowns (1)	(27,506		)	(1,837		)	(29,343		)
Unrealized investment (gains) losses (1)	(114,519		)	(427		)	(114,946		)
Balance, December 31, 2010 (1)	158,526			46,405			204,931
Capitalized additions (1)	57,108			—			57,108
Amortization and writedowns (1)	(25,184		)	(3,636		)	(28,820		)
Unrealized investment (gains) losses (1)	(12,669		)	(717		)	(13,386		)
Balance, December 31, 2011 (1)	177,781			42,052			219,833
Capitalized additions	94,826			—			94,826
Amortization and writedowns	(51,434		)	(9,045		)	(60,479		)
Unrealized investment (gains) losses	(48,757		)	(962		)	(49,719		)
Balance, December 31, 2012	$	172,416		$	32,045		$	204,461

(1) As adjusted; See Note 1

(2) Adjusted by $143,550 from $396,588 to $253,038 for the adoption of ASU No. 2010-26;  See Note 1

The estimated future amortization of VOBA for the years ended December 31, 2013 through December 31, 2017 is approximately $4,000 per annum.

9.            Goodwill and Other Intangible Assets

The balance of goodwill, all of which is within the Retirement Services segment, at December 31, 2012 and 2011 was $105,255.

The following tables summarize other intangible assets, all of which are within the Retirement Services segment, as of December 31, 2012 and 2011:

	December 31, 2012
	Gross carrying amount		Accumulated amortization			Net book value
Customer relationships	$	36,314	$	(18,065	)	$	18,249
Preferred provider agreements	7,970		(7,970		)	—
Total	$	44,284	$	(26,035	)	$	18,249

	December 31, 2011
	Gross carrying amount		Accumulated amortization			Net book value
Customer relationships	$	36,314	$	(15,234	)	$	21,080
Preferred provider agreements	7,970		(7,195		)	775
Total	$	44,284	$	(22,429	)	$	21,855

Amortization expense for other intangible assets included in general insurance expenses was $3,606, $3,787 and $3,990 for the years ended December 31, 2012, 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 year ended December 31, 2012.

85

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

The estimated future amortization of other intangible assets using current assumptions, which are subject to change, for the years ended December 31, 2013 through December 31, 2017 is approximately $2,700 per annum.

10.          Commercial Paper

The Company maintains a commercial paper program that is partially supported by a $50,000 corporate credit facility.

The following table provides information regarding the Company’s commercial paper program at December 31, 2012 and 2011:

	December 31,
	2012	2011
Face Value	$97,987	$97,536
Carrying Value	97,987	97,536
Effective interest rate	0.3% - 0.4%	0.2% - 0.4%
Maturity range (days)	3 - 74	4 - 75

11.          Stockholder’s Equity and Dividend Restrictions

At December 31, 2012 and 2011, the Company had 50,000,000 shares of $1 par value preferred stock authorized, none of which were issued or outstanding at either date.  In addition, the Company has 50,000,000 shares of $1 par value common stock authorized, 7,032,000 of which were issued and outstanding at both December 31, 2012 and 2011.

GWLA’s net income and capital and surplus, as determined in accordance with statutory accounting principles and practices as prescribed by the National Association of Insurance Commissioners (“NAIC”), is as follows:

	2012		2011		2010			2012		2011
Net income	$	147,741	$	155,998	$	398,555	Capital and surplus	$	1,109,498	$	1,062,947

Regulatory compliance is determined by a ratio of a company’s total adjusted capital (“TAC”) to its authorized control level risk-based capital (“ACL”), as determined in accordance with statutory accounting principles and practices as prescribed by the NAIC.  Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The minimum level of TAC before corrective action commences is 200% of ACL.  The Company’s risk-based capital ratio was in excess of the required amount as of December 31, 2012.

Dividends are paid as determined by the Board of Directors, subject to restrictions as discussed below.  During the years ended December 31, 2012, 2011 and 2010, the Company paid dividends in the amounts of $184,401, $206,353 and $160,917, respectively, to its parent company, GWL&A Financial.

The maximum amount of dividends that can be paid to stockholders by insurance companies domiciled in the State of Colorado, without prior approval of the Insurance Commissioner, is subject to restrictions relating to statutory capital and surplus and statutory net gain from operations.  As filed with the Colorado Division of Insurance, the statutory capital and surplus and net gain from operations at and for the year ended December 31, 2012 were $1,109,498 and $162,991, respectively.  Based on the as filed amounts, GWLA may pay up to $162,991 of dividends during the year ended December 31, 2013 without the prior approval of the Colorado Insurance Commissioner.  Prior to any payments of dividends, the Company seeks approval from the Colorado Insurance Commissioner.

86

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

12.          Other Comprehensive Income

The following tables present the composition of other comprehensive income (loss) for the years ended December 31, 2012, 2011 and 2010:

	Year ended December 31, 2012
	Before-tax amount			Tax (expense) benefit			Net-of-tax amount
Unrealized holding gains arising during the year on available-for-sale fixed maturity investments	$	534,028		$	(186,910	)	$	347,118
Net changes during the year related to cash flow hedges	(18,881		)	6,608			(12,273		)
Reclassification adjustment for gains realized in net income	(107,713		)	37,700			(70,013		)
Net unrealized gains	407,434			(142,602		)	264,832
Future policy benefits, deferred acquisition costs and value of business acquired adjustments	(83,835		)	29,343			(54,492		)
Net unrealized gains	323,599			(113,259		)	210,340
Employee benefit plan adjustment	(68,650		)	24,027			(44,623		)
Other comprehensive income	$	254,949		$	(89,232	)	$	165,717

	Year ended December 31, 2011
	Before-tax amount			Tax (expense) benefit			Net-of-tax amount
Unrealized holding gains arising during the year on available-for-sale fixed maturity investments	$	511,663		$	(179,082	)	$	332,581
Net changes during the year related to cash flow hedges	21,014			(7,355		)	13,659
Reclassification adjustment for gains realized in net income	(74,165		)	25,958			(48,207		)
Net unrealized gains	458,512			(160,479		)	298,033
Future policy benefits, deferred acquisition costs and value of business acquired adjustments (1)	(100,216		)	35,075			(65,141		)
Net unrealized gains	358,296			(125,404		)	232,892
Employee benefit plan adjustment	(49,566		)	17,348			(32,218		)
Other comprehensive income	$	308,730		$	(108,056	)	$	200,674

(1) As adjusted; See Note 1

87

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

	Year ended December 31, 2010
	Before-tax amount			Tax (expense) benefit			Net-of-tax amount
Unrealized holding gains arising during the year on available-for-sale fixed maturity investments	$	724,296		$	(253,504	)	$	470,792
Net changes during the year related to cash flow hedges	17,293			(6,053		)	11,240
Reclassification adjustment for losses realized in net income	23,198			(8,119		)	15,079
Net unrealized gains	764,787			(267,676		)	497,111
Future policy benefits, deferred acquisition costs and value of business acquired adjustments (1)	(129,715		)	45,400			(84,315		)
Net unrealized gains	635,072			(222,276		)	412,796
Employee benefit plan adjustment	(5,142		)	1,800			(3,342		)
Other comprehensive income	$	629,930		$	(220,476	)	$	409,454

(1) As adjusted; See Note 1

13.          General Insurance Expenses

The following table summarizes the significant components of general insurance expenses for the years ended December 31, 2012, 2011 and 2010:

	Year ended December 31,
	2012		2011 (1)		2010 (1)
Compensation	$	335,212	$	303,514	$	294,923
Commissions	180,529		156,461		143,680
Other	80,908		106,718		92,290
Total general insurance expenses	$	596,649	$	566,693	$	530,893

(1) As adjusted; See Note 1

14.          Employee Benefit Plans

Defined Benefit Pension, Post-Retirement Medical and Supplemental Executive Retirement Plans

The Company has a noncontributory Defined Benefit Pension Plan covering substantially all of its employees that were hired before January 1, 1999.  Prior to December 31, 2012, the Company accounted for the Defined Benefit Pension Plan as the direct legal obligation of the Company and accounted for the corresponding plan obligations on its Balance Sheet and Statements of Income.  Effective December 31, 2012, the Company transferred the sponsorship of the Defined Benefit Pension Plan to GWL&A Financial, the Company’s immediate parent.  Despite the change in sponsorship of the Defined Benefit Pension Plan, the Company will continue to account for the corresponding plan obligations on its Balance Sheet and Statements of Income.

Benefits for the Defined Benefit Pension Plan are based principally on an employee’s years of service and compensation levels near retirement.  The Company’s policy for funding the Defined Benefit Pension Plans is to make annual contributions, which equal or exceed regulatory requirements.

88

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

The Company sponsors an unfunded Post-Retirement Medical Plan (the “Medical Plan”) that provides health benefits to retired employees who are not Medicare eligible.  The medical plan is contributory and contains other cost sharing features which may be adjusted annually for the expected general inflation rate.  The Company’s policy is to fund the cost of the medical plan benefits in amounts determined at the discretion of management.

The Company also provides supplemental executive retirement plans to certain key executives.  These plans provide key executives with certain benefits upon retirement, disability or death based upon total compensation.  The Company has purchased individual life insurance policies with respect to each employee covered by this plan.  The Company is the owner and beneficiary of the insurance contracts.

A December 31 measurement date is used for the employee benefit plans.

The following tables provide a reconciliation of the changes in the benefit obligations, fair value of plan assets and the underfunded status for the Company’s Defined Benefit Pension, Post-Retirement Medical and Supplemental Executive Retirement plans as of the years ended December 31, 2012 and 2011:

													Supplemental executive
	Defined benefit pension plan						Post-retirement medical plan						retirement plan						Total
	2012			2011			2012			2011			2012			2011			2012			2011
Change in projected benefit obligation:
Benefit obligation, January 1	$	401,134		$	349,435		$	11,725		$	10,162		$	61,358		$	54,855		$	474,217		$	414,452
Service cost	4,350			3,935			817			622			991			916			6,158			5,473
Interest cost	20,945			20,286			569			585			2,912			3,136			24,426			24,007
Actuarial (gain) loss	87,117			39,211			974			693			6,760			3,520			94,851			43,424
Regular benefits paid	(12,943		)	(11,733		)	(623		)	(337		)	(2,792		)	(2,719		)	(16,358		)	(14,789		)
Plan amendments	—			—			—			—			—			1,650			—			1,650
Benefit obligation, December 31	$	500,603		$	401,134		$	13,462		$	11,725		$	69,229		$	61,358		$	583,294		$	474,217
Accumulated benefit obligation	$	491,712		$	393,487		$	13,462		$	11,725		$	58,135		$	50,033		$	563,309		$	455,245

													Supplemental executive
	Defined benefit pension plan						Post-retirement medical plan						retirement plan						Total
	2012			2011			2012			2011			2012			2011			2012			2011
Change in plan assets:
Value of plan assets, January 1	$	293,336		$	282,616		$	—		$	—		$	—		$	—		$	293,336		$	282,616
Actual return on plan assets	38,541			12,353			—			—			—			—			38,541			12,353
Employer contributions	17,600			10,100			623			337			2,792			2,719			21,015			13,156
Benefits paid	(12,943		)	(11,733		)	(623		)	(337		)	(2,792		)	(2,719		)	(16,358		)	(14,789		)
Value of plan assets, December 31	$	336,534		$	293,336		$	—		$	—		$	—		$	—		$	336,534		$	293,336

													Supplemental executive
	Defined benefit pension plan						Post-retirement medical plan						retirement plan						Total
	2012			2011			2012			2011			2012			2011			2012			2011
Under funded status at December 31	$	(164,069	)	$	(107,798	)	$	(13,462	)	$	(11,725	)	$	(69,229	)	$	(61,358	)	$	(246,760	)	$	(180,881	)

The following table presents amounts recognized in the consolidated balance sheets at December 31, 2012 and 2011 for the Company’s Defined Benefit Pension, Post-retirement Medical and Supplemental Executive Retirement plans:

													Supplemental executive
	Defined benefit pension plan						Post-retirement medical plan						retirement plan						Total
	2012			2011			2012			2011			2012			2011			2012			2011
Amounts recognized in consolidated balance sheets:
Other assets	$	—		$	12,690		$	—		$	—		$	—		$	—		$	—		$	12,690
Other liabilities	(164,069		)	(120,488		)	(13,462		)	(11,725		)	(69,229		)	(61,358		)	(246,760		)	(193,571		)
Accumulated other comprehensive income (loss)	(180,869		)	(120,487		)	12,662			15,741			(20,710		)	(15,520		)	(188,917		)	(120,266		)

89

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

The following table provides information regarding amounts in AOCI that have not yet been recognized as components of net periodic benefit cost at December 31, 2012:

											Supplemental executive
	Defined benefit pension plan						Post-retirement medical plan				retirement plan						Total
	Gross			Net of tax			Gross		Net of tax		Gross			Net of tax			Gross			Net of tax
Net gain (loss)	$	(180,754	)	$	(117,490	)	$	6,170	$	4,011	$	(15,710	)	$	(10,211	)	$	(190,294	)	$	(123,690	)
Net prior service (cost) credit	(115		)	(75		)	6,492		4,220		(5,000		)	(3,250		)	1,377			895
	$	(180,869	)	$	(117,565	)	$	12,662	$	8,231	$	(20,710	)	$	(13,461	)	$	(188,917	)	$	(122,795	)

The following table provides information regarding amounts in AOCI that are expected to be recognized as components of net periodic benefit costs during the year ended December 31, 2013:

											Supplemental executive
	Defined benefit pension plan						Post-retirement medical plan				retirement plan						Total
	Gross			Net of tax			Gross		Net of tax		Gross			Net of tax			Gross			Net of tax
Net gain (loss)	$	(15,577	)	$	(10,125	)	$	413	$	268	$	(1,300	)	$	(845	)	$	(16,464	)	$	(10,702	)
Prior service (cost) credit	(51		)	(33		)	1,650		1,072		(933		)	(606		)	666			433
	$	(15,628	)	$	(10,158	)	$	2,063	$	1,340	$	(2,233	)	$	(1,451	)	$	(15,798	)	$	(10,269	)

The expected benefit payments for the Company’s Defined Benefit Pension, Post-Retirement Medical and Supplemental Executive Retirement plans for the years indicated are as follows:

					Supplemental
	Defined benefit		Post-retirement		executive
	pension plan		medical plan		retirement plan
2013	$	13,621	$	637	$	3,720
2014	14,259		697		3,529
2015	15,136		727		4,940
2016	16,640		743		3,390
2017	17,708		771		18,909
2018 through 2022	112,582		4,166		13,813

Net periodic (benefit) cost of the Defined Benefit Pension, Post-Retirement Medical and Supplemental Executive Retirement plans included in general insurance expenses in the accompanying consolidated statements of income for the years ended December 31, 2012, 2011 and 2010 includes the following components:

	Defined benefit pension plan
	2012			2011			2010
Components of net periodic cost:
Service cost	$	4,350		$	3,935		$	3,739
Interest cost	20,945			20,286			19,578
Expected return on plan assets	(21,797		)	(21,093		)	(18,618		)
Amortization of transition obligation	—			(1,388		)	(1,514		)
Amortization of unrecognized prior service cost	51			51			82
Amortization of loss from earlier periods	9,941			5,115			5,091
Net periodic cost	$	13,490		$	6,906		$	8,358

90

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

	Post-retirement medical plan
	2012			2011			2010
Components of net periodic benefit:
Service cost	$	817		$	622		$	728
Interest cost	569			585			713
Amortization of unrecognized prior service benefit	(1,650		)	(1,650		)	(1,650		)
Amortization of gain from earlier periods	(455		)	(611		)	(461		)
Net periodic benefit	$	(719	)	$	(1,054	)	$	(670	)

	Supplemental executive retirement plan
	2012		2011		2010
Components of net periodic (benefit) cost:
Service cost	$	991	$	916	$	673
Interest cost	2,912		3,136		2,905
Amortization of unrecognized prior service cost	934		2,584		899
Amortization of net (gain) loss	637		145		—
Net periodic (benefit) cost	$	5,474	$	6,781	$	4,477

The following tables present the assumptions used in determining benefit obligations of the Defined Benefit Pension, Post-Retirement Medical and the Supplemental Executive Retirement plans at December 31, 2012 and 2011:

	Defined benefit pension plan
	2012		2011
Discount rate	4.19	%	5.23	%
Rate of compensation increase	3.14	%	3.14	%

	Post-retirement medical plan
	2012		2011
Discount rate	3.74	%	4.70	%
Initial health care cost trend	7.50	%	8.00	%
Ultimate health care cost trend	5.25	%	5.25	%
Year ultimate trend is reached	2018		2018

	Supplemental executive
	retirement plan
	2011		2011
Discount rate	3.79	%	4.87	%
Rate of compensation increase	4.00	%	5.00	%

The following tables present the assumptions used in determining the net periodic benefit/cost of the Defined Benefit Pension, Post-Retirement Medical and the Supplemental Executive Retirement plans for the years ended December 31, 2012 and 2011:

	Defined benefit pension plan
	2012		2011
Discount rate	5.23	%	5.87	%
Expected return on plan assets	7.25	%	7.50	%
Rate of compensation increase	3.14	%	3.14	%

91

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

	Post-retirement medical plan
	2012		2011
Discount rate	4.70	%	5.87	%
Initial health care cost trend	8.00	%	7.50	%
Ultimate health care cost trend	5.25	%	5.25	%
Year ultimate trend is reached	2018		2016

	Supplemental executive
	retirement plan
	2012		2011
Discount rate	4.87	%	5.87	%
Rate of compensation increase	5.00	%	6.00	%

The discount rate has been set based upon the rates of return on high-quality fixed-income investments currently available and expected to be available during the period the benefits will be paid.  In particular, the yields on bonds rated AA or better on the measurement date have been used to set the discount rate.

The following table presents the impact on the Post-Retirement Medical Plan that a one-percentage-point change in assumed healthcare cost trend rates would have on the following:

	One percentage		One percentage
	point increase		point decrease
Increase (decrease) on total service and interest cost on components	$	199	$	(170	)
Increase (decrease) on post-retirement benefit obligation	1,448		(1,260		)

The following table presents how the Company’s Defined Benefit Pension Plan assets are invested at December 31, 2012 and 2011:

	December 31,
	2012		2011
Equity securities	56	%	52	%
Debt securities	41	%	44	%
Other	3	%	4	%
Total	100	%	100	%

92

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

The following tables present information about the Defined Benefit Retirement Plan’s assets measured at fair value on a recurring basis as of December 31, 2012 and 2011 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:

	Defined Benefit Plan Assets Measured at Fair Value on a Recurring Basis
	December 31, 2012
	Quoted prices		Significant
	in active		other		Significant
	markets for		observable		unobservable
	identical assets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Common collective trust funds:
Equity index funds	$	—	$	60,601	$	—	$	60,601
Midcap index funds	—		60,289		—		60,289
World equity index funds	—		6,798		—		6,798
U.S. equity market funds	—		60,723		—		60,723
Total common collective trust funds	—		188,411		—		188,411
Fixed maturity investments:
U.S. government direct obligations and agencies	—		9,907		—		9,907
Obligations of U.S. states and their municpalities	—		16,899		—		16,899
Corporate debt securities	—		100,142		—		100,142
Asset-backed securities	—		8,386		—		8,386
Commercial mortgage-backed securities	—		2,961		—		2,961
Total fixed maturity investments	—		138,295		—		138,295
Preferred stock	134		—		—		134
Limited partnership investments	—		—		6,485		6,485
Money market funds	3,209		—		—		3,209
Total defined benefit plan assets	$	3,343	$	326,706	$	6,485	$	336,534

93

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

	Defined Benefit Plan Assets Measured at Fair Value on a Recurring Basis
	December 31, 2011
	Quoted prices		Significant
	in active		other		Significant
	markets for		observable		unobservable
	identical assets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Common collective trust funds:
Equity index funds	$	—	$	49,211	$	—	$	49,211
Midcap index funds	—		48,406		—		48,406
World equity index funds	—		5,336		—		5,336
U.S. equity market funds	—		48,972		—		48,972
Total common collective trust funds	—		151,925		—		151,925
Fixed maturity investments:
U.S. government direct obligations and agencies	—		10,676		—		10,676
Obligations of U.S. states and their municpalities	—		22,467		—		22,467
Corporate debt securities	—		86,836		—		86,836
Asset-backed securities	—		7,711		—		7,711
Commercial mortgage-backed securities	—		2,487		—		2,487
Total fixed maturity investments	—		130,177		—		130,177
Preferred stock	—		111		—		111
Limited partnership investments	—		—		7,116		7,116
Money market funds	4,007		—		—		4,007
Total defined benefit plan assets	$	4,007	$	282,213	$	7,116	$	293,336

The following tables present additional information at December 31, 2012 and 2011 about assets of the Defined Benefit Retirement Plan measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

	Fair Value Measurements Using
	Significant Unobservable Inputs (Level 3)
	Limited partnership interest
	2012			2011
Balance, January 1	$	7,116		$	6,030
Actual return on plan assets
Purchases	61			(34		)
Issuances	(692		)	1,542
Settlement				(422		)
Balance, December 31	$	6,485		$	7,116

The investment objective of the Defined Benefit Pension Plan is to provide a risk-adjusted return that will ensure the payment of benefits while protecting against the risk of substantial investment losses.  Correlations among the asset classes are used to identify an asset mix that the Company believes will provide the most attractive returns.  Long-term return forecasts for each asset class using historical data and other qualitative considerations to adjust for projected economic forecasts are used to set the expected rate of return for the entire portfolio.

The Defined Benefit Pension Plan utilizes various investment securities.  Generally, investment securities are exposed to various risks, such as interest rate risks, credit risk and overall market volatility.  Due to the level of

94

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur and that such changes could materially affect the amounts reported.

The following table presents the ranges the Company targets for the allocation of invested Defined Benefit Pension Plan assets at December 31, 2013:

	December 31, 2013
Equity securities	25% - 80%
Debt securities	25% - 75%
Other	0% - 40%

Management estimates the value of these investments will be recoverable.  The Company does not expect any plan assets to be returned to it during the year ended December 31, 2013.  The Company expects to make payments of approximately $637 with respect to its Post-Retirement Medical Plan and $3,720 with respect to its Supplemental Executive Retirement Plan during the year ended December 31, 2013.  The Company expects to make a contribution of $6,300 to its Defined Benefit Pension Plan during the year ended December 31, 2013.

Other employee benefit plans

The Company has an executive deferred compensation plan providing key executives with the opportunity to participate in an unfunded deferred compensation program.  Under the program, participants may defer base compensation and bonuses and earn interest on the amounts deferred.  The program is not qualified under Section 401 of the Internal Revenue Code.  Participant balances, which are reflected in other liabilities in the accompanying consolidated balance sheets, are $12,430 and $13,330 at December 31, 2012 and 2011, respectively.  The participant deferrals earned interest at the average rates of 7.17% and 6.72% during the years ended December 31, 2012 and 2011, respectively.  The interest rate is based on the Moody’s Average Annual Corporate Bond Index rate plus 0.45% for actively employed participants and fixed rates ranging from 6.37% to 7.91% for retired participants.

The Company offers an unfunded, non-qualified deferred compensation plan to a select group of management and highly compensated individuals.  Participants defer a portion of their compensation and realize potential market gains or losses on the invested contributions.  The program is not qualified under Section 401 of the Internal Revenue Code.  Participant balances, which are included in other liabilities in the accompanying consolidated balance sheets are $12,239 and $11,258 at December 31, 2012 and 2011, respectively.

15.  Income Taxes

The provision for income taxes from continuing operations is comprised of the following:

	Year ended December 31,
	2012		2011		2010
Current	$	89,934	$	70,201	$	34,090
Deferred	45,371		23,617		34,537
Total income tax provision from continuing operations	$	135,305	$	93,818	$	68,627

95

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

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 years ended December 31, 2012, 2011 and 2010:

	Year ended December 31,
	2012		2011		2010
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
Income tax effect of:
Investment income not subject to federal tax	(2.3	)%	(2.7	)%	(2.2	)%
Tax credits	(1.3	)%	(2.1	)%	(2.9	)%
State income taxes, net of federal benefit	1.2	%	0.7	%	0.7	%
Income tax contingency provisions	0.0	%	2.0	%	(3.9	)%
Other, net	3.6	%	(1.2	)%	(0.8	)%
Effective federal income tax rate from continuing operations	36.2	%	31.7	%	25.9	%

A reconciliation of unrecognized tax benefits for the years ended December 31, 2012, 2011 and 2010 is as follows:

	Year ended December 31,
	2012			2011			2010
Balance, beginning of year	$	32,123		$	35,256		$	81,390
Additions to tax positions in the current year	6,230			6,557			6,939
Reductions to tax positions in the current year	—			(420		)	—
Additions to tax positions in the prior year	420			4,785			142
Reductions to tax positions in the prior year	(10,219		)	(9,858		)	(47,922		)
Reductions to tax positions from statutes expiring	(2,704		)	(4,197		)	(5,253		)
Settlements	—			—			(40		)
Balance, end of year	$	25,850		$	32,123		$	35,256

Included in the unrecognized tax benefits of $25,850 at December 31, 2012 was $3,832 of tax benefits that, if recognized, would impact the annual effective tax rate.

The Company anticipates additional increases in its unrecognized tax benefits of $0 to $1,000 in the next twelve months.  The Company expects that this increase in its unrecognized tax benefit will impact the effective tax rate.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in current income tax expense.  The Company recognized approximately $208, $2,629 and $(13,403) in interest and penalties related to the uncertain tax positions during the years ended December 31, 2012, 2011 and 2010, respectively.  The Company had approximately $4,412 and $4,204 accrued for the payment of interest and penalties at December 31, 2012 and 2011, respectively.

The Company files income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years 2007 and prior.  Tax years 2008, 2009, 2010 and 2011 are open to federal examination by the I.R.S.  The Company does not expect significant increases or decreases to unrecognized tax benefits relating to federal, state or local audits.

96

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

Deferred income taxes represent the tax effect of the differences between the book and tax bases of assets and liabilities.  The tax effect of temporary differences, which give rise to the deferred tax assets and liabilities as of December 31, 2012 and 2011, are as follows:

	December 31,
	2012				2011
	Deferred		Deferred		Deferred		Deferred
	tax asset		tax liability		tax asset		tax liability
Policyholder reserves	$	—	$	218,303	$	—	$	210,457
Deferred acquisition costs	46,832		—		35,154		—
Investment assets	—		496,096		—		336,482
Policyholder dividends	11,586		—		18,449		—
Net operating loss carryforward	180,448		—		200,486		—
Pension plan accrued benefit liability	98,981		—		72,387		—
Goodwill	—		24,045		—		25,169
Experience rated refunds	10,908		—		21,623		—
Tax credits	106,552		—		74,389		—
Other	—		5,858		—		4,843
Total deferred taxes	$	455,307	$	744,302	$	422,488	$	576,951

Amounts presented for investment assets above include $(410,044) and $(264,078) related to the net unrealized losses (gains) on the Company’s investments, which are classified as available-for-sale at December 31, 2012 and 2011, respectively.

The Company, together with certain of its subsidiaries, and Lifeco U.S. have entered into an income tax allocation agreement whereby Lifeco U.S. files a consolidated federal income tax return.  Under the agreement, these companies are responsible for and will receive the benefits of any income tax liability or benefit computed on a separate tax return basis.

The Company has federal net operating loss carry forwards generated by a subsidiary that is included in the Lifeco U.S. consolidated federal income tax return.  As of December 31, 2012, the subsidiary had net operating loss carry forwards expiring as follows:

Year	Amount
2020	$	119,978
2021	113,002
2022	136,796
2023	81,693
Total	$	451,469

During 2012 and 2011, the Company generated $30,965 and $34,020 of Guaranteed Federal Low Income Housing tax credit carryforwards respectively.  As of December 31, 2012, the total credit carryforward for Low Income Housing is $100,670.  These credits will begin to expire in 2030.

Included in due from parent and affiliates at December 31, 2012 and 2011 is $4,353 and $115,300, respectively, of income taxes receivable from Lifeco U.S. related to the consolidated income tax return filed by the Company and certain subsidiaries.  Included in the consolidated balance sheets at December 31, 2012 and 2011 is $12,585 and $9,019, respectively, of income taxes receivable in other assets primarily related to the separate state income tax returns filed by certain subsidiaries.

97

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

16.   Segment Information

The Company has three reportable segments: Individual Markets, Retirement Services and Other.

Individual Markets

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

Retirement Services

The Retirement Services reporting and operating segment provides various retirement plan products and investment options as well as comprehensive administrative and record-keeping services for financial institutions and employers, which include educational, advisory, enrollment and communication services for employer-sponsored defined contribution plans and associated defined benefit plans.

Other

The Company’s Other reporting segment is substantially comprised of activity under the assumption reinsurance agreement between GWSC and CLAC (“the GWSC operating segment”), corporate items not directly allocated to the other operating segments and interest expense on long-term debt.

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

98

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

The following tables summarize segment financial information for the year ended and as of December 31, 2012:

	Year ended December 31, 2012
	Individual		Retirement
	Markets		Services		Other			Total
Revenue:
Premium income	$	314,350	$	3,670	$	104,133		$	422,153
Fee income	74,985		456,052		4,786			535,823
Net investment income	729,885		414,114		47,552			1,191,551
Net realized gains on investments	55,959		60,726		32			116,717
Total revenues	1,175,179		934,562		156,503			2,266,244
Benefits and expenses:
Policyholder benefits	882,726		204,296		111,288			1,198,310
Operating expenses	136,895		492,427		65,193			694,515
Total benefits and expenses	1,019,621		696,723		176,481			1,892,825
Income (loss) from continuing operations before income taxes	155,558		237,839		(19,978		)	373,419
Income tax expense (benefit)	50,869		78,150		6,286			135,305
Income (loss) from continuing operations	$	104,689	$	159,689	$	(26,264	)	$	238,114

	December 31, 2012
	Individual		Retirement
	Markets		Services		Other		Total
Assets:
Investments	$	14,797,517	$	9,761,036	$	1,551,823	$	26,110,376
Other assets	1,172,932		773,712		123,006		2,069,650
Separate account assets	6,363,214		18,242,312		—		24,605,526
Assets of continuing operations	$	22,333,663	$	28,777,060	$	1,674,829	52,785,552
Assets of discontinued operations							33,053
Total assets							$	52,818,605

99

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

The following tables summarize segment financial information for the year ended and as of December 31, 2011:

	Year ended December 31, 2011 (1)
	Individual		Retirement
	Markets		Services		Other			Total
Revenue:
Premium income	$	395,923	$	1,960	$	125,333		$	523,216
Fee income	65,487		416,405		4,903			486,795
Net investment income	714,228		399,222		45,036			1,158,486
Net realized gains on investments	20,533		3,311		651			24,495
Total revenues	1,196,171		820,898		175,923			2,192,992
Benefits and expenses:
Policyholder benefits	937,885		222,642		103,435			1,263,962
Operating expenses	109,005		435,149		88,821			632,975
Total benefits and expenses	1,046,890		657,791		192,256			1,896,937
Income (loss) from continuing operations before income taxes	149,281		163,107		(16,333		)	296,055
Income tax expense (benefit)	49,221		50,869		(6,272		)	93,818
Income (loss) from continuing operations	$	100,060	$	112,238	$	(10,061	)	$	202,237

	December 31, 2011 (1)
	Individual		Retirement
	Markets		Services		Other		Total
Assets:
Investments	$	13,702,356	$	8,752,301	$	1,540,575	$	23,995,232
Other assets	1,108,744		610,971		126,468		1,846,183
Separate account assets	5,884,676		16,446,714		—		22,331,391
Assets of continuing operations	$	20,695,776	$	25,809,986	$	1,667,043	48,172,806
Assets of discontinued operations							39,621
Total assets							$	48,212,427

(1) As adjusted; See Note 1

100

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

The following tables summarize segment financial information for the year ended December 31, 2010:

	Year ended December 31, 2010 (1)
	Individual			Retirement
	Markets			Services			Other			Total
Revenue:
Premium income	$	676,395		$	5,509		$	123,718		$	805,622
Fee income	56,232			387,103			4,619			447,954
Net investment income	730,439			399,456			44,849			1,174,744
Net realized losses on investments	(1,239		)	(23,229		)	(27		)	(24,495		)
Total revenues	1,461,827			768,839			173,159			2,403,825
Benefits and expenses:
Policyholder benefits	1,218,791			221,943			99,673			1,540,407
Operating expenses	134,445			401,117			62,095			597,657
Total benefits and expenses	1,353,236			623,060			161,768			2,138,064
Income from continuing operations before income taxes	108,591			145,779			11,391			265,761
Income tax expense	29,487			34,547			4,593			68,627
Income from continuing operations	$	79,104		$	111,232		$	6,798		$	197,134

(1) As adjusted; See Note 1

17.  Share-Based Compensation

Equity Awards

Lifeco, of which the Company is an indirect wholly-owned subsidiary, maintains the Great-West Lifeco Inc. Stock Option Plan (the “Lifeco 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.  Options are granted with exercise prices not less than the average market price of the shares on the five days preceding the date of the grant.  Termination of employment prior to the vesting of the options results in the forfeiture of the unvested options.  The Lifeco plan provides for the granting of options with varying terms and vesting requirements with vesting commencing on the first anniversary of the grant and expiring ten years from the date of grant.

The Lifeco plan contains a provision that permits a retiring option holder with unvested stock options on the date of retirement to continue to vest in them after retirement for a period of up to five years.  Upon the retirement of an option holder with unvested options, the Company accelerates the recognition period to the date of retirement for any unrecognized share-based compensation cost related thereto and recognizes it in its earnings at that time.

Liability Awards

In 2011, the Company implemented a Performance Share Unit Plan (“PSU plan”) for senior executives of the Company.  Under the PSU plan, “performance share units” are granted to certain senior executives of the Company having a value equal to the participants’ deferred incentive compensation for the period. Each performance unit has a value equal to one share of Lifeco common stock and is subject to adjustment for cash dividends paid to Lifeco stockholders as well as stock dividends and splits, consolidations and the like that affect shares of Lifeco common stock outstanding.

If the performance share units vest, the units are multiplied by a performance factor to produce a final number of units which are payable in cash equal to the closing price of Lifeco common stock on the date following the last day of the three-year performance period.  Accordingly, the estimated fair value of the performance unit is based on the closing price of Lifeco common stock on the date of grant. The performance share units generally vest in

101

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

their entirety at the end of the three-year performance period based on continued service.  The PSU plan contains a provision that permits all unvested performance share units to become vested upon death or retirement.

Performance share units are settled in cash and are recorded as liabilities until payout is made.  Unlike share-settled awards, which have a fixed grant-date fair value, the fair value of unsettled or unvested liabilities awards is remeasured at the end of each reporting period based on the change in fair value of one share of Lifeco common stock.  The liability and corresponding expense are adjusted accordingly until the award is settled.

Compensation Expense Related to Stock-Based Compensation

The compensation expense related to stock-based compensation for the years ended December 31, 2012, 2011 and 2010 were as follows:

	2012		2011		2010
Lifeco Stock Plan	$	2,314	$	1,786	$	1,855
Performance Share Unit Plan	3,658		1,161		—
Total compensation expense	$	5,972	$	2,947	$	1,855
Income tax benefits	$	1,729	$	752	$	226

The following table presents the total unrecognized compensation expense related to stock-based compensation at December 31, 2012 and the expected weighted average period over which these expenses will be recognized:

	Expense		Weighted average period (years)
Lifeco Stock Plan	$	3,016	1.7
Performance Share Unit Plan	4,414		1.4

Equity Award Activity

During the year ended December 31, 2012, Lifeco granted 739,600 stock options to employees of the Company.  These stock options vest over five-year periods ending in March 2017.  Compensation expense of $2,566 will be recognized in the Company’s financial statements over the vesting period of these stock options using the accelerated method of recognition.

102

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

The following table summarizes the status of, and changes in, the Lifeco plan options granted to Company employees which are outstanding at December 31, 2012.  The options granted relate to underlying stock traded in Canadian dollars on the Toronto Stock Exchange, therefore, the amounts, which are presented in United States dollars, will fluctuate as a result of exchange rate fluctuations.

			Weighted average
			Exercise		Remaining	Aggregate
	Shares		price		contractual	intrinsic
	under option		(Whole dollars)		term (Years)	value (1)
Outstanding, January 1, 2012	2,896,560		$	28.01
Granted	739,600		23.28
Exercised	(354,000	)	19.43
Outstanding, December 31, 2012	3,282,160		28.42		6.2	$	1,518
Vested and expected to vest, December 31, 2012	3,261,022		$	28.42	6.2	$	1,168
Exercisable, December 31, 2012	1,483,080		$	30.10	4.4	$	171

(1) The aggregate intrinsic value is calculated as the difference between the market price of Lifeco common shares on December 31, 2012 and the exercise price of the option (only if the result is positive) multiplied by the number of options.

The following table presents additional information regarding stock options under the Lifeco plan during the years ended December 31, 2012, 2011 and 2010:

	2012		2011		2010
Weighted average fair value of options granted	$	3.47	$	4.49	$	4.41
Intrinsic value of options exercised (1)	1,397		1,197		5,218
Fair value of options vested	1,740		1,541		943

(1) The intrinsic value of options exercised is calculated as the difference between the market price of Lifeco common shares on the date of exercise and the exercise price of the option multiplied by the number of options exercised.

The fair value of the options granted during the years ended December 31, 2012, 2011 and 2010 was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2012		2011		2010
Dividend yield	5.31	%	4.59	%	4.53	%
Expected volatility	25.65	%	25.22	%	25.03	%
Risk free interest rate	1.52	%	2.62	%	2.62	%
Expected duration (years)	6.0		5.5		5.5

103

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

Liability Award Activity

The following table summarizes the status of, and changes in, the Performance Share Unit Plan units granted to Company employees which are outstanding at December 31, 2012.

	Performance Units
Outstanding, December 31, 2011	163,708
Granted	211,600
Paid	—
Forfeited	—
Outstanding, December 31, 2012	375,308
Vested and expected to vest, December 31, 2012	375,308

18.  Commitments and Contingencies

Commitments

The following table summarizes the Company’s future purchase obligations and commitments as of December 31, 2012:

	Payment due by period
	Less than		One to		Three to		More than
	one year		three years		five years		five years		Total
Related party long-term debt - principal (1)	—		—		—		528,400		528,400
Related party long-term debt - interest (2)	37,031		74,062		74,062		901,069		1,086,224
Investment purchase obligations (3)	127,255		—		—		—		127,255
Operating leases (4)	4,404		5,683		607		—		10,694
Other liabilities (5)	42,391		49,041		70,713		66,799		228,944
Total	$	211,081	$	128,786	$	145,382	$	1,496,268	$	1,981,517

(1)  Related party long-term debt principal - Represents contractual maturities of principal due to the Company’s parent, GWL&A Financial, under the terms of two long-term surplus notes.  The amounts shown in this table differ from the amounts included in the Company’s consolidated balance sheet because the amounts shown above do not consider the discount upon the issuance of one of the surplus notes.

(2)  Related party long-term debt interest - One long-term surplus note bears interest at a fixed rate through maturity.  The second surplus note bears interest initially at a fixed rate that will change in the future based upon the then current three-month London Interbank Offering Rate.  The interest payments shown in this table are calculated based upon the contractual rates in effect on December 31, 2012 and do not consider the impact of future interest rate changes.

(3)  Investment purchase obligations - The Company commits to fund limited partnership interests, mortgage loan and other investments in the normal course of its business.  As the timing of the fulfillment of the commitment to fund partnership interests cannot be predicted, such obligations are presented in the less than one year category.  The timing of the funding of mortgage loans is based on the expiration date of the commitment. The amounts of these unfunded commitments at December 31, 2012 and 2011 were $127,255 and $97,694, of which $11,031 and $13,205 was related to cost basis limited partnership interests, respectively, all of which is due within one year from the dates indicated.

104

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Consolidated Financial Statements

Years Ended December 31 2012, 2011 and 2010

(Dollars in Thousands, Except Share Amounts)

(4) Operating leases - The Company is obligated to make payments under various non-cancelable operating leases, primarily for office space.  Contractual provisions exist that could increase the lease obligations presented, including operating expense escalation clauses.  Management does not consider the impact of any such clauses to be material to the Company’s operating lease obligations.  The Company incurred rent expense, net of sublease income, of $5,764, $5,645 and $6,047 for the years ended December 31, 2012, 2011 and 2010, respectively and is recorded in general insurance expense.

From time to time, the Company enters into agreements or contracts, including capital leases, to purchase goods or services in the normal course of its business.  However, these agreements and contracts are not material and are excluded from the table above.

(5)  Other liabilities - Other liabilities include those other liabilities which represent contractual obligations not included elsewhere in the table above.  If the timing of the payment of any other liabilities was sufficiently uncertain, the amounts were included in the less than one year category.  Other liabilities presented in the table above include:

·Expected contributions to the Company’s defined benefit pension plan and benefit payments for the post-retirement medical plan and supplemental executive retirement plan through 2022.

·Miscellaneous purchase obligations to acquire goods and services.

·Unrecognized tax benefits

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 was in compliance with all covenants at December 31, 2012 and 2011.  At December 31, 2012 and 2011 there were no outstanding amounts related to this credit facility.

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 effect on the Company’s consolidated financial position, results of its operations or cash flows.

19.  Subsequent Event

On February 1, 2013, the Company’s Board of Directors declared a dividend of $44,435 to be paid to its sole shareholder, GWL&A Financial, on March 29, 2013.

105

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Schedule III

Supplemental Insurance Information

(In Thousands)

	As of and for the year ended December 31, 2012
	Individual		Retirement
	Markets		Services		Other
	Segment		Segment		Segment		Total
Deferred acquisition costs	$	118,490	$	53,926	$	—	$	172,416
Future policy benefits, losses, claims and expenses	13,593,217		9,491,094		369,300		23,453,611
Unearned premium reserves	27,007		—		—		27,007
Other policy claims and benefits payable	744,504		476		24,711		769,691
Premium income	314,350		3,670		104,133		422,153
Net investment income	729,885		414,114		47,552		1,191,551
Benefits, claims, losses and settlement expenses	882,726		204,296		111,288		1,198,310
Amortization of deferred acquisition costs	28,926		22,508		—		51,434
Other operating expenses	107,969		469,919		65,193		643,081
	As of and for the year ended December 31, 2011
	Individual		Retirement
	Markets		Services		Other
	Segment		Segment		Segment		Total
Deferred acquisition costs (1)	$	102,598	$	75,183	$	—	$	177,781
Future policy benefits, losses, claims and expenses	12,812,079		8,620,044		356,296		21,788,419
Unearned premium reserves	39,855		—		—		39,855
Other policy claims and benefits payable	742,457		445		26,184		769,086
Premium income	395,923		1,960		125,333		523,216
Net investment income	714,228		399,222		45,036		1,158,486
Benefits, claims, losses and settlement expenses	937,885		222,643		103,434		1,263,962
Amortization of deferred acquisition costs (1)	10,497		14,687		—		25,184
Other operating expenses (1)	98,509		420,461		88,821		607,791
	As of and for the year ended December 31, 2010
	Individual		Retirement
	Markets		Services		Other
	Segment		Segment		Segment		Total
Premium income	676,395		5,509		123,718		805,622
Net investment income	730,439		399,456		44,849		1,174,744
Benefits, claims, losses and settlement expenses	1,218,791		221,943		99,673		1,540,407
Amortization of deferred acquisition costs (1)	20,448		7,057		—		27,505
Other operating expenses (1)	113,997		394,060		62,095		570,152

(1) As adjusted; See Note 1

106

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

There has been no change in the Company’s independent registered public accounting firm nor have there been any disagreements on accounting or financial disclosure matters.

Item 9A.

Controls and Procedures

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting.  The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012.  In making this evaluation, management used criteria set forth in “Internal Control - Integrated Framework” issued by the committee of Sponsoring Organizations of the Treadway Commission.  Based on their evaluation, the Chief Executive Officer and Principal Financial Officer and the Chief Accounting Officer have concluded that the Company’s internal control over financial reporting is effective as of December 31, 2012.

The Chief Executive Officer and Principal Financial Officer and the Chief Accounting Officer hereby confirm that there were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  As the Company is neither an accelerated filer nor a large accelerated filer, management’s report is not subject to attestation by the Company’s registered public accounting firm pursuant to final rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Item 9B.

Other Information

None.

Part III

Item 10.

Directors and Executive Officers of the Registrant

10.1  Identification of Directors

		Served as a
		Director
Director	Age	from	Principal Occupation(s) for Last Five Years
John L. Bernbach (5) (6)	69	2006	Chief Operating Officer, Engine USA
André Desmarais (1) (2) (4) (6) (7) (8)	56	1997	Deputy Chairman, President and Co-Chief Executive Officer, Power Corporation; Co-Chairman, Power Financial Corporation

107

		Served as a
		Director
Director	Age	from	Principal Occupation(s) for Last Five Years
Paul Desmarais, Jr. (1) (2) (4) (6) (7) (8)	58	1991	Chairman and Co-Chief Executive Officer, Power Corporation; Co-Chairman, Power Financial Corporation
Mitchell T.G. Graye (1) (2)	57	2008	President and Chief Executive Officer of the Company
Alain Louvel (3) (5)	67	2006	Corporate Director
Raymond L. McFeetors (1) (2) (4) (6) (8)	68	2006	Chairman of the Board of the Company; Chairman of the Board of Lifeco, Great-West Life, CLAC and London Life Insurance Company
Jerry E.A. Nickerson (3)	76	1994	Chairman of the Board, H.B.Nickerson & Sons Limited
R. Jeffrey Orr (1) (2) (4) (6) (8)	54	2005	President and Chief Executive Officer, Power Financial Corporation
Michel Plessis-Bélair (8)	70	1991	Vice Chairman, Power Corporation
Henri-Paul Rousseau (1) (2) (8)	64	2009	Vice Chairman, Power Corporation since January 2009; previously President and Chief Executive Officer of la Caisse de dépot et placement du Québec
Raymond Royer (3) (8)	74	2009	Corporate Director since December 2008; previously President and Chief Executive Officer of Domtar Inc.
T. Timothy Ryan, Jr. (1) (2) (8)	67	2009	Global Head of Regulatory Strategy and Policy, JPMorgan Chase and Co. since January 2013; previously President and Chief Executive Officer of Securities Industry and Financial Markets Association
Jerome J. Selitto (1) (2) (8)	71	2012	Corporate Director since July 2012; previously Chief Executive Officer of PHH Corporation from October 2009 to January 2012; previously Executive Vice President, National Sales, The Astor Group, from October 2005 to October 2009
Gregory D. Tretiak (1) (2) (3) (8)	57	2012	Executive Vice President and Chief Financial Officer, Power Corporation since May 2012; previously Executive Vice President and Chief Financial Officer, IGM Financial Inc., since January 1999
Brian E. Walsh (1) (2) (4) (6) (8)	59	1995	Chairman and Chief Investment Officer, Saguenay Strathmore Capital, LLC since September 2011; previously Managing Partner, Saguenay Capital, LLC

108

(1)   Member of the Executive Committee.

(2)   Member of the Investment and Credit Committee.

(3)   Member of the Audit Committee.

(4)   Member of the Compensation Committee.

(5)   Member of the Conduct Review Committee.

(6)   Member of the Governance and Nominating Committee.

(7)   Mr. André Desmarais and Mr. Paul Desmarais, Jr. are brothers.

(8)   Also a director of Great-West Lifeco.

Unless otherwise indicated, all of the directors have been engaged for not less than five years in their present principal occupations or in another executive capacity with the companies or firms identified.

The appointments of directors are confirmed annually.

The following is a list of directorships currently held or formerly held within the five previous years by the directors of the Company, on companies whose securities are traded publicly in the United States or that are investment companies (other than the Company) registered under the Investment Company Act of 1940.

		Former
	Current	Directorships
Director	Directorships	and Dates
André Desmarais	CITIC Pacific Limited	BELLUS Health Inc.
		(formerly Neurochem, Inc.)
		May 2006 - June 2009
Paul Desmarais, Jr.	TOTAL S.A.	* GDF Suez
	LAFARGE S.A.
Mitchell T.G. Graye	Great-West Funds, Inc.
R. Jeffrey Orr	Panagora Asset Management, Inc.
T. Timothy Ryan, Jr.	Lloyds Banking Group PLC
Jerome J. Selitto		PHH Corporation
		October 2009 - January 2012
Gregory D. Tretiak	Panagora Asset Management, Inc.

* Mr. Desmarais remains a director of GDF Suez which deregistered with the Securities and Exchange Commission during 2009.

The Company’s Governance and Nominating Committee (the “Nominating Committee”) is charged with recommending to the Board of Directors the qualifications for Directors, including among other things, the competencies, skills, experience and level of commitment required to fulfill Board responsibilities and the personal qualities that should be sought in candidates for Board membership. The Nominating Committee’s duties include identifying and recommending Director candidates to the Board based on a consideration of the competencies and skills that the Board considers appropriate for the Board as a whole to possess, the competencies and skills that the Board considers each existing Director to possess and that each new nominee will bring to the Board, and the appropriate level of representation on the Board by Directors who are independent of management and who are neither officers nor employees of any of the Company’s affiliates.

The Company’s Directors are elected on an annual basis by the Company’s sole shareholder, GWL&A Financial Inc.

The Company’s Directors are identified below along with an indication of their experience, qualifications, attributes and skills, which leads the Company to believe that they are qualified to serve on the Board of Directors.

109

John L. Bernbach

Mr. Bernbach is Chief Operating Officer of Engine USA, a media and marketing services company, which is a subsidiary of The Engine Group Ltd, headquartered in the U.K. He was also a co-founder of NTM (Not Traditional Media) Inc. in 2003, a marketing and media advisory firm that worked with clients and media companies to develop strategies integrating nontraditional marketing solutions and new media models. Prior to that, Mr. Bernbach was Chairman and CEO of The Bernbach Group, an executive management consulting business. From 1995 to 2000, Mr. Bernbach served as Director and then CEO and Chairman of North American Television, which produced and distributed news and entertainment programming. In 1994, Mr. Bernbach launched the publication of luxury goods magazines in China, Japan, France and Spain. Prior to 1994, Mr. Bernbach spent 22 years at the advertising firm Doyle Dane Bernbach, the last eight as President/COO of DDB Needham Worldwide. Mr. Bernbach currently serves on the Boards of Putnam Investments, Cellfish Media and Casita Maria and as an advisor to The Blackstone Group.

André Desmarais

Mr. Desmarais is Co-Chairman of Power Financial and Deputy Chairman, President and Co-Chief Executive Officer of Power Corporation. Prior to joining Power in 1983, he was Special Assistant to the Minister of Justice of Canada and an institutional investment counselor at Richardson Greenshields Securities Ltd. He has held a number of senior positions with Power group companies. Mr. Desmarais is a Director of Lifeco, Great-West Life, London Life Insurance Company (“London Life”), CLAC and Putnam Investments. He is a Director of IGM Financial Inc. (“IGM”), Investors Group Inc. (Investors Group”) and Mackenzie Inc. (“Mackenzie”). He is also a Director of Power Financial, Pargesa Holding S.A. (“Pargesa”) in Europe, Power Corporation and CITIC Pacific Ltd. in Asia. Mr. Desmarais is Honorary Chairman of the Canada China Business Council and is a member of several China-based organizations. Mr. Desmarais is active in cultural, health and other not-for-profit organizations. He is an Officer of the Order of Canada and of the National Order of Québec.

Paul Desmarais, Jr.

Mr. Desmarais is Co-Chairman of Power Financial and Chairman and Co-Chief Executive Officer of Power Corporation. Prior to joining Power in 1981, he was with S.G. Warburg & Co. in London, England, and with Standard Brands Incorporated in New York. He was Chairman of the Board of Power Financial from 1990 to 2005, Vice-Chairman of Power Financial from 1989 to 1990 and President and Chief Operating Officer of Power Financial from 1986 to 1989.  He was named to his present position with Power in 1996. He is a Director of Lifeco, Great-West Life, London Life, CLAC, Putnam Investments, IGM, Investors Group and Mackenzie. In Europe, he is also Vice-Chairman of the Board and Executive Director of Pargesa Holding SA, Vice-Chairman and Director of Groupe Bruxelles Lambert, and Director of GDF Suez, Total SA and Lafarge SA.  He was Vice-Chairman of the Board and a Director of Imerys until 2008. Mr. Desmarais is a member of the Advisory Council of the European Institute of Business Administration (INSEAD), a Trustee of the Brookings Institution (Washington) and the Co-Chair of the Brookings International Advisory Council, a member of the Global Board of Advisers of the Council on Foreign Relations (New York), Chairman of the Canadian Council of Chief Executives and a member of the Global Advisory Council of the Harvard University (Boston). He is also involved in charitable and community activities in Montréal.  He was named an Officer of the Order of Canada in 2005 and an Officer of the National Order of Québec in 2009.  He has received Doctorates Honoris Causa from Université Laval, the Université de Montréal and from McGill University.

Mitchell T.G. Graye

Mr. Graye was appointed President and Chief Executive Officer of the Company in May 2008.  From 1997 until his appointment as CEO, he served as Chief Financial Officer of the Company. From 1993 to 1997, Mr. Graye served as Senior Vice President and Chief Financial Officer for Great-West Life in Winnipeg.  Prior to his roles within the Great-West Life family of companies, Mr. Graye held senior financial positions in both the corporate and investment banking sectors. Mr. Graye is an Honors graduate in Business Administration from the University of Western Ontario, where he was the Gold Medalist for Standing First in Class.

Alain Louvel

After receiving an MBA from Columbia University, and a masters in Economics and Political Sciences degree from the Paris University, Mr. Louvel began his professional career in 1970 as an advisor to the Department of Industry and Trade of the Quebec Government. In 1972, he joined Bank Paribas (“Paribas”) and for the next 33 years held numerous positions with Paribas in France, Canada and the United States.  He completed his career

110

with Paribas as the Head of Risk Management for the Americas, with overall responsibilities over credit, market, counterparty and operational risk for the combined operations of Paribas and BNP following the merger which formed BNP Paribas. Mr. Louvel serves as a Director of Putnam Investments, Mountain Asset Management LLC and World Point Terminals. He is also a Trustee of the French Institute Alliance Francaise and a French Foreign Trade Counselor. Mr. Louvel is a permanent resident of the United States with dual French and Canadian citizenship.

Raymond L. McFeetors

Mr. McFeetors is Chairman of the Board of Lifeco and the Company, a position he has held since May, 2008. He is also Vice-Chairman of Power Financial. Prior to May, 2008 he was President and Chief Executive Officer of Lifeco, Great-West Life, London Life, CLAC and the Company. Mr. McFeetors has been with Lifeco since 1968, and is a Director and Chairman of the Board of Lifeco, Great-West Life, London Life, and CLAC. He is a Director of Putnam Investments, IGM, Investors Group, Mackenzie, Power Financial and Power Corporation. Mr. McFeetors is also a Director of a number of national organizations in the health, education, cultural and business sectors. In 2002, he was appointed Honorary Colonel of The Royal Winnipeg Rifles. Also in 2002, he was awarded the Queen Elizabeth II Golden Jubilee Medal. Mr. McFeetors received an Honorary Doctorate of Laws from the University of Winnipeg in 2007.

Jerry E.A. Nickerson

Mr. Nickerson is Chairman of the Board of H.B. Nickerson & Sons Limited, a management and holding company based in North Sydney, Nova Scotia. He is also a Director of Putnam Investments. He has also served on the boards of various organizations, federal and provincial Crown corporations, and other public and private companies.

R. Jeffrey Orr

Mr. Orr is President and Chief Executive Officer of Power Financial, a position he has held since May, 2005. From May, 2001 until May, 2005, he was President and Chief Executive Officer of IGM. Previously, he was Chairman and Chief Executive Officer of BMO Nesbitt Burns Inc. and Vice-Chairman, Investment Banking Group, Bank of Montreal. He is a Director of Lifeco, Great-West Life, London Life, CLAC and he is also a Director and Chairman of Putnam Investments. Mr. Orr is also a Director and Chairman of IGM, Investors Group, Mackenzie, and a Director of Power Financial and Power Corporation. He is active in a number of community and business organizations.

Michel Plessis-Bélair

Mr. Plessis-Bélair was Executive Vice-President and Chief Financial Officer of Power Financial and Vice-Chairman and Chief Financial Officer of Power Corporation until his retirement in January, 2008. He continues to serve as Vice-Chairman of Power Financial and Power Corporation. Before joining Power Corporation in 1986, he was Executive Vice-President and Director of Société générale de financement du Québec and prior to that he was Senior Vice-President of Marine Industries Ltd. Mr. Plessis-Bélair is a Director of Lifeco, Great-West Life, London Life, and CLAC. He is also a Director of IGM, Investors Group and Mackenzie. He is also a Director of Pargesa and Groupe Bruxelles Lambert. Mr. Plessis-Bélair is also a Director of Lallemand Inc., Hydro-Québec.

Henri-Paul Rousseau

Mr. Rousseau is Vice-Chairman of Power Financial and Power Corporation, positions he has held since January, 2009. He was President and Chief Executive Officer of la Caisse de dépôt et placement du Québec from May, 2005 until May, 2008 and Chairman and Chief Executive Officer from September, 2002 until April, 2005. He was President and Chief Executive Officer of Laurentian Bank of Canada from 1994 until 2002 and prior to that held senior offices with Boréal Assurances Inc. and the National Bank of Canada. Mr. Rousseau was an economics professor at Université Laval from 1975 until 1986 and at Université du Québec à Montréal from 1973 until 1975. He is a Director of Lifeco, Great-West Life, London Life, CLAC and Putnam Investments. He is also a Director of IGM, Investors Group and Mackenzie. He is a Director of GFMA (Global Financial Markets Association). He received doctorates Honoris Causa from Concordia University, from Université Lumière Lyon 2 (France), from Université Laval and from Université de Sherbrooke. Mr. Rousseau is active in a number of community and non-profit organizations.

111

Raymond Royer

Mr. Royer was President and Chief Executive Officer and a Director of Domtar Inc. from 1996 until December, 2008. He was previously President and Chief Operating Officer of Bombardier Inc. Mr. Royer is a Director of Lifeco, Great-West Life, London Life, CLAC and Putnam Investments. Mr. Royer is also a Director of Power Financial. He was a Director of Shell Canada Limited until 2007. He is a Member of the International Advisory Board of École des Hautes Études Commerciales of Montréal. He is an Officer of the Order of Canada and of the National Order of Québec.

T. Timothy Ryan, Jr.

Mr. Ryan is Global Head of Regulatory Strategy and Policy at JPMorgan Chase. He previously served as President and Chief Executive Officer of Securities Industry and Financial Markets Association (“SIFMA”) from January 2008 through January, 2013. SIFMA is the leading industry trade association representing 680 global financial market participants. Prior to joining SIFMA, Mr. Ryan was Vice-Chairman, Financial Institutions and Governments at J.P. Morgan where he was a member of the firm’s senior leadership. He is a Director of Lifeco, Great-West Life, London Life, CLAC and Putnam Investments. He is also a Director of Power Financial and Power Corporation. Mr. Ryan is a member of the board of Lloyds Banking Group PLC, where he serves on the Remuneration, Audit and Risk Committees, and is a director of The U.S. Japan Foundation. He is also a private sector member of the Global Markets Advisory Committee for the National Intelligence Council. Prior to joining J.P. Morgan in 1993, Mr. Ryan was the Director of the Office of Thrift Supervision, U.S. Department of the Treasury. Mr. Ryan was a Director of the Resolution Trust Corporation and a Director of the Federal Deposit Insurance Corporation. From 1983 to 1990 Mr. Ryan was a Partner in the Washington, D.C. office of the law firm Reed, Smith, Shaw & McClay, where he headed the Pension Investment Group and was a member of the firm’s Executive Committee. From 1981 to 1983 Mr. Ryan was Solicitor of Labor, U.S. Department of Labor. Mr. Ryan is a graduate of Villanova University and American University Law School.

Jerome J. Selitto

Mr. Selitto served as a Director and as the President and Chief Executive Officer of PHH Corporation (“PHH”), a leading outsource provider of mortgage and fleet management services, from October 26, 2009 to January 4, 2012.  Prior to joining PHH, Mr. Selitto most recently worked at Ellie Mae, Inc., a provider of enterprise solutions, including an online network, software and services for the residential mortgage industry. While at Ellie Mae, Mr. Selitto initially served as a senior consultant beginning in 2007 and, later in 2007 through 2009, as Executive Vice-President, Lender Division.  In 2000, Mr. Selitto founded and served as Chief Executive Officer of DeepGreen Financial, a privately-held, innovative web-based federal savings bank and mortgage company that grew to become one of the nation’s most successful online home equity lenders. From 1992 to 1999, he served as co-founder and Vice Chairman of Amerin Guaranty Corporation (now Radian Guaranty), a mortgage insurance company. Mr. Selitto previously served as a Managing Director at First Chicago Corporation and PaineWebber Inc., and as a senior executive at Kidder, Peabody & Co., William R. Hough & Company, and the Florida Federal Savings and Loan Association. Mr. Selitto is a Director of Lifeco, Great-West Life, London Life and CLAC.

Gregory D. Tretiak

Mr. Tretiak is Executive Vice-President and Chief Financial Officer of Power and Power Financial. Mr. Tretiak joined Investors Group in 1988 and was Executive Vice-President and Chief Financial Officer of IGM Financial Inc. until 2012. Mr. Tretiak is a Director of Lifeco, Great-West Life, London Life, and CLAC. Mr. Tretiak also serves on the Board of Directors of Putnam and PanAgora Asset Management, Inc. He is also a Director of IGM, Investors Group and Mackenzie. He holds a Bachelor of Arts in Economics and Political Science from the University of Winnipeg and is a Chartered Accountant, a Fellow of the Institute of Chartered Accountants of Manitoba and has been a Certified Financial Planner. Throughout his career, Mr. Tretiak has been an active member in professional industry groups including the Institute of Chartered Accountants, Financial Executives International, the Certified Financial Planners, and the Institute of Internal Auditors. He has served with national organizations such as the Investment Funds Institute of Canada, the Canadian Chamber of Commerce Economic and Taxation Committee and the Canadian Institute of Chartered Accountants.

Brian E. Walsh

Mr. Walsh is Chairman and Chief Investment Officer of Saguenay Strathmore Capital, LLC, a money management and investment advisory company, a position that he has held since September, 2011. He was previously Managing Partner of Saguenay Capital, LLC from January, 2001 to September, 2011. Mr. Walsh has

112

over 30 years of investment banking, international capital markets and investment management experience. He had a long career at Bankers Trust culminating in his appointment as Co-head of Global Investment Banking and as a member of the Management Committee. Mr. Walsh is a Director of Lifeco, Great-West Life, London Life and CLAC. Mr. Walsh also serves on the Board of Directors of Putnam Investments, and serves on the International Advisory Board of École des Hautes Études Commerciales of Montréal.

10.2  Identification of Executive Officers

		Served as
		Executive
Executive	Age	Officer from	Principal Occupation(s) for Last Five Years
Mitchell T.G. Graye President and Chief Executive Officer	57	1997	President and Chief Executive Officer of the Company
Charles P. Nelson President, Great-West Retirement Services	52	2008	President, Great-West Retirement Services of the Company
S. Mark Corbett Executive Vice President and Chief Investment Officer	53	2008	Executive Vice President and Chief Investment Officer of the Company
Robert K. Shaw Executive Vice President, Individual Markets	57	2008	Executive Vice President, Individual Markets of the Company
Scot A. Miller Senior Vice President and Chief Information Officer	54	2008	Senior Vice President and Chief Information Officer of the Company
Richard G. Schultz Senior Vice President, General Counsel and Secretary	52	2008	Senior Vice President, General Counsel and Secretary of the Company

Unless otherwise indicated, all of the executive officers have been engaged for not less than five years in their present principal occupations or in another executive capacity with the companies or firms identified.

The appointments of executive officers are confirmed annually.

10.3  Code of Ethics

The Company has adopted a Code of Business Conduct and Ethics (the “Code”) that is applicable to its senior financial officers, as well as to other officers and employees.  All of the items identified as elements of a “code of ethics” as defined in Securities and Exchange Commission regulations adopted pursuant to the Sarbanes-Oxley Act of 2002 are substantively covered by the Code.  A copy of the Code is available without charge upon written request to Beverly A. Byrne, Chief Compliance Officer, 8525 East Orchard Road, Greenwood Village, Colorado 80111.

10.4  Security Holder Communications

As a wholly-owned subsidiary, the Board of Directors of the Company does not have a process for security holders to send communications to the Board of Directors.

113

10.5  Audit Committee Financial Expert

The Board of Directors has reviewed the qualifications and backgrounds of the members of the Audit Committee and determined that, although no one member of the Audit Committee is an “audit committee financial expert” within the meaning of the Rules under the Securities Exchange Act of 1934, the combined qualifications and experience of the members of the Audit Committee give the Committee collectively the financial expertise necessary to discharge its responsibilities.

Item 11.

Executive Compensation

11.1  Compensation Discussion and Analysis

1.  General

The executive compensation program adopted by the Company and applied to the executive officers (including the Named Executive Officers) is designed to support the primary objective of generating added value for shareholders and policyholders over the long term.   The Compensation Committee of the Board of Directors of the Company oversees the executive compensation program. The Board and the Compensation Committee recognize the importance of executive compensation decisions to the management and shareholders of the Corporation, and have given careful consideration to the process which is followed to make decisions.

The main objectives of the executive compensation program are to:

·attract, retain and reward qualified and experienced executives who will contribute to the success of the Company;

·motivate executive officers to meet annual corporate, divisional, and individual performance goals; and

·enhance long-term shareholder and policyholder value.

More specifically, the executive compensation program is designed to reward the following:

·excellence in crafting and executing strategies that will produce significant value for the shareholders and policyholders over the long term;

·management vision and an entrepreneurial approach;

·quality of decision-making;

·strength of leadership;

·record of performance over the long term; and

·initiating and implementing transactions and activities that create shareholder and policyholder value.

In designing and administering the individual elements of the executive compensation program, the Compensation Committee strives to balance short-term and long-term incentive objectives and to apply prudent judgment in establishing performance criteria, evaluating performance, and determining actual incentive awards. The total compensation of each Named Executive Officer is reviewed by the Compensation Committee from time to time for market competitiveness, and reflects each Named Executive Officer’s job responsibilities, experience and proven and/or expected performance.

The executive compensation programs consist of five primary components:

·base salary;

·annual incentive bonus;

·share units;

·options for Lifeco common shares; and

·retirement benefits.

114

The primary role of each of these components is presented in the table below:

Base Salary	Reflect skills, competencies, experience and performance appraisal of the Named Executive Officers
Annual Incentive Bonus	Reflect performance for the year
Share Units	More closely align the medium term interests of the Named Executive Officers with the interests of the shareholders
Stock Options	More closely align the long term interests of the Named Executive Officers with interests of the shareholders
Retirement Benefits	Provide for appropriate replacement income upon retirement based on years of service with the Company

Base salary, annual incentive bonus, share units and retirement benefits are determined by the Compensation Committee for the executive officers (including the Named Executive Officers) other than the President and Chief Executive Officer, whose base salary, share units and annual incentive bonus are recommended by the Compensation Committee for approval by the Board of Directors. The long-term compensation component in the form of options for Lifeco common shares is determined and administered by Lifeco’s Compensation Committee. For the Named Executive Officers, the annual incentive bonus, share unit and stock option components are an essential part of their compensation.

The President and Chief Executive Officer participates in the compensation setting process for the other Named Executive Officers by evaluating individual performance, establishing individual performance targets and objectives and recommending salary levels.

2.  Base Salary

Base salaries for the Named Executive Officers are set annually, taking into account the individual’s job responsibilities, experience and proven or expected performance, as well as market conditions. The Company gathers market data in relation to the insurance and financial services industries and also considers surveys prepared by external professional compensation consultants such as Tower Watson, Hewitt, Mercer and McLagan Partners with regard to peer groups in these industries.

3.  Bonuses

(a)  Annual Incentive Bonus Plan

To relate the compensation of the Named Executive Officers to the performance of the Company, an annual incentive bonus plan (the “Annual Incentive Bonus Plan”) is provided. Target objectives are set annually, and may include earnings, expense or sales targets of the Company and/or a business unit of the Company or specific individual objectives related to strategic initiatives, acquisition related integration or synergy achievements.

These objectives are designed to be integrated with the Company’s overall goals and initiatives.  These targets are set high enough to drive performance while still being reasonable in terms of the likelihood of being met if individuals perform to the levels expected by the Company.

See Section 11.5 below for information on the participation of the Named Executive Officers in the Annual Incentive Bonus Plan and a further description of the terms of the Annual Incentive Bonus Plan.

115

(b)  Special Bonuses

From time to time, special bonuses may be provided related to significant projects such as acquisitions or dispositions or for retention purposes.

4.  Share Units

To provide a medium term component to the executive compensation program, the Named Executive Officers participate in the Company’s Share Unit Plan for Senior Executives (the “Executive Share Unit Plan”).

The Company’s Compensation Committee is responsible for the granting of share units to participants under the Executive Share Unit Plan.  Share Units are not granted based on the timing of the disclosure of non-public material information with respect to Lifeco or the Company.

The granting of share units is considered annually by the Compensation Committee.  Officer levels are taken into account when new share unit grants are considered.  The granting of share units is subject to the terms and conditions contained in the Executive Share Unit Plan and any additional terms and conditions fixed by the Compensation Committee at the time of the grant.

See Section 11.5 below for information on the participation of the Named Executive Officers in the Executive Share Unit Plan and a further description of the terms of the Executive Share Unit Plan.

The Compensation Committee of the Company believes that medium-term incentives in the form of share units, with delayed vesting provisions, will play an important part in retaining key executive officers and in aligning the interests of the executive officers with those of the shareholders, and in contributing to the achievement of the results that have been attained by the Company.

5.  Stock Options

To provide a long-term component to the executive compensation program, the Named Executive Officers participate in Lifeco’s Stock Option Plan (the “Lifeco Option Plan”).

While the Company’s Compensation Committee makes recommendations with respect to the granting of Lifeco options, Lifeco’s Compensation Committee is responsible for the granting of options to participants under the Lifeco Option Plan.  Options are not granted based on the timing of the disclosure of non-public material information with respect to Lifeco or the Company.

The granting of Lifeco options is considered annually by the Lifeco Compensation Committee.  Officer levels are taken into account when new option grants are considered.  The granting of options is subject to the terms and conditions contained in the Lifeco Stock Option Plan and any additional terms and conditions fixed by the Lifeco Compensation Committee at the time of the grant.

See Section 11.5 below for information on the participation of the Named Executive Officers in the Lifeco Option Plan and a further description of the terms of the Lifeco Option Plan.

The Compensation Committees of the Company and Lifeco believe that long-term incentives in the form of stock options, with delayed vesting provisions, play an important part in retaining key executive officers and in aligning the interests of the executive officers with those of the shareholders, and in contributing to the achievement of the results that have been attained by the Company.

6.  Pension Benefits

(a)  Defined Benefit Plan

GWL&A Financial has a qualified defined benefit pension plan (the “Defined Benefit Plan”) which is available to all employees of the Company hired before January 1, 1999.  See Section 11.8 below for information on the

116

participation of the Named Executive Officers in the Defined Benefit Plan and a description of the terms of the Defined Benefit Plan.

(b)  SERP

To provide a competitive retirement benefit to certain key executives, the Company also has a nonqualified supplemental executive retirement plan (the “SERP”), which provides benefits above the compensation limits applicable to the Defined Benefit Plan.  See Section 11.8 below for information on the participation of the Named Executive Officers in the SERP and a description of the terms of the SERP.

(c) 401(k) Plan

All employees, including the Named Executive Officers, may participate in the Company’s qualified defined contribution 401(k) Plan (the “401(k) Plan”).  Under the 401(k) Plan, employees may make contributions of between 1% and 50% of base salary, subject to applicable Internal Revenue Service (“IRS”) limits.  All new employees are automatically enrolled in the 401(k) Plan at a 3% contribution rate unless the employee elects out or elects a different contribution rate.

For employees participating in the Defined Benefit Plan, the Company matches 50% of the first 5% of pre-tax and/or Roth contributions.  For employees who do not participate in the Defined Benefit Plan, the Company matches 50% of the first 8% of pre-tax and/or Roth contributions.

The 401(k) Plan offers a variety of investment options, including variable funds, collective funds, a stable value fund, Lifeco common shares (company matching contributions only) and a self-directed investment option.

7.  Nonqualified Deferred Compensation

To provide market competitive compensation to certain key executives, the Company also has a nonqualified deferred compensation plan (“NQDCP”) and a nonqualified executive deferred compensation plan (“EDCP”).  See Section 11.9 below for information on the participation of the Named Executive Officers in these plans and a description of the terms of the plans.

8.  Perquisites Program

The Company has a limited perquisites program in which the Named Executive Officers participate.

A perquisites account of up to $5,500 is available to officers at the level of Senior Vice President and above for reimbursement of expenses such as club dues, employee recognition or other miscellaneous expenses.  In addition, these officers have available a one time membership perquisite of up to $10,000.

The President and Chief Executive Officer receives a yearly car lease benefit.  Executive Vice Presidents receive a fixed car allowance of $800 per month.

11.2  Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management of the Company and based on such review and discussions, recommends to the Board of Directors that the Compensation and Analysis be included in this Form 10-K.

Compensation Committee Members:

R. J. Orr (Chairman)

A. Desmarais

P. Desmarais, Jr.

R.L. McFeetors

117

B.E. Walsh

11.3  Compensation Committee Interlocks and Insider Participation

R.L. McFeetors retired as President and Chief Executive Officer of the Company effective May 1, 2008 and is currently Chairman of the Board of Directors.  Mr. McFeetors is a member of the Compensation Committee.

11.4  Summary Compensation Table

The following table sets out compensation earned in 2012 by the individuals who (i) served as Chief Executive Officer or Chief Financial Officer of the Company during 2012; and (ii) were the other three most highly compensated executive officers of the Company at December 31, 2012 (collectively, the “Named Executive Officers”).

Name and Principal Position	Year	Salary ($)	Bonus ($)	Stock Awards ($)(2)	Option Awards ($)(3)	Non-Equity Incentive Plan Compensation ($)(4)	Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)(5)	All Other Compensation ($)(6)	Total ($)
Mitchell T.G. Graye (1)	2012	969,615	—	748,403	516,420	1,454,423	4,354,499	154,837	8,198,197
President and Chief	2011	942,029	—	693,751	483,963	1,413,043	638,315	159,427	4,330,528
Executive Officer	2010	916,667	—	—	—	1,375,000	735,829	150,658	3,178,154
Charles P. Nelson	2012	659,208	—	255,797	175,788	645,826	894,424	80,533	2,711,576
President, Great-West	2011	642,419	—	282,405	170,004	579,334	586,536	80,292	2,340,990
Retirement Services	2010	626,550	—	—	—	614,019	532,234	80,408	1,853,211
S. Mark Corbett	2012	612,058	—	250,802	163,476	580,047	783,741	21,337	2,411,461
Executive Vice	2011	528,099	—	237,495	138,014	491,132	427,070	21,183	1,842,993
President and Chief	2010	509,375	—	—	—	509,375	588,334	21,195	1,628,279
Investment Officer
Robert K. Shaw	2012	478,781	—	147,084	128,592	445,266	2,064,098	21,350	3,285,171
Executive Vice	2011	458,100	—	191,432	121,562	361,899	487,301	20,995	1,641,289
President, Individual	2010	440,975	—	—	215,366	418,926	349,908	21,225	1,446,400
Markets	��

(1)Mr. Graye is President and Chief Executive Officer and the principal financial officer of the Company.

(2)This relates to share units granted under the Executive Share Unit Plan.  The amounts are the aggregate grant date fair value of awards computed in accordance with FASB ASC Topic 718.

(3)This relates to Lifeco options granted under the Lifeco Option Plan.  The amounts are the aggregate grant date fair value of awards computed in accordance with FASB ASC Topic 718.  For further information, see Footnote 17 to the Company’s December 31, 2011 Financial Statements contained in Item 8 of this Form 10-K.

(4)These are bonuses earned under the Annual Incentive Bonus Plan.

(5)The change in pension value and nonqualified deferred compensation earnings are as follows:

(a)Mr. Graye had a change in actuarial present value under the Defined Benefit Plan of $159,840 and a change in actuarial present value under the SERP of $4,194,659.

(b)Mr. Nelson had a change in actuarial present value under the Defined Benefit Plan of $334,343, a change in actuarial present value under the SERP of $551,734 and above market earnings under the EDCP of $8,347.  For each of the Named Executive Officers participating in the EDCP, above average earnings equaled total earnings less 2.88% of total earnings (2.88% being 120% of the applicable federal long-term rate at December 31, 2012).

118

(c)Mr. Corbett had a change in actuarial present value under the Defined Benefit Plan of $292,827 and a change in actuarial present value under the SERP of $490,914.

(d)Mr. Shaw had a change in actuarial present value under the Defined Benefit Plan of $354,265, a change in actuarial present value under the SERP of $1,700,147 and above market earnings under the EDCP of $9,686.

(6)The components of other compensation for each of the Named Executive Officers are as follows:

(a)Mr. Graye received (i) a car lease benefit of $10,919; (ii) a perquisites account reimbursement of $5,500; (iii) a 401(k) Plan employer contribution of $6,250; and (iv) $132,168 in respect of directors’ fees.

(b)Mr. Nelson received (i) a housing benefit of $59,183 (determined by calculating a lost investment return on the money used by the Company to contribute toward the purchase of a house for use by Mr. Nelson equal to the 30-year agency mortgage backed security rate of 6.07% in effect on June 9, 2008, the purchase date, less a 35% corporate tax rate on income earned); (ii) a car allowance of $9,600; (iii) a perquisites account reimbursement of $5,500; and (iv) a 401(k) Plan employer contribution of $6,250.

(c)Mr. Corbett received (i) a car allowance of $9,600; (ii) a perquisites account reimbursement of $5,487; and (iii) a 401(k) plan employer contribution of $6,250.

(d)Mr. Shaw received (i) a car allowance of $ 9,600; (ii) a perquisites account reimbursement of $5,500; and (iii) a 401(k) Plan employer contribution of $6,250.

11.5  Grants of Plan-Based Awards for 2012

1.  Table

The following table sets out information with respect to grants to the Named Executive Officers under the Annual Incentive Bonus Plan, Executive Share Unit Plan and Lifeco Option Plan.

Estimated Future Payouts Under Non-Equity Incentive Plan Awards				Estimated Future Payouts Under Equity Incentive Plan Awards
Name	Thresholds ($)	Target ($)	Maximum ($)	All Other Stock Awards: Number of Shares of Stock or Units (#)(1)	All Other Option Awards: Number of Securities Underlying Options (#)(2)	Exercise or Base Price of Option Awards ($/Share)(3)	Grant Date Fair Value of Stock and Option Awards ($)
M.T.G. Graye	—	969,615	1,454,423	37,760	151,000	23.17	1,264,823
C.P. Nelson	—	659,208	659,208	12,906	51,400	23.17	431,585
S.M. Corbett	—	612,058	612,058	12,654	47,800	23.17	414,278
R.K. Shaw	—	478,781	478,781	7,421	37,600	23.17	275,676

(1)These are Executive Share Units granted under the Executive Share Unit Plan.  The grant date was January 1, 2012.  The Company’s Compensation Committee approved the grants on February 8, 2012.

(2)These are Lifeco options granted under the Lifeco Option Plan.  The grant date was March 1, 2012.  The Lifeco Compensation Committee approved the grants on February 8, 2012.

(3)Lifeco options are issued with an exercise price in Canadian dollars, which have been translated to U.S. dollars at 1.00/1.00 which was Lifeco’s average rate for the year (the “Conversion Rate”).

119

2.  Narrative Description of the Annual Incentive Bonus Plan

Under the Annual Incentive Bonus Plan, bonus opportunity is expressed as a percentage of base salary and varies by office.  The President and Chief Executive Officer and Executive Vice Presidents can earn bonuses of up to 150% and 100%, respectively, of base salary if all targets and objectives are met. For individuals promoted during the year, the bonus opportunity for the year is prorated based on the different percentages applicable to the two positions held.

Bonus amounts are established against each target or objective.  If objectives are not met, the President and Chief Executive Officer is not entitled to any bonus.  Lower bonus amounts may be earned by Executive Vice Presidents and Senior Vice Presidents on partial achievement of bonus objectives.

For 2012:

(i)M.T.G. Graye had an opportunity to earn 100% of base salary earned in 2012 if earnings targets were met and up to 150% of base salary earned in 2012 if earnings targets were exceeded by specified amounts;

(ii)C.P. Nelson had an opportunity to earn up to 100% of base salary earned in 2012 -  55% based on earnings targets, 10% based on expense related targets, 17.5% based on sales related targets and 17.5% based on specific individual objectives;

(iii)S.M. Corbett had an opportunity to earn up to 100% of base salary earned in 2012 -  55% based on earnings targets, 10% based on expense related targets, 7% based on sales related targets and 28% based on specific individual objectives; and

(iv)R.K. Shaw had an opportunity to earn up to 100% of base salary earned in 2012 - 55% based on earnings targets, 10% based on expense related targets, 20% based on sales related targets and 15% based on specific individual objectives.

3.  Narrative Description of the Executive Share Unit Plan

Under the Executive Share Unit Plan, notional share units (“Executive Share Units”) may be granted to the Named Executive Officers by the Compensation Committee.  The value of an Executive Share Unit on a grant date is based on the average closing price of Lifeco common shares on the Toronto Stock Exchange for the preceding 20 days (the “Market Value”).

The number of Executive Share Units granted is generally related to the base salaries of the Named Executive Officers.  Each grant of Executive Share Units has a three year vesting period during which certain conditions (including continued employment) must be satisfied.

The number of Executive Share Units granted is increased during the three year vesting period based on dividends declared on Lifeco common shares, and may be increased or decreased based on business segment performance results.

Subject to satisfaction of the vesting conditions, the Executive Share Units becomes payable in cash during the fourth year following the date of the award, at the Market Value as of the vesting date.

4.  Narrative Description of the Lifeco Option Plan

Under the Lifeco Option Plan, the Lifeco Compensation Committee sets the exercise price of the options but under no circumstances can it be less than the weighted average trading price per Lifeco common share on the Toronto Stock Exchange for the five trading days preceding the date of the grant.

Options are either regular options or contingent options.  Regular options are generally granted in multi-year allotments. Regular options become exercisable at the rate of 20% per year commencing one year after the date

120

of the grant, except that grants made during the period February 2007 to February 2009 became exercisable over a seven and one-half year period commencing one year after the date of the grant at a rate of 4%, 8%, 14.66%, 14.66%, 14.66%, 14.66%, and 14.66% per year, with the final 14.66% becoming exercisable six months later.  Contingent options do not become exercisable unless and until conditions prescribed by the Lifeco Compensation Committee have been satisfied.

Options generally expire ten years after the date of the grant, except that if options would otherwise expire during a blackout period or within ten business days of the end of a blackout period, the expiry date for the options is extended to the tenth business day after the expiry date of the blackout period.

In the event of the death of a participant or the termination of a participant’s employment, then the period within which the options may be exercised is generally reduced depending on the circumstances surrounding the death or termination of employment. Options are not assignable by participants otherwise than by will or pursuant to the laws of succession. Lifeco does not provide any financial assistance to participants to facilitate the purchase of common shares under the Lifeco Option Plan.  Subject to any regulatory or shareholder approval required by law, the Lifeco Board of Directors may amend the Lifeco Option Plan or the terms of a grant.

11.6  Outstanding Equity Awards at 2012 Fiscal Year End

The following table sets out Lifeco options held by the Named Executive Officers under the Lifeco Option Plan, and Executive Share Units held by the Named Executive Officers under the Executive Share Unit Plan, as of December 31, 2012.

	Option Awards					Stock awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable	Number of Securities Underlying Unexercised Options (#) Unexercisable		Option Exercise Price ($)(9)	Option Expiration Date	Number of Shares or Units of Stock that have not Vested (#)		Market Value of Shares or Units of Stock that have not Vested ($)(12)
M.T.G. Graye	280,000	—		29.84	December 13, 2015	29,491	(10)	718,106
	113,666	161,334	(1)	31.27	May 12, 2018	39,846	(11)	970,250
	21,180	84,720	(7)	27.16	February 28, 2021	—		—
	—	151,000	(8)	23.17	February 28, 2022
C.P. Nelson	61,596	48,404	(2)	37.22	February 27, 2017	12,005	(10)	292,322
	45,466	64,534	(3)	28.59	March 24, 2018	13,619	(11)	331,623
	7,440	29,760	(7)	27.16	February 28, 2021	—		—
	—	51,400	(8)	23.17	February 28. 2022
S.M. Corbett	20,000	—		19.42	July 9, 2013	10,096	(10)	245,838
	50,397	39,603	(4)	37.22	February 27, 2017	13,353	(11)	325,146
	20,666	29,334	(5)	31.27	May 12, 2018	—		—
	6,040	24,160	(7)	27.16	February 28, 2021	—		—
	—	47,800	(8)	23.17	February 28, 2022	—		—
R.K. Shaw	20,560	30,840	(6)	27.13	February 29, 2020	8,138	(10)	198,160
	5,320	21,280	(7)	27.16	February 28, 2021	7,831	(11)	190,685
	—	37,600	(8)	23.17	February 28, 2022

(1)These options vest as follows: 40,333 on each of May 13, 2013, 2014 and 2015; and 40,335 on November 13, 2015.

(2)These options vest as follows: 16,132 on each of February 28, 2013 and 2014; and 16,140 on August 28, 2014.

(3)These options vest as follows: 16,133 on each of March 25, 2013, 2014 and 2015; and 16,135 on September 25, 2015.

121

(4)These options vest as follows: 13,199 on each of February 28, 2013 and 2014; and 13,205 on August 28, 2014.

(5)These options vest as follows: 7,333 on each of May 13, 2013, 2014 and 2015; and 7,335 on November 13, 2015.

(6)These options vest 20% of the total grant on each of March 1, 2013, 2014 and 2015.

(7)These options vest 20% of the total grant on each of March 1, 2013, 2014, 2015 and 2016.

(8)These options vest 20% of the total grant on each of March 1, 2013, 2014, 2015, 2016 and 2017.

(9)Lifeco options are issued with an exercise price in Canadian dollars, which have been translated to U.S. dollars at the Conversion Rate.

(10)These Executive Share Unit grants vest on December 31, 2013.

(11)These Executive Share Unit grants vest on December 31, 2014

(12)The market value of Executive Share Units held as of December 31, 2012 is based on the year-end closing price of Lifeco common shares on the Toronto Stock Exchange, translated into U.S. dollars at the Conversion Rate.

11.7  Option Exercises and Stock Vested for 2012

The following table sets out Lifeco options exercised by the Named Executive Officers in 2012.  No Executive Share Units vested for the Named Executive Officers in 2012.

	Option Awards
	Number of Shares Acquired on Exercise (#)	Value Realized on Exercise ($)
M.T.G. Graye	100,000	364,264
R.K. Shaw	20,000	72,784

122

11.8  Pension Benefits for 2012

1.  Table

The following table sets out information with respect to the participation of the Named Executive Officers in the Defined Benefit Plan and the SERP.

Name	Plan Name	Number of Years of Credited Service	Present Value of Accumulated Benefit ($) (1)	Payments During Last Fiscal Year ($)
M.T.G. Graye	Defined Benefit Plan	20	612,969	—
	SERP	20	6,434,179	—
C.P. Nelson	Defined Benefit Plan	30	1,208,480	—
	SERP	30	1,940,961	—
S.M. Corbett	Defined Benefit Plan	26	1,070,056	—
	SERP	26	1,201,871	—
R.K. Shaw	Defined Benefit Plan	35	1,574,964	—
	SERP	35	2,578,797	—

(1)The amounts shown in the table are calculated according to the terms of the plans based on age and years of service as of December 31, 2012.  These amounts are based on pay through December 31, 2012.  The assumptions used for these calculations are consistent with actuarial valuations of the plans.  The present value of accumulated benefit under the plans equals the actuarial present value of the annuity earned as of December 31, 2012, payable at age 65 for the Defined Benefit Plan and age 62 for the SERP, discounted to December 31, 2012 at the applicable discount rate for December 31, 2012.  Benefits calculated under the SERP are the termination benefit.

2.  Narrative Description of the Defined Pension Plan

The Defined Benefit Plan is designed to provide regular income at retirement to eligible employees.  In general, an eligible employee is any employee hired prior to January 1, 1999.  Participants in the Defined Benefit Plan are entitled to benefits at age 65 if they have 5 or more years of service.

The benefit formula for participants hired before January 1, 1992 is 1.5% for each of the first 30 years of service multiplied by the participant’s average annual compensation, plus 0.5% for each of the next 5 years of service multiplied by the participant’s average annual compensation, plus 0.5% for each year of service to retirement up to a maximum of 35 years multiplied by the participant’s average annual compensation minus the covered compensation amount (as determined by the IRS).  If a participant made required or voluntary contributions to the Defined Benefit Plan prior to July 1, 1979, the participant’s benefit is increased to reflect these contributions and interest accrued thereon, so long as the employee contributions plus interest have not been withdrawn in a lump sum.

The benefit formula for participants hired on and after January 1, 1992 is 1.0% for each of the first 30 years of service multiplied by the participant’s average annual compensation, plus 0.5% for each of the next 5 years of service multiplied by the participant’s average annual compensation, plus 0.5% for each year of service to retirement up to a maximum of 35 years multiplied by the participant’s average annual compensation minus the covered compensation amount (as determined by the IRS).

Average annual compensation is the highest average of compensation paid during 5 consecutive years of service out of the last 7 years of service.

123

Participants who have terminated service prior to age 65 and who have at least 5 years of service may begin receiving benefits as early as age 55.  Benefits that begin prior to age 65 are reduced by approximately 5% for each year prior to age 65.

The normal form of benefit for a married participant is a joint and 50% survivor annuity.  The normal form of benefit for an unmarried participant is a life only annuity.  Other optional forms of pension payment are available on an actuarially equivalent basis.

3.  Narrative Description of the SERP

The SERP is designed to provide retirement benefits to certain key executive officers who are subject to qualified plan compensation limits.  At the Company’s discretion, executive officers may be designated to participate in the SERP.  Participants in the SERP are generally entitled to benefits if they have 15 or more years of service.

The following describes the retirement benefit amount under the SERP based on age at the time of separation of service.

(1)For participants who separate from service at or after age 62, the normal retirement benefit is equal to 60% of final average compensation if the participant has 30 years of service.  The benefit is prorated for less than 30 years of service.  Final average compensation is the average of the highest 60 consecutive months of compensation during the last 84 months of employment.  Compensation includes salary, bonuses and commissions prior to any deferrals to other benefit plans.  Benefits are offset by benefits under the Defined Benefit Plan and 50% of estimated social security benefits as of retirement.

(2)For participants who separate from service between ages 57 and 62, the early retirement benefit is calculated by reducing the bonus used in determining final average compensation by 5/6% for each month prior to age 62 and by further reducing the early retirement benefit by 5/12% for each month prior to age 62.  Benefits are offset by benefits under the Defined Benefit Plan and 50% of estimated social security benefits as of age 62.

(3)For participants who separate from service prior to age 57, the termination benefit is equal to 60% of final average salary if the participant has 30 years of service.  The benefit is prorated for less than 30 years of service.  If the participant has less than 35 years of service, the termination benefit is also reduced by 5% for each of the first three years of service below 35.  Final average salary is the average of the highest 60 consecutive months of salary during the last 84 months of employment.  Salary includes deferrals of any salary to other benefit plans.  Benefits are offset by benefits under the Defined Benefit Plan and 50% of estimated social security benefits payable as of age 62.

Payments under the normal retirement benefit and the early retirement benefit commence upon retirement.  Payments under the termination benefit commence at age 62.

The normal form of benefit under the SERP is a life only annuity.  Other optional forms of payment are available on an actuarially equivalent basis.

124

11.9  Nonqualified Deferred Compensation for 2012

1.  Table

The following table sets out information with respect to the participation of the Named Executive Officers in the NQDCP and/or EDCP.

Name	Plan Name	Executive Contributions in Last Fiscal Year ($)(1)	Aggregate Earnings in Last Fiscal Year ($)	Aggregate Withdrawls or Distributions ($)	Aggregate Balance at Last Fiscal Year End ($)
C.P. Nelson	EDCP	—	20,410	—	445,231
R.K. Shaw	NQDCP	—	44,315	—	321,989
	EDCP	78,224	23,886	—	542,456

(1)Amounts contributed are included in the Salary column of the Summary Compensation Table.

2. Narrative Description of the Nonqualified Deferred Compensation Plan and Executive Deferred Compensation Plan

All officers and certain senior employees of the Company, and others at the discretion of the Company, are eligible to participate in the NQDCP.  At the Company’s discretion, executive officers may be designated to participate in the EDCP.

Under the NQDCP and EDCP, a participant may defer (i) a minimum of the greater of $2,500 or 5% of base salary (including sales related compensation under the NQDCP) and a maximum of 90% of base salary; and (ii) a minimum of 5% and a maximum of 90% of bonus.

Under the NQDCP, participants specify one or more investment preferences in which deferrals are deemed to be invested.  Participant accounts are adjusted for interest, earnings or losses equal to the actual results of the underlying investment(s).  Under the EDCP, participant deferrals earn an interest rate equal to the Moody’s Average Annual Corporate Bond Index rate plus .45% for active participants and fixed rates ranging from 6.37% to 7.91% for participants receiving benefits.

Amounts deferred under both plans and the earnings from the plans are distributed to a participant upon termination of employment, if not distributed earlier.  Amounts distributed under the plans are generally paid in either a lump sum or installments over 3, 5, 10 or 15 years at the election of the participant.

Following a change in control of the Company, the Board of Directors may terminate one or both plans in its discretion and pay all amounts due under a terminated plan to participants.  Certain payments following termination of employment or after a change in control may be delayed to comply with requirements under the Internal Revenue Code.

125

11.10  Compensation of Company Directors for 2012

1.  Table

The Company compensates Directors who are not also Directors of Lifeco (“Company Directors”).  The following sets out compensation earned in 2012 by the Company Directors.

Name	Fees Earned or Paid in Cash ($)(3)	Stock Awards ($)(4)	All Other Compensation ($)(5)	Total ($)
J. Balog (1)	33,000	25,000	84	58,084
J.L. Bernbach	62,000	50,000	168	112,168
M.T.G. Graye	82,000	50,000	168	132,168
A. Louvel	81,000	50,000	168	131,168
J.E.A. Nickerson (2)	30,121	20,959	84	51,164

(1)Mr. Balog retired as a Director on June 30, 2012.

(2)On August 1, 2012, Mr. Nickerson ceased to be a Director of Lifeco and became a Company Director only.

(3)Mr. Balog, Mr. Bernbach and Mr. Louvel received their payment in cash.  Mr. Graye received his payment in Deferred Share Units under the voluntary component of the Company’s Director Deferred Share Unit Plan (“DSUP”).  The value for these Deferred Share Units is the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.

(4)These amounts represent Deferred Share Units granted under the mandatory component of the DSUP.  The value for these Deferred Share Units is the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.

As of December 31, 2012, Mr. Balog held 60,484 Deferred Share Units, Mr. Bernbach held 14,531 Deferred Share Units, Mr. Graye held  29,013 Deferred Share Units, Mr. Louvel held 14,349 Deferred Share Units and Mr. Nickerson held 18,632 Deferred Share Units.

(5)These amounts are life insurance premiums paid under the Great-West Life Director’s Group Life Insurance Plan.

2.  Narrative Description of Company Director Compensation

The Company pays Company Directors an annual retainer fee in the amount of $100,000.  $50,000 of this retainer is paid in Deferred Share Units under the mandatory component of the DSUP.  The remaining $50,000 is available in cash.

A Company Director serving on the Audit Committee receives an additional retainer fee in the amount of $3,000.  The Company pays each Company Director a meeting fee in the amount of $2,000 for each meeting of the Board of Directors or a committee thereof attended.

At their option, in lieu of cash payments, Company Directors may receive additional Deferred Share Units for 50% or 100% of the cash payments under the voluntary component of the DSUP.

Under both the mandatory and voluntary components of the DSUP the number of Deferred Share Units granted is determined by dividing the amount of remuneration payable to the Company Director by the weighted average Canadian dollar trading price per Lifeco common share on the Toronto Stock Exchange for the last five trading days of the preceding fiscal quarter (such weighted average trading price being the “value of a Deferred Share

126

Unit”).  Directors receive additional Deferred Share Units in respect of dividends payable on the common shares based on the value of a Deferred Share Unit at that time.

Deferred Share Units are redeemable at the time that an individual ceases to be a Director by a lump sum cash payment, based on the value of the Deferred Share Units on the date of redemption.

Item 11.11  Compensation Policies and Risk Management

The Company has evaluated its compensation policies and practices applicable to all employees and believes that they do not create risks that are reasonably likely to have a material adverse effect on the Company.

Item 12.

Security Ownership of Certain Beneficial Owners and Management

12.1  Security Ownership of Certain Beneficial Owners

Set forth below is certain information, as of January 1, 2013, concerning beneficial ownership of the voting securities of the Company by entities and persons who beneficially own more than 5% of the voting securities of the Company.  The determinations of “beneficial ownership” of voting securities are based upon Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  This rule provides that securities will be deemed to be “beneficially owned” where a person has, either solely or in conjunction with others, (1) the power to vote or to direct the voting of securities and/or the power to dispose or to direct the disposition of the securities or (2) the right to acquire any such power within 60 days after the date such “beneficial ownership” is determined.

(1)100% of the Company’s 7,032,000 outstanding common shares are owned by GWL&A Financial Inc., 8515 East Orchard Road, Greenwood Village, Colorado 80111.

(2)100% of the outstanding common shares of GWL&A Financial Inc. are owned by Great-West Lifeco U.S. Inc., 8515 East Orchard Road, Greenwood Village, Colorado 80111.

(3)100% of the outstanding common shares of Great-West Lifeco U.S. Inc. are owned by Great-West Financial (Nova Scotia) Co., Suite 800, 1959 Upper Water Street, Halifax, Nova Scotia, Canada B3J 2X2.

(4)100% of the outstanding common shares of Great-West Financial (Nova Scotia) Co. are owned by Great-West Financial (Canada) Inc., 100 Osborne Street North, Winnipeg, Manitoba, Canada R3C 3A5.

(5)100% of the outstanding common shares of Great-West Financial (Canada) Inc. are owned by Great-West Lifeco Inc., 100 Osborne Street North, Winnipeg, Manitoba, Canada R3C 3A5.

(6)68.18% of the outstanding common shares of Great-West Lifeco Inc. are controlled by Power Financial Corporation, 751 Victoria Square, Montréal, Québec, Canada H2Y 2J3, representing approximately 61.6% of the voting rights attached to all outstanding voting shares of Great-West Lifeco Inc.

(7)66.06% of the outstanding common shares of Power Financial Corporation are owned by 171263 Canada Inc., 751 Victoria Square, Montréal, Québec, Canada H2Y 2J3.

(8)100% of the outstanding common shares of 171263 Canada Inc. are owned by Power Corporation of Canada, 751 Victoria Square, Montréal, Québec, Canada H2Y 2J3.

(9)Mr. Paul Desmarais, 751 Victoria Square, Montréal, Québec, Canada H2Y 2J3, directly and through a group of private holding companies which he controls, has voting control of Power Corporation of Canada.

As a result of the chain of ownership described in paragraphs (1) through (9) above, each of the entities and persons listed in paragraphs (1) through (9) would be considered under Rule 13d-3 of the Exchange Act to be a “beneficial owner” of 100% of the outstanding voting securities of the Company.

127

12.2  Security Ownership of Management

The following tables set out the number of equity securities and exercisable options for equity securities of the Company or any of its parents or subsidiaries, beneficially owned, as of January 1, 2013, by (i) the directors of the Company (ii) the Named Executive Officers and (iii) the directors and executive officers of the Company as a group.

Directors	Great-West Lifeco Inc. (1)	Power Financial Corporation (2)	Power Corporation of Canada (3)
J.L. Bernbach	—	—	—
A. Desmarais	350,000	43,200	552,982
			1,617,950 options
P. Desmarais, Jr.	100,000	—	67,411
			1,617,950 options
M.T.G. Graye	7,889	75,000	—
	414,846 options
A. Louvel	—	—	—
R.L. McFeetors	2,407,303	170,500	15,793
	1,800,000 options	650,666 options
J.E.A. Nickerson	—	25,469	28,873
R.J. Orr	20,000	400,400	20,000
		3,075,426 options
M. Plessis-Bélair	40,000	6,000	162,426
			287,975 options
H.P. Rousseau	2,800	5,400	10,618
			342,858 options
R. Royer	15,000	174,000	—
T.T. Ryan, Jr.	—	—	—
J. J. Selitto	—	—	—
G.D. Tretiak	—	—	1,129
B.E. Walsh	—	—	—

128

Named Executive Officers	Great-West Lifeco Inc. (1)	Power Financial Corporation (2)	Power Corporation of Canada (3)
M.T.G. Graye	7,889	75,000	—
	414,846 options
C.P. Nelson	26,367	—	—
	114,502 options
S.M. Corbett	—	—	—
	97,103 options
R.K. Shaw	3,294	—	—
	25,880 options

Directors and Executive Officers as a Group	Great-West Lifeco Inc. (1)	Power Financial Corporation (2)	Power Corporation of Canada (3)
	2,980,666	899,969	859,232
	2,488,648 options	3,726,092 options	3,866,733 options

(1)All holdings are common shares, or where indicated, preferred shares or exercisable options for common shares of Great-West Lifeco Inc.

(2)All holdings are common shares, or where indicated, exercisable options for common shares of Power Financial Corporation.

(3)All holdings are subordinate voting shares, or where indicated, exercisable options for subordinate voting shares of Power Corporation of Canada.

The number of subordinate voting shares and exercisable options for subordinate voting shares of Power Corporation of Canada held by the directors and executive officers as a group represents 1.0% of the total number of subordinate voting shares and exercisable options for subordinate voting shares of Power Corporation of Canada outstanding.

None of the remaining holdings set out above exceeds 1% of the total number of shares and exercisable options for shares of the class outstanding.

Item 13.

Transactions with Related Persons, Promoters and Certain Control Persons

(a) There are no transactions to report.

(b) The Company’s Board of Directors has a Conduct Review Committee which acts pursuant to a written Charter and procedures (together, the “procedures”).  Messrs. Bernbach and Louvel serve on the Conduct Review Committee.

The Conduct Review Committee, in accordance with the procedures, considers and approves transactions between the Company or its subsidiaries and (i) the directors and senior officers of the Company or its affiliates, including their spouses and minor children; (ii) its affiliates; and (iii) companies controlled by a director or senior officer of the Company or its affiliates, or their spouses or minor children.  Control and affiliation is defined as a 10% voting interest or 25% ownership interest, but does not include subsidiaries of the Company.

129

Among other criteria, the Conduct Review Committee considers whether such transactions were on market terms and conditions, including interest rates and fees, as those prevailing at the time for comparable transactions with third parties.  Such review also considers the Company’s established conflict of interest guidelines with respect to the transaction, as set forth in the Company’s Code.

There were no reportable related party transactions during the Registrant’s most recently completed fiscal year where the aforementioned procedures did not require review, approval or ratification or where the procedures were not followed.

Item 14.

Principal Accounting Fees and Services

14.1  Principal Accounting Fees

For the years ended December 31, 2012 and 2011, professional services were performed by Deloitte & Touche LLP (“D&T”).  The total fees for these services were $7,258,300 and $7,959,200 for the years ended December 31, 2012 and 2011, respectively, and were composed of the following:

Audit fees - The aggregate fees billed for the audit of the Company’s and its subsidiaries’ annual financial statements for the fiscal years ended December 31, 2012 and 2011, and for the review of the financial statements included in the Company’s quarterly reports on Form 10-Q, were $6,322,700 and $6,776,700, respectively.

Audit related fees - The aggregate fees billed for audit related services for the fiscal years ended December 31, 2012 and 2011 were $917,600 and $829,000, respectively.  These services included Statement on Standards for Attestation Engagements No. 16 internal control reports and audits of the Company’s employee benefit plans.

Tax fees - The aggregate fees billed for tax services for the fiscal years ended December 31, 2012 and 2011 were $0 and $353,500, respectively.  These services included tax compliance services for the Company’s affiliated mutual fund, Great-West Funds, Inc., as well as tax planning and compliance services for the Company and its subsidiaries.

All other fees - The aggregate fees for services not included above were $18,000 and $0 for the years ended December 31, 2012 and 2011, respectively.

14.2  Pre-approval Policies and Procedures

The Audit Committee pre-approves all services, including both audit and non-audit services, provided by D&T.  Each year, the Audit Committee receives a schedule of the audit, audit-related and tax services that it is asked to approve for the year before D&T may be engaged.

None of the services described in this Item 14 were approved by the Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, the de minimis safe harbor exemption from pre-approval requirements.  The amount of hours expended on D&T’s audit of the Company’s financial statements for 2012 attributable to work performed by persons other than D&T’s full-time, permanent employees was less than 50%.

130

Part IV

Item 15.

Exhibits and Financial Statement Schedules

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

15.1Index to Financial Statements

	Page
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements for the Years Ended December 31, 2012, 2011 and 2010	42
Consolidated Balance Sheets as of December 31, 2012 and 2011	43
Consolidated Statements of Income for the Years Ended December 31, 2012, 2011 and 2010	45
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2011 and 2010	46
Consolidated Statements of Stockholder’s Equity for the Years Ended December 31, 2012, 2011 and 2010	47
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010	48
Notes to Consolidated Financial Statements for the Years Ended December 31, 2012, 2011 and 2010	50
Schedule III - Supplemental Insurance Information	106

All other schedules and separate financial statements of the Registrant are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto.

15.2Index to Exhibits

Exhibit Number	Title	Page
3(i)	Amended and Restated Articles of Incorporation of Great-West Life & Annuity Insurance Company Filed as Exhibit 3(i) to Registrant’s Form 10-K for the year ended December 31, 2006
3(ii)	Bylaws of Great-West Life & Annuity Insurance Company Filed as Exhibit 3(ii) to Registrant’s Form 10-K for the year ended December 31, 2006
10	Material Contracts

131

10.1	Great-West Lifeco Inc. Stock Option Plan Filed as Exhibit 3(ii) to Registrant’s Form 10-K for the year ended Decfember 31, 2011 and incorporated herein by reference
10.2	Supplemental Executive Retirement Plan Filed as Exhibit 10.2 to Registrant’s Form 10-K for the year ended December 31, 2009 and incorporated herein by reference
10.3	Executive Deferred Compensation Plan Filed as Exhibit 10.3 to Registrant’s Form 10-K for the year ended December 31, 2009 and incorporated herein by reference
10.4	Deferred Share Unit Plan Filed as Exhibit 10.4 to Registrant’s Form 10-K for the year ended December 31, 2009 and incorporated herein by reference
10.5	Executive Long-Term Disability Plan Filed as Exhibit 10.5 to Registrant’s Form 10-K for the year ended December 31, 2002 and incorporated herein by reference
10.6	Nonqualified Deferred Compensation Plan Filed as Exhibit 10.6 to Registrant’s Form 10-K for the year ended December 31, 2009 and incorporated herein by reference
10.7	Asset and Stock Purchase Agreement Filed as Exhibit 99.9 by way of a Form 8-K dated December 6, 1997 and incorporated herein by reference
10.8	Asset and Stock Purchase Agreement Filed as Exhibit 99.9 by way of a Form 8-K dated November 26, 2007 and incorporated herein by reference
10.9	Share Unit Plan effective January 1, 2011 Filed as Exhibit 10.9 to Registrant’s Form 10-K for the year ended December 31, 2010 and incorporated herein by reference
21	Subsidiaries of Great-West Life & Annuity Insurance Company filed herewith	136

132

24	Directors’ Power of Attorney Directors’ Power of Attorney filed herewith; and filed as Exhibit 24 to Registrant’s Form 10-K for the year ended December 31, 2011 and incorporated herein by reference
31.1	Section 302 Certification of the Chief Executive Officer and Principal Financial Officer filed herewith	137
31.2	Section 302 Certification of the Chief Accounting Officer filed herewith	138
32	Section 906 Certification of the Chief Executive Officer and Principal Financial Officer and Chief Accounting Officer filed herewith	139
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

133

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
/s/ Mitchell T.G. Graye
	Mitchell T.G. Graye, President and Chief Executive Officer and Principal Financial Officer

Date: February 28, 2013

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

	Signature and Title	Date
/s/	Mitchell T.G. Graye	February 28, 2013
	Mitchell T.G. Graye
	President and Chief Executive Officer and Principal Financial Officer  and a Director
/s/	James H. Van Harmelen	February 28, 2013
	James H. Van Harmelen
	Senior Vice President and Corporate Controller
/s/	John L. Bernbach *	February 28, 2013
	John L. Bernbach, Director
/s/	André Desmarais *	February 28, 2013
	André Desmarais, Director

134

	Signature and Title	Date
/s/	Paul Desmarais, Jr. *	February 28, 2013
	Paul Desmarais, Jr., Director
/s/	Alain Louvel *	February 28, 2013
	Alain Louvel, Director
/s/	Raymond L. McFeetors *	February 28, 2013
	Raymond L. McFeetors, Chairman of the Board
/s/	Jerry E.A. Nickerson *	February 28, 2013
	Jerry E.A. Nickerson, Director
/s/	R. Jeffrey Orr *	February 28, 2013
	R. Jeffrey Orr, Director
/s/	Michel Plessis-Bélair *	February 28, 2013
	Michel Plessis-Bélair, Director
/s/	Henri-Paul Rousseau *	February 28, 2013
	Henri-Paul Rousseau, Director
/s/	Raymond Royer *	February 28, 2013
	Raymond Royer, Director
/s/	T. Timothy Ryan, Jr. *	February 28, 2013
	T. Timothy Ryan, Jr., Director
/s/	Jerome J. Selitto *	February 28, 2013
	Jerome J. Selitto, Director *
/s/	Gregory D. Tretiak *	February 28, 2013
	Gregory D. Tretiak, Director
/s/	Brian E. Walsh *	February 28, 2013
	Brian E. Walsh, Director
* By:/s/	James Van Harmelen	February 28, 2013
	James Van Harmelen
	Attorney-in-fact pursuant to filed Power of Attorney

135