0000744455-18-000019.txt : 20181114 0000744455-18-000019.hdr.sgml : 20181114 20181114130924 ACCESSION NUMBER: 0000744455-18-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 80 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181114 DATE AS OF CHANGE: 20181114 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: 181182247 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 q32018gwla10q.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 September 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 November 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
September 30, 2018 (Unaudited) and December 31, 2017
(In Thousands, Except Share Amounts)
 
 
 
September 30, 2018
 
December 31, 2017
Assets
 
 

 
 

Investments:
 
 

 
 

Fixed maturities, available-for-sale, at fair value (amortized cost $22,696,473 and $22,762,962)
 
$
22,550,302

 
$
23,593,139

Fixed maturities, held-for-trading, at fair value (amortized cost $142,981 and $20,512)
 
141,943

 
21,059

Mortgage loans on real estate (net of allowances of $773 and $773)
 
4,365,189

 
4,005,187

Policy loans
 
4,103,408

 
4,104,094

Short-term investments (amortized cost $415,189 and $350,266)
 
415,189

 
350,266

Limited partnership interests
 
71,895

 
45,540

Other investments
 
54,614

 
17,997

Total investments
 
31,702,540

 
32,137,282

 
 
 
 
 
Other assets:
 
 

 
 

Cash and cash equivalents
 
11,782

 
17,211

Reinsurance recoverable
 
581,026

 
589,080

Deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”)
 
712,453

 
518,510

Investment income due and accrued
 
324,698

 
299,362

Deferred income tax assets, net
 
2,715

 

Collateral under securities lending agreements
 
66,784

 

Due from parent and affiliates
 
108,501

 
114,133

Goodwill
 
137,683

 
137,683

Other intangible assets
 
15,068

 
17,085

Other assets
 
1,033,650

 
954,250

Assets of discontinued operations
 
14,286

 
16,095

Separate account assets
 
26,142,156

 
27,660,571

Total assets
 
$
60,853,342

 
$
62,461,262

 
See notes to condensed consolidated financial statements.
 
(Continued)


3



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

 
 

Policy benefit liabilities:
 
 

 
 

Future policy benefits
 
$
30,393,726

 
$
30,048,927

Policy and contract claims
 
380,903

 
389,029

Policyholders’ funds
 
239,576

 
280,578

Provision for policyholders’ dividends
 
40,061

 
41,972

Undistributed earnings on participating business
 
9,586

 
14,636

Total policy benefit liabilities
 
31,063,852

 
30,775,142

 
 
 
 
 
General liabilities:
 
 

 
 

Due to parent and affiliates
 
569,370

 
553,901

Commercial paper
 
99,692

 
99,886

Payable under securities lending agreements
 
66,784

 

Deferred income tax liabilities, net
 

 
93,203

Other liabilities
 
906,039

 
812,875

Liabilities of discontinued operations
 
14,286

 
16,095

Separate account liabilities
 
26,142,156

 
27,660,571

Total liabilities
 
58,862,179

 
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
 
952,682

 
949,520

Accumulated other comprehensive (loss) income
 
(142,356
)
 
440,957

Retained earnings
 
1,173,517

 
1,051,792

Total stockholder’s equity
 
1,991,163

 
2,449,589

Total liabilities and stockholder’s equity
 
$
60,853,342

 
$
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 Nine Months Ended September 30, 2018 and 2017
(In Thousands)
(Unaudited)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 

 
 

 
 
 
 
Premium income
 
$
130,953

 
$
145,504

 
$
353,790

 
$
365,408

Fee income
 
290,790

 
264,304

 
853,450

 
786,758

Other revenue
 
3,078

 
3,322

 
9,140

 
9,367

Net investment income
 
322,425

 
300,582

 
988,037

 
911,274

Investment gains (losses), net
 
4,409

 
13,861

 
922

 
24,171

Total revenues
 
751,655

 
727,573


2,205,339


2,096,978

Benefits and expenses:
 
 

 
 

 
 
 
 
Life and other policy benefits
 
180,698

 
161,017

 
534,856

 
498,300

(Decrease) increase in future policy benefits
 
(13,058
)
 
12,704

 
(112,448
)
 
(51,148
)
Interest credited or paid to contractholders
 
166,903

 
160,040

 
492,583

 
471,531

Provision for policyholders’ share of losses on participating business
 
(539
)
 
(1,033
)
 
(1,396
)
 
(1,097
)
Dividends to policyholders
 
8,990

 
11,513

 
28,669

 
35,627

Total benefits
 
342,994

 
344,241


942,264


953,213

General insurance expenses
 
298,669

 
293,176

 
905,347

 
884,670

Amortization of DAC and VOBA
 
14,241

 
14,076

 
56,490

 
39,798

Interest expense
 
7,082

 
7,811

 
24,479

 
23,087

Total benefits and expenses
 
662,986

 
659,304


1,928,580


1,900,768

Income before income taxes
 
88,669

 
68,269

 
276,759

 
196,210

Income tax expense
 
17,287

 
21,688

 
58,091

 
64,973

Net income
 
$
71,382

 
$
46,581


$
218,668


$
131,237

 
See notes to condensed consolidated financial statements.


5



GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Comprehensive (Loss) Income
Three and Nine Months Ended September 30, 2018 and 2017
(In Thousands)
(Unaudited)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
71,382

 
$
46,581

 
$
218,668

 
$
131,237

Components of other comprehensive (loss) income
 
 

 
 

 
 

 
 

Unrealized holding (losses) gains, net, arising on available-for-sale fixed maturity investments
 
(148,340
)
 
39,983

 
(961,854
)
 
407,208

Unrealized holding gains (losses), net, arising on cash flow hedges
 
4,063

 
(23,111
)
 
56,506

 
(48,311
)
Reclassification adjustment for (gains) losses, net, realized in net income
 
(6,937
)
 
(2,885
)
 
(24,244
)
 
(3,242
)
Net unrealized (losses) gains related to investments
 
(151,214
)
 
13,987


(929,592
)

355,655

Future policy benefits, DAC and VOBA adjustments
 
35,053

 
(1,977
)
 
189,415

 
(85,992
)
Employee benefit plan adjustment
 
646

 
10,744

 
1,805

 
15,036

Other comprehensive (loss) income before income taxes
 
(115,515
)
 
22,754


(738,372
)

284,699

Income tax (benefit) expense related to items of other comprehensive income
 
(24,259
)
 
7,963

 
(155,059
)
 
99,644

Other comprehensive (loss) income(1)
 
(91,256
)
 
14,791


(583,313
)

185,055

Total comprehensive (loss) income
 
$
(19,874
)
 
$
61,372


$
(364,645
)

$
316,292


(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 $635 and $(2,258) for the three months ended September 30, 2018 and 2017, respectively and $(12,611) and $(3,867) for the nine months ended September 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
Nine Months Ended September 30, 2018 and 2017
(In Thousands)
(Unaudited)
 
 
 
Nine Months Ended September 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
 

 

 

 
218,668

 
218,668

Other comprehensive loss, net of income taxes
 

 

 
(583,313
)
 

 
(583,313
)
Dividends
 

 

 

 
(129,895
)
 
(129,895
)
Capital contribution(1)
 

 
2,514

 

 

 
2,514

Capital contribution - stock-based compensation
 

 
648

 

 

 
648

Balances, September 30, 2018
 
$
7,320

 
$
952,682


$
(142,356
)

$
1,173,517


$
1,991,163

(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. In August 2018, an additional capital contribution was received in the amount of $826. No additional shares of the Company were issued in relation to these contributions.


 
 
Nine Months Ended September 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
 

 

 

 
131,237

 
131,237

Other comprehensive income, net of income taxes
 

 

 
185,055

 

 
185,055

Dividends
 

 

 

 
(145,301
)
 
(145,301
)
Capital Contribution(1)
 

 
76,429

 

 

 
76,429

Capital contribution - stock-based compensation
 

 
1,156

 

 

 
1,156

Balances, September 30, 2017
 
$
7,293

 
$
940,616


$
420,930


$
892,058


$
2,260,897

(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
Nine Months Ended September 30, 2018 and 2017
(In Thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Net cash provided by operating activities
 
$
316,452

 
$
699,942

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Proceeds from sales, maturities and redemptions of investments:
 
 

 
 

Fixed maturities, available-for-sale
 
2,892,673

 
3,920,591

Mortgage loans on real estate
 
288,150

 
322,326

Limited partnership interests and other investments
 
5,827

 
8,439

Purchases of investments:
 
 

 
 

Fixed maturities, available-for-sale
 
(2,786,257
)
 
(4,313,849
)
Mortgage loans on real estate
 
(650,495
)
 
(689,122
)
Limited partnership interests and other investments
 
(27,656
)
 
(17,697
)
Net change in short-term investments
 
(39,274
)
 
(517,840
)
Net change in policy loans
 
(1,057
)
 
(9,677
)
Purchases of furniture, equipment, and software
 
(39,541
)
 
(30,867
)
Net cash used in investing activities
 
(357,630
)
 
(1,327,696
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Contract deposits
 
2,064,895

 
2,251,508

Contract withdrawals
 
(1,888,977
)
 
(1,565,225
)
Proceeds from surplus note issued to parent
 
346,218

 

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

Dividends paid
 
(129,895
)
 
(145,301
)
Capital contribution
 
2,514

 
76,429

Payments for and interest paid on financing element derivatives, net
 
(724
)
 
(3,290
)
Net change in commercial paper borrowings
 
(194
)
 
819

Net change in book overdrafts
 
(24,647
)
 
15,659

Employee taxes paid for withheld shares
 
(41
)
 
(671
)
Net cash provided by financing activities
 
35,749

 
629,928

 
 
 
 
 
Net (decrease) increase in cash and cash equivalents
 
(5,429
)
 
2,174

Cash and cash equivalents, beginning of year
 
17,211

 
18,321

Cash and cash equivalents, end of period
 
$
11,782

 
$
20,495

 
See notes to condensed consolidated financial statements.
 
(Continued)

8



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

 
 
Net cash paid during the year for:
 
 

 
 

Income taxes
 
$
(17,070
)
 
$
(17,449
)
Interest
 
(16,728
)
 
(16,447
)
 
 
 
 
 
Non-cash investing and financing transactions during the years:
 
 
 
 
Share-based compensation expense
 
$
648

 
$
1,156

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

 
9,323

 
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 nine months ended September 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 September 30, 2018, and for all periods presented. The condensed consolidated results of operations and condensed consolidated statement of cash flows for the nine months ended September 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 nine months ended September 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 $9,760 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 incorporating a new lease accounting system and estimating the impact to the condensed consolidated financial statements upon adoption. The adoption of this standard is not anticipated to have a material impact on the 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.
In August 2018, the FASB issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Targets, effective for certain long-duration insurance contracts for fiscal years and interim periods beginning after December 15, 2020. Early adoption is permitted. The amendments update the measurement of the liability for future policy benefits related to non-participating traditional and limited payment contracts, the measurement of market risk benefits, the amortization of deferred acquisition costs and require new, disaggregated disclosures. The Company is evaluating the impact of this update on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Internal-Use Software, effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The standard requires companies to capitalize certain implementation costs on cloud computing arrangements that are service contacts. The Company is evaluating the impact of this update on its 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 GWLA, to seed new investment products. As of September 30, 2018, the Company held $35,957 in seed investments. 


12

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



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 nine months ended September 30, 2018 and 2017, the Company paid dividends of $129,895 and $145,301, respectively, to its parent, GWL&A Financial. 

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”): 
 
 
September 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
 
$
1,446,233

 
$
22,552

 
$
42,690

 
$
1,426,095

 
$

Obligations of U.S. states and their subdivisions
 
1,828,711

 
137,944

 
7,530

 
1,959,125

 

Corporate debt securities (2)
 
15,593,111

 
222,689

 
475,892

 
15,339,908

 
(684
)
Asset-backed securities
 
1,530,147

 
63,096

 
24,504

 
1,568,739

 
(37,382
)
Residential mortgage-backed securities
 
74,403

 
1,813

 
969

 
75,247

 
(50
)
Commercial mortgage-backed securities
 
1,287,600

 
3,725

 
45,827

 
1,245,498

 

Collateralized debt obligations
 
936,268

 
870

 
1,448

 
935,690

 

Total fixed maturities
 
$
22,696,473

 
$
452,689


$
598,860


$
22,550,302


$
(38,116
)
 
 
 
 
 
 
 
 
 
 
 
(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 $80,673. 

13

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




 
 
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.

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. 
 
September 30, 2018
 
Amortized cost
 
Estimated fair value
Maturing in one year or less
$
624,398

 
$
623,752

Maturing after one year through five years
3,470,116

 
3,451,165

Maturing after five years through ten years
8,251,124

 
8,071,691

Maturing after ten years
5,419,415

 
5,501,579

Mortgage-backed and asset-backed securities
4,931,420

 
4,902,115

 Total fixed maturities
$
22,696,473

 
$
22,550,302


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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Proceeds from sales
$
433,643

 
$
339,051

 
$
1,911,262

 
$
2,810,599

Gross realized gains from sales
5,887

 
8,512

 
30,613

 
29,433

Gross realized losses from sales
3,650

 
2,993

 
19,722

 
24,330



14

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



Mortgage loans on real estate — The recorded investment of the mortgage loan portfolio categorized as performing was $4,365,962 and $4,005,960 as of September 30, 2018 and December 31, 2017, respectively.

The following table summarizes activity in the mortgage provision allowance:
 
Nine Months Ended September 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:
$
4,365,962

 
$
4,005,960

Individually evaluated for impairment
2,725

 
2,942

Collectively evaluated for impairment
4,363,237

 
4,003,018


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 $71,895 and $45,540 at September 30, 2018 and December 31, 2017, respectively.

Securities lending — Securities with a cost or amortized cost of $89,641 and estimated fair values of $84,511 were on loan under the program at September 30, 2018. There were no securities on loan at December 31, 2017. The Company received cash of $66,784 and securities with a fair value of $21,026 as collateral at September 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 following table summarizes the cash collateral liability under the securities lending program, by class of securities loaned:
 
 
 
 
September 30, 2018
 
December 31, 2017
Cash collateral liability by class of loaned security
 
 
 
 
 
 
U.S. government direct obligations and U.S. agencies
 
 
 
$
7,700

 
$

Corporate debt securities
 
 
 
59,084

 

Total
 
 
 
$
66,784

 
$


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.


15

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



Unrealized losses on fixed maturity investments classified as available-for-sale — The following tables summarize unrealized investment losses, including the non-credit-related portion of OTTI losses reported in AOCI, by class of investment:
 
 
September 30, 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
 
$
821,260


$
29,409


$
251,365


$
13,281


$
1,072,625


$
42,690

Obligations of U.S. states and their subdivisions
 
230,553


4,602


37,812


2,928


268,365


7,530

Corporate debt securities
 
8,692,153


291,447


2,291,736


184,445


10,983,889


475,892

Asset-backed securities
 
649,403


13,531


299,315


10,973


948,718


24,504

Residential mortgage-backed securities
 
3,395


70


9,621


899


13,016


969

Commercial mortgage-backed securities
 
745,307


22,217


366,889


23,610


1,112,196


45,827

Collateralized debt obligations
 
346,122


1,448






346,122


1,448

Total fixed maturities
 
$
11,488,193

 
$
362,724


$
3,256,738


$
236,136


$
14,744,931


$
598,860

Total number of securities in an unrealized loss position
 
 


1,061


 


385


 


1,446

 
 
 
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 $455,096, or 317%, from December 31, 2017 to September 30, 2018. The majority, or $333,252, 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 September 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 $121,844 from December 31, 2017 to September 30, 2018.  Corporate debt securities account for 78%, or $184,445, of the unrealized losses and OTTI greater than twelve months at September 30, 2018. Non-investment grade corporate debt securities account for $6,640 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.
 

16

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



Asset-backed and commercial mortgage-backed securities account for 15% of the unrealized losses and OTTI greater than twelve months at September 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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Beginning balance
$
49,683

 
$
77,411

 
$
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
(2,399
)
 
(5,273
)
 
(13,437
)
 
(11,527
)
Ending balance
$
47,284

 
$
72,138


$
47,284


$
72,138


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 $71,684 and $93,761 as of September 30, 2018, and December 31, 2017, respectively. The Company had pledged collateral related to these derivatives of $26,839 and $42,750 as of September 30, 2018, and December 31, 2017, respectively, in the normal course of business. If the credit-risk-related contingent features were triggered on September 30, 2018, the fair value of assets that could be required to settle the derivatives in a net liability position was $44,845.
 
At September 30, 2018, and December 31, 2017, the Company had pledged $39,130 and $52,330 of unrestricted cash collateral to counterparties in the normal course of business, while other counterparties had pledged $11,960 and $5,490 of unrestricted cash collateral to the Company to satisfy collateral netting agreements, respectively.
 
At September 30, 2018, the Company estimated $15,814 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. 
 

17

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



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.

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. 


18

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



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


$
5,037


$
5,037


$

Cross-currency swaps
886,018


(6,517
)

31,025


37,542

Total cash flow hedges
908,318

 
(1,480
)

36,062


37,542

 











Total derivatives designated as hedges
908,318


(1,480
)

36,062


37,542

 











Derivatives not designated as hedges:
 


 


 


 

Interest rate swaps
560,500


(262
)

681


943

Futures on equity indices
58,344







Interest rate futures
33,300







Interest rate swaptions
192,670


164


164



Other forward contracts
2,054,000


(5,084
)

976


6,060

Cross-currency swaps
573,703


(6,404
)

22,435


28,839

Total derivatives not designated as hedges
3,472,517

 
(11,586
)

24,256


35,842

Total derivative financial instruments
$
4,380,835

 
$
(13,066
)

$
60,318


$
73,384

 
 
 
 
 
 
 
 
(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.

19

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 nine months ended September 30, 2018, was $646,060, $1,453,024, $89,039, $183,639, and $1,735,100 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 September 30,
 
Three Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
Cash flow hedges:
 

 
 

 
 

 
 

 
Interest rate swaps
$
(596
)
 
$
115

 
$
579

 
$
1,175

(A)
Interest rate swaps

 
(653
)
 
443

 
(690
)
(B)
Cross-currency swaps
4,659

 
(22,573
)
 
3,696

 
(108
)
(A)
Total cash flow hedges
$
4,063

 
$
(23,111
)

$
4,718


$
377

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

20

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)
 
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
Cash flow hedges:
 

 
 

 
 

 
 

 
Interest rate swaps
$
(1,927
)
 
$
611

 
$
2,212

 
$
3,581

(A)
Interest rate swaps
29,030

 
(5,003
)
 
1,075

 
(2,357
)
(B)
Cross-currency swaps
29,403

 
(43,919
)
 
10,637

 
21

(A)
Total cash flow hedges
$
56,506

 
$
(48,311
)

$
13,924


$
1,245


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

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

 
 

 
Futures on equity indices
$

(A)
$
(583
)
(A)
Futures on equity indices
(2,511
)
(B)
(1,070
)
(B)
Interest rate swaps

(A)
492

(A)
Interest rate swaps
(6,651
)
(B)

(B)
Interest rate futures

(A)
(40
)
(A)
Interest rate futures
(146
)
(B)
18

(B)
Interest rate swaptions

(A)
(6
)
(A)
Interest rate swaptions
1,003

(B)
(73
)
(B)
Other forward contracts

(A)
(571
)
(A)
Other forward contracts
(5,457
)
(B)
7,264

(B)
Cross-currency swaps

(A)
(16,046
)
(A)
Cross-currency swaps
5,570

(B)

(B)
Total derivatives not designated as hedging instruments
$
(8,192
)
 
$
(10,615
)
 
(A) Net investment income.
(B) Represents investment (losses) gains, net.

21

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



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

 
 

 
Futures on equity indices
$

(A)
$
(917
)
(A)
Futures on equity indices
(4,656
)
(B)
(3,890
)
(B)
Interest rate swaps

(A)
3,919

(A)
Interest rate swaps
(20,953
)
(B)

(B)
Interest rate futures

(A)
62

(A)
Interest rate futures
(31
)
(B)
(183
)
(B)
Interest rate swaptions

(A)
(37
)
(A)
Interest rate swaptions
852

(B)
(224
)
(B)
Other forward contracts

(A)
(3,151
)
(A)
Other forward contracts
(27,400
)
(B)
20,383

(B)
Cross-currency swaps

(A)
(38,297
)
(A)
Cross-currency swaps
18,165

(B)

(B)
Total derivatives not designated as hedging instruments
$
(34,023
)
 
$
(22,335
)
 
(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 an asset of $6,849 and a liability of $11,095 at September 30, 2018, and December 31, 2017, respectively. The changes in fair value of the GLWB were a gain of $7,362 and a loss of $626 for the three months ended September 30, 2018 and 2017, respectively, and a gain of $17,944 and a loss of $4,509 for the nine months ended September 30, 2018 and 2017, respectively.


22

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: 
 
 
September 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)
 
$
60,318


$
(49,741
)

$
(8,939
)

$
1,638

Derivative instruments (liabilities) (3)
 
$
73,363

 
$
(49,741
)
 
$
(20,588
)
 
$
3,034

 
 
 
 
 
 
 
 
 
(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.





23

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
 
September 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: