0000744455-18-000016.txt : 20180814 0000744455-18-000016.hdr.sgml : 20180814 20180814152426 ACCESSION NUMBER: 0000744455-18-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 79 CONFORMED PERIOD OF REPORT: 20180630 FILED AS OF DATE: 20180814 DATE AS OF CHANGE: 20180814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREAT WEST LIFE & ANNUITY INSURANCE CO CENTRAL INDEX KEY: 0000744455 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 840467907 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-01173 FILM NUMBER: 181016837 BUSINESS ADDRESS: STREET 1: 8515 E ORCHARD RD CITY: GREENWOOD VILLAGE STATE: CO ZIP: 80111 BUSINESS PHONE: 303-737-3000 MAIL ADDRESS: STREET 1: 8515 E ORCHARD RD CITY: GREENWOOD VILLAGE STATE: CO ZIP: 80111 10-Q 1 q22018gwla10q.htm 10-Q Document


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

 (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018

 OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                to               
 
Commission file number 333-1173
 
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
COLORADO
 
84-0467907
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
8515 EAST ORCHARD ROAD, GREENWOOD VILLAGE, CO 80111
(Address of principal executive offices)
 
(303) 737-3000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x         No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes x         No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined in Rule 12b-2 of the Act. 
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer x
Smaller reporting company ¨
Emerging growth company
¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Act.
 
Yes ¨         No x
 
As of August 14, 2018, 7,320,176 shares of the registrant’s common stock were outstanding, all of which were owned by the registrant’s parent company.




Table of Contents
 
 
 
Page
 
 
 
Number
Part I
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
Item 3
 
Item 4
 
 
 
 
Part II
 
Item 1
 
Item 1A
 
Item 6
 
 
 
 
 
 


2



Part I     Financial Information
Item1.    Interim Financial Statements


 GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Balance Sheets
June 30, 2018 (Unaudited) and December 31, 2017
(In Thousands, Except Share Amounts)
 
 
 
June 30, 2018
 
December 31, 2017
Assets
 
 

 
 

Investments:
 
 

 
 

Fixed maturities, available-for-sale, at fair value (amortized cost $22,757,572 and $22,762,962)
 
$
22,762,737

 
$
23,593,139

Fixed maturities, held-for-trading, at fair value (amortized cost $19,825 and $20,512)
 
19,519

 
21,059

Mortgage loans on real estate (net of allowances of $773 and $773)
 
4,316,198

 
4,005,187

Policy loans
 
4,121,136

 
4,104,094

Short-term investments (amortized cost $294,314 and $350,266)
 
294,314

 
350,266

Limited partnership interests
 
63,586

 
45,540

Other investments
 
53,298

 
17,997

Total investments
 
31,630,788

 
32,137,282

 
 
 
 
 
Other assets:
 
 

 
 

Cash and cash equivalents
 
88,106

 
17,211

Reinsurance recoverable
 
591,657

 
589,080

Deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”)
 
681,959

 
518,510

Investment income due and accrued
 
285,953

 
299,362

Collateral under securities lending agreements
 
80,013

 

Due from parent and affiliates
 
101,671

 
114,133

Goodwill
 
137,683

 
137,683

Other intangible assets
 
15,741

 
17,085

Other assets
 
1,039,558

 
954,250

Assets of discontinued operations
 
14,662

 
16,095

Separate account assets
 
26,676,615

 
27,660,571

Total assets
 
$
61,344,406

 
$
62,461,262

 
See notes to condensed consolidated financial statements.
 
(Continued)


3



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Balance Sheets
June 30, 2018 (Unaudited) and December 31, 2017
(In Thousands, Except Share Amounts)
 
 
 
June 30, 2018
 
December 31, 2017
Liabilities and stockholder’s equity
 
 

 
 

Policy benefit liabilities:
 
 

 
 

Future policy benefits
 
$
30,293,590

 
$
30,048,927

Policy and contract claims
 
388,222

 
389,029

Policyholders’ funds
 
273,319

 
280,578

Provision for policyholders’ dividends
 
40,325

 
41,972

Undistributed earnings on participating business
 
10,903

 
14,636

Total policy benefit liabilities
 
31,006,359

 
30,775,142

 
 
 
 
 
General liabilities:
 
 

 
 

Due to parent and affiliates
 
563,852

 
553,901

Commercial paper
 
99,381

 
99,886

Payable under securities lending agreements
 
80,013

 

Deferred income tax liabilities, net
 
5,643

 
93,203

Other liabilities
 
857,885

 
812,875

Liabilities of discontinued operations
 
14,662

 
16,095

Separate account liabilities
 
26,676,615

 
27,660,571

Total liabilities
 
59,304,410

 
60,011,673

 
 
 
 
 
Commitments and contingencies (See Note 14)
 


 


 
 
 
 
 
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; 7,320,176 shares issued and outstanding
 
7,320

 
7,320

Additional paid-in capital
 
951,640

 
949,520

Accumulated other comprehensive (loss) income
 
(51,100
)
 
440,957

Retained earnings
 
1,132,136

 
1,051,792

Total stockholder’s equity
 
2,039,996

 
2,449,589

Total liabilities and stockholder’s equity
 
$
61,344,406

 
$
62,461,262

 
See notes to condensed consolidated financial statements.
 
(Concluded)


4



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Income
Three and Six Months Ended June 30, 2018 and 2017
(In Thousands)
(Unaudited)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 

 
 

 
 
 
 
Premium income
 
$
78,155

 
$
67,663

 
$
222,836

 
$
219,904

Fee income
 
286,696

 
267,338

 
562,660

 
522,453

Other revenue
 
3,077

 
3,661

 
6,062

 
6,045

Net investment income
 
327,471

 
297,221

 
665,612

 
610,691

Investment gains (losses), net
 
40,256

 
22,064

 
(3,487
)
 
10,310

Total revenues
 
735,655

 
657,947


1,453,683


1,369,403

Benefits and expenses:
 
 

 
 

 
 
 
 
Life and other policy benefits
 
166,613

 
166,995

 
354,157

 
337,283

Decrease in future policy benefits
 
(77,381
)
 
(63,978
)
 
(99,390
)
 
(63,852
)
Interest credited or paid to contractholders
 
164,397

 
157,544

 
325,680

 
311,490

Provision for policyholders’ share of losses on participating business
 
(340
)
 
(62
)
 
(856
)
 
(64
)
Dividends to policyholders
 
7,397

 
9,045

 
19,679

 
24,114

Total benefits
 
260,686

 
269,544


599,270


608,971

General insurance expenses
 
308,545

 
284,364

 
606,677

 
591,495

Amortization of DAC and VOBA
 
30,957

 
20,401

 
42,249

 
25,723

Interest expense
 
9,588

 
7,646

 
17,397

 
15,276

Total benefits and expenses
 
609,776

 
581,955


1,265,593


1,241,465

Income before income taxes
 
125,879

 
75,992

 
188,090

 
127,938

Income tax expense
 
27,251

 
26,168

 
40,804

 
43,286

Net income
 
$
98,628

 
$
49,824


$
147,286


$
84,652

 
See notes to condensed consolidated financial statements.


5



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Comprehensive (Loss) Income
Three and Six Months Ended June 30, 2018 and 2017
(In Thousands)
(Unaudited)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
98,628

 
$
49,824

 
$
147,286

 
$
84,652

Components of other comprehensive (loss) income
 
 

 
 

 
 

 
 

Unrealized holding (losses) gains, net, arising on available-for-sale fixed maturity investments
 
(353,834
)
 
236,996

 
(813,514
)
 
367,225

Unrealized holding gains (losses), net, arising on cash flow hedges
 
58,939

 
(18,245
)
 
52,443

 
(25,200
)
Reclassification adjustment for (gains) losses, net, realized in net income
 
(11,720
)
 
(1,832
)
 
(17,307
)
 
(357
)
Net unrealized (losses) gains related to investments
 
(306,615
)
 
216,919


(778,378
)

341,668

Future policy benefits, DAC and VOBA adjustments
 
66,954

 
(55,549
)
 
154,362

 
(84,015
)
Employee benefit plan adjustment
 
579

 
2,146

 
1,159

 
4,292

Other comprehensive (loss) income before income taxes
 
(239,082
)
 
163,516


(622,857
)

261,945

Income tax (benefit) expense related to items of other comprehensive income
 
(50,207
)
 
57,231

 
(130,800
)
 
91,681

Other comprehensive (loss) income(1)
 
(188,875
)
 
106,285


(492,057
)

170,264

Total comprehensive (loss) income
 
$
(90,247
)
 
$
156,109


$
(344,771
)

$
254,916


(1) Other comprehensive (loss) income includes the non-credit component of impaired (losses) gains, net, on fixed maturities available-for-sale in the amounts of $2,976 and $(520) for the three months ended June 30, 2018 and 2017, respectively and $(13,246) and $(1,609) for the six months ended June 30, 2018 and 2017, respectively.
 
See notes to condensed consolidated financial statements.


6



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Stockholder’s Equity
Six Months Ended June 30, 2018 and 2017
(In Thousands)
(Unaudited)
 
 
 
Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
 other
comprehensive
income (loss)
 
Retained
earnings
 
Total
Balances, January 1, 2018
 
$
7,320

 
$
949,520

 
$
440,957

 
$
1,051,792

 
$
2,449,589

Cumulative impact of adopting ASC 606, net of tax
 

 

 

 
32,952

 
32,952

Adjusted balances, January 1, 2018
 
7,320

 
949,520


440,957


1,084,744


2,482,541

Net income
 

 

 

 
147,286

 
147,286

Other comprehensive loss, net of income taxes
 

 

 
(492,057
)
 

 
(492,057
)
Dividends
 

 

 

 
(99,894
)
 
(99,894
)
Capital contribution(1)
 

 
1,688

 

 

 
1,688

Capital contribution - stock-based compensation
 

 
432

 

 

 
432

Balances, June 30, 2018
 
$
7,320

 
$
951,640


$
(51,100
)

$
1,132,136


$
2,039,996

(1) In February 2018, the Company received a capital contribution from its parent, GWL&A Financial Inc., in the amount of $848. In May 2018, an additional capital contribution was received in the amount of $840. No additional shares of the Company were issued in relation to these contributions.


 
 
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
other
comprehensive
income
 
Retained
earnings
 
Total
Balances, January 1, 2017
 
$
7,293

 
$
863,031

 
$
235,875

 
$
906,122

 
$
2,012,321

Net income
 

 

 

 
84,652

 
84,652

Other comprehensive income, net of income taxes
 

 

 
170,264

 

 
170,264

Dividends
 

 

 

 
(137,301
)
 
(137,301
)
Capital Contribution(1)
 

 
76,429

 

 

 
76,429

Capital contribution - stock-based compensation
 

 
925

 

 

 
925

Balances, June 30, 2017
 
$
7,293

 
$
940,385


$
406,139


$
853,473


$
2,207,290

(1) In May 2017, the Company received a capital contribution from its parent, GWL&A Financial Inc., in the amount of $76,429. No additional shares of the Company were issued in relation to this contribution.

See notes to condensed consolidated financial statements.


7



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2018 and 2017
(In Thousands)
(Unaudited)
 
 
Six Months Ended June 30,
 
 
2018
 
2017
Net cash provided by operating activities
 
$
261,940

 
$
481,107

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Proceeds from sales, maturities and redemptions of investments:
 
 

 
 

Fixed maturities, available-for-sale
 
2,130,539

 
3,132,414

Mortgage loans on real estate
 
223,785

 
209,888

Limited partnership interests and other investments
 
4,438

 
6,425

Purchases of investments:
 
 

 
 

Fixed maturities, available-for-sale
 
(2,108,487
)
 
(2,840,513
)
Mortgage loans on real estate
 
(536,765
)
 
(565,217
)
Limited partnership interests and other investments
 
(15,581
)
 
(8,114
)
Net change in short-term investments
 
81,207

 
(612,835
)
Net change in policy loans
 
3,783

 
(9,037
)
Purchases of furniture, equipment, and software
 
(26,247
)
 
(21,710
)
Net cash used in investing activities
 
(243,328
)
 
(708,699
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Contract deposits
 
1,330,196

 
1,405,204

Contract withdrawals
 
(1,176,725
)
 
(1,087,940
)
Proceeds from surplus note issued to parent
 
346,218

 

Redemption of surplus note issued to parent
 
(333,400
)
 

Dividends paid
 
(99,894
)
 
(137,301
)
Capital contribution
 
1,688

 
76,429

Payments for and interest paid on financing element derivatives, net
 
(1,673
)
 
(3,461
)
Net change in commercial paper borrowings
 
(505
)
 
(27,796
)
Net change in book overdrafts
 
(13,590
)
 
1,623

Employee taxes paid for withheld shares
 
(32
)
 
(648
)
Net cash provided by financing activities
 
52,283

 
226,110

 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
70,895

 
(1,482
)
Cash and cash equivalents, beginning of year
 
17,211

 
18,321

Cash and cash equivalents, end of period
 
$
88,106

 
$
16,839

 
See notes to condensed consolidated financial statements.
 
(Continued)

8



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2018 and 2017
(In Thousands)
(Unaudited)
 
 
 
Six Months Ended June 30,
 
 
2018
 
2017
Supplemental disclosures of cash flow information:
 
 

 
 
Net cash paid during the year for:
 
 

 
 

Income taxes
 
$
(9,323
)
 
$
(10,449
)
Interest
 
(16,194
)
 
(12,931
)
 
 
 
 
 
Non-cash investing and financing transactions during the years:
 
 
 
 
Share-based compensation expense
 
$
432

 
$
925

   Fair value of assets acquired in settlement of fixed maturity investments
 
28,315

 

 
See notes to condensed consolidated financial statements.
 
(Concluded)


9

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




1.  Organization and Basis of Presentation
 
Organization
 
Great-West Life & Annuity Insurance Company (“GWLA”) and its subsidiaries (collectively, the “Company”) is a direct wholly-owned subsidiary of GWL&A Financial Inc. (“GWL&A Financial”), a holding company.  GWL&A Financial is a direct wholly-owned subsidiary of Great-West Lifeco U.S. LLC (“Lifeco U.S.”) and an indirect wholly-owned subsidiary of Great-West Lifeco Inc. (“Lifeco”), a Canadian holding company.  The Company offers a wide range of life insurance, retirement, and investment products to individuals, businesses, and other private and public organizations throughout the United States. The Company is an insurance company domiciled in the State of Colorado and is subject to regulation by the Colorado Division of Insurance.
 
Basis of Presentation
 
The condensed consolidated financial statements include the accounts of the Company and the accounts of its subsidiaries over which it exercises control and are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).  Intercompany transactions and balances have been eliminated in consolidation.
 
The condensed consolidated balance sheet as of December 31, 2017, which was derived from the Company’s audited consolidated financial statements, and the unaudited interim condensed consolidated financial statements as of and for the three and six months ended June 30, 2018, have been prepared in accordance with the instructions for Form 10-Q.  In compliance with those instructions, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.  As such, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
 
In the opinion of management, these statements include all normal recurring adjustments necessary to fairly present the Company’s condensed consolidated results of operations, financial position, and cash flows as of June 30, 2018, and for all periods presented. The condensed consolidated results of operations and condensed consolidated statement of cash flows for the six months ended June 30, 2018, are not necessarily indicative of the results or cash flows expected for the full year.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2.  Application of Recent Accounting Pronouncements

Recently adopted accounting pronouncements

In May, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, and all the related amendments to customer contracts (collectively “ASC 606”), effective for interim and annual periods beginning after December 15, 2017. ASC 606 supersedes nearly all existing revenue recognition guidance under U.S. GAAP; however, it did not impact the accounting for insurance and investment contracts within the scope of financial services insurance, leases, financial instruments and guarantees. The core principle of the model requires that an entity recognizes revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The update also requires increased disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. See Note 10 for additional information.


10

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



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

The primary impact of ASC 606 to the Company relates to the accounting for certain contract costs and contract fulfillment costs, which were expensed as incurred under ASC 605. Under ASC 606, these costs are deferred and amortized over the expected life of the customer contract, which the Company determined to be 10 years. The Company presents these contract costs and contract fulfillment costs on the condensed consolidated balance sheet as a part of the DAC and VOBA balance.

The Company recorded a net increase to opening retained earnings of $32,952, net of tax, as of January 1, 2018 due to the cumulative impact of adopting ASC 606.

In January, 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, effective for interim and annual periods beginning after December 15, 2017. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments including requiring equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income, eliminating certain disclosure requirements related to financial instruments measured at amortized cost, and adding disclosures related to the measurement categories of financial assets and financial liabilities.  The primary impact to the Company’s condensed consolidated financial statements was that the Company’s limited partnership interests, that were accounted for under the cost method, are now measured at fair value with changes in the fair value recognized in net income. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), effective for fiscal years and interim periods within those beginning after December 15, 2017. This ASU addresses diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The primary impacts to the Company’s condensed consolidated financial statement include reclassification of proceeds received from the settlement of corporate-owned life insurance policies (“COLI”) from cash flow from operations to cash flow from investing and reclassification of certain change in due to / from parent and affiliate from investing to operating. As the Company has retroactively applied this guidance as required by the ASU, the following updates were made to the condensed consolidated cash flow statement for the six months ended June 30, 2017 to conform to current year presentation:
Reclassification of proceeds received from the settlement of COLIs of $1,680 from cash flow from operations to cash flows from investing; and
Reclassification of change in due to / from parent and affiliate of $21,388 from cash flow from financing to cash flows from operations.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash (a consensus of the Emerging Issues Task Force), effective for fiscal years and interim periods within those beginning after December 15, 2017. This update requires organizations to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The adoption of this standard did not have a material impact on the condensed consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, effective for annual reporting periods beginning on or after December 15, 2017, and interim periods within those annual periods. This update requires organizations to disaggregate the service cost component from the other components of net benefit costs in the income statement and present it with other current compensation costs for the related employees while providing guidance for capitalization eligibility for service costs. The adoption of this standard did not have a material impact on the condensed consolidated financial statements.


11

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



Future adoption of new accounting pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases, and all the related amendments to leases (collectively “ASU 2016-02”) effective for annual reporting periods beginning on or after December 15, 2018, and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual period. This update requires organizations to recognize lease assets and lease liabilities on the balance sheet with lease terms of more than 12 months and also disclose certain qualitative and quantitative information about leasing arrangements. The Company’s implementation efforts are primarily focused on identifying a new lease accounting system, the review of its existing lease contracts and performing a completeness assessment over the lease population. The Company continues to evaluate the impact of this update on its condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments: Credit Losses: Measurement of Credit Losses on Financial Instruments, effective for fiscal years and interim periods within those beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018. This update amends guidance on the impairment of financial instruments by adding an impairment model that is based on expected losses rather than incurred losses and is intended to result in more timely recognition of losses. The standard also simplifies the accounting by decreasing the number of credit impairment models that an entity can use to account for debt instruments. The Company continues to evaluate the impact of this update on its condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other, effective for annual or any interim goodwill impairment tests after December 15, 2019.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The update eliminates Step 2 from the goodwill impairment test and will require management to perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.  Any amount by which the carrying amount exceeds the reporting unit’s fair value (not to exceed the goodwill allocated to that reporting unit) is recognized as an impairment charge.  The Company performs its goodwill impairment annually in the 4th quarter or more frequently if events or circumstances indicate that there may be justification for performing an interim test. The adoption of this standard is not anticipated to have a material impact on the condensed consolidated financial statements.

3.  Related Party Transactions

A note payable to GWL&A Financial was issued as a surplus note on May 17, 2018, with a face and carrying amount of $346,218. The surplus note bears a fixed interest rate of 4.881%. The note matures on May 17, 2048.

On June 15, 2018, the surplus note with a principal amount of $333,400 was redeemed in full. The surplus note to GWL&A Financial was issued on May 19, 2006. The surplus note bore an interest rate of 2.588% plus the then-current three-month London Interbank Offering Rate (“LIBOR”). The surplus note became redeemable by the Company at the principal amount plus any accrued and unpaid interest after May 16, 2016.

From time to time, the Company makes direct investments in mutual funds of Great-West Funds, Inc., an open-end management investment company, which is a related party of GWL&A, to seed new investment products. As of June 30, 2018, the Company held $35,268 in seed investments. 

4.  Dividends
 
The maximum amount of dividends, which can be paid to stockholders by insurance companies domiciled in the State of Colorado, is subject to restrictions relating to statutory surplus and statutory net gain from operations.  Prior to the payment of any dividends, the Company seeks approval from the Colorado Insurance Commissioner.  During the six months ended June 30, 2018 and 2017, the Company paid dividends of $99,894 and $137,301, respectively, to its parent, GWL&A Financial. 


12

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



5.  Summary of Investments
 
The following tables summarize fixed maturity investments classified as available-for-sale and the non-credit-related component of other-than-temporary impairments (“OTTI”) in accumulated other comprehensive income (loss) (“AOCI”): 
 
 
June 30, 2018
 
 
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
 
$
1,362,245

 
$
26,310

 
$
32,382

 
$
1,356,173

 
$

Obligations of U.S. states and their subdivisions
 
1,841,971

 
165,819

 
4,368

 
2,003,422

 

Corporate debt securities (2)
 
15,596,700

 
262,319

 
420,281

 
15,438,738

 
(779
)
Asset-backed securities
 
1,609,259

 
68,040

 
23,498

 
1,653,801

 
(36,665
)
Residential mortgage-backed securities
 
56,655

 
2,056

 
886

 
57,825

 
(70
)
Commercial mortgage-backed securities
 
1,358,117

 
4,899

 
43,216

 
1,319,800

 

Collateralized debt obligations
 
932,625

 
1,544

 
1,191

 
932,978

 

Total fixed maturities
 
$
22,757,572

 
$
530,987


$
525,822


$
22,762,737


$
(37,514
)
 
 
 
 
 
 
 
 
 
 
 
(1)  Indicates the amount of any OTTI (gain) loss included in AOCI that is included in gross unrealized gains and losses.  OTTI (gain) loss included in AOCI, as presented above, includes both the initial recognition of non-credit losses and the effects of subsequent increases and decreases in estimated fair value for those fixed maturity securities with previous non-credit impairment. The non-credit loss component of OTTI (gain) loss was in an unrealized gain position due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.
(2) Includes perpetual debt investments with amortized cost of $89,267 and estimated fair value of $81,435. 

 
 
December 31, 2017
 
 
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
 
$
1,837,748

 
$
41,777

 
$
7,883

 
$
1,871,642

 
$

Obligations of U.S. states and their subdivisions
 
1,872,120

 
220,507

 
1,655

 
2,090,972

 

Corporate debt securities (2)
 
15,234,473

 
581,991

 
110,377

 
15,706,087

 
(1,018
)
Asset-backed securities
 
1,622,806

 
105,301

 
10,131

 
1,717,976

 
(56,735
)
Residential mortgage-backed securities
 
63,187

 
2,446

 
649

 
64,984

 
(140
)
Commercial mortgage-backed securities
 
1,352,906

 
17,692

 
12,989

 
1,357,609

 

Collateralized debt obligations
 
779,722

 
4,227

 
80

 
783,869

 

Total fixed maturities
 
$
22,762,962

 
$
973,941


$
143,764


$
23,593,139


$
(57,893
)
 
 
 
 
 
 
 
 
 
 
 
(1)  Indicates the amount of any OTTI (gain) loss included in AOCI that is included in gross unrealized gains and losses.  OTTI (gain) loss included in AOCI, as presented above, includes both the initial recognition of non-credit losses and the effects of subsequent increases and decreases in estimated fair value for those fixed maturity securities with previous non-credit impairment. The non-credit loss component of OTTI (gain) loss was in an unrealized gain position due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.
(2) Includes perpetual debt investments with amortized cost of $89,267 and estimated fair value of $87,348.
 
See Note 8 for additional discussion regarding fair value measurements.


13

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



The amortized cost and estimated fair value of fixed maturity investments classified as available-for-sale, by contractual maturity date, 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. 
 
June 30, 2018
 
Amortized cost
 
Estimated fair value
Maturing in one year or less
$
619,874

 
$
620,381

Maturing after one year through five years
3,447,149

 
3,441,249

Maturing after five years through ten years
8,216,510

 
8,066,134

Maturing after ten years
5,500,704

 
5,670,372

Mortgage-backed and asset-backed securities
4,973,335

 
4,964,601

 Total fixed maturities
$
22,757,572

 
$
22,762,737

 
 
 
 

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

The following table summarizes information regarding the sales of securities classified as available-for-sale:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Proceeds from sales
$
511,199

 
$
891,026

 
$
1,477,619

 
$
2,471,548

Gross realized gains from sales
12,452

 
8,488

 
24,726

 
20,921

Gross realized losses from sales
9,789

 
6,080

 
16,072

 
21,337

 
 
 
 
 
 
 
 

Mortgage loans on real estate — The recorded investment of the mortgage loan portfolio categorized as performing was $4,316,971 and $4,005,960 as of June 30, 2018 and December 31, 2017, respectively.

The following table summarizes activity in the mortgage provision allowance:
 
Six Months Ended June 30, 2018
 
Year Ended December 31, 2017
 
Commercial mortgages
 
Commercial mortgages
Beginning balance
$
773

 
$
2,882

Provision increases

 
157

Charge-off

 
(663
)
Recovery

 
(30
)
Provision decreases

 
(1,573
)
Ending balance
$
773

 
$
773

 
 
 
 
Allowance ending balance by basis of impairment method:
 
 
 
Collectively evaluated for impairment
773

 
773

 
 
 
 
Recorded investment balance in the mortgage loan portfolio, gross of allowance, by basis of impairment method:
$
4,316,971

 
$
4,005,960

Individually evaluated for impairment
2,799

 
2,942

Collectively evaluated for impairment
4,314,172

 
4,003,018

 
 
 
 


14

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



Limited partnership interests — Limited partnership interests represent the Company’s minority ownership interests in pooled investment funds that primarily make private equity investments across diverse industries and geographical focuses. The Company has determined its interest in each limited partnership to be considered a variable interest entity (“VIE”). Consolidation is not required as the Company is not deemed to be the primary beneficiary of the VIEs. The carrying value and maximum exposure to loss in relation to the activities of the VIEs was $63,586 and $45,540 at June 30, 2018 and December 31, 2017, respectively.

Securities lending — Securities with a cost or amortized cost of $98,705 and estimated fair values of $93,255 were on loan under the program at June 30, 2018. There were no securities on loan at December 31, 2017.  The Company received cash of $80,013 and securities with a fair value of $16,502 as collateral at June 30, 2018. The Company bears the risk of any deficiency in the amount of collateral available for return to a borrower due to a loss in an approved investment.

Under the securities lending program the collateral pledged is, by definition, the securities loaned against the cash borrowed. The cash collateral liability under the securities lending program is $80,013, and the class of securities loaned consists entirely of corporate debt securities.

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

Unrealized losses on fixed maturity investments classified as available-for-sale — The following tables summarize unrealized investment losses, including the non-credit-related portion of OTTI losses reported in AOCI, by class of investment:
 
 
June 30, 2018
 
 
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
 
$
833,130


$
25,923


$
150,012


$
6,459


$
983,142


$
32,382

Obligations of U.S. states and their subdivisions
 
157,066


1,958


36,003


2,410


193,069


4,368

Corporate debt securities
 
8,687,225


278,236


1,591,254


142,045


10,278,479


420,281

Asset-backed securities
 
764,102


14,417


211,254


9,081


975,356


23,498

Residential mortgage-backed securities
 
3,679


63


10,029


823


13,708


886

Commercial mortgage-backed securities
 
838,617


24,039


280,386


19,177


1,119,003


43,216

Collateralized debt obligations
 
296,314


1,191






296,314


1,191

Total fixed maturities
 
$
11,580,133

 
$
345,827


$
2,278,938


$
179,995


$
13,859,071


$
525,822

Total number of securities in an unrealized loss position
 
 


1,076


 


268


 


1,344

 

15

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



 
 
December 31, 2017
 
 
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
 
$
755,861


$
4,159


$
230,447


$
3,724


$
986,308


$
7,883

Obligations of U.S. states and their subdivisions
 
24,908


180


37,012


1,475


61,920


1,655

Corporate debt securities
 
2,229,585


19,568


2,036,323


90,809


4,265,908


110,377

Asset-backed securities
 
544,778


3,011


245,341


7,120


790,119


10,131

Residential mortgage-backed securities
 
4,405


23


11,416


626


15,821


649

Commercial mortgage-backed securities
 
342,820


2,451


295,164


10,538


637,984


12,989

Collateralized debt obligations
 
7,277


80






7,277


80

Total fixed maturities
 
$
3,909,634

 
$
29,472


$
2,855,703


$
114,292


$
6,765,337


$
143,764

Total number of securities in an unrealized loss position
 
 


368


 


293


 


661

 
 
 
 
 
 
 
 
 
 
 
 
 

Fixed maturity investments — Total unrealized losses and OTTI increased by $382,058, or 266%, from December 31, 2017 to June 30, 2018. The majority, or $316,355, of the increase was in the less than twelve months category. The overall increase in unrealized losses was across most asset classes and reflects higher interest rates at June 30, 2018, compared to December 31, 2017, resulting in generally lower valuations of these fixed maturity securities.
 
Total unrealized losses greater than twelve months increased by $65,703 from December 31, 2017 to June 30, 2018.  Corporate debt securities account for 79%, or $142,045, of the unrealized losses and OTTI greater than twelve months at June 30, 2018.  Non-investment grade corporate debt securities account for $6,676 of the unrealized losses and OTTI greater than twelve months. Management does not have the intent to sell these assets; therefore, an OTTI was not recognized in earnings.
 
Asset-backed and commercial-backed securities account for 16% of the unrealized losses and OTTI greater than twelve months at June 30, 2018.  The present value of the cash flows expected to be collected is not less than amortized cost and management does not have the intent to sell these assets; therefore, an OTTI was not recognized in earnings.

Other-than-temporary impairment recognition — The OTTI on fixed maturity securities where the loss portion is bifurcated and the credit related component is recognized in investment (losses) gains is summarized as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Beginning balance
$
52,775

 
$
80,359

 
$
62,231

 
$
83,665

Reductions:
 
 
 
 
 
 
 
Due to sales, maturities or payoffs during the period

 

 
(1,510
)
 

Due to increases in cash flows expected to be collected that are recognized over the remaining life of the security
(3,092
)
 
(2,948
)
 
(11,038
)
 
(6,254
)
Ending balance
$
49,683

 
$
77,411


$
49,683


$
77,411



16

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



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

The ISDA Master Agreements contain provisions that would allow the counterparties to require immediate settlement of all derivative instruments in a net liability position if the Company were to default on any debt obligations over a certain threshold.  The MSFTA contain provisions which do not stipulate a threshold for default and only apply to debt obligations between the Company and the specific counterparty.  The aggregate fair value, inclusive of accrued income and expense, of derivative instruments with credit-risk-related contingent features that were in a net liability position was $72,759 and $93,761 as of June 30, 2018, and December 31, 2017, respectively.  The Company had pledged collateral related to these derivatives of $15,900 and $42,750 as of June 30, 2018, and December 31, 2017, respectively, in the normal course of business.  If the credit-risk-related contingent features were triggered on June 30, 2018, the fair value of assets that could be required to settle the derivatives in a net liability position was $56,859.
 
At June 30, 2018, and December 31, 2017, the Company had pledged $27,169 and $52,330 of unrestricted cash collateral to counterparties in the normal course of business, while other counterparties had pledged $12,696 and $5,490 of unrestricted cash collateral to the Company to satisfy collateral netting agreements, respectively.
 
At June 30, 2018, the Company estimated $15,222 of net derivative gains related to cash flow hedges included in AOCI will be reclassified into net income within the next twelve months. Gains and losses included in AOCI are reclassified into net income when the hedged item affects earnings.

Types of derivative instruments and derivative strategies

Interest rate contracts
 
Cash flow hedges
 
Interest rate swap agreements are used to convert the interest rate on certain debt security investments and debt obligations from a floating rate to a fixed rate. 
 
Not designated as hedging instruments
 
The Company enters into certain transactions in which derivatives are hedging an economic risk but hedge accounting is either not elected or the transactions are not eligible for hedge accounting.  These derivative instruments include:  exchange-traded interest rate swap futures, over-the-counter (“OTC”) interest rate swaptions, OTC interest rate swaps, exchange-traded Eurodollar interest rate futures, and treasury interest rate futures.  Certain of the Company’s OTC derivatives are cleared and settled through the Chicago Mercantile Exchange ("CME") while others are bilateral contracts between the Company and a counterparty.
 
In 2017, the CME amended its rulebook to classify variation margin transfers as settlement payments instead of collateral. The Company adjusts the fair value by the variation margin payments on derivatives cleared through the CME.

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


17

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



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

Equity contracts

The Company uses futures on equity indices to offset changes in guaranteed lifetime withdrawal benefit liabilities; however, they are not eligible for hedge accounting.

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

The following tables summarize the notional amount and fair value of derivative financial instruments, excluding embedded derivatives:
 
June 30, 2018
 
 
 
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
$
22,300


$
5,917


$
5,917


$

Cross-currency swaps
864,154


(8,854
)

30,471


39,325

Total cash flow hedges
886,454

 
(2,937
)

36,388


39,325

 











Total derivatives designated as hedges
886,454


(2,937
)

36,388


39,325

 











Derivatives not designated as hedges:
 


 


 


 

Interest rate swaps
548,500


577


1,461


884

Futures on equity indices
56,521







Interest rate futures
34,300







Interest rate swaptions
190,400


163


163



Other forward contracts
2,460,000


3,294


4,565


1,271

Cross-currency swaps
573,703


(11,778
)

20,292


32,070

Total derivatives not designated as hedges
3,863,424

 
(7,744
)

26,481


34,225

Total derivative financial instruments
$
4,749,878

 
$
(10,681
)

$
62,869


$
73,550

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

18

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



 
December 31, 2017
 
 
 
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
$
388,800


$
7,476


$
7,476


$

Cross-currency swaps
800,060


(31,358
)

19,958


51,316

Total cash flow hedges
1,188,860

 
(23,882
)

27,434


51,316

 











Total derivatives designated as hedges
1,188,860


(23,882
)

27,434


51,316

 











Derivatives not designated as hedges:
 


 


 


 

Interest rate swaps
519,100


1,902


3,530


1,628

Futures on equity indices
22,074







Interest rate futures
60,700







Interest rate swaptions
164,522


75


75



Cross-currency swaps
612,733


(21,279
)

20,320


41,599

Total derivatives not designated as hedges
1,379,129

 
(19,302
)

23,925


43,227

Total derivative financial instruments
$
2,567,989

 
$
(43,184
)

$
51,359


$
94,543

 
 
 
 
 
 
 
 
(1) The estimated fair value excludes accrued income and expense. The estimated fair value of all derivatives in an asset position is reported within other assets and the estimated fair value of all derivatives in a liability position is reported within other liabilities in the condensed consolidated balance sheets.
 
Notional amounts are used to express the extent of the Company’s involvement in derivative transactions and represent a standard measurement of the volume of its derivative activity.  Notional amounts represent those amounts used to calculate contractual flows to be exchanged and are not paid or received. The average notional outstanding during the six months ended June 30, 2018, was $672,886, $1,451,399, $90,541, $179,348, and $1,764,286 for interest rate swaps, cross-currency swaps, futures, swaptions, and other forward contracts, respectively. The average notional outstanding during the year ended December 31, 2017, was $905,977, $1,323,398, $108,438, $162,896, and $2,231,196 for interest rate swaps, cross-currency swaps, futures, swaptions, and other forward contracts, respectively.

The following tables present the effect of derivative instruments in the condensed consolidated statements of income and comprehensive income reported by cash flow hedges and derivatives not designated as hedges, excluding embedded derivatives: 

Gain (loss) recognized in OCI on derivatives (Effective portion)
 
Gain (loss) reclassified from OCI
into net income (Effective portion)
 
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
Cash flow hedges:
 

 
 

 
 

 
 

 
Interest rate swaps
$
(319
)
 
$
644

 
$
705

 
$
1,186

(A)
Interest rate swaps
1

 
(8,193
)
 
887

 
(787
)
(B)
Cross-currency swaps
59,257

 
(10,696
)
 
7,467

 
(973
)
(A)
Total cash flow hedges
$
58,939

 
$
(18,245
)

$
9,059


$
(574
)
 
(A) Net investment income.
(B) Interest expense.

19

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



 
Gain (loss) recognized in OCI on derivatives (Effective portion)
 
Gain (loss) reclassified from OCI
into net income (Effective portion)
 
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
Cash flow hedges:
 

 
 

 
 

 
 

 
Interest rate swaps
$
(1,331
)
 
$
496

 
$
1,633

 
$
2,406

(A)
Interest rate swaps
29,030

 
(4,350
)
 
632

 
(1,667
)
(B)
Cross-currency swaps
24,744

 
(21,346
)
 
6,941

 
129

(A)
Total cash flow hedges
$
52,443

 
$
(25,200
)

$
9,206


$
868


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

 
Gain (loss) on derivatives recognized in net income
 
 
Three Months Ended June 30,
 
 
2018
 
2017
 
Derivatives not designated as hedging instruments:
 

 
 

 
Futures on equity indices
$

(A)
$
350

(A)
Futures on equity indices
(1,504
)
(B)
(1,536
)
(B)
Interest rate swaps

(A)
4,976

(A)
Interest rate swaps
(3,336
)
(B)

(B)
Interest rate futures

(A)
116

(A)
Interest rate futures
67

(B)
(206
)
(B)
Interest rate swaptions

(A)
(4
)
(A)
Interest rate swaptions
(187
)
(B)
(77
)
(B)
Other forward contracts

(A)
(9,363
)
(A)
Other forward contracts
(1,575
)
(B)
18,716

(B)
Cross-currency swaps

(A)
(8,083
)
(A)
Cross-currency swaps
40,739

(B)

(B)
Total derivatives not designated as hedging instruments
$
34,204

 
$
4,889

 
(A) Net investment income.
(B) Represents investment (losses) gains, net.

20

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



 
Gain (loss) on derivatives recognized in net income
 
 
Six Months Ended June 30,
 
 
2018
 
2017
 
Derivatives not designated as hedging instruments:
 

 
 

 
Futures on equity indices
$

(A)
$
(334
)
(A)
Futures on equity indices
(2,145
)
(B)
(2,820
)
(B)
Interest rate swaps

(A)
3,427

(A)
Interest rate swaps
(14,302
)
(B)

(B)
Interest rate futures

(A)
102

(A)
Interest rate futures
115

(B)
(201
)
(B)
Interest rate swaptions

(A)
(31
)
(A)
Interest rate swaptions
(151
)
(B)
(151
)
(B)
Other forward contracts

(A)
(2,580
)
(A)
Other forward contracts
(21,943
)
(B)
13,119

(B)
Cross-currency swaps

(A)
(22,251
)
(A)
Cross-currency swaps
12,595

(B)

(B)
Total derivatives not designated as hedging instruments
$
(25,831
)
 
$
(11,720
)
 
(A) Net investment income.
(B) Represents investment (losses) gains, net.

Embedded derivative - Guaranteed Lifetime Withdrawal Benefit

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

The estimated fair value of the GLWB was $513 and $11,095 at June 30, 2018, and December 31, 2017, respectively. The changes in fair value of the GLWB were $3,480 and $(5,553) for the three months ended June 30, 2018 and 2017, respectively, and $10,582 and $(3,883) for the six months ended June 30, 2018 and 2017, respectively.


21

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



7.  Summary of Offsetting Assets and Liabilities
 
The Company enters into derivative transactions and short-term reverse repurchase agreements with several approved counterparties. The Company’s derivative transactions are generally governed by MSFTA or ISDA Master Agreements which provide for legally enforceable set-off and close-out netting in the event of default or bankruptcy of the Company’s counterparties.  The Company’s MSFTA and ISDA Master Agreements generally include provisions which require both the pledging and accepting of collateral in connection with its derivative transactions. These provisions have the effect of securing each party’s position to the extent of collateral held. Short-term reverse repurchase agreements also include collateral provisions with the counterparty. The following tables summarize the effect of master netting arrangements on the Company’s financial position in the normal course of business and in the event of default or bankruptcy of the Company’s counterparties: 
 
 
June 30, 2018
 
 
 
 
Gross fair value not offset
 
 
 
 
 
 
in balance sheets
 
 
 
 
Gross fair value of
 
Financial
 
 
 
Net
Financial instruments:
 
recognized assets/liabilities (1)
 
instruments
 
Cash collateral
 
fair value
Derivative instruments (assets) (2)
 
$
62,869


$
(50,356
)

$
(10,612
)

$
1,901

Derivative instruments (liabilities) (3)
 
$
73,550

 
$
(50,356
)
 
$
(16,310
)
 
$
6,884

 
 
 
 
 
 
 
 
 
(1) The gross fair value of derivative instrument assets is not netted against offsetting liabilities for presentation on the condensed consolidated balance sheets.
(2) The estimated fair value of derivative instrument assets is reported in other assets in the condensed consolidated balance sheets. Derivative transactions entered into under ISDA master agreements include income and expense accruals.
(3) The estimated fair value of derivative instrument liabilities is reported in other liabilities in the condensed consolidated balance sheets. Derivative transactions entered into under ISDA master agreements include income and expense accruals.

 

December 31, 2017
 

 
 
Gross fair value not offset
 
 
 

 
 
in balance sheets
 
 
 

Gross fair value of
 
Financial
 
 
 
Net
Financial instruments (assets):

recognized assets (1)
 
instruments
 
Cash collateral
 
fair value
Derivative instruments (2)

$
52,738


$
(47,827
)

$
(4,911
)

$

Short-term reverse repurchase agreements (3)
 
23,200

 
(23,200
)
 

 

Total financial instruments (assets)
 
$
75,938

 
$
(71,027
)

$
(4,911
)

$

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
Gross fair value not offset
 
 
 
 
 
 
in balance sheets
 
 
 
 
Gross fair value of
 
Financial
 
 
 
Net
Financial instruments (liabilities):
 
recognized liabilities (1)
 
instruments
 
Cash collateral
 
fair value
Derivative instruments (4)

$
93,761


$
(47,827
)

$
(42,750
)

$
3,184

 
 
 
 
 
 
 
 
 
(1) The gross fair value of derivative instrument and short-term reverse repurchase agreement assets is not netted against offsetting liabilities for presentation on the condensed consolidated balance sheets.
(2) The estimated fair value of derivative instrument assets is reported in other assets in the condensed consolidated balance sheets. Derivative transactions entered into under ISDA master agreements include income and expense accruals.
(3) The estimated fair value of short-term reverse repurchase agreement assets is reported in short-term investments in the condensed consolidated balance sheets. The collateral is held by an independent third-party custodian under a tri-party agreement.
(4) The estimated fair value of derivative instrument liabilities is reported in other liabilities in the condensed consolidated balance sheets. Derivative transactions entered into under ISDA master agreements include income and expense accruals.
 

22

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



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

Assets and liabilities measured at
fair value on a recurring basis
 
June 30, 2018
 
Quoted prices
in active
markets for
identical assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
Assets
 

 
 

 
 

 
 

Fixed maturities available-for-sale:
 

 
 

 
 

 
 

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


$
1,356,173


$


$
1,356,173

Obligations of U.S. states and their subdivisions


2,003,422




2,003,422

Corporate debt securities


15,429,768


8,970


15,438,738