Part I Financial Information

Item1. Interim Financial Statements

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Balance Sheets

March 31, 2014 and December 31, 2013

(In Thousands, Except Share Amounts)

(Unaudited)

	March 31, 2014		December 31, 2013
Assets
Investments:
Fixed maturities, available-for-sale, at fair value (amortized cost $15,614,905 and $17,807,359)	$	16,569,435	$	18,469,544
Fixed maturities, held for trading, at fair value (amortized cost $352,598 and $333,892)	358,686		336,055
Mortgage loans on real estate (net of allowances of $2,890 and $2,890)	3,182,905		3,134,255
Policy loans	4,182,605		4,185,472
Short-term investments, available-for-sale (amortized cost $2,662,176 and $294,287)	2,662,176		294,287
Limited partnership and other corporation interests	69,585		79,236
Other investments	17,476		17,574
Total investments	27,042,868		26,516,423

Other assets:
Cash	14,937		7,491
Reinsurance receivable	589,069		588,533
Deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”)	319,199		343,288
Investment income due and accrued	299,530		270,024
Collateral under securities lending agreements	95,997		18,534
Due from parent and affiliates	54,171		91,057
Goodwill	105,255		105,255
Other intangible assets	14,394		15,155
Other assets	722,779		707,856
Assets of discontinued operations	28,183		29,007
Separate account assets	27,355,843		26,630,904
Total assets	$	56,642,225	$	55,323,527

See notes to condensed consolidated financial statements.

(Continued)

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Balance Sheets

March 31, 2014 and December 31, 2013

(In Thousands, Except Share Amounts)

(Unaudited)

	March 31, 2014		December 31, 2013

Liabilities and stockholder’s equity
Policy benefit liabilities:
Future policy benefits	$	24,874,693	$	24,609,155
Policy and contract claims	345,645		345,261
Policyholders’ funds	315,441		345,689
Provision for policyholders’ dividends	62,715		62,797
Undistributed earnings on participating business	17,850		10,776
Total policy benefit liabilities	25,616,344		25,373,678

General liabilities:
Due to parent and affiliates	548,295		541,793
Commercial paper	98,691		98,990
Payable under securities lending agreements	95,997		18,534
Deferred income tax liabilities, net	201,807		106,849
Other liabilities	667,440		648,040
Liabilities of discontinued operations	28,183		29,007
Separate account liabilities	27,355,843		26,630,904
Total liabilities	54,612,600		53,447,795

Commitments and contingencies

Stockholder’s equity:
Preferred stock, $1 par value, 50,000,000 shares authorized; none issued and outstanding	—		—
Common stock, $1 par value, 50,000,000 shares authorized; 7,032,000 shares issued and outstanding	7,032		7,032
Additional paid-in capital	774,792		774,115
Accumulated other comprehensive income	497,020		345,754
Retained earnings	750,781		748,831
Total stockholder’s equity	2,029,625		1,875,732
Total liabilities and stockholder’s equity	$	56,642,225	$	55,323,527

See notes to condensed consolidated financial statements.

(Concluded)

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Income

Three Months Ended March 31, 2014 and 2013

(In Thousands)

(Unaudited)

	Three months ended March 31,
	2014			2013

Revenues:
Premium income	$	131,854		$	178,321
Fee income	166,513			146,946
Other revenue	—			7,355
Net investment income	300,023			285,362
Realized investment gains (losses), net:
Total other-than-temporary gains (losses)	(688		)	(420		)
Other-than-temporary (gains) losses transferred to other comprehensive loss	—			(434		)
Other realized investment gains (losses), net	27,597			15,593
Total realized investment gains (losses), net	26,909			14,739
Total revenues	625,299			632,723
Benefits and expenses:
Life and other policy benefits	149,889			145,592
Increase in future policy benefits	4,580			45,272
Interest credited or paid to contractholders	132,133			126,931
Provision for policyholders’ share of (losses) earnings on participating business	(352		)	4,979
Dividends to policyholders	20,129			21,852
Total benefits, net	306,379			344,626
General insurance expenses	164,086			158,476
Amortization of DAC and VOBA	403			15,506
Interest expense	9,326			9,339
Total benefits and expenses, net	480,194			527,947
Income before income taxes	145,105			104,776
Income tax expense	50,354			37,941
Net income	$	94,751		$	66,835

See notes to condensed consolidated financial statements.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Comprehensive Income (Loss)

Three Months Ended March 31, 2014 and 2013

(In Thousands)

(Unaudited)

	Three months ended March 31,
	2014			2013

Net income	$	94,751		$	66,835
Components of other comprehensive income (loss)
Unrealized holding gains (losses) arising on available-for-sale fixed maturity investments	311,298			(41,181		)
Unrealized holding gains (losses) arising on cash flow hedges	884			23,948
Reclassification adjustment for (gains) losses realized in net income	(22,218		)	(24,580		)
Net unrealized gains (losses) related to investments	289,964			(41,813		)
Future policy benefits, DAC and VOBA adjustments	(57,248		)	15,359
Other comprehensive income (loss) before income taxes	232,716			(26,454		)
Income tax expense (benefit) related to items of other comprehensive income	81,450			(9,259		)
Other comprehensive income (loss) (1)	151,266			(17,195		)
Total comprehensive income (loss)	$	246,017		$	49,640

(1) Other comprehensive income (loss) includes the non-credit component of impaired losses on fixed maturities available-for-sale, net of future policy benefits, DAC and VOBA adjustments and income taxes, in the amounts of $1,772 and $3,726 for the three months ended March 31, 2014 and 2013, respectively.

See notes to condensed consolidated financial statements.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Stockholder’s Equity

Three Months Ended March 31, 2014 and 2013

(In Thousands)

(Unaudited)

	Three months ended March 30, 2014
					Accumulated
			Additional		other
	Common		paid-in		comprehensive		Retained
	stock		capital		income (loss)		earnings			Total
Balances, January 1, 2014	$	7,032	$	774,115	$	345,754	$	748,831		$	1,875,732
Net income							94,751			94,751
Other comprehensive income (loss), net of income taxes					151,266					151,266
Dividends							(92,801		)	(92,801		)
Capital contribution - stock-based compensation			650							650
Income tax benefit on stock options exercised			27							27
Balances, March 31, 2014	$	7,032	$	774,792	$	497,020	$	750,781		$	2,029,625

	Three months ended March 31, 2013
					Accumulated
			Additional		other
	Common		paid-in		comprehensive			Retained
	stock		capital		income (loss)			earnings			Total
Balances, January 1, 2013	$	7,032	$	771,041	$	635,699		$	722,525		$	2,136,297
Net income								66,835			66,835
Other comprehensive income (loss), net of income taxes					(17,195		)				(17,195		)
Dividends								(44,435		)	(44,435		)
Capital contribution - stock-based compensation			608								608
Income tax benefit on stock-based compensation			32								32
Balances, March 31, 2013	$	7,032	$	771,681	$	618,504		$	744,925		$	2,142,142

See notes to condensed consolidated financial statements.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31, 2014 and 2013

(In Thousands)

(Unaudited)

	Three months ended March 31,
	2014			2013
				(Restated, See Note 2)
Net cash provided by operating activities	$	112,280		$	352,059

Cash flows from investing activities:
Proceeds from sales, maturities and redemptions of investments:
Fixed maturities, available-for-sale	2,648,898			2,273,076
Mortgage loans on real estate	40,355			23,305
Limited partnership interests, other corporation interests and other investments	4,574			11,314
Purchases of investments:
Fixed maturities, available-for-sale	(409,356		)	(918,045		)
Mortgage loans on real estate	(89,239		)	(39,877		)
Limited partnership interests, other corporation interests and other investments	(606		)	(669		)
Net change in short-term investments	(2,367,889		)	(1,659,437		)
Net change in policy loans	(18		)	69
Purchases of furniture, equipment and software	(5,365		)	(3,211		)
Net cash used in investing activities	(178,646		)	(313,475		)

Cash flows from financing activities:
Contract deposits	576,724			459,640
Contract withdrawals	(436,178		)	(499,091		)
Change in due to/from parent and affiliates	43,388			(10,296		)
Dividends paid	(92,801		)	(44,435		)
Proceeds from financing element derivatives	—			45,031
Payments for and interest (paid) received on financing element derivatives, net	(4,029		)	(2,647		)
Net commercial paper borrowings	(299		)	(1,201		)
Change in book overdrafts	(13,020		)	9,554
Income tax benefit of stock option exercises	27			32
Net cash provided by (used in) financing activities	73,812			(43,413		)

Net increase (decrease) in cash	7,446			(4,829		)
Cash, beginning of year	7,491			11,387
Cash, end of period	$	14,937		$	6,558

See notes to condensed consolidated financial statements.

(Continued)

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

1. Organization and Basis of Presentation

Organization

Great-West Life & Annuity Insurance Company (“GWLA”) and its subsidiaries (collectively, the “Company”) is a direct wholly-owned subsidiary of GWL&A Financial Inc. (“GWL&A Financial”), a holding company formed in 1998. GWL&A Financial is a direct wholly-owned subsidiary of Great-West Lifeco U.S. Inc. (“Lifeco U.S.”) and an indirect wholly-owned subsidiary of Great-West Lifeco Inc. (“Lifeco”), a Canadian holding company. The Company offers a wide range of life insurance, retirement and investment products to individuals, businesses and other private and public organizations throughout the United States. The Company is an insurance company domiciled in the State of Colorado and is subject to regulation by the Colorado Division of Insurance.

Basis of Presentation

The 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, 2013, which was derived from the Company’s audited financial statements, and the unaudited interim condensed consolidated financial statements as of and for the three months ended March 31, 2014, 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. The Company believes that the disclosures made are adequate such that the information presented is not misleading.

In the opinion of management, these statements include all normal recurring adjustments necessary to fairly present the Company’s condensed consolidated results of operations, financial position and cash flows as of March 31, 2014, and for all periods presented. 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, 2013.

The condensed consolidated results of operations and condensed consolidated statement of cash flows for the three months ended March 31, 2014 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. Significant estimates are required to account for items and matters such as, but not limited to, the valuation of investments and derivatives in the absence of quoted market values, impairment of investments, accounting for derivative financial instruments, valuation of DAC, valuation of unearned revenue liabilities (“URL”), valuation of policy benefit liabilities, valuation of employee benefits plan obligation and the valuation of deferred tax assets or liabilities, net. Actual results could differ from those estimates.

2. Restatement of the March 31, 2013 Statements of Cash Flows

The accompanying statements of cash flows for the three months ended March 31, 2013 has been restated to reflect the following corrections of misstatements identified subsequent to the issuance of the March 31, 2013 quarterly financial statements:

· During the fourth quarter of 2013, the Company recorded a cumulative out-of-period adjustment in connection with certain derivative instruments not qualifying for hedge accounting due to ineffectiveness. These derivative instruments were deemed to have a financing element at inception which should be classified as a financing activity instead of an operating activity within the statement of cash flows. As a result, net cash provided by operating activities was overstated by $42,384 and net cash provided by financing activities was understated by the same amount for the three months ended March 31, 2013. The Company believes the effects of this error are immaterial to the prior period.

· The Company holds certain forward settling to be announced (“TBA”) securities that are accounted for as derivative instruments as the Company does not regularly accept delivery of such securities when issued. In certain limited circumstances, the Company will accept delivery of the securities from one broker and then immediately deliver the securities to another broker. In these limited circumstances, the Company recorded the purchase and sale of the securities as an equal and offsetting purchase and sale of investments in the net cash provided by investing activities. Because the Company did not hold the securities as an investment, the cash flows should be accounted for net within operating activities. As a result of this misstatement, both proceeds from sales, maturities and redemptions of investments and purchases of investments were overstated by $1,360,676 for the three months ended March 31, 2013. The Company believes the effects of this error are immaterial to the prior period.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

The following table summarizes the effect of the adjustments the Company made to its financial statements:

	As previously reported			Adjustments			As restated
Statements of Cash Flows
Net cash provided by operating activities	$	394,443		$	(42,384	)	$	352,059
Proceeds from sales, maturities and redemptions of investments:
Fixed maturities, available-for-sale	3,633,752			(1,360,676		)	2,273,076
Purchases of investments:
Fixed maturities, available-for-sale	(2,278,721		)	1,360,676			(918,045		)
Proceeds from financing element derivatives	—			45,031			45,031
Payments for and interest (paid) received on financing element derivatives, net	—			(2,647		)	(2,647		)
Net cash provided by financing activities	(85,797		)	42,384			(43,413		)

3. Application of Recent Accounting Pronouncements

Future adoption of new accounting pronouncements

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-01 Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (“ASU No. 2014-01”). ASU No. 2014-01 permits reporting entities to make an accounting election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those pre-existing investments. The Company uses the effective yield method for its investments in qualified affordable housing projects. ASU 2014-01 is effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. The Company is currently evaluating the impact of this guidance on its condensed consolidated financial statements.

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 capital and surplus and statutory net gain from operations. Prior to the payment of any dividends, the Company seeks approval from the Colorado Insurance Commissioner. During the three months ended March 31, 2014 and 2013, the Company paid dividends of $92,801 and $44,435, respectively, to its parent, GWL&A Financial.

5. Related Party Transactions

On January 1, 2013, the Company terminated its reinsurance agreement with an affiliate, The Canada Life Assurance Company (“CLAC”), pursuant to which it had ceded certain participating life business on a coinsurance basis. As a result of that termination, on January 1, 2013, the Company recorded the following increases (decreases) in its statement of income in connection with the termination of the reinsurance agreement:

Premium income	$	42,297
Other revenue	7,355
Total	49,652

Increase in future policy benefits	41,297
Dividends to policyholders	1,000
Total	42,297

Participating policyholders’ net income before income taxes	7,355
Income tax expense	2,574
Participating policyholders’ income	4,781

Provision for policyholders’ share of earnings on participating business	4,781
Net income available to shareholder	$	—

Participating policyholders share in the financial results of the participating business in the form of policyholder dividends. The policyholder dividends can be distributed directly to the policyholders in the form of cash or through an increase in benefits such as paid-up additions. The participating policyholder earnings that cannot be distributed to the Company’s shareholder and have not been distributed to participating policyholders are not included in the Company’s net income and are reflected in liabilities in undistributed earnings on participating business in the Company’s balance sheets. As such, the transaction above had no impact on net income available to the Company’s shareholder.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

6. Summary of Investments

The following tables summarize fixed maturity investments classified as available-for-sale and the non-credit-related component of other-than-temporary impairments (“OTTI”) in accumulated other comprehensive income (loss) (“AOCI”):

	March 31, 2014
	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	$	869,362	$	49,369	$	6,482	$	912,249	$	—
Obligations of U.S. states and their subdivisions	1,833,739		230,402		7,107		2,057,034		—
Foreign government securities	2,577		—		13		2,564		—
Corporate debt securities (2)	10,467,062		670,107		130,282		11,006,887		(2,574		)
Asset-backed securities	1,480,864		143,357		18,909		1,605,312		(103,259		)
Residential mortgage-backed securities	226,792		10,902		3,177		234,517		(297		)
Commercial mortgage-backed securities	723,020		23,082		6,347		739,755		—
Collateralized debt obligations	11,489		12		384		11,117		—
Total fixed maturities	$	15,614,905	$	1,127,231	$	172,701	$	16,569,435	$	(106,130	)

(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 $157,742 and estimated fair value of $131,957.

	December 31, 2013
	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	$	3,044,185	$	43,827	$	23,373	$	3,064,639	$	—
Obligations of U.S. states and their subdivisions	1,763,797		196,742		16,952		1,943,587		—
Foreign government securities	2,617		—		14		2,603		—
Corporate debt securities (2)	10,454,252		568,261		223,532		10,798,981		(2,553		)
Asset-backed securities	1,553,510		131,277		29,150		1,655,637		(98,502		)
Residential mortgage-backed securities	244,723		8,335		3,473		249,585		(129		)
Commercial mortgage-backed securities	731,688		21,951		11,515		742,124		—
Collateralized debt obligations	12,587		14		213		12,388		—
Total fixed maturities	$	17,807,359	$	970,407	$	308,222	$	18,469,544	$	(101,184	)

(2) Includes perpetual debt investments with amortized cost of $172,054 and estimated fair value of $143,644.

See Note 9 for additional discussion regarding fair value measurements.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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

	March 31, 2014
	Amortized cost		Estimated fair value
Maturing in one year or less	$	549,343	$	578,736
Maturing after one year through five years	3,374,455		3,667,227
Maturing after five years through ten years	3,791,476		4,034,551
Maturing after ten years	4,801,497		5,008,965
Mortgage-backed and asset-backed securities	3,098,134		3,279,956
	$	15,614,905	$	16,569,435

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

The following table summarizes information regarding the sales of securities classified as available-for-sale:

	Three months ended March 31,
	2014		2013
Proceeds from sales	$	2,239,661	$	3,301,164
Gross realized gains from sales	19,773		33,213
Gross realized losses from sales	1,062		7,276

Mortgage loans on real estate — The following table summarizes the carrying value of the mortgage loan portfolio by component:

	March 31, 2014			December 31, 2013
Principal	$	3,174,070		$	3,124,626
Unamortized premium (discount) and fees, net	11,725			12,519
Mortgage provision allowance	(2,890		)	(2,890		)
Total mortgage loans	$	3,182,905		$	3,134,255

The following table summarizes the recorded investment of the mortgage loan portfolio by risk assessment category:

	March 31, 2014		December 31, 2013
Performing	$	3,180,766	$	3,137,145
Non-performing	5,029		—
Total	$	3,185,795	$	3,137,145

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

The following table summarizes activity in the mortgage provision allowance:

	Three months ended March 31, 2014		Year ended December 31, 2013
	Commercial mortgages		Commercial mortgages
Beginning balance	$	2,890	$	2,890
Provision increases	—		273
Charge-off	—		(273		)
Ending balance	$	2,890	$	2,890

Allowance ending balance by basis of impairment method:
Collectively evaluated for impairment	$	2,890	$	2,890

Recorded investment balance in the mortgage loan portfolio, gross of allowance, by basis of impairment method:	$	3,185,795	$	3,137,145
Individually evaluated for impairment	13,771		13,906
Collectively evaluated for impairment	3,172,024		3,123,239

The table below summarizes the recorded investment of the mortgage loan portfolio by aging category:

	Current		Loan balances 30-59 days past due		Loan balances 60-89 days past due		Loan balances greater than 90 days past due or in process of foreclosure		Total portfolio balance
Commercial mortgages:
March 31, 2014	$	3,178,202	$	7,593	$	—	$	—	$	3,185,795
December 31, 2013	3,137,145		—		—		—		3,137,145

Limited partnership and other corporation interests — At March 31, 2014 and December 31, 2013, the Company had $69,585 and $79,236, respectively, invested in limited partnership and other corporation interests. Included in limited partnership interests are investments in low-income housing partnerships that qualify for federal and state tax credits and ownership interests in pooled investment funds.

The Company has determined each investment in low-income housing limited partnerships (“LIHLP”) to be considered a variable interest entity (“VIE”). Although the Company is involved with the VIE, it determined that consolidation was not required because it has no power to direct the activities that most significantly impact the entities’ economic performance.

As a 99% limited partner in various upper-tier LIHLPs, the Company has few or no voting rights, but expects to receive the tax credits allocated to the partnership and operating losses from depreciation and interest expense. The Company is only an equity investor and views the LIHLP as a single investment. The general partner of the LIHLPs is most closely involved in the development and management of the LIHLP project. The general partner has a small ownership of the partnership, which requires a de minimus capital contribution. This equity investment is reduced based on fees paid at inception by the limited partner; therefore, the general partner does not qualify as having an equity investment at risk in the LIHLP project. However, the limited partner does not have the direct or indirect ability through voting rights or similar rights to make decisions about the general partner’s activities that have a significant effect on the success of the partnership.

The carrying value and maximum exposure to loss in relation to the activities of the VIEs was $23,745 and $31,563 at March 31, 2014 and December 31, 2013, respectively.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

Special deposits and securities lending — The Company had securities on deposit with government authorities as required by certain insurance laws with fair values of $14,371 and $14,072 at March 31, 2014 and December 31, 2013, respectively.

The Company participates in a securities lending program whereby securities are loaned to third parties. Securities with a cost or amortized cost of $99,835 and $28,178 and estimated fair values of $100,016 and $27,166 were on loan under the program at March 31, 2014 and December 31, 2013, respectively. The Company received restricted cash of $95,997 and $18,534 and securities with a fair value of $6,611 and $9,424 as collateral at March 31, 2014 and December 31, 2013, respectively.

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

	March 31, 2014
	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	$	173,157	$	5,708	$	16,931	$	774	$	190,088	$	6,482
Obligations of U.S. states and their subdivisions	205,330		6,914		880		193		206,210		7,107
Foreign government securities	2,565		13		—		—		2,565		13
Corporate debt securities	1,734,823		61,149		604,637		69,133		2,339,460		130,282
Asset-backed securities	189,404		4,725		287,434		14,184		476,838		18,909
Residential mortgage-backed securities	3,179		241		23,001		2,936		26,180		3,177
Commercial mortgage-backed securities	83,630		2,974		50,190		3,373		133,820		6,347
Collateralized debt obligations	11,088		384		—		—		11,088		384
Total fixed maturities	$	2,403,176	$	82,108	$	983,073	$	90,593	$	3,386,249	$	172,701

Total number of securities in an unrealized loss position			276				116				392

	December 31, 2013
	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	$	2,399,373	$	23,156	$	5,192	$	217	$	2,404,565	$	23,373
Obligations of U.S. states and their subdivisions	214,979		16,713		837		239		215,816		16,952
Foreign government securities	2,603		14		—		—		2,603		14
Corporate debt securities	2,632,093		144,367		511,376		79,165		3,143,469		223,532
Asset-backed securities	305,377		12,763		305,740		16,387		611,117		29,150
Residential mortgage-backed securities	32,131		3,454		1,011		19		33,142		3,473
Commercial mortgage-backed securities	177,395		6,703		48,825		4,812		226,220		11,515
Collateralized debt obligations	—		—		12,356		213		12,356		213
Total fixed maturities	$	5,763,951	$	207,170	$	885,337	$	101,052	$	6,649,288	$	308,222

Total number of securities in an unrealized loss position			458				109				567

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

Fixed maturity investments — Total unrealized losses and OTTI decreased by $135,521, or 44%, from December 31, 2013 to March 31, 2014. The majority, or $125,062, of the decrease was in the less than twelve months category. The decrease in unrealized losses was across most asset classes and reflects lower interest rates and tightening of credit spreads, although economic uncertainty in certain asset classes still remains.

Total unrealized losses greater than twelve months decreased by $10,459 from December 31, 2013 to March 31, 2014. Corporate debt securities account for 76%, or $69,133, of the unrealized losses and OTTI greater than twelve months at March 31, 2014. Non-investment grade corporate debt securities account for $10,727 of the unrealized losses and OTTI greater than twelve months and $9,353 of the losses are on perpetual debt investments issued by banks in the United Kingdom, which have bank ratings of BBB+ or higher. The Company determined the majority of the unrealized losses on perpetual securities were due to widening credit spreads and low London Interbank Offered Rate (“LIBOR”) based coupon rates on the securities, which are not expected to compromise the issuers’ ability to service the investments. Management does not have the intent to sell these assets; therefore, an OTTI was not recognized in earnings.

Asset-backed securities account for 16% of the unrealized losses and OTTI greater than twelve months at March 31, 2014. 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.

See Note 9 for additional discussion regarding fair value measurements.

Other-than-temporary impairment recognition — The OTTI on fixed maturity securities where the loss portion is bifurcated and the credit related component is recognized in realized investment gains (losses) is summarized as follows:

	Three months ended March 31,
	2014		2013
Beginning balance	$	167,961	$	167,788
Additional credit loss recognized on securities previously impaired	—		173
Ending balance	$	167,961	$	167,961

7. Derivative Financial Instruments

Derivative transactions are generally entered into pursuant to master agreements and other contracts 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.

Certain derivative 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 aggregate fair value of derivative instruments with credit-risk-related contingent features that were in a net liability position was $166,826 and $167,743 as of March 31, 2014 and December 31, 2013, respectively. The Company had pledged collateral related to these derivatives of $141,700 and $143,540 as of March 31, 2014 and December 31, 2013, respectively, in the normal course of business. If the credit-risk-related contingent features were triggered on March 31, 2014 the fair value of assets that could be required to settle the derivatives in a net liability position was $25,126.

At March 31, 2014 and December 31, 2013, the Company had pledged $141,959 and $143,710, respectively, of unrestricted cash collateral to counterparties in the normal course of business.

At March 31, 2014, the Company estimated $7,522 of net derivative gains related to cash flow hedges included in AOCI will be reclassified into net income within the next twelve months.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

The following tables summarize derivative financial instruments:

	March 31, 2014
			Net derivatives			Asset derivatives		Liability derivatives
	Notional amount		Fair value			Fair value (1)		Fair value (1)
Hedge designation/derivative type:
Derivatives designated as hedges:
Cash flow hedges:
Interest rate swaps	$	184,200	$	15,072		$	15,072	$	—
Cross-currency swaps	135,733		(8,203		)	—		8,203
Total cash flow hedges	319,933		6,869			15,072		8,203

Fair value hedges:
Interest rate swaps	78,000		3,883			4,022		139
Total fair value hedges	78,000		3,883			4,022		139

Total derivatives designated as hedges	397,933		10,752			19,094		8,342

Derivatives not designated as hedges:
Interest rate swaps	57,600		(946		)	1,292		2,238
Futures on equity indices	3,357		—			—		—
Interest rate futures	15,620		—			—		—
Interest rate swaptions	444,814		625			625		—
Other forward contracts	4,697,783		(6,343		)	1,569		7,912
Cross-currency swaps	532,726		(151,951		)	1,395		153,346

Total derivatives not designated as hedges	5,751,900		(158,615		)	4,881		163,496

Total cash flow hedges, fair value hedges and derivatives not designated as hedges	$	6,149,833	$	(147,863	)	$	23,975	$	171,838

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

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

	December 31, 2013
			Net derivatives			Asset derivatives		Liability derivatives
	Notional amount		Fair value			Fair value (1)		Fair value (1)
Hedge designation/derivative type:
Derivatives designated as hedges:
Cash flow hedges:
Interest rate swaps	$	184,200	$	13,829		$	13,829	$	—
Cross-currency swaps	102,545		(7,843		)	—		7,843
Total cash flow hedges	286,745		5,986			13,829		7,843

Fair value hedges:
Interest rate swaps	78,000		4,951			5,098		147
Total fair value hedges	78,000		4,951			5,098		147

Total derivatives designated as hedges	364,745		10,937			18,927		7,990

Derivatives not designated as hedges:
Interest rate swaps	55,600		(2,038		)	1,454		3,492
Futures on equity indices	3,483		—			—		—
Interest rate futures	16,233		—			—		—
Interest rate swaptions	494,774		1,176			1,176		—
Cross-currency swaps	557,676		(154,340		)	1,921		156,261

Total derivatives not designated as hedges	1,127,766		(155,202		)	4,551		159,753

Total cash flow hedges, fair value hedges and derivatives not designated as hedges	$	1,492,511	$	(144,265	)	$	23,478	$	167,743

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

The Company had 1 and 46 interest rate swap transactions with an average notional amount of $2,000 and $3,175 during the three months ended March 31, 2014 and the year ended December 31, 2013, respectively. During the three months ended March 31, 2014 and the year ended December 31, 2013, the Company had 3 and 17 cross-currency swap transactions with an average notional amount of $19,380 and $13,881, respectively. The Company had 525 and 695 futures transactions with an average number of contracts per transaction of 4 and 9 during the three months ended March 31, 2014 and the year ended December 31, 2013, respectively. The Company had 13 and 52 swaption transactions with an average notional amount of $4,926 and $5,040 during the three months ended March 31, 2014 and the year ended December 31, 2013, respectively. The Company had 259 and 986 forward settling TBA security transactions with an average notional amount of $55,957 and $47,566 during the three months ended March 31, 2014 and the year ended December 31, 2013, respectively.

Significant changes in the derivative notional amount during the three months ended March 31, 2014 were primarily due to the following:

· The net decrease of $48,699 in interest rate swaps, interest rate swaptions and futures was primarily due to a change in the Company’s interest rate risk hedging strategy.

· The net increase of $8,238 in cross-currency swaps was due to additional swaps opened to hedge newly purchased assets denominated in British pounds and Canadian dollars.

· The increase of $4,697,783 in other forward contracts since December 31, 2013 was due to the Company’s positions being closed at year end.

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

The Company recognized total derivative gains (losses) in net investment income of ($6,010) and $5,077 for the three-month periods ended March 31, 2014 and 2013, respectively. The Company recognized net investment gains (losses) on closed derivative positions of $6,561 and ($9,201) for the three-month periods ended March 31, 2014 and 2013, respectively. The preceding amounts are shown net of any gains (losses) on the hedged assets in a fair value hedge that has been recorded in net investment income.

The following tables present the effect of derivative instruments in the condensed consolidated statements of income reported by cash flow hedges, fair value hedges and economic hedges:

	Gain (loss) recognized
	in OCI on derivatives						Gain (loss) reclassified from OCI
	(Effective portion)						into net income (Effective portion)
	Three months ended March 31,						Three months ended March 31,
	2014			2013			2014		2013
Cash flow hedges:
Interest rate swaps	$	1,244		$	(2,693	)	$	563	$	691	(A)
Cross-currency swaps	(360		)	26,641			—		—
Interest rate futures	—			—			17		16		(A)
Total cash flow hedges	$	884		$	23,948		$	580	$	707

(A) Net investment income.

	Gain (loss) on derivatives						Gain (loss) on hedged assets
	recognized in net income						recognized in net income
	Three months ended March 31,						Three months ended March 31,
	2014			2013			2014		2013
Fair value hedges:
Interest rate swaps	$	(1,067	)	$	1,892	(A)	$	—	$	—
Interest rate swaps	—			384		(B)	—		—
Items hedged in interest rate swaps	—			—			1,067		(1,892		)(A)
Items hedged in interest rate swaps	—			—			—		(384		)(B)
Total fair value hedges	$	(1,067	)	$	2,276		$	1,067	$	(2,276	)

(A) Net investment income.

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

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

	Gain (loss) on derivatives recognized in net income
	Three months ended March 31,
	2014			2013
Derivatives not designated as hedging instruments:
Futures on equity indices	$	77	(A)	$	24	(A)
Futures on equity indices	(163		)(B)	(234		)(B)
Interest rate swaps	1,109		(A)	(515		)(A)
Interest rate swaps	—		(B)	(163		)(B)
Interest rate futures	(3		)(A)	(1,380		)(A)
Interest rate futures	(24		)(B)	1,472		(B)
Interest rate swaptions	202		(A)	690		(A)
Interest rate swaptions	(833		)(B)	(625		)(B)
Other forward contracts	(6,343		)(A)	5,551		(A)
Other forward contracts	7,581		(B)	(9,651		)(B)
Cross-currency swaps	(1,632		)(A)	—		(A)

Total derivatives not designated as hedging instruments	$	(29	)	$	(4,831	)

(A) Net investment income.

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

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

8. 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 International Swaps and Derivatives Association (“ISDA”) Master Agreements or Master Securities Forward Transaction Agreements (“MSFTA”) 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 ISDA and MSFTA Master Agreements generally include provisions which require both the pledging and accepting of collateral in connection with its derivative transactions. These provisions have the effect of securing each party’s position to the extent of collateral held. Short-term reverse repurchase agreements also include collateral provisions with the counterparty. The following tables summarize the effect of master netting arrangements on the Company’s financial position in the normal course of business and in the event of default or bankruptcy of the Company’s counterparties:

	March 31, 2014
			Gross fair value not offset
			in balance sheets
	Gross fair value of		Financial			Cash collateral			Net
Financial instruments (assets):	recognized assets (1)		instruments			received			fair value
Derivative instruments (2)	$	24,528	$	(24,289	)	$	(17	)	$	222
Short-term reverse repurchase agreements (3)	600,000		(600,000		)	—			—
Total financial instruments (assets)	$	624,528	$	(624,289	)	$	(17	)	$	222

	March 31, 2014
			Gross fair value not offset
			in balance sheets
	Gross fair value of		Financial			Cash collateral			Net
Financial instruments (liabilities):	recognized liabilities (1)		instruments			pledged			fair value
Derivative instruments (4)	$	168,473	$	(24,289	)	$	(141,071	)	$	3,113

(1) The gross fair value of derivative instrument and short-term reverse repurchase agreement assets are 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 and includes income and expense accruals.

(3) The estimated fair value of short-term reverse repurchase agreement assets is reported in short-term investments, available-for-sale 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 and includes income and expense accruals.

	December 31, 2013
			Gross fair value not offset
			in balance sheets
	Gross fair value of		Financial			Cash collateral			Net
Financial instruments:	recognized assets/liabilities (1)		instruments			received/(pledged)			fair value
Derivative instruments (assets) (2)	$	25,250	$	(25,023	)	$	—		$	227
Derivative instruments (liabilities) (3)	171,387		(25,023		)	(143,540		)	2,824

(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 and includes income and expense accruals.

(3) The estimated fair value of derivative instrument liabilities is reported in other liabilities in the condensed consolidated balance sheets and includes income and expense accruals.

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

9. 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
	March 31, 2014
	Quoted prices		Significant
	in active		other		Significant
	markets for		observable		unobservable
	identical assets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets
Fixed maturities available-for-sale:
U.S. government direct obligations and U.S. agencies	$	—	$	912,249	$	—	$	912,249
Obligations of U.S. states and their subdivisions	—		2,057,034		—		2,057,034
Foreign government securities	—		2,564		—		2,564
Corporate debt securities	—		11,000,364		6,523		11,006,887
Asset-backed securities	—		1,359,287		246,025		1,605,312
Residential mortgage-backed securities	—		234,517		—		234,517
Commercial mortgage-backed securities	—		739,755		—		739,755
Collateralized debt obligations	—		11,088		29		11,117
Total fixed maturities available- for-sale	—		16,316,858		252,577		16,569,435
Fixed maturities held for trading:
U.S. government direct obligations and U.S. agencies	—		258,871		—		258,871
Corporate debt securities	—		58,356		—		58,356
Asset-backed securities	—		40,413		—		40,413
Commercial mortgage-backed securities	—		1,046		—		1,046
Total fixed maturities held for trading	—		358,686		—		358,686
Short-term investments available-for-sale	322,175		2,340,001		—		2,662,176
Collateral under securities lending agreements	95,997		—		—		95,997
Collateral under derivative counterparty collateral agreements	141,959		—		—		141,959
Derivative instruments designated as hedges:
Interest rate swaps	—		19,094		—		19,094
Derivative instruments not designated as hedges:
Interest rate swaps	—		1,292		—		1,292
Interest rate swaptions	—		625		—		625
Other forward contracts	—		1,569		—		1,569
Cross-currency swaps	—		1,395		—		1,395
Total derivative instruments	—		23,975		—		23,975
Separate account assets	15,353,665		12,002,178		—		27,355,843
Total assets	$	15,913,796	$	31,041,698	$	252,577	$	47,208,071

Liabilities
Payable under securities lending agreements	$	95,997	$	—	$	—	$	95,997
Derivative instruments designated as hedges:
Interest rate swaps	—		139		—		139
Cross-currency swaps	—		8,203		—		8,203
Derivative instruments not designated as hedges:
Interest rate swaps	—		2,238		—		2,238
Other forward contracts	—		7,912		—		7,912
Cross-currency swaps	—		153,346		—		153,346
Total derivative instruments	—		171,838		—		171,838
Separate account liabilities (1)	—		78,880		—		78,880
Total liabilities	$	95,997	$	250,718	$	—	$	346,715

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

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

	Assets and liabilities measured at
	fair value on a recurring basis
	December 31, 2013
	Quoted prices		Significant
	in active		other		Significant
	markets for		observable		unobservable
	identical assets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets
Fixed maturities available-for-sale:
U.S. government direct obligations and U.S. agencies	$	—	$	3,064,639	$	—	$	3,064,639
Obligations of U.S. states and their subdivisions	—		1,943,587		—		1,943,587
Foreign government securities	—		2,603		—		2,603
Corporate debt securities	—		10,792,329		6,652		10,798,981
Asset-backed securities	—		1,402,679		252,958		1,655,637
Residential mortgage-backed securities	—		249,585		—		249,585
Commercial mortgage-backed securities	—		742,124		—		742,124
Collateralized debt obligations	—		12,356		32		12,388
Total fixed maturities available- for-sale	—		18,209,902		259,642		18,469,544
Fixed maturities held for trading:
U.S. government direct obligations and U.S. agencies	—		236,000		—		236,000
Corporate debt securities	—		58,171		—		58,171
Asset-backed securities	—		40,858		—		40,858
Commercial mortgage-backed securities	—		1,026		—		1,026
Total fixed maturities held for trading	—		336,055		—		336,055
Short-term investments available-for-sale	254,378		39,909		—		294,287
Collateral under securities lending agreements	18,534		—		—		18,534
Collateral under derivative counterparty collateral agreements	143,710		—		—		143,710
Derivative instruments designated as hedges:
Interest rate swaps	—		18,927		—		18,927
Derivative instruments not designated as hedges:
Interest rate swaps	—		1,454		—		1,454
Interest rate swaptions	—		1,176		—		1,176
Cross-currency swaps	—		1,921		—		1,921
Total derivative instruments	—		23,478		—		23,478
Separate account assets	14,861,680		11,769,224		—		26,630,904
Total assets	$	15,278,302	$	30,378,568	$	259,642	$	45,916,512

Liabilities
Payable under securities lending agreements	$	18,534	$	—	$	—	$	18,534
Derivative instruments designated as hedges:
Interest rate swaps	—		147		—		147
Cross-currency swaps	—		7,843		—		7,843
Derivative instruments not designated as hedges:
Interest rate swaps	—		3,492		—		3,492
Cross-currency swaps	—		156,261		—		156,261
Total derivative instruments	—		167,743		—		167,743
Separate account liabilities (1)	2		166,325		—		166,327
Total liabilities	$	18,536	$	334,068	$	—	$	352,604

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

Table of Contents

GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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

	Recurring Level 3 financial assets and liabilities
	Three months ended March 31, 2014
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized
	debt securities			securities			debt obligations			Total
Balance, January 1, 2014	$	6,652		$	252,958		$	32		$	259,642
Realized and unrealized gains (losses) included in:
Other comprehensive income (loss)	58			6,813			(3		)	6,868
Settlements	(187		)	(13,746		)	—			(13,933		)
Balance, March 31, 2014	$	6,523		$	246,025		$	29		$	252,577
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at March 31, 2014	$	—		$	—		$	—		$	—

	Recurring Level 3 financial assets and liabilities
	Three months ended March 31, 2013
	Fixed maturities available-for-sale
	Corporate			Asset-backed			Collateralized
	debt securities			securities			debt obligations		Total
Balance, January 1, 2013	$	1,822		$	265,538		$	32	$	267,392
Realized and unrealized gains (losses) included in:
Other comprehensive income (loss)	(16		)	7,005			—		6,989
Settlements	(5		)	(11,040		)	—		(11,045		)
Balance, March 31, 2013	$	1,801		$	261,503		$	32	$	263,336
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at March 31, 2013	$	—		$	—		$	—	$	—

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

	March 31, 2014
	Fair Value		Valuation Technique	Unobservable Input	Weighted Average
Fixed maturities available-for-sale:
Asset-backed securities(1)	$	245,982	Internal model pricing	Prepayment speed assumption	9

				Constant default rate assumption	5

				Adjusted ABX Index spread assumption (2)	487

(1) Includes home improvement loans only.

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

At March 31, 2014, after adjusting the Asset Backed Securities Index (“ABX Index”) spread assumption by the liquidity premium, the overall discount rate ranged from 292 to 612 basis points. The constant default rate assumption ranged from 2.4 to 12.7.

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

	December 31, 2013
	Fair Value		Valuation Technique	Unobservable Input	Weighted Average
Fixed maturities available-for-sale:
Asset-backed securities(1)	$	252,902	Internal model pricing	Prepayment speed assumption	9

				Constant default rate assumption	5

				Adjusted ABX Index spread assumption (2)	455

(1) Includes home improvement loans only.

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

At December 31, 2013, after adjusting the ABX Index spread assumption by the liquidity premium, the overall discount rate ranged from 327 to 647 basis points. The constant default rate assumption ranged from 2.0 to 12.9.

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

Fair value of financial instruments

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

	March 31, 2014				December 31, 2013
	Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value
Assets
Mortgage loans on real estate	$	3,182,905	$	3,283,114	$	3,134,255	$	3,197,292
Policy loans	4,182,605		4,182,605		4,185,472		4,185,472
Limited partnership interests	42,719		40,479		44,551		42,433
Other investments	16,580		42,809		16,643		42,814

Liabilities
Annuity contract benefits without life contingencies	$	10,287,000	$	10,217,380	$	10,263,043	$	9,986,464
Policyholders’ funds	315,441		315,441		345,689		345,689
Commercial paper	98,691		98,691		98,990		98,990
Notes payable	541,784		559,877		532,519		541,918

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

Notes payable

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

10. Other Comprehensive Income

The following tables present the accumulated balances for each classification of other comprehensive income (loss):

	Three months ended March 31, 2014
	Unrealized holding gains / losses arising on fixed maturities, available-for- sale			Unrealized holding gains / losses arising on cash flow hedged			Future policy benefits, DAC and VOBA adjustments			Employee benefit plan adjustment			Total
Balances, January 1, 2014	$	434,023		$	25,517		$	(70,000	)	$	(43,786	)	$	345,754
Other comprehensive income (loss) before reclassifications	202,344			575			(37,211		)	—			165,708
Amounts reclassified from AOCI	(14,065		)	(377		)	—			—			(14,442		)
Net current period other comprehensive income (loss)	188,279			198			(37,211		)	—			151,266
Balances, March 31, 2014	$	622,302		$	25,715		$	(107,211	)	$	(43,786	)	$	497,020

	Three months ended March 31, 2013
	Unrealized holding gains / losses arising on fixed maturities, available-for- sale			Unrealized holding gains / losses arising on cash flow hedged			Future policy benefits, DAC and VOBA adjustments			Employee benefit plan adjustment			Total
Balances, January 1, 2013	$	927,678		$	24,962		$	(194,146	)	$	(122,795	)	$	635,699
Other comprehensive income (loss) before reclassifications	(26,768		)	15,566			9,984			—			(1,218		)
Amounts reclassified from AOCI	(15,517		)	(460		)	—			—			(15,977		)
Net current period other comprehensive income (loss)	(42,285		)	15,106			9,984			—			(17,195		)
Balances, March 31, 2013	$	885,393		$	40,068		$	(184,162	)	$	(122,795	)	$	618,504

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

The following tables present the composition of other comprehensive income (loss):

	Three months ended March 31, 2014
	Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount
Unrealized holding gains (losses) arising during the period on available-for-sale fixed maturity investments	$	311,298		$	(108,954	)	$	202,344
Unrealized holding gains (losses) arising during the period on cash flow hedges	884			(309		)	575
Reclassification adjustment for (gains) losses realized in net income	(22,218		)	7,776			(14,442		)
Net unrealized gains (losses)	289,964			(101,487		)	188,477
Future policy benefits, DAC and VOBA adjustments	(57,248		)	20,037			(37,211		)
Net unrealized gains (losses)	232,716			(81,450		)	151,266
Other comprehensive income (loss)	$	232,716		$	(81,450	)	$	151,266

	Three months ended March 31, 2013
	Before-tax			Tax (expense)			Net-of-tax
	amount			benefit			amount
Unrealized holding gains (losses) arising during the period on available-for-sale fixed maturity investments	$	(41,181	)	$	14,413		$	(26,768	)
Unrealized holding gains (losses) arising during the period on cash flow hedges	23,948			(8,382		)	15,566
Reclassification adjustment for (gains) losses realized in net income	(24,580		)	8,603			(15,977		)
Net unrealized gains (losses)	(41,813		)	14,634			(27,179		)
Future policy benefits, DAC and VOBA adjustments	15,359			(5,375		)	9,984
Net unrealized gains (losses)	(26,454		)	9,259			(17,195		)
Other comprehensive income (loss)	$	(26,454	)	$	9,259		$	(17,195	)

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

The following tables presents the reclassifications out of accumulated other comprehensive income (loss):

	Three months ended March 31, 2014
	Amount reclassified
	from accumulated
Details about accumulated other	other comprehensive			Affected line item in the statement
comprehensive income (loss) components	income (loss)			where net income is presented
Unrealized (gains) losses arising on fixed maturities available-for-sale	$	(21,638	)	Other realized investment (gains) losses, net
	(21,638		)	Total before tax
	(7,573		)	Tax expense or benefit
	$	(14,065	)	Net of tax

Unrealized (gains) losses arising on cash flow hedges	$	(580	)	Net investment income
	(580		)	Total before tax
	(203		)	Tax expense or benefit
	$	(377	)	Net of tax

Total reclassification for the period	$	(14,442	)	Net of tax

	Three months ended March 31, 2013
	Amount reclassified
	from accumulated
Details about accumulated other	other comprehensive			Affected line item in the statement
comprehensive income (loss) components	income (loss)			where net income is presented
Unrealized (gains) losses arising on fixed maturities available-for-sale	$	(23,873	)	Other realized investment (gains) losses, net
	(23,873		)	Total before tax
	(8,356		)	Tax expense or benefit
	$	(15,517	)	Net of tax

Unrealized (gains) losses arising on cash flow hedges	$	(707	)	Net investment income
	(707		)	Total before tax
	(247		)	Tax expense or benefit
	$	(460	)	Net of tax

Total reclassification for the period	$	(15,977	)	Net of tax

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

11. Employee Benefit Plans

Net periodic cost (benefit) of the Defined Benefit Pension, Post-Retirement Medical and Supplemental Executive Retirement plans included in general insurance expenses in the accompanying condensed consolidated statements of income includes the following components:

	Three months ended March 31,
	Defined Benefit Pension Plan						Post-Retirement Medical Plan						Supplemental Executive Retirement Plan
	2014			2013			2014			2013			2014		2013
Components of net periodic cost (benefit):
Service cost	$	1,174		$	1,259		$	206		$	232		$	205	$	251
Interest cost	5,738			5,173			130			123			697		637
Expected return on plan assets	(7,319		)	(6,029		)	—			—			—		—
Amortization of unrecognized prior service cost (benefit)	13			13			(426		)	(412		)	233		233
Amortization of loss (gain) from earlier periods	645			3,894			(130		)	(103		)	92		325
Net periodic cost (benefit)	$	251		$	4,310		$	(220	)	$	(160	)	$	1,227	$	1,446

The Company expects to make payments of approximately $524 with respect to its Post-Retirement Medical Plan and $3,630 with respect to its Supplemental Executive Retirement Plan during the year ended December 31, 2014. The Company expects to make contributions of $13,307 to its Defined Benefit Pension Plan during the year ended December 31, 2014. A December 31 measurement date is used for the employee benefit plans.

The following table summarizes contributions to the Defined Benefit Pension Plan and payments made to the Post-Retirement Medical Plan and the Supplemental Executive Retirement Plan:

	Three months ended March 31,
	2014		2013
Contributions to the Defined Benefit Pension Plan	$	2,024	$	—
Payments to the Post-Retirement Medical Plan	131		153
Payments to the Supplemental Executive Retirement Plan	908		930

12. Income Taxes

The provision for income taxes is comprised of the following:

	Three months ended March 31,
	2014		2013
Current	$	31,044	$	26,835
Deferred	19,310		11,106
Total income tax provision	$	50,354	$	37,941

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

The following table presents a reconciliation between the statutory federal income tax rate and the Company’s effective income tax rate:

	Three months ended March 31,
	2014		2013
Statutory federal income tax rate	35.0	%	35.0	%
Income tax effect of:
Investment income not subject to federal tax	(2.1	)%	(1.9	)%
Tax credits	(0.2	)%	(0.6	)%
State income taxes, net of federal benefit	1.5	%	1.3	%
Other, net	0.5	%	2.4	%
Effective income tax rate	34.7	%	36.2	%

During the three months ended March 31, 2014 and 2013, the Company recorded an increase in unrecognized tax benefits in the amount of $1,992 and $3,372, respectively. The Company does not anticipate significant changes to its unrecognized tax benefits in the next twelve months.

The Company files income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years 2009 and prior. Tax years 2010 through 2013 are open to federal examination by the Internal Revenue Service (“IRS”). The Company does not expect significant increases or decreases to unrecognized tax benefits relating to federal, state or local audits.

13. Segment Information

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

Individual Markets

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

Retirement Services

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

Other

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

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

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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

The following tables summarize segment financial information:

	Three months ended March 31, 2014
	Individual		Retirement
	Markets		Services		Other			Total
Revenue:
Premium income	$	112,777	$	572	$	18,505		$	131,854
Fee income	23,630		141,881		1,002			166,513
Net investment income	185,520		101,174		13,329			300,023
Realized investment gains (losses), net	6,735		20,154		20			26,909
Total revenues	328,662		263,781		32,856			625,299
Benefits and expenses:
Policyholder benefits	238,997		48,480		18,902			306,379
Operating expenses	35,338		123,986		14,491			173,815
Total benefits and expenses	274,335		172,466		33,393			480,194
Income (loss) before income taxes	54,327		91,315		(537		)	145,105
Income tax expense	18,965		31,310		79			50,354
Net income (loss)	$	35,362	$	60,005	$	(616	)	$	94,751

	Three months ended March 31, 2013
	Individual		Retirement
	Markets		Services		Other		Total
Revenue:
Premium income	$	153,676	$	—	$	24,645	$	178,321
Fee income	23,200		122,654		1,092		146,946
Other revenue	7,355		—		—		7,355
Net investment income	177,126		96,291		11,945		285,362
Realized investment gains (losses), net	8,873		5,857		9		14,739
Total revenues	370,230		224,802		37,691		632,723
Benefits and expenses:
Policyholder benefits	278,308		44,977		21,341		344,626
Operating expenses	35,882		131,895		15,544		183,321
Total benefits and expenses	314,190		176,872		36,885		527,947
Income (loss) before income taxes	56,040		47,930		806		104,776
Income tax expense	21,527		16,108		306		37,941
Net income (loss)	$	34,513	$	31,822	$	500	$	66,835

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

General

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

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

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

The following discussion addresses the Company’s results of operations for the three months ended March 31, 2014 compared with the same period in 2013. The discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” to which the reader is directed for additional information.

(In millions)
Premium income	$	42
Other revenue	7
Total	49

Increase in future policy benefits	41
Dividends to policyholders	1
Total	42

Participating policyholders’ net income before income taxes	7
Income tax expense	2
Participating policyholders’ income	5

Provision for policyholders’ share of earnings on participating business	5
Net income available to shareholder	$	—

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On March 20, 2014, Great-West Lifeco Inc. announced its intent to combine the retirement business of Putnam Investments, an affiliate of the Company, with the retirement business of the Company. Management is still assessing the form of the combination. The Putnam Investments retirement business comprises 375 clients with approximately 199,000 participants and $15 billion in assets.

On April 3, 2014, the Company announced it has reached an agreement to acquire the J.P. Morgan Retirement Plan Services large-market recordkeeping business. The transaction is expected to close during the third quarter pending regulatory approval. The J.P. Morgan Retirement Plan Services business comprises 200 clients with approximately 1.9 million participants and $167 billion in assets. It also includes the more than 1,000 personnel affiliated with J.P. Morgan Retirement Plan Services, including sales staff, consultant relations, relationship managers and client service specialists.

The Company employs hedging strategies for the purpose of managing the interest rate, foreign currency exchange rate and equity market risks impacting the Company’s business. For some derivative instruments, hedge accounting is not elected; therefore all gains or losses from these transactions are recorded in the consolidated statement of income. As a result, fluctuations in interest rates, foreign currencies or equity markets may cause the Company to experience volatility in net income.

Company Results of Operations

Three months ended March 31, 2014 compared with the three months ended March 31, 2013

The following is a summary of certain financial data of the Company:

	Three months ended March 31,
Income statement data (In millions)	2014		2013
Premium income	$	132	$	178
Fee income	167		147
Other revenue	—		7
Net investment income	300		286
Realized investment gains (losses), net	27		15
Total revenues	626		633
Policyholder benefits	306		345
Operating expenses	175		183
Total benefits and expenses	481		528
Income before income taxes	145		105
Income tax expense	50		38
Net income	$	95	$	67

The Company’s consolidated net income increased by $28 million, or 42%, to $95 million for the three months ended March 31, 2014 when compared to 2013. The increase in earnings is due to increases in fees, net investment income and net realized investment gains (losses), net, and a decrease in operating expenses.

Premium income decreased by $46 million, or 26%, to $132 million for the three months ended March 31, 2014 when compared to 2013. This decrease is primarily related to the Company’s Individual Markets segment which is driven by the $42 million received in 2013 in conjunction with the termination of the reinsurance agreement with CLAC. The Other segment had a decrease of $6 million due to lapses on a block of 10-year term policies whose original term ended in 2013.

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Fee income increased by $20 million, or 14%, to $167 million for the three months ended March 31, 2014 when compared to 2013. The increase is primarily related to improved variable fee income resulting from increased average asset levels driven by higher average equity market levels. The equity market performance is evidenced by the 21% increase in the average S&P 500 index during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013.

Other revenue decreased by $7 million for the three months ended March 31, 2014 when compared to 2013 as a result of the termination of the reinsurance agreement with CLAC in 2013.

Net investment income increased by $14 million, or 5%, to $300 million during the three months ended March 31, 2014 when compared to 2013. The primary driver of the change is a $12 million increase in investment income earned on bonds, mortgages and policy loans as a result of higher invested assets balances partially offset by lower yields. Additionally, there was a $6 million and $4 million increase in unrealized gains from derivatives and bonds, respectively, and a $4 million increase in investment income earned on other investments. The increase in net investment income was partially offset by a $12 million decrease in unrealized gains from forward settling TBA security agreements.

Realized investment gains (losses), net, increased by $12 million, or 80%, to $27 million during the three months ended March 31, 2014 when compared to 2013. The fluctuation is driven primarily by the increase in gains of $17 million on forward settling TBA security transactions offset by a decrease in gains of $5 million on bonds and derivatives.

Total benefits and expenses decreased by $47 million, or 9%, to $481 million for the three months ended March 31, 2014 when compared to 2013 primarily due to lower policyholder benefits. The decrease in benefits and expenses is attributable to the $40 million decrease in the Company’s Individual Markets segment driven by benefits expense incurred in 2013 in conjunction with the termination of the reinsurance agreement with CLAC. The Retirement Services segment had a decrease of $5 million primarily driven by lower DAC amortization as a result of actual gross profits coming in lower than previously estimated gross profits.

Income tax expense increased by $12 million, or 32%, to $50 million for the three months ended March 31, 2014 when compared to 2013 primarily due to an increase in net income before tax.

Individual Markets Segment Results of Operations

Three months ended March 31, 2014 compared with the three months ended March 30, 2013

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

	Three months ended March 31,
Income statement data (In millions)	2014		2013
Premium income	$	112	$	154
Fee income	24		23
Other revenue	—		7
Net investment income	186		177
Realized investment gains (losses), net	7		9
Total revenues	329		370
Policyholder benefits	239		278
Operating expenses	35		36
Total benefits and expenses	274		314
Income before income taxes	55		56
Income tax expense	19		22
Net income	$	36	$	34

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Net income for the Individual Markets segment increased by $2 million, or 6%, to $36 million during the three months ended March 31, 2014 when compared to 2013. The increase in earnings is primarily due to higher net investment income driven by higher invested assets partially offset by a decrease in other revenues.

Premium income decreased by $42 million, or 27%, to $112 million for the three months ended March 31, 2014 when compared to 2013. This decrease is primarily driven by the $42 million received in 2013 in conjunction with the termination of the reinsurance agreement with CLAC.

Fee income remained relatively consistent, increasing $1 million, or 4%, to $24 million for the three months ended March 31, 2014 when compared to 2013.

Other revenue decreased by $7 million for the three months ended March 31, 2014 when compared to 2013 as a result of the termination of the reinsurance agreement with CLAC in 2013.

Net investment income increased by $9 million, or 5%, to $186 million for the three months ended March 31, 2014 when compared to 2013. The primary driver of the change is a $5 million increase in investment income earned on bonds, mortgages and policy loans as a result of higher invested assets balances partially offset by lower yields. Additionally, there was a $2 million increase in unrealized gains from bonds and a $2 million increase in investment income earned on other investments.

Realized investment gains (losses), net, decreased by $2 million, or 22%, to $7 million during the three months ended March 31, 2014 when compared to 2013. The increase is primarily driven by an increase in gains of $3 million on bonds.

Total benefits and expenses decreased by $40 million, or 13%, to $274 million during the three months ended March 31, 2014 when compared to 2013. The change in benefits and expenses is primarily attributable to a $41 million benefits expense incurred in 2013 in conjunction with the termination of the reinsurance agreement with CLAC.

Income tax expense decreased by $3 million, or 14%, to $19 million during the three months ended March 31, 2014 when compared to 2013 primarily due to a decrease in net income before tax.

Retirement Services Segment Results of Operations

Three months ended March 31, 2014 compared with the three months ended March 31, 2013

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

	Three months ended March 31,
Income statement data (In millions)	2014		2013
Premium income	$	1	$	—
Fee income	142		123
Net investment income	101		97
Realized investment gains (losses), net	20		6
Total revenues	264		226
Policyholder benefits	48		45
Operating expenses	125		133
Total benefits and expenses	173		178
Income before income taxes	91		48
Income tax expense	31		16
Net income	$	60	$	32

Net income for the Retirement Services segment increased by $28 million, or 88%, to $60 million for the three months ended March 31, 2014 when compared to 2013. The increase in earnings is primarily due to higher realized gains from forward settling TBA security transactions and higher fee income due to increased average asset levels driven by higher average equity market levels.

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Fee income increased by $19 million, or 15%, to $142 million for the three months ended March 31, 2014 when compared to 2013. The increase is primarily related to improved variable fee income due to increased average asset levels driven by higher average equity market levels. The equity market performance is evidenced by a 21% increase in the average S&P 500 index during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013.

Net investment income increased by $4 million, or 4%, to $101 million for the three months ended March 31, 2014 when compared to 2013. The primary driver of the change is a $6 million increase in investment income earned on bonds, mortgages and policy loans as a result of higher invested assets balances partially offset by lower yields and a $5 million increase in unrealized gains from derivatives. Additionally, there was a $2 million increase in unrealized gains from bonds and a $2 million increase in investment income earned on other investments. The increase in net investment income was partially offset by an $11 million decrease in unrealized gains from forward settling TBA security agreements.

Realized investment gains (losses), net, increased by $14 million to $20 million for the three months ended March 31, 2014 when compared to 2013. The fluctuation is driven primarily by a $14 million increase in gains from forward settling TBA security transactions.

Total benefits and expenses decreased by $5 million, or 3%, to $173 million for the three months ended March 31, 2014 when compared to 2013. The decrease in benefits and expenses is primarily attributable to an $8 million, or 6%, decrease in operating expenses due to lower DAC amortization as a result of actual gross profits coming in lower than previously estimated gross profits. This was partially offset by higher asset-based commissions.

Income tax expense increased by $15 million, or 94%, to $31 million during the three months ended March 31, 2014 when compared to 2013. The increase is primarily due to the increase in net income before income taxes.

Other Segment Results of Operations

Three months ended March 31, 2014 compared with the three months ended March 31, 2013

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

	Three months ended March 31,
Income statement data (In millions)	2014			2013
Premium income	$	19		$	25
Fee income	1			1
Net investment income	13			12
Total revenues	33			38
Policyholder benefits	19			21
Operating expenses	15			16
Total benefits and expenses	34			37
(Loss) income before income taxes	(1		)	1
Income tax expense	—			—
Net (loss) income	$	(1	)	$	1

Net (loss) income for the Company’s Other segment decreased by $2 million from income of $1 million to a loss of $1 million in 2014. Premium income decreased by $6 million due to lapses on a block of 10-year term policies whose original term ended in 2013. Offsetting the decrease is a decrease of $2 million in policyholder benefits as a result of more surrenders in 2014 as compared to 2013, as well as a decrease in operating expenses as a result of lower commissions.

Investment Operations

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

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

A summary of the Company’s general account investment assets and the assets as a percentage of total general account investments follows:

(In millions)	March 31, 2014				December 31, 2013
Fixed maturities, available-for-sale	$	16,569	61.3	%	$	18,470	69.6	%
Fixed maturities, held for trading	359		1.3	%	336		1.3	%
Mortgage loans on real estate	3,183		11.8	%	3,134		11.8	%
Policy loans	4,183		15.5	%	4,185		15.8	%
Short-term investments, available-for-sale	2,662		9.8	%	294		1.1	%
Limited partnership and other corporation interests	70		0.2	%	79		0.3	%
Other investments	17		0.1	%	18		0.1	%
Total investments	$	27,043	100.0	%	$	26,516	100.0	%

The March 31, 2014 fixed maturities, available-for-sale amount decreased as compared to December 31, 2013 as the Company sold government agency mortgage-backed security (“MBS”) pools to enter into forward settling TBA contracts which are treated as derivatives. There is a corresponding increase in short-term investments, available-for-sale as the Company holds these investments in order to settle the forward settling TBA contracts.

Fixed Maturity Investments

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

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

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

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The distribution of the Company’s fixed maturity portfolio by the Company’s internal credit rating is summarized as follows:

Credit Rating	March 31, 2014		December 31, 2013
AAA	18.8	%	28.4	%
AA	17.3	%	15.3	%
A	31.4	%	26.5	%
BBB	31.4	%	28.6	%
BB and below (Non-investment grade)	1.1	%	1.2	%
Total	100.0	%	100.0	%

The March 31, 2014 AAA rating percentage decreased as compared to December 31, 2013 as the Company sold AAA rated government agency MBS pools to enter into forward settling TBA contracts which are treated as derivatives.

The following table contains the sector distribution of the Company’s corporate fixed maturity investment portfolio, calculated as a percentage of fixed maturities:

Sector	March 31, 2014		December 31, 2013
Utility	18.4	%	18.5	%
Finance	9.8	%	10.0	%
Consumer	9.8	%	9.9	%
Natural resources	5.2	%	5.2	%
Transportation	3.0	%	3.0	%
Other	11.0	%	11.1	%

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

Each fixed maturity investment is categorized in a hierarchy based on the observability of inputs into the valuation methodology with Level 3 being the least observable. Management uses some judgment in determining the observability of valuation inputs. Level 3 assets at March 31, 2014 were $253 million, or 1%, of total net assets and liabilities carried at fair value compared to Level 3 assets of $260 million, or 1%, at December 31, 2013. The decrease in Level 3 assets is primarily due to principal reductions.

Securities Lending, Reverse Repurchase Agreements and Cash Collateral Reinvestment Practices

Cash collateral related to the securities lending program and reverse repurchase agreements is invested in U.S. Government or U.S. Government Agency securities. In addition, the securities lending agent indemnifies the Company against borrower risk, meaning that the lending agent agrees contractually to replace securities not returned due to a borrower default. As of March 31, 2014 and December 31, 2013, the Company had $100 million and $27 million, respectively, of securities out on loan and $600 million and zero, respectively, in short-term reverse repurchase agreements, all of which are fully collateralized as described above. The Company does not enter into these types of transactions for liquidity purposes, but rather for yield enhancement on its investment portfolio.

Mortgage Loans on Real Estate

The Company’s mortgage loans on real estate are comprised exclusively of domestic commercial collateralized real estate loans. The mortgage loan portfolio is diversified with regard to geographical markets and commercial real estate property types within the United States. The Company originates, directly or through correspondents, real estate mortgages with the intent to hold to maturity. The Company’s portfolio includes loans which are fully amortizing, amortizing with a balloon balance at maturity, interest only to maturity and interest only for a number of years followed by an amortizing period. During the three months ended March 31, 2014 and the year ended December 31, 2013, the Company originated 5 and 45 new loans with aggregate principal balances of $89 million and $562 million, respectively.

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connection with surrenders and withdrawals and general expenses. However, since the timing of available funds cannot always be matched precisely to commitments, imbalances may arise when demands for funds exceed those on hand. A primary liquidity concern regarding cash flows from operations is the risk of early policyholder and contractholder withdrawals. A primary liquidity concern regarding investment activity is the risk of defaults and market volatility. In addition, a demand for funds may arise as a result of the Company taking advantage of current investment opportunities. The sources of the funds that may be required in such situations include the issuance of commercial paper or other debt instruments. Management believes that the liquidity profile of its assets is sufficient to satisfy the liquidity requirements of reasonably foreseeable scenarios.

Generally, the Company has met its operating requirements by utilizing cash flows from operations and maintaining appropriate levels of liquidity in its investment portfolio. Liquidity for the Company has remained strong, as evidenced by the amounts of short-term investments and cash that totaled $249 million and $302 million as of March 31, 2014 and December 31, 2013, respectively. The March 31, 2014 short-term investments included above exclude amounts held to settle TBA forward contracts. In addition, 99% of the fixed maturity portfolio carried an investment grade rating at March 31, 2014 and December 31, 2013, thereby providing significant liquidity to the Company’s overall investment portfolio.

The Company continues to be well capitalized, with sufficient borrowing capacity. Additionally, the Company anticipates that cash on hand and expected net cash generated by operating activities will exceed the forecasted needs of the business over the next 12 months. The Company’s financial strength provides the capacity and flexibility to enable it to raise funds in the capital markets through the issuance of commercial paper. The Company had $99 million of commercial paper outstanding at March 31, 2014 and December 31, 2013. The commercial paper has been given a rating of A-1+ by Standard & Poor’s Ratings Services and a rating of P-1 by Moody’s Investors Service, each being the highest rating available. Through the recent financial market volatility, the Company continued to have the ability to access the capital markets for funds. The loss of this access in the future would not have a significant impact to the Company’s liquidity as commercial paper is not used to fund daily operations and is an insignificant amount in relation to total invested assets.

The Company also has available a revolving credit facility agreement, which expires on March 1, 2018, in the amount of $50 million for general corporate purposes. The Company had no borrowings under this credit facility as of or during the three months ended March 31, 2014. The Company does not anticipate the need for borrowings under this facility and the loss of its availability would not significantly impact its liquidity.

Capital resources provide protection for policyholders and financial strength to support the underwriting of insurance risks and allow for continued business growth. The amount of capital resources that may be needed is determined by the Company’s senior management and Board of Directors, as well as by regulatory requirements. The allocation of resources to new long-term business commitments is designed to achieve an attractive return, tempered by considerations of risk and the need to support the Company’s existing business.

Off-Balance Sheet Arrangements

The Company makes commitments to fund partnership interests, mortgage loans on real estate and other investments in the normal course of its business. The amounts of these unfunded commitments at March 31, 2014 and December 31, 2013 were $145 million and $197 million, respectively. The precise timing of the fulfillment of the commitment cannot be predicted; however, these amounts are due within one year of the dates indicated. There are no other obligations or liabilities arising from such arrangements that are reasonably likely to become material.

The Company participates in a short-term reverse repurchase program for the purpose of enhancing the total return on its investment portfolio. This type of transaction involves the purchase of securities with a simultaneous agreement to sell similar securities at a future date at an agreed-upon price. In exchange, the financial institutions put non-cash collateral on deposit with a third-party custodian on behalf of the Company. The amount of securities purchased in connection with these transactions was $600 million and zero at March 31, 2014 and December 31, 2013, respectively. Non-cash collateral on deposit with the third-party custodian on the Company’s behalf was $612 million and zero at March 31, 2014 and December 31, 2013, respectively, which cannot be sold or re-pledged and which has not been recorded on the condensed consolidated balance sheets.

COLORADO		84-0467907
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

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Part I	Financial Information

	Item 1	Interim Financial Statements	3

		Condensed Consolidated Balance Sheets at March 31, 2014 and December 31, 2013 (Unaudited)	3

		Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2014 and 2013 (Unaudited)	5

		Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2014 and 2013 (Unaudited)	6

		Condensed Consolidated Statements of Stockholder’s Equity for the Three Months Ended March 31, 2014 and 2013 (Unaudited)	7

		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (Unaudited)	8

		Notes to Condensed Consolidated Financial Statements (Unaudited)	10

	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	45

	Item 4	Controls and Procedures	45

Part II	Other Information		46

	Item 1	Legal Proceedings	46

	Item 1A	Risk Factors	46

	Item 6	Exhibits	47

		Signature	47

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

By:	/s/ Rebecca M. Southall		Date:	May 14, 2014
	Rebecca M. Southall, Vice President and Principal Accounting Officer