UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

**FORM 10-Q**

 

(Mark            One)

|   | **•** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF                            THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|------------|------------------------------------------------------------------------------------------------------------------------|

For the quarterly period ended June 30, 2007

**OR**

|   | **•** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF                            THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------|

For the transition period from _______ to _______

 

Commission file number 333-1173

             

             

| **GREAT-WEST LIFE & ANNUITY INSURANCE                            COMPANY**    |
|-----------------------------------------------------------------------------------|
| (Exact name of registrant as specified in its                            charter) |

             

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

 

| **8515 EAST ORCHARD ROAD, GREENWOOD VILLAGE, CO                            80111** |
|------------------------------------------------------------------------------------|
| (Address of principal executive offices)                                           |
|                                                                               |
| **(303) 737-3000**                                                                 |
| (Registrant's telephone number, including area                            code)    |

             

             

Indicate by check mark whether the registrant (1) has filed all reports            required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934            during the preceding 12 months (or for such shorter period that the registrant was            required to file such reports), and (2) has been subject to such filing requirements            for the past 90 days.

| Yes [X ] | No o |
|----------|------|

 

 

Indicate by check mark whether the registrant is a large accelerated            filer, an accelerated filer, or a non-accelerated filer as defined in Rule 12b-2 of the            Act.

| Large accelerated filer                            o | Accelerated filer                            o | Non-accelerated filerx |
|------------------------------------------------------|------------------------------------------------|------------------------|

 

 

Indicate by check mark whether the registrant is a shell company as            defined in Rule 12b-2 of the Act.

| Yes o | No [X ] |
|-------|---------|

 

 

As            of August 1, 2007, 7,032,000 shares of the registrant’s common stock were            outstanding, all of which were owned by the registrant’s parent            company.

 

 

| NOTE: | This Form 10-Q is filed by the registrant only as a                            consequence of the sale by the registrant of a market value adjusted                            annuity product. |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

             

             

             

1

 

             

Table            of Contents

 

 

 

 

|    |                                                                                                                             | Page   |
|---------|----------------------------------------------------------------------------------------------------------------------------------|--------|
| Part I  | Financial Information                                                                                                            |   |
|    |                                                                                                                             |   |
|    | Item 1   Financial Statements                                                                                     | 3.     |
|    |                                                                                                                             |   |
|    | Condensed Consolidated Balance Sheets                            (Unaudited)                                                     | 3.     |
|    |                                                                                                                             |   |
|    | Condensed Consolidated Statements of Income                            (Unaudited)                                               | 5.     |
|    |                                                                                                                             |   |
|    | Condensed Consolidated Statements of Stockholder’s                            Equity (Unaudited)                           | 6.     |
|    |                                                                                                                             |   |
|    | Condensed Consolidated Statements of Cash Flows                            (Unaudited)                                           | 7.     |
|    |                                                                                                                             |   |
|    | Notes to Condensed Consolidated Financial Statements                            (Unaudited)                                      | 9.     |
|    |                                                                                                                             |   |
|    | Item 2   Management’s Discussion                            and Analysis of Financial Condition and Results |   |
|    | of Operations                                                                                                                    | 22.    |
|    |                                                                                                                             |   |
|    | Item 3   Quantitative and Qualitative                            Disclosures About Market Risk                    | 40.    |
|    |                                                                                                                             |   |
|    | Item 4   Controls and                            Procedures                                                       | 41.    |
|    |                                                                                                                             |   |
| Part II | Other Information                                                                                                                | 41.    |
|    |                                                                                                                             |   |
|    | Item 1   Legal Proceedings                                                                                        | 41.    |
|    |                                                                                                                             |   |
|    | Item 1A Risk Factors                                                                                                             | 41.    |
|    |                                                                                                                             |   |
|    | Item 6   Exhibits                                                                                                 | 41.    |
|    |                                                                                                                             |   |
|    | Signature                                                                                                                        | 42.    |

 

 

2

 

| **Part I** | **Financial Information** |
|------------|---------------------------|

             

| **Item 1.** | **Financial Statements** |
|-------------|--------------------------|

             

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

Condensed Consolidated Balance Sheets

June            30, 2007 and December 31, 2006

(In            Thousands, Except Share Amounts)

(Unaudited)

             

             

|                                                                                 |   | June 30,   |   | December 31, |
|--------------------------------------------------------------------------------------|--------|------------|--------|--------------|
| **Assets**                                                                           |   | 2007       |   | 2006         |
| **Investments:**                                                                     |   |       |   |         |
| Fixed maturities available-for-sale, at fair                            value        |   |       |   |         |
| (amortized cost $13,985,837 and $15,546,700)                                         | $      | 13,768,648 | $      | 15,486,655   |
| Fixed maturities held for trading, at fair                            value          |   |       |   |         |
| (amortized cost $19,918 and $0)                                                      |   | 19,792     |   | -            |
| Mortgage loans on real estate (net of                            allowances          |   |       |   |         |
| of $9,448 and $15,661)                                                               |   | 1,129,327  |   | 1,338,193    |
| Equity investments available-for-sale, at                            fair            |   |       |   |         |
| value (cost $17,659 and $17,875)                                                     |   | 29,224     |   | 28,268       |
| Policy loans                                                                         |   | 3,692,339  |   | 3,797,649    |
| Short-term investments, available-for-sale                                           |   |       |   |         |
| (cost approximates fair value)                                                       |   | 1,177,947  |   | 1,056,705    |
| Other limited partnership interests                                                  |   | 334,487    |   | 345,192      |
| Other investments                                                                    |   | 4,291      |   | 4,413        |
| Total investments                                                                    |   | 20,156,055 |   | 22,057,075   |
|                                                                                 |   |       |   |         |
| **Other assets:**                                                                    |   |       |   |         |
| Cash                                                                                 |   | 43,993     |   | 33,572       |
| Reinsurance receivable:                                                              |   |       |   |         |
| Related party                                                                        |   | 251,948    |   | 531,389      |
| Other                                                                                |   | 250,635    |   | 258,355      |
| Deferred acquisition costs and value of                                              |   |       |   |         |
| business acquired                                                                    |   | 444,511    |   | 505,134      |
| Investment income due and accrued                                                    |   | 132,300    |   | 161,146      |
| Receivables related to uninsured accident                                            |   |       |   |         |
| and health plan claims (net of allowances of                                         |   |       |   |         |
| $13,232 and $14,299)                                                                 |   | 155,037    |   | 150,854      |
| Premiums in course of collection (net of                            allowances       |   |       |   |         |
| of $3,943 and $4,351)                                                                |   | 92,292     |   | 107,874      |
| Deferred income taxes                                                                |   | 274,413    |   | 173,059      |
| Collateral under securities lending                            agreements            |   | 155,712    |   | 382,423      |
| Due from parent and affiliates                                                       |   | 1,169      |   | 10,650       |
| Goodwill                                                                             |   | 154,698    |   | 146,030      |
| Other intangible assets                                                              |   | 52,351     |   | 47,112       |
| Other assets                                                                         |   | 769,723    |   | 627,207      |
| **Separate account assets**                                                          |   | 18,003,629 |   | 16,289,974   |
| **Total assets**                                                                     | $      | 40,938,466 | $      | 41,481,854   |
|                                                                                 |   |       |   |         |
|                                                                                 |   |       |   |         |
| See notes to condensed consolidated financial                            statements. |   |       |   | (Continued)  |

 

3

 

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

Condensed Consolidated Balance Sheets

June            30, 2007 and December 31, 2006

(In            Thousands, Except Share Amounts)

(Unaudited)

 

 

|                                                                                 |   | June 30,   |        | December 31, |
|--------------------------------------------------------------------------------------|--------|------------|-------------|--------------|
| **Liabilities and Stockholder’s                            Equity**            |   | 2007       |        | 2006         |
| **Policy Benefit Liabilities:**                                                      |   |       |        |         |
| Policy reserves:                                                                     |   |       |        |         |
| Related party                                                                        | $      | 2,526,394  | $           | 4,639,829    |
| Other                                                                                |   | 14,791,719 |        | 14,695,926   |
| Policy and contract claims                                                           |   | 382,734    |        | 413,022      |
| Policyholders’ funds                                                           |   | 408,180    |        | 386,301      |
| Provision for policyholders’ dividends                                         |   | 78,740     |        | 109,700      |
| Undistributed earnings on participating                            business          |   | 203,137    |        | 188,198      |
| Total policy benefit liabilities                                                     |   | 18,390,904 |        | 20,432,976   |
|                                                                                 |   |       |        |         |
| **General Liabilities:**                                                             |   |       |        |         |
| Due to parent and affiliates                                                         |   | 580,599    |        | 547,951      |
| Repurchase agreements                                                                |   | 544,079    |        | 763,779      |
| Commercial paper                                                                     |   | 71,749     |        | 95,020       |
| Payable under securities lending agreements                                          |   | 155,712    |        | 382,423      |
| Other liabilities                                                                    |   | 1,010,440  |        | 840,776      |
| **Separate Account Liabilities**                                                     |   | 18,003,629 |        | 16,289,974   |
| Total liabilities                                                                    |   | 38,757,112 |        | 39,352,899   |
|                                                                                 |   |       |        |         |
| **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                                                           |   | 741,242    |        | 737,857      |
| Accumulated other comprehensive income (loss)                                        |   | (123,515)  |        | (46,537)     |
| Retained earnings                                                                    |   | 1,556,595  |        | 1,430,603    |
| Total stockholder’s equity                                                     |   | 2,181,354  |        | 2,128,955    |
| **Total Liabilities and Stockholder’s                            Equity**      | $      | 40,938,466 | $           | 41,481,854   |
|                                                                                 |   |       |        |         |
|                                                                                 |   |       |        |         |
|                                                                                 |   |       |        |         |
|                                                                                 |   |       |        |         |
|                                                                                 |   |       |        |         |
|                                                                                 |   |       |        |         |
|                                                                                 |   |       |        |         |
|                                                                                 |   |       |        |         |
|                                                                                 |   |       |        |         |
|                                                                                 |   |       |        |         |
|                                                                                 |   |       |        |         |
|                                                                                 |   |       |        |         |
|                                                                                 |   |       |        |         |
| See notes to condensed consolidated financial                            statements. |   |       | (Concluded) |

             

4

 

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

Condensed Consolidated Statements of Income

Three            and Six Months Ended June 30, 2007 and 2006

(In            Thousands)

(Unaudited)

 

 

|                                                                                 |   | Three months ended |   | Six months ended |   |
|--------------------------------------------------------------------------------------|--------|--------------------|--------|------------------|--------|
|                                                                                 |   | June 30,           |   | June 30,         |   |
|                                                                                 |   | 2007               |   | 2006             |   | 2007 |   | 2006 |
| **Revenues:**                                                                        |   |               |   |             |   |   |   |   |
| Premium income:                                                                      |   |               |   |             |   |   |   |   |
| Related party (net of premiums                                                       |   |               |   |             |   |   |   |   |
| ceded of $1,486,123, $1,843,                                                         |   |               |   |             |   |   |   |   |
| $1,544,322 and $2,271)                                                               | $      | (1,405,150)        | $      | 50,300           | $      | (1,399,360) | $ | 119,787 |
| Other (net of premiums ceded                                                         |   |               |   |             |   |   |   |   |
| of $21,609, $26,602,                                                                 |   |               |   |             |   |   |   |   |
| $29,261 and $36,227)                                                                 |   | 262,763            |   | 265,369          |   | 586,897 |   | 563,831 |
| Fee income                                                                           |   | 298,328            |   | 256,558          |   | 594,670 |   | 514,088 |
| Net investment income                                                                |   | 348,624            |   | 285,346          |   | 654,550 |   | 551,069 |
| Net realized gains (losses) on                                                       |   |               |   |             |   |   |   |   |
| investments                                                                          |   | (15,938)           |   | (14,122)         |   | (7,745) |   | (22,757) |
| Total revenues                                                                       |   | (511,373)          |   | 843,451          |   | 429,012 |   | 1,726,018 |
| **Benefits and Expenses:**                                                           |   |               |   |             |   |   |   |   |
| Life and other policy benefits                                                       |   |               |   |             |   |   |   |   |
| (net of reinsurance recoveries                                                       |   |               |   |             |   |   |   |   |
| of $101,492, $9,036, $161,064                                                        |   |               |   |             |   |   |   |   |
| And $28,854)                                                                         |   | 285,451            |   | 372,986          |   | 608,209 |   | 700,715 |
| Increase (decrease) in reserves:                                                     |   |               |   |             |   |   |   |   |
| Related party                                                                        |   | (1,568,703)        |   | (9,619)          |   | (1,558,666) |   | 2,341 |
| Other                                                                                |   | 84,682             |   | (28,069)         |   | 38,550 |   | 2,303 |
| Interest paid or credited to                                                         |   |               |   |             |   |   |   |   |
| contractholders                                                                      |   | 125,547            |   | 117,425          |   | 250,360 |   | 230,723 |
| Provision for policyholders’ share                                             |   |               |   |             |   |   |   |   |
| of earnings on participating                                                         |   |               |   |             |   |   |   |   |
| business                                                                             |   | 10,171             |   | 152              |   | 15,209 |   | 2,765 |
| Dividends to policyholders                                                           |   | 18,325             |   | 19,970           |   | 54,903 |   | 50,948 |
| Total benefits                                                                       |   | (1,044,527)        |   | 472,845          |   | (591,435) |   | 989,795 |
| General insurance expenses                                                           |   | 268,886            |   | 237,295          |   | 535,283 |   | 470,989 |
| Amortization of deferred                                                             |   |               |   |             |   |   |   |   |
| acquisition costs and value of                                                       |   |               |   |             |   |   |   |   |
| business acquired                                                                    |   | 76,682             |   | 7,536            |   | 113,029 |   | 16,230 |
| Interest expense                                                                     |   | 10,345             |   | 7,559            |   | 20,846 |   | 12,226 |
| Total benefits and expenses                                                          |   | (688,614)          |   | 725,235          |   | 77,723 |   | 1,489,240 |
| **Income Before Income Taxes**                                                       |   | 177,241            |   | 118,216          |   | 351,289 |   | 236,778 |
| **Provision for Income Taxes:**                                                      |   |               |   |             |   |   |   |   |
| Current                                                                              |   | 49,418             |   | 31,725           |   | 88,375 |   | 56,792 |
| Deferred                                                                             |   | 14,122             |   | 349              |   | 35,722 |   | 13,461 |
| Total income taxes                                                                   |   | 63,540             |   | 32,074           |   | 124,097 |   | 70,253 |
| **Net Income**                                                                       | $      | 113,701            | $      | 86,142           | $      | 227,192 | $ | 166,525 |
|                                                                                 |   |               |   |             |   |   |   |   |
|                                                                                 |   |               |   |             |   |   |   |   |
|                                                                                 |   |               |   |             |   |   |   |   |
|                                                                                 |   |               |   |             |   |   |   |   |
|                                                                                 |   |               |   |             |   |   |   |   |
| See notes to condensed consolidated financial                            statements. |
|                                                                                      |        |                    |        |                  |        |  |  |  |  |  |  |

 

5

 

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

 

Condensed Consolidated Statements of Stockholder’s            Equity

Year            Ended December 31, 2006 and Six Months Ended June 30, 2007

(In            Thousands)

(Unaudited)

 

 

|                                                                                 |   |           |                                       |                |   | Accumulated Other

Comprehensive Income (Loss) |   |                   |   |             |
|--------------------------------------------------------------------------------------|--------|----------------|--------------------------------------------|---------------------|--------|------------------------------------------------|--------|------------------------|--------|------------------|
|                                                                                 |   |           |                                       |                |   |                                           |   |                   |   |
|                                                                                 |   |           |                                       |                |   | Unrealized                                     |   |                   |   |             |   |   |
|                                                                                 |   |  

Common |  

                              | Additional

Paid-in |   | Gains

(Losses) on                             |   | Employee

Benefit Plan |   |  

Retained |   |   |
|                                                                                 |   | Stock          |                                       | Capital             |   | Securities                                     |   | Adjustments            |   | Earnings         |   | Total |
| **Balances, January 1, 2006**                                                        | $      | 7,032          | $                                          | 728,701             | $      | 8,266                                          | $      | (25,084)               | $      | 1,342,796        | $ | 2,061,711 |
| Net income                                                                           |   |           |                                       |                |   |                                           |   |                   |   | 337,202          |   | 337,202 |
| Other comprehensive income (loss):                                                   |   |           |                                       |                |   |                                           |   |                   |   |             |   |   |
| Net change in unrealized losses                                                      |   |           |                                       |                |   | (23,974)                                       |   |                   |   |             |   | (23,974) |
| Minimum pension liability adjustment                                                 |   |           |                                       |                |   |                                           |   | 989                    |   |             |   | 989 |
| Total comprehensive income (loss)                                                    |   |           |                                       |                |   |                                           |   |                   |   |             |   | 314,217 |
| Impact of adopting SFAS No. 158                                                      |   |           |                                       |                |   |                                           |   | (6,734)                |   |             |   | (6,734) |
| Dividends                                                                            |   |           |                                       |                |   |                                           |   |                   |   | (249,395)        |   | (249,395) |
| Capital contribution – stock-based                            compensation     |   |           |                                       | 4,525               |   |                                           |   |                   |   |             |   | 4,525 |
| Income tax benefit on stock compensation                                             |   |           |                                       | 4,631               |   |                                           |   |                   |   |             |   | 4,631 |
| **Balances, December 31, 2006**                                                      | $      | 7,032          | $                                          | 737,857             | $      | (15,708)                                       | $      | (30,829)               | $      | 1,430,603        | $ | 2,128,955 |
| Net income                                                                           |   |           |                                       |                |   |                                           |   |                   |   | 227,192          |   | 227,192 |
| Other comprehensive income (loss):                                                   |   |           |                                       |                |   |                                           |   |                   |   |             |   |   |
| Net change in unrealized losses                                                      |   |           |                                       |                |   | (77,349)                                       |   |                   |   |             |   | (77,349) |
| Employee benefit plan adjustments                                                    |   |           |                                       |                |   |                                           |   | 253                    |   |             |   | 253 |
| Total comprehensive income (loss)                                                    |   |           |                                       |                |   |                                           |   |                   |   |             |   | 150,096 |
| Impact of adoption of SFAS No. 155                                                   |   |           |                                       |                |   | 118                                            |   |                   |   | (3)              |   | 115 |
| Impact of adoption of FIN No. 48                                                     |   |           |                                       |                |   |                                           |   |                   |   | (6,195)          |   | (6,195) |
| Dividends                                                                            |   |           |                                       |                |   |                                           |   |                   |   | (95,002)         |   | (95,002) |
| Capital contribution – stock-based                            compensation     |   |           |                                       | 1,918               |   |                                           |   |                   |   |             |   | 1,918 |
| Income tax benefit on stock-based                            compensation            |   |           |                                       | 1,467               |   |                                           |   |                   |   |             |   | 1,467 |
| **Balances, June 30, 2007**                                                          | $      | 7,032          | $                                          | 741,242             | $      | (92,939)                                       | $      | (30,576)               | $      | 1,556,595        | $ | 2,181,354 |
|                                                                                 |   |           |                                       |                |   |                                           |   |                   |   |             |   |   |
|                                                                                 |   |           |                                       |                |   |                                           |   |                   |   |             |   |   |
|                                                                                 |   |           |                                       |                |   |                                           |   |                   |   |             |   |   |
|                                                                                 |   |           |                                       |                |   |                                           |   |                   |   |             |   |   |
|                                                                                 |   |           |                                       |                |   |                                           |   |                   |   |             |   |   |
|                                                                                 |   |           |                                       |                |   |                                           |   |                   |   |             |   |   |
|                                                                                 |   |           |                                       |                |   |                                           |   |                   |   |             |   |   |
|                                                                                 |   |           |                                       |                |   |                                           |   |                   |   |             |   |   |
| See notes to condensed consolidated financial                            statements. |   |           |                                       |                |   |                                           |   |                   |   |
|                                                                                 |   |           |                                       |                |   |                                           |   |                   |   |             |   |   |
|                                                                                      |        |                |                                            |                     |        |                                                |        |                        |        |                  |  |  |  |  |

 

6

 

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

Condensed Consolidated Statements of Cash Flows

Six            Months Ended June 30, 2007 and 2006

(In            Thousands)

(Unaudited)

 

 

|                                                                                                 |   | Six months ended June 30, |
|------------------------------------------------------------------------------------------------------|--------|---------------------------|
| **Operating Activities:**                                                                            |   | 2007                      |   | 2006 |
| Net income                                                                                           | $      | 227,192                   | $ | 166,525 |
| Adjustments to reconcile net income to net                            cash                           |   |                      |   |   |
| provided by (used in) operating activities:                                                          |   |                      |   |   |
| Earnings allocated to participating                            policyholders                         |   | 15,209                    |   | 2,765 |
| Amortization of (premiums) and accretion of discounts on                            investments, net |   |  

(31,729)          |   |  

(25,261) |
| Net realized (gains) losses on investments                                                           |   | 7,745                     |   | 22,757 |
| Proceeds from sales of trading securities                                                            |   | 248,021                   |   | - |
| Purchases of trading securities                                                                      |   | (269,555)                 |   | - |
| Depreciation and amortization                                                                        |   | 130,999                   |   | 29,808 |
| Deferral of acquisition costs                                                                        |   | (35,460)                  |   | (27,421) |
| Deferred income taxes                                                                                |   | 35,722                    |   | 13,461 |
| Changes in assets and liabilities, net of                            effects                         |   |                      |   |   |
| of acquisitions:                                                                                     |   |                      |   |   |
| Policy benefit liabilities                                                                           |   | 990                       |   | (22,239) |
| Reinsurance receivable                                                                               |   | (90,763)                  |   | 64,811 |
| Accrued interest and other receivables                                                               |   | 22,032                    |   | (19,174) |
| Other, net                                                                                           |   | (62,931)                  |   | 9,005 |
| Net cash provided by operating activities                                                            |   | 197,472                   |   | 215,037 |
|                                                                                                 |   |                      |   |   |
| **Investing Activities:**                                                                            |   |                      |   |   |
| Proceeds from sales, maturities and                            redemptions                           |   |                      |   |   |
| of investments:                                                                                      |   |                      |   |   |
| Fixed maturities available-for-sale                                                                  |   | 2,738,858                 |   | 2,993,407 |
| Mortgage loans on real estate                                                                        |   | 103,837                   |   | 156,412 |
| Equity investments and other limited                                                                 |   |                      |   |   |
| partnership interests                                                                                |   | 25,964                    |   | 58,135 |
| Purchases of investments:                                                                            |   |                      |   |   |
| Fixed maturities available-for-sale                                                                  |   | (2,542,755)               |   | (3,158,540) |
| Mortgage loans on real estate                                                                        |   | (89,814)                  |   | (104,950) |
| Equity investments and other limited                                                                 |   |                      |   |   |
| partnership interests                                                                                |   | (14,619)                  |   | (46,889) |
| Net change in short-term investments                                                                 |   | 87,901                    |   | (294,783) |
| Change in repurchase agreements                                                                      |   | (219,700)                 |   | 103,584 |
| Other, net                                                                                           |   | (42,372)                  |   | 22,707 |
| Net cash provided by (used in) investing                            activities                       | $      | 47,300                    | $ | (270,917) |
|                                                                                                 |   |                      |   |   |
|                                                                                                 |   |                      |   |   |
|                                                                                                 |   |                      |   |   |
|                                                                                                 |   |                      |   |   |
|                                                                                                 |   |                      |   |   |
|                                                                                                 |   |                      |   |   |
|                                                                                                 |   |                      |   |   |
|                                                                                                 |   |                      |   |   |
|                                                                                                 |   |                      |   |   |
|                                                                                                 |   |                      |   | (Continued) |

 

7

 

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

Condensed Consolidated Statements of Cash Flows

Six            Months Ended June 30, 2007 and 2006

(In            Thousands)

(Unaudited)

 

 

|                                                                                         |   | Six months ended June 30, |
|----------------------------------------------------------------------------------------------|--------|---------------------------|
| **Financing Activities:**                                                                    |   | 2007                      |   | 2006 |
| Contract deposits                                                                            | $      | 621,778                   | $ | 491,664 |
| Contract withdrawals                                                                         |   | (764,744)                 |   | (696,937) |
| Change in due to parent and affiliates                                                       |   | 42,129                    |   | 332,230 |
| Dividends paid                                                                               |   | (95,002)                  |   | (99,025) |
| Net commercial paper borrowings (repayments)                                                 |   | (23,271)                  |   | (2,663) |
| Change in bank overdrafts                                                                    |   | (15,241)                  |   | 24,863 |
| Net cash provided by (used in) financing                            activities               |   | (234,351)                 |   | 50,132 |
|                                                                                         |   |                      |   |   |
| Net increase (decrease) in cash                                                              |   | 10,421                    |   | (5,748) |
| Cash, beginning of period                                                                    |   | 33,572                    |   | 57,903 |
| Cash, end of period                                                                          | $      | 43,993                    | $ | 52,155 |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
| Supplemental disclosures of cash flow                            information:                |   |                      |
|                                                                                         |   |                      |   |   |
| Net cash paid during the periods for:                                                        |   |                      |   |   |
| Income taxes                                                                                 | $      | 25,108                    | $ | 38,926 |
| Interest                                                                                     |   | 20,220                    |   | 9,423 |
|                                                                                         |   |                      |   |   |
| Non-cash investing and financing transactions during the                            periods: |   |                      |
| Share-based compensation expense                                                             | $      | 1,918                     | $ | 2,476 |
| Return of invested reinsurance assets to The                            Canada               |   |                      |   |   |
| Life Assurance Company (See Note 4)                                                          |   | (1,608,804)               |   | - |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
|                                                                                         |   |                      |   |   |
| See notes to condensed consolidated financial                            statements.         |   |                      | (Concluded) |

             

8

 

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

Notes            to Condensed Consolidated Financial Statements

Six            Months Ended June 30, 2007 and 2006

(Dollars In Thousands)

(Unaudited)

 

 

**1. Organization and Basis of Presentation**

             

Great-West Life & Annuity Insurance Company and its subsidiaries            (collectively, the “Company”) is a direct wholly-owned subsidiary of            GWL&A Financial Inc. (“GWL&A Financial”). GWL&A Financial is an            indirect wholly-owned subsidiary of Great-West Lifeco Inc. (“Lifeco”). The            Company offers a wide range of life insurance, health insurance and 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.

             

The preparation of financial statements in conformity with accounting            principles generally accepted in the United States of America applicable to interim            financial reporting 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 policy reserves, allowances for credit losses on mortgage loans,            deferred policy acquisition costs, derivative instruments, valuation of privately            placed fixed maturity investments, employee benefits plan obligations and taxes on            income. Actual results could differ from those estimates. However, in the opinion of            management, these statements include all normal recurring adjustments necessary for a            fair presentation of the Company’s financial position and the results of its            operations.

             

The accompanying condensed consolidated financial statements should be            read in conjunction with the audited consolidated financial statements and the            accompanying notes included in the Company’s latest annual report on Form 10-K            for the year ended December 31, 2006. Operating results for the six months ended June            30, 2007 are not necessarily indicative of the results that may be expected for the            full year ending December 31, 2007.

             

Reclassifications have been made to the 2006 condensed consolidated            financial statements to conform to the 2007 presentation. The changes in presentation            to the condensed consolidated statements of cash flows relate to the cash flows from            sales and purchases of repurchase agreement assets which in 2007 are presented in net            change in short-term investments and in 2006 were presented on a gross basis in            proceeds from sales of fixed maturities and in purchases of fixed maturities, and to            the reclassification of the change in repurchase agreement borrowings from financing            activities to investing activities. Reclassifications were also made in the 2006            condensed consolidated statements of income regarding the presentation of general            insurance expense, amortization of deferred acquisition costs and interest            expense.

 

A reclassification was also made in the 2006 condensed consolidated            balance sheet related to certain equity investments which in 2007 are presented in            other limited partnership interests and in 2006 were presented in equity investments.            Other limited partnership interests include partnerships established for the purpose of            investing in public and private debt and equity securities. Since the Company has minor            interest in these partnerships, and has virtually no influence over the            partnerships’ operating and financial policies, the cost method of accounting is            used. Also included in other limited partnership interests are limited partnerships            established for the purpose of investing in low-income housing that qualify for federal            and state tax credits. These securities are carried at amortized cost as determined            using the effective yield method.

 

The reclassifications had no effect on previously reported net income,            total assets or total stockholder’s equity and were made in order to further            enhance the readers’ understanding of the Company’s condensed consolidated            financial statements.

 

 

9

 

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

Notes            to Condensed Consolidated Financial Statements

Six            Months Ended June 30, 2007 and 2006

(Dollars In Thousands)

(Unaudited)

 

 

During the quarter ended June 30, 2007, the Company purchased securities            which were classified as held for trading. Assets in the held for trading category are            carried at fair value with unrealized gains and losses, net of taxes, reported in net            investment income.

 

**2. New Accounting Pronouncements**

             

**Recently adopted accounting pronouncements**

             

In September 2005, the Accounting Standards Executive Committee of the            American Institute of Certified Public Accountants issued Statement of Position No.            05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in            Connection With Modifications or Exchanges of Insurance Contracts” (“SOP            05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for            deferred acquisition costs on internal replacements of insurance and investment            contracts other than those specifically described in the Financial Accounting Standards            Board (the “FASB”) Statement of Financial Accounting Standards No. 97,            “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration            Contracts and for Realized Gains and Losses From the Sale of Investments.” SOP            05-1 defines an internal replacement as a modification in product benefits, features,            rights or coverages that occurs by the exchange of a contract for a new contract, or by            amendment, endorsement or rider to a contract, or by the election of a feature or            coverage within a contract. SOP 05-1 is effective for internal replacements occurring            in fiscal years beginning after December 15, 2006. The Company adopted SOP 05-1 on            January 1, 2007. The adoption of SOP 05-1 did not have a material effect on the            Company’s consolidated financial position or the results of its            operations.

 

In February 2006, the FASB issued Statement of Financial Accounting            Standards No. 155, “Accounting for Certain Hybrid Financial Instruments”            (“SFAS No. 155”). SFAS No. 155 permits any hybrid financial instrument that            contains an embedded derivative that otherwise would require bifurcation under            Statement of Financial Accounting Standards No. 133 “Accounting for Derivative            Instruments and Hedging Activities” to be carried at fair value in its entirety,            with changes in fair value recognized in earnings. In addition, SFAS No. 155 requires            that beneficial interests in securitized financial assets be analyzed to determine            whether they are freestanding derivatives or contain an embedded derivative. SFAS No.            155 is applicable to new or modified financial instruments in fiscal years beginning            after September 15, 2006, however it may be applied to instruments that an entity holds            at the date of adoption on an instrument-by-instrument basis. The Company adopted SFAS            No. 155 on January 1, 2007. The adoption of SFAS No. 155 increased stockholder’s            equity by $115.

             

In June 2006, the FASB issued Financial Interpretation No. 48,            “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48            clarifies the accounting for uncertainty in income taxes recognized in accordance with            FASB Statement of Financial Accounting Standards No. 109 “Accounting for Income            Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for            the financial statement recognition and measurement of a tax position taken in a tax            return. It also provides guidance on derecognition, classification, interest and            penalties, accounting in interim periods, disclosure and transition. FIN 48 is            effective for fiscal years beginning after December 15, 2006. The Company adopted FIN            48 on January 1, 2007. The adoption of FIN 48 decreased stockholder’s equity by            $6,195.

             

In September 2006, the FASB issued Statement of Financial Accounting            Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and            Other Postretirement Plans” (“SFAS No. 158”). For fiscal years ending            after December 15, 2006, SFAS No. 158 requires a company to recognize in its balance            sheet an asset for a defined benefit postretirement plan’s overfunded status or a            liability for a plan’s underfunded status and recognize changes in the funded            status of a defined

             

10

             

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

Notes            to Condensed Consolidated Financial Statements

Six            Months Ended June 30, 2007 and 2006

(Dollars In Thousands)

(Unaudited)

 

 

benefit postretirement plan in the other comprehensive income section of            stockholder’s equity in the year in which the changes occur, and provide            additional disclosures. The Company adopted the recognition and disclosure provisions            of SFAS No. 158 as of December 31, 2006. The adoption of SFAS No. 158 decreased            accumulated other comprehensive income (loss) by $6,734. The adoption of SFAS No. 158            did not affect the results of operations for the year ended December 31, 2006, and will            not affect the Company’s results of operations in future periods. For fiscal            years ending after December 15, 2008, SFAS No. 158 requires a company to measure a            defined benefit postretirement plan’s assets and obligations that determine its            funded status as of the end of its fiscal year. The Company is evaluating the impact            that the adoption of the measurement date provision of SFAS No. 158 will have on its            consolidated financial position and results of operations.

             

In September 2006, the U.S. Securities and Exchange Commission issued            Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year            Misstatements when Quantifying Misstatements in Current Year Financial            Statements” (“SAB No. 108”). SAB No. 108 provides guidance on how            prior year misstatements should be considered when quantifying misstatements in current            year financial statements for purposes of assessing materiality. SAB No. 108 requires            that registrants quantify errors using both a balance sheet and income statement            approach and evaluate whether either approach results in quantifying a misstatement            that, when relevant quantitative and qualitative factors are considered, is material.            SAB No. 108 permits companies to initially apply its provisions by either restating            prior financial statements or recording a cumulative effect adjustment to the carrying            values of assets and liabilities as of January 1, 2006 with an offsetting adjustment to            retained earnings for errors that were previously deemed immaterial but are material            under the guidance in SAB No. 108. The Company adopted SAB No. 108 on December 31,            2006. The adoption of SAB No. 108 did not have a material effect on the Company’s            consolidated financial position.

             

**Accounting pronouncements that will be adopted in the            future**

 

In September 2006, the FASB issued Statement of Financial Accounting            Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”).            SFAS No. 157 provides enhanced guidance for using fair value to measure assets and            liabilities. SFAS No. 157 also provides expanded information about the extent to which            a company measures assets and liabilities at fair value, the information used to            measure fair value and the effect of fair value measurements on earnings. SFAS No. 157            is applicable whenever other authoritative pronouncements require or permit assets or            liabilities to be measured at fair value. SFAS No. 157 is effective for fiscal years            beginning after November 15, 2007. The Company will adopt the provisions of SFAS No.            157 for its fiscal year beginning January 1, 2008. The Company is evaluating the impact            that the adoption of SFAS No. 157 will have on its consolidated financial position, the            results of its operations and the disclosure requirements applicable to its fair value            measurements.

             

In February 2007, the FASB issued Statement of Financial Accounting            Standards No. 159, “The Fair Value Option for Financial Assets and Financial            Liabilities - Including an Amendment of FASB Statement No. 115” (“SFAS            No.159”). SFAS No. 159 permits an entity to measure financial instruments and            certain other items at estimated fair value. Most of the provisions of SFAS            No. 159 are elective; however, the amendment to FASB No. 115,            “Accounting for Certain Investments in Debt and Equity Securities”, applies            to all entities that own trading and available-for-sale securities. The fair value            option created by SFAS No. 159 permits an entity to measure eligible items at fair            value as of specified election dates. The fair value option (a) may generally be            applied instrument by instrument, (b) is irrevocable unless a new election date occurs,            and (c) must be applied to the entire instrument and not to only a portion of the            instrument. SFAS No. 159 is effective as of the beginning of the first fiscal year that            begins after November 15, 2007. The Company will adopt the provisions of SFAS No.            159 for its fiscal year beginning January 1, 2008. The Company is evaluating the            impact

             

11

             

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

Notes            to Condensed Consolidated Financial Statements

Six            Months Ended June 30, 2007 and 2006

(Dollars In Thousands)

(Unaudited)

 

 

that the adoption of SFAS No. 159 will have on its consolidated            financial position and the results of its operations.

             

|   | **3.** | **Acquisition** |
|--------|--------|-----------------|

             

On May 31, 2007, the Company acquired an 80% equity interest in Benefits            Management Corporation (“BMC”). The assets acquired, liabilities assumed            and the Company’s equity interest in the results of BMC’s operations have            been included in its consolidated financial statements since that date. The acquisition            added approximately 90,000 members to the Company’s medical membership.            BMC’s principal subsidiary, Allegiance Benefit Management, Inc.            (“Allegiance”), is a Montana-based third-party administrator of employee            health plans. Allegiance is the leading medical administrator for large employer groups            in Montana and it has the second largest overall market share among health plans in the            state. The acquisition includes Allegiance’s physician and hospital networks, as            well as BMC’s other subsidiaries, including a newly created company to sell            fully-insured health benefit plans in Montana and a company that provides medical            management services primarily in Montana.

             

**4. Related Party Transactions**

             

Effective February 1, 2007, the Company’s Healthcare segment            entered into a reinsurance agreement with an affiliate, London Life International            Reinsurance Corporation, to cede 50% of direct written stop loss and excess loss health            insurance business on a coinsurance with funds withheld basis.

             

On June 1, 2007, the Company’s Individual Markets segment            terminated its reinsurance agreement with an affiliate, The Canada Life Assurance            Company (“CLAC”), pursuant to which it had assumed 80% of certain United            States life, health and annuity business on a coinsurance and coinsurance with funds            withheld basis. The Company recorded, at fair value, the following on June 1, 2007 in            its condensed consolidated balance sheet in connection with the termination of the            reinsurance agreement.

             

| Assets                                                      |   | Liabilities and                            Stockholder’s Equity |
|-------------------------------------------------------------|--------|-----------------------------------------------------------------------|
| Fixed maturities                                            | $      | (1,177,074)                                                           |   | Policy reserves | $ | (1,976,028) |
| Mortgage loans on real                            estate    |   | (196,743)                                                             |   | Policy and contract                            claims |   | (20,256) |
| Policy loans                                                |   | (219,149)                                                             |   | Policyholders’                            funds |   | (20,464) |
| Reinsurance                            receivable           |   | (310,312)                                                             |   | Provision for                            policyholder |   |   |
| Deferred policy acquisition costs                           |   |                                                                  |   | dividends |   | (31,841) |
| and value of business acquired                              |   | (68,809)                                                              |   | Undistributed earnings                            on |   |   |
| Investment income                                           |   |                                                                  |   | participating business |   | 8,161 |
| due and                            accrued                  |   | (15,837)                                                              |   | Other                            liabilities |   | 297 |
| Premiums in course of                            collection |   | (3,540)                                                               |   | Total                            liabilities |   | (2,040,131) |
| Deferred income                            taxes            |   | (18,292)                                                              |   |   |   |   |
|                                                        |   |                                                                  |   | Accumulated other |   |   |
|                                                        |   |                                                                  |   | comprehensive income |   | 7,737 |
|                                                        |   |                                                                  |   | Retained                            earnings |   | 22,638 |
|                                                        |   |                                                                  |   | Total                            stockholder’s equity |   | 30,375 |
|                                                        |   |                                                                  |   | Total liabilities                            and |   |   |
| Total                            assets                     | $      | (2,009,756)                                                           |   | stockholder’s equity | $ | (2,009,756) |

             

             

             

12

 

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

Notes            to Condensed Consolidated Financial Statements

Six            Months Ended June 30, 2007 and 2006

(Dollars In Thousands)

(Unaudited)

 

 

The Company recorded the following on June 1, 2007 in its condensed            consolidated statement of income in connection with the termination of the reinsurance            agreement.

             

| Premium income, related party                                                                             | $      | (1,386,626) |
|-----------------------------------------------------------------------------------------------------------|--------|-------------|
| Net investment income                                                                                     |   | 58,569      |
| Net realized gains (losses) on investments                                                                |   | (14,744)    |
| Total revenues                                                                                            |   | (1,342,801) |
| Increase (decrease) in reserves, related                            party                                 |   | (1,453,145) |
| Provision for policyholders’ share of earnings on                            participating business |   | 8,161       |
| Amortization of deferred acquisition costs and value of                            business acquired      |   | 62,961      |
| Total benefits and expenses                                                                               |   | (1,382,023) |
| Income before income taxes                                                                                |   | 39,222      |
| Total income taxes                                                                                        |   | 16,584      |
| Net income                                                                                                | $      | 22,638      |

             

The Company’s separate accounts invest in shares of Maxim Series            Fund, Inc., an open-end management investment company which is an affiliate of the            Company, and shares of other non-affiliated mutual funds and government and corporate            bonds. The Company’s separate accounts include mutual funds or other investment            options that purchase guaranteed interest annuity contracts issued by the Company.            During the three and six-month periods ended June 30, 2007 and 2006, these purchases            totaled $19,200, $44,963, $7,735 and $34,872, respectively. As the general account            investment contracts are also included in the separate account balances in the            accompanying condensed consolidated balance sheets, the Company has reduced the            separate account assets and liabilities by $387,381 and $356,992 at June 30, 2007 and            December 31, 2006, respectively, to eliminate these amounts in its condensed            consolidated balance sheets at those dates.

             

             

             

             

             

             

             

             

             

             

             

             

             

 

13

 

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

Notes            to Condensed Consolidated Financial Statements

Six            Months Ended June 30, 2007 and 2006

(Dollars In Thousands)

(Unaudited)

 

 

|   | **5.** | **Impairment of Available-for-Sale Fixed Maturity and                            Equity Investments – Unrealized                            Losses**        |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

The following tables summarize unrealized investment losses by class of            investment at June 30, 2007 and December 31, 2006. The Company considers these            investments to be only temporarily impaired.

             

|           |   | June 30, 2007           |
|----------------|--------|-------------------------|
|           |   | Less than twelve months |   | Twelve months or longer |   | Total |
| Fixed          |   | Estimated               |   | Unrealized |   | Estimated |   | Unrealized |   | Estimated |   | Unrealized |
| Maturities:    |   | fair value              |   | loss |   | fair value |   | loss |   | fair value |   | loss |
| U.S.           |   |                    |   |   |   |   |   |   |   |   |   |   |
| government     |   |                    |   |   |   |   |   |   |   |   |   |   |
| direct         |   |                    |   |   |   |   |   |   |   |   |   |   |
| obligations    |   |                    |   |   |   |   |   |   |   |   |   |   |
| and U.S.       |   |                    |   |   |   |   |   |   |   |   |   |   |
| agencies       | $      | 1,271,262               | $ | 12,779 | $ | 1,040,738 | $ | 28,929 | $ | 2,312,000 | $ | 41,708 |
| Obligations    |   |                    |   |   |   |   |   |   |   |   |   |   |
| of U.S. states |   |                    |   |   |   |   |   |   |   |   |   |   |
| and their      |   |                    |   |   |   |   |   |   |   |   |   |   |
| sub-divisions  |   | 120,419                 |   | 2,591 |   | 418,600 |   | 8,119 |   | 539,019 |   | 10,710 |
| Foreign        |   |                    |   |   |   |   |   |   |   |   |   |   |
| governments    |   | 623                     |   | 1 |   | 1,754 |   | 82 |   | 2,377 |   | 83 |
| Corporate      |   |                    |   |   |   |   |   |   |   |   |   |   |
| debt           |   |                    |   |   |   |   |   |   |   |   |   |   |
| securities     |   | 1,126,568               |   | 27,537 |   | 2,440,097 |   | 103,980 |   | 3,566,665 |   | 131,517 |
| Mortgage-      |   |                    |   |   |   |   |   |   |   |   |   |   |
| backed and     |   |                    |   |   |   |   |   |   |   |   |   |   |
| asset-backed   |   |                    |   |   |   |   |   |   |   |   |   |   |
| securities     |   | 1,181,737               |   | 29,210 |   | 2,445,986 |   | 103,855 |   | 3,627,723 |   | 133,065 |
| Total fixed    |   |                    |   |   |   |   |   |   |   |   |   |   |
| maturities     | $      | 3,700,609               | $ | 72,118 | $ | 6,347,175 | $ | 244,965 | $ | 10,047,784 | $ | 317,083 |
| Equity         |   |                    |   |   |   |   |   |   |   |   |   |   |
| investments    | $      | 2,218                   | $ | 61 | $ | 2 | $ | 2 | $ | 2,220 | $ | 63 |

             

             

             

             

             

             

             

             

             

             

14

 

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

Notes            to Condensed Consolidated Financial Statements

Six            Months Ended June 30, 2007 and 2006

(Dollars In Thousands)

(Unaudited)

 

 

             

|           |   | December 31, 2006       |
|----------------|--------|-------------------------|
|           |   | Less than twelve months |   | Twelve months or longer |   | Total |
| Fixed          |   | Estimated               |   | Unrealized |   | Estimated |   | Unrealized |   | Estimated |   | Unrealized |
| Maturities:    |   | fair value              |   | loss |   | fair value |   | loss |   | fair value |   | loss |
| U.S.           |   |                    |   |   |   |   |   |   |   |   |   |   |
| government     |   |                    |   |   |   |   |   |   |   |   |   |   |
| direct         |   |                    |   |   |   |   |   |   |   |   |   |   |
| obligations    |   |                    |   |   |   |   |   |   |   |   |   |   |
| and U.S.       |   |                    |   |   |   |   |   |   |   |   |   |   |
| agencies       | $      | 1,543,431               | $ | 8,907 | $ | 986,022 | $ | 21,734 | $ | 2,529,453 | $ | 30,641 |
| Obligations    |   |                    |   |   |   |   |   |   |   |   |   |   |
| of U.S. states |   |                    |   |   |   |   |   |   |   |   |   |   |
| and their      |   |                    |   |   |   |   |   |   |   |   |   |   |
| sub-divisions  |   | 279,895                 |   | 6,251 |   | 456,157 |   | 16,532 |   | 736,052 |   | 22,783 |
| Foreign        |   |                    |   |   |   |   |   |   |   |   |   |   |
| governments    |   | 1,217                   |   | 7 |   | 13,242 |   | 125 |   | 14,459 |   | 132 |
| Corporate      |   |                    |   |   |   |   |   |   |   |   |   |   |
| debt           |   |                    |   |   |   |   |   |   |   |   |   |   |
| securities     |   | 1,157,847               |   | 15,972 |   | 2,159,779 |   | 74,447 |   | 3,317,626 |   | 90,419 |
| Mortgage-      |   |                    |   |   |   |   |   |   |   |   |   |   |
| backed and     |   |                    |   |   |   |   |   |   |   |   |   |   |
| asset-backed   |   |                    |   |   |   |   |   |   |   |   |   |   |
| securities     |   | 724,267                 |   | 7,782 |   | 2,091,923 |   | 62,867 |   | 2,816,190 |   | 70,649 |
| Total fixed    |   |                    |   |   |   |   |   |   |   |   |   |   |
| maturities     | $      | 3,706,657               | $ | 38,919 | $ | 5,707,123 | $ | 175,705 | $ | 9,413,780 | $ | 214,624 |
| Equity         |   |                    |   |   |   |   |   |   |   |   |   |   |
| investments    | $      | 309                     | $ | 1 | $ | 79 | $ | 4 | $ | 388 | $ | 5 |

 

**Fixed maturity investments**- At June 30,            2007 and December 31, 2006, there were 665 and 980 securities, respectively, that had            been in a loss position for less than twelve months with carrying values in the amounts            of $3,700,609 and $3,706,657, respectively, and unrealized losses in the amounts of            $72,118 and $38,919, respectively. At June 30, 2007 and December 31, 2006, less than 1%            of these securities were rated non-investment grade. At June 30, 2007 and December 31,            2006, there were 1,386 and 1,456 securities, respectively, that had been in a            continuous loss position for twelve months or longer with carrying values in the            amounts of $6,347,175 and $5,707,123, respectively, and unrealized losses in the            amounts of $244,965 and $175,705, respectively. The unrealized losses on these            securities are primarily attributable to changes in market interest rates and changes            in credit spreads since the securities were acquired. The Company does not consider            these investments to be other-than-temporarily impaired at June 30, 2007.

             

**Equity investments**- At June 30, 2007 and            December 31, 2006, the Company had unrealized losses on equity investments with            carrying values in the amounts of $2,220 and $388, respectively, and unrealized losses            in the amounts of $63 and $5, respectively. Of the total unrealized losses, $61 and $1            have been in loss positions for less than twelve months. At June 30, 2007, the Company            does not consider any of these investments to be other-than-temporarily            impaired.

             

**Other-than-temporary impairment**- During            the six months ended June 30, 2007, the Company recorded other-than-temporary            impairments on fixed maturity investments in the amount of $22,283. Of this, $20,750            was recognized in connection to the termination of the CLAC reinsurance agreement (See            Note 4) because the Company no longer had the intent to hold the investments until            recovery. The Company did not record any other-than-temporary impairments on fixed            maturity

             

15

             

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

Notes            to Condensed Consolidated Financial Statements

Six            Months Ended June 30, 2007 and 2006

(Dollars In Thousands)

(Unaudited)

 

 

investments during the six months ended June 30, 2006. During the six            months ended June 30, 2007 and 2006, the Company recorded other-than-temporary            impairments on equity securities in the amounts of $23 and $373,            respectively.

             

**6. Reinsurance**

             

The Company enters into reinsurance transactions as both a provider and            purchaser of reinsurance. In the normal course of business, the Company seeks to limit            its exposure to loss on any single insured and to recover a portion of benefits paid by            ceding risks to other insurance enterprises under excess coverage and coinsurance            contracts. The Company retains a maximum liability of $3,500 of coverage per individual            life.

             

Ceded reinsurance contracts do not relieve the Company from its            obligations to policyholders. Failure of reinsurers to honor their obligations could            result in losses to the Company. The Company evaluates the financial condition of its            reinsurers and monitors concentrations of credit risk arising from similar geographic            regions, activities or economic characteristics of the reinsurers to minimize its            exposure to significant losses from reinsurer insolvencies.

             

**7. Share-Based Compensation**

 

Lifeco has a stock option plan that provides for the granting of options            on its common shares to certain of its officers and employees and those of its            subsidiaries, including the Company.

             

The Company adopted the provisions of Statement of Financial Accounting            Standards No. 123R, “Share-Based Payment” (“SFAS No. 123R”) on            January 1, 2006, applying the modified prospective transition method. During the three            and six-month periods ended June 30, 2007 and 2006, the Company recognized $1,161,            $1,918, $1,161 and $2,476, respectively, in its condensed consolidated statements of            income related to share-based compensation expense.

             

During the six months ended June 30, 2007, Lifeco granted 720,000 stock            options to employees of the Company. The stock options vest over a seven and one half            year period ending in August 2014. Compensation expense in the amount of $4,608,            computed using the accelerated method of recognition, will be recognized in the            Company’s financial statements over the vesting period. The use of the            accelerated method is a change in accounting principle, which was elected upon adoption            of SFAS No. 123R on January 1, 2006. The fair market value of all stock options granted            subsequent to January 1, 2006 will be recognized as compensation expense over the            requisite service period using the accelerated method.

             

             

             

             

             

             

             

             

16

 

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

Notes            to Condensed Consolidated Financial Statements

Six            Months Ended June 30, 2007 and 2006

(Dollars In Thousands)

(Unaudited)

 

 

             

|   | **8. Components of Net Periodic Benefit                            Cost** |
|--------|---------------------------------------------------------------------------|

 

The components of the cost of employee benefit plans included in            operating expenses during the three and six-month periods ended June 30, 2007 and 2006            are as follows.

             

|                        |     | Three months ended |   | Three months ended |
|-----------------------------|----------|--------------------|--------|--------------------|
| June 30,                    | June 30, |
|                        |     | 2007               |   | 2006               |   | 2007 |   | 2006 |
|                        |     |               |   |               |   | Post-Retirement |
|                        |     | Pension Benefits   |   | Medical Plan       |
| Service cost                | $        | 2,421              | $      | 2,352              | $ | 513 | $ | 463 |
| Interest cost               |     | 4,323              |   | 3,993              |   | 372 |   | 327 |
| Expected return on          |     |               |   |               |   |   |   |   |
| plan assets                 |     | (5,041)            |   | (4,209)            |   | - |   | - |
| Amortization of transition  |     |               |   |               |   |   |   |   |
| obligation                  |     | (379)              |   | (379)              |   | - |   | - |
| Amortization of             |     |               |   |               |   |   |   |   |
| unrecognized prior          |     |               |   |               |   |   |   |   |
| service cost                |     | 55                 |   | 115                |   | (932) |   | (932) |
| Amortization of losses from |     |               |   |               |   |   |   |   |
| earlier periods             |     | 1,219              |   | 1,362              |   | 163 |   | 139 |
| Net periodic benefit cost   | $        | 2,598              | $      | 3,234              | $ | 116 | $ | (3) |

 

|                        |     | Six months ended |   | Six months ended |
|-----------------------------|----------|------------------|--------|------------------|
| June 30,                    | June 30, |
|                        |     | 2007             |   | 2006             |   | 2007 |   | 2006 |
|                        |     |             |   |             |   | Post-Retirement |
|                        |     | Pension Benefits |   | Medical Plan     |
| Service cost                | $        | 4,877            | $      | 4,595            | $ | 1,023 | $ | 896 |
| Interest cost               |     | 8,670            |   | 7,976            |   | 742 |   | 679 |
| Expected return on          |     |             |   |             |   |   |   |   |
| plan assets                 |     | (10,084)         |   | (8,391)          |   | - |   | - |
| Amortization of transition  |     |             |   |             |   |   |   |   |
| obligation                  |     | (758)            |   | (758)            |   | - |   | - |
| Amortization of             |     |             |   |             |   |   |   |   |
| unrecognized prior          |     |             |   |             |   |   |   |   |
| service cost                |     | 110              |   | 230              |   | (1,864) |   | (1,862) |
| Amortization of losses from |     |             |   |             |   |   |   |   |
| earlier periods             |     | 2,450            |   | 2,549            |   | 321 |   | 316 |
| Net periodic benefit cost   | $        | 5,265            | $      | 6,201            | $ | 222 | $ | 29 |

             

             

The Company does not expect to make any contributions to its pension            plan during the year ended December 31, 2007.

             

             

             

17

 

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

Notes            to Condensed Consolidated Financial Statements

Six            Months Ended June 30, 2007 and 2006

(Dollars In Thousands)

(Unaudited)

 

 

             

             

**9. Federal Income Taxes**

 

Deferred income taxes represent the tax effect of the differences            between the book and tax bases of assets and liabilities. The change in the deferred            income tax asset between December 31, 2006 and June 30, 2007 is as follows.

             

| Deferred tax asset, December 31, 2006                                                            | $      | 173,059  |
|--------------------------------------------------------------------------------------------------|--------|----------|
| Increase in deferred tax asset included in other                            comprehensive income |   |     |
| related to change in unrealized (gains) losses on                            investment assets,  |   |     |
| net of policyholder related amounts                                                              |   | 41,354   |
| Increase in deferred tax asset related to implementation                            of FIN 48    |   | 95,651   |
| Reduction in deferred tax asset related to the                            consolidated           |   |     |
| statement of income                                                                              |   | (35,722) |
| Other, net                                                                                       |   | 71       |
| Deferred tax asset, June 30, 2007                                                                | $      | 274,413  |

             

|   | **10. Segment Information** |
|--------|-----------------------------|

 

As of January 1, 2007, the Company’s business segments have been            redefined from prior periods whereby the Individual Markets and Retirement Services            segments (formerly combined as the Company’s Financial Services segment) were            identified and reported separately. The segment reporting for prior periods has been            restated to reflect this change in business segments.

             

The Company’s four business segments include: Great-West            Healthcare, Individual Markets, Retirement Services and Other. The Great-West            Healthcare segment markets group life and health insurance to corporate employers. The            Individual Markets segment distributes life insurance and individual annuity products            to both individuals and businesses through various distribution channels. The            Retirement Services segment provides enrollment services, communications materials,            various investment options and educational services to employer-sponsored defined            contribution and voluntary 403(b) plans, as well as comprehensive administrative and            record-keeping services for financial institutions and employers. The Company’s            Other segment includes corporate items not directly allocated to any of its other            business segments, interest expense and the activities of Great-West Life and Annuity            Insurance Company of South Carolina, a wholly owned subsidiary whose sole business is            the assumption of a certain block of term life insurance from CLAC. The Company’s            business segments are strategic business units that offer different products and            services. They are managed separately as each segment has its own unique distribution            channels.

             

             

             

             

             

             

18

 

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

Notes            to Condensed Consolidated Financial Statements

Six            Months Ended June 30, 2007 and 2006

(Dollars In Thousands)

(Unaudited)

 

 

             

             

The following table summarizes the financial results of the            Company’s Great-West Healthcare segment for the three and six-month periods ended            June 30, 2007 and 2006.

             

|                        |   | Three months ended

June 30, |  

                              | Six months ended

June 30, |
|-----------------------------|--------|------------------------------|--------------------------------------------|----------------------------|
|                        |   | 2007                         |                                       | 2006                       |   | 2007 |   | 2006 |
| Premium income              | $      | 126,312                      | $                                          | 207,719                    | $ | 336,230 | $ | 442,850 |
| Fee income                  |   | 177,871                      |                                       | 175,281                    |   | 357,747 |   | 349,379 |
| Net investment income       |   | 20,489                       |                                       | 19,518                     |   | 45,972 |   | 40,726 |
| Net realized gains (losses) |   |                         |                                       |                       |   |   |   |   |
| on investments              |   | 3,485                        |                                       | 1,771                      |   | 5,145 |   | 1,100 |
| Total revenues              |   | 328,157                      |                                       | 404,289                    |   | 745,094 |   | 834,055 |
| Policyholder benefits       |   | 99,817                       |                                       | 195,302                    |   | 270,144 |   | 403,193 |
| Operating expenses          |   | 168,650                      |                                       | 168,997                    |   | 335,474 |   | 335,639 |
| Total benefits and expenses |   | 268,467                      |                                       | 364,299                    |   | 605,618 |   | 738,832 |
| Income before income taxes  |   | 59,690                       |                                       | 39,990                     |   | 139,476 |   | 95,223 |
| Income tax expense          |   | 20,544                       |                                       | 14,308                     |   | 47,518 |   | 31,805 |
| Net income                  | $      | 39,146                       | $                                          | 25,682                     | $ | 91,958 | $ | 63,418 |

             

As described in Note 4, the Company’s Individual Markets segment            terminated its reinsurance agreement with CLAC on June 1, 2007. The following table            summarizes the financial results of the Company’s Individual Markets segment for            the three and six-month periods ended June 30, 2007 and 2006.

             

|                        |     | Three months ended |   | Six months ended |
|-----------------------------|----------|--------------------|--------|------------------|
| June 30,                    | June 30, |
|                        |     | 2007               |   | 2006             |   | 2007 |   | 2006 |
| Premium income              | $        | (1,307,655)        | $      | 87,317           | $ | (1,210,570) | $ | 210,471 |
| Fee income                  |     | 21,940             |   | 11,143           |   | 43,552 |   | 22,250 |
| Net investment income       |     | 231,923            |   | 186,179          |   | 415,606 |   | 355,595 |
| Net realized losses         |     |               |   |             |   |   |   |   |
| on investments              |     | (16,288)           |   | (11,713)         |   | (12,733) |   | (15,317) |
| Total revenues              |     | (1,070,080)        |   | 272,926          |   | (764,145) |   | 572,999 |
| Policyholder benefits       |     | (1,237,069)        |   | 219,861          |   | (1,025,529) |   | 476,965 |
| Operating expenses          |     | 87,476             |   | 14,094           |   | 132,292 |   | 29,993 |
| Total benefits and expenses |     | (1,149,593)        |   | 233,955          |   | (893,237) |   | 506,958 |
| Income before income taxes  |     | 79,513             |   | 38,971           |   | 129,092 |   | 66,041 |
| Income tax expense          |     | 28,394             |   | 12,536           |   | 47,173 |   | 22,173 |
| Net income                  | $        | 51,119             | $      | 26,435           | $ | 81,919 | $ | 43,868 |

             

             

             

             

             

19

 

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

Notes            to Condensed Consolidated Financial Statements

Six            Months Ended June 30, 2007 and 2006

(Dollars In Thousands)

(Unaudited)

 

 

             

             

The following table summarizes the financial results of the            Company’s Retirement Services segment for the three and six-month periods ended            June 30, 2007 and 2006.

             

|                        |     | Three months ended |   | Six months ended |
|-----------------------------|----------|--------------------|--------|------------------|
| June 30,                    | June 30, |
|                        |     | 2007               |   | 2006             |   | 2007 |   | 2006 |
| Premium income              | $        | 1,864              | $      | 2,422            | $ | 3,698 | $ | 5,563 |
| Fee income                  |     | 97,254             |   | 69,097           |   | 190,852 |   | 140,165 |
| Net investment income       |     | 86,177             |   | 71,122           |   | 174,108 |   | 141,742 |
| Net realized losses         |     |               |   |             |   |   |   |   |
| on investments              |     | (2,948)            |   | (3,366)          |   | (624) |   | (7,652) |
| Total revenues              |     | 182,347            |   | 139,275          |   | 368,034 |   | 279,818 |
| Policyholder benefits       |     | 56,281             |   | 43,668           |   | 110,550 |   | 89,187 |
| Operating expenses          |     | 80,051             |   | 54,881           |   | 163,943 |   | 111,900 |
| Total benefits and expenses |     | 136,332            |   | 98,549           |   | 274,493 |   | 201,087 |
| Income before income taxes  |     | 46,015             |   | 40,726           |   | 93,541 |   | 78,731 |
| Income tax expense          |     | 14,103             |   | 4,992            |   | 28,448 |   | 16,594 |
| Net income                  | $        | 31,912             | $      | 35,734           | $ | 65,093 | $ | 62,137 |

             

The following table summarizes the financial results of the            Company’s Other segment for the three and six-month periods ended June 30, 2007            and 2006.

             

|                        |     | Three months ended |   | Six months ended |
|-----------------------------|----------|--------------------|--------|------------------|
| June 30,                    | June 30, |
|                        |     | 2007               |   | 2006             |   | 2007 |   | 2006 |
| Premium income              | $        | 37,092             | $      | 18,211           | $ | 58,179 | $ | 24,734 |
| Fee income                  |     | 1,263              |   | 1,037            |   | 2,519 |   | 2,294 |
| Net investment income       |     | 10,035             |   | 8,527            |   | 18,864 |   | 13,006 |
| Net realized gains (losses) |     |               |   |             |   |   |   |   |
| on investments              |     | (187)              |   | (814)            |   | 467 |   | (888) |
| Total revenues              |     | 48,203             |   | 26,961           |   | 80,029 |   | 39,146 |
| Policyholder benefits       |     | 36,444             |   | 14,014           |   | 53,400 |   | 20,450 |
| Operating expenses          |     | 19,736             |   | 14,418           |   | 37,449 |   | 21,913 |
| Total benefits and expenses |     | 56,180             |   | 28,432           |   | 90,849 |   | 42,363 |
| Loss before income taxes    |     | (7,977)            |   | (1,471)          |   | (10,820) |   | (3,217) |
| Income tax expense          |     | 499                |   | 238              |   | 958 |   | (319) |
| Net loss                    | $        | (8,476)            | $      | (1,709)          | $ | (11,778) | $ | (2,898) |

             

**11. Commitments and Contingencies**

             

The Company is involved in various legal proceedings that arise in the            ordinary course of its business. In the opinion of management, after consultation with            counsel, the resolution of these proceedings should not have a material adverse effect            on its consolidated financial position or results of operations.

             

The Company has a corporate credit facility agreement in the amount of            $50,000 for general corporate purposes. The credit facility matures on May 26, 2010.            Interest accrues at a rate

             

20

             

**GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY**

Notes            to Condensed Consolidated Financial Statements

Six            Months Ended June 30, 2007 and 2006

(Dollars In Thousands)

(Unaudited)

 

 

dependent on various conditions and terms of borrowings. The agreement            requires the Company to maintain a minimum adjusted net worth of $900,000 plus 50% of            its net income, if positive (both compiled by the unconsolidated statutory accounting            basis prescribed by the National Association of Insurance Commissioners), for each            quarter ending after March 31, 2005. The Company had no borrowings under the credit            facility at either June 30, 2007 or December 31, 2006 and was in compliance with all            covenants.

             

In connection with certain business acquisitions, the Company has agreed            to pay additional consideration in future periods, based upon the attainment by the            acquired entity of certain defined operating objectives. The contingent consideration            obligations are not considered contractual obligations and are not accrued for prior to            the attainment of the objectives. Any such contingent payments will be considered as            additional purchase consideration and will result in an adjustment to the purchase            price allocation in the period in which the contingency is resolved.

             

**12. Subsequent Events**

             

On August 1, 2007, the Company announced that it reached an agreement            with Franklin Templeton Investments Corp. (“Franklin Templeton”) whereby            Franklin Templeton will transition its 401(k) recordkeeping business to the            Company.

             

The Company has been providing recordkeeping services on an outsourced            basis for Franklin Templeton’s 401(k) business through its FASCore, LLC            subsidiary since 2006. Under the new agreement, the Company will assume additional            servicing and custodial responsibilities for approximately 340 plans, representing            about 64,000 participants and $1.8 billion in assets.

             

The transaction is expected to be completed in the fourth quarter of            2007.

             

On August 2, 2007, the Company paid an extraordinary dividend in the            amount of $400,000 to its parent, GWL&A Financial.

             

             

             

             

             

 

21

 

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

             

**General**

             

This Form 10-Q contains forward-looking statements. Forward-looking            statements are statements not based on historical information and that relate to future            operations, strategies, financial results, or other developments. In particular,            statements using verbs such as “expect,” “anticipate,”            “believe,” or words of similar import generally involve forward-looking            statements. Without limiting the foregoing, forward-looking statements include            statements which represent the Company’s beliefs concerning future or projected            levels of sales of its products, investment spreads or yields, or the earnings or            profitability of its activities. Forward-looking statements are necessarily based upon            estimates and assumptions that are inherently subject to significant business,            economic, and competitive uncertainties and contingencies, many of which are beyond the            Company’s control and many of which, with respect to future business decisions,            are subject to change. These uncertainties and contingencies can affect actual results            and could cause actual results to differ materially from those expressed in any            forward-looking statements made by, or on behalf of, the Company. Whether or not actual            results differ materially from forward-looking statements may depend on numerous            foreseeable and unforeseeable events or developments, some of which may be national in            scope, such as general economic conditions and interest rates, some of which may be            related to the insurance industry generally, such as pricing competition, regulatory            developments, and industry consolidation, and others of which may relate to the Company            specifically, such as credit, 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.

             

As of January 1, 2007, the Company’s business segments have been            redefined from prior periods whereby the Individual Markets and Retirement Services            segments (formerly combined as the Company’s Financial Services segment) were            identified and reported separately. The segment reporting for prior periods has been            restated to reflect this change in business segments.

             

**Company Results of Operations**

             

The following discussion addresses the Company’s results of            operations for the three and six-month periods ended June 30, 2007 compared with the            same periods of the preceding year. The discussion should be read in conjunction with            the Management’s Discussion and Analysis of Financial Condition and Results of            Operations section included in the Company’s Annual Report on Form 10-K for the            year ended December 31, 2006, to which the reader is directed for additional            information.

             

As more fully described in Note 4 to the accompanying condensed            consolidated financial statements, on June 1, 2007, the Company’s Individual            Markets segment terminated one of its reinsurance agreements with an affiliate, The            Canada Life Assurance Company (“CLAC”), pursuant to which it had assumed            80% of certain United States life, health and annuity business on a coinsurance and            coinsurance with funds withheld basis.

             

             

             

             

             

             

22

 

**Three months ended June 30, 2007 compared with the three months ended            June 30, 2006**

             

The following is a summary of certain of the Company’s financial            data for the three months ended June 30, 2007 and 2006.

             

| Income Statement Data                      |   | Three months ended June 30, |
|--------------------------------------------|--------|-----------------------------|
| (In millions)                              |   | 2007                        |   | 2006 |
| Premium income                             | $      | (1,142)                     | $ | 316 |
| Fee income                                 |   | 298                         |   | 256 |
| Net investment income                      |   | 349                         |   | 285 |
| Net realized gains (losses) on investments |   | (16)                        |   | (14) |
| Total revenues                             |   | (511)                       |   | 843 |
| Policyholder benefits                      |   | (1,044)                     |   | 473 |
| Operating expenses                         |   | 356                         |   | 252 |
| Total benefits and expenses                |   | (688)                       |   | 725 |
| Income before income taxes                 |   | 177                         |   | 118 |
| Income tax expense                         |   | 63                          |   | 32 |
| Net income                                 | $      | 114                         | $ | 86 |

             

| Operating Data                             |   | Three months ended June 30, |
|--------------------------------------------|--------|-----------------------------|
| (In millions)                              |   | 2007                        |   | 2006 |
| Deposits to separate accounts              | $      | 742                         | $ | 606 |
| Deposits to investment-type contracts**1** |   | 276                         |   | 193 |
| Withdrawals from investment-type contracts |   | 883                         |   | 354 |
| Self funded premium equivalents            |   | 1,164                       |   | 1,189 |

             

**1**Includes $19 million and $8 million            during the three months ended June 30, 2007 and 2006, respectively, of the            Company’s guaranteed interest annuity contracts purchased by affiliated funds or            other separate account investment options as discussed in Note 4 to the accompanying            condensed consolidated financial statements.

             

The Company’s consolidated net income increased by $28 million, or            32.6%, to $114 million for the three months ended June 30, 2007 when compared to 2006.            The increase in net income is primarily due to a gain of $23 million resulting from the            termination of the CLAC reinsurance agreement within the Individual Markets            segment.

             

Excluding the negative premium revenue of $1,387 million resulting from            the termination of the CLAC reinsurance agreement, total premiums decreased by $71            million, or 22.5%, to $245 million during the three months ended June 30, 2007 when            compared to 2006. The decrease is largely due to $96 million of premiums ceded to            London Life International Reinsurance Corporation (“LLIRC”) in the            Healthcare segment under the February 1, 2007, reinsurance agreement. The decrease was            partially offset by strong renewal pricing on individual stop loss business and            increased Healthcare segment membership.

             

Fee income has increased by $42 million, or 16.4%, to $298 million            during the three months ended June 30, 2007 when compared to 2006. This increase is            primarily the result of the addition of participant accounts and the related account            balances from the 2006 acquisitions of business from Metropolitan Life Insurance            Company and its affiliates (“MetLife”) and U.S. Bank in the Retirement            Services segment.

             

Net investment income increased by $64 million, or 22.5%, to $349            million during the three months ended June 30, 2007 when compared to 2006. The increase            is primarily due to $59 million of income in the Individual Markets segment from the            settlement of the embedded derivative as the result of the termination of the CLAC            reinsurance agreement. The remaining increase is largely due

             

23

             

to changes in invested assets due to the MetLife acquisition, partially            offset by the impact of the return of invested assets under the CLAC reinsurance            agreement.

             

Excluding the decrease in policy reserves of $1,453 million and            additional amortization of deferred acquisition costs of $63 million resulting from the            termination of the CLAC reinsurance agreement, total benefits and expenses remained            relatively constant, decreasing by $23 million, or 3.2%, to $702 million during the            three months ended June 30, 2007 when compared to 2006.

             

Deposits to separate accounts increased by $136 million, or 22.4%, to            $742 million during the three months ended June 30, 2007 when compared to 2006. This            increase was primarily due to increased sales of the Business Owned Life Insurance            (“BOLI”) separate account product within the Individual Markets            segment.

             

Deposits to investment-type contracts increased by $83 million, or            43.0%, to $276 million during the three months ended June 30, 2007 when compared to            2006. This increase was primarily due to a $108 million increase in deposits from            participant accounts that were acquired from MetLife.

             

Withdrawals from investment-type contracts increased by $529 million, or            149.4%, to $883 million during the three months ended June 30, 2007 when compared to            2006. This increase is primarily attributable to $497 of withdrawals as a result of the            termination of the CLAC reinsurance agreement which was partially offset by a decrease            in contractually scheduled maturities of guaranteed investment contracts.

             

The segment information below further discusses the reasons for these            changes.

             

**Six months ended June 30, 2007 compared with the six months ended            June 30, 2006**

             

The following is a summary of certain of the Company’s financial            data for the six months ended June 30, 2007 and 2006.

             

| Income Statement Data                      |   | Six months ended June 30, |
|--------------------------------------------|--------|---------------------------|
| (In millions)                              |   | 2007                      |   | 2006 |
| Premium income                             | $      | (812)                     | $ | 684 |
| Fee income                                 |   | 595                       |   | 514 |
| Net investment income                      |   | 654                       |   | 551 |
| Net realized gains (losses) on investments |   | (8)                       |   | (23) |
| Total revenues                             |   | 429                       |   | 1,726 |
| Policyholder benefits                      |   | (591)                     |   | 990 |
| Operating expenses                         |   | 669                       |   | 499 |
| Total benefits and expenses                |   | 78                        |   | 1,489 |
| Income before income taxes                 |   | 351                       |   | 237 |
| Income tax expense                         |   | 124                       |   | 71 |
| Net income                                 | $      | 227                       | $ | 166 |

             

| Operating Data                             |   | Six months ended June 30, |
|--------------------------------------------|--------|---------------------------|
| (In millions)                              |   | 2007                      |   | 2006 |
| Deposits to separate accounts              | $      | 1,513                     | $ | 1,212 |
| Deposits to investment-type contracts**1** |   | 642                       |   | 386 |
| Withdrawals from investment-type contracts |   | 1,310                     |   | 803 |
| Self funded premium equivalents            |   | 2,357                     |   | 2,383 |

             

**1**Includes $45 million and $35 million            during the six months ended June 30, 2007 and 2006, respectively, of the            Company’s guaranteed interest annuity contracts purchased by affiliated funds or            other separate account investment options as discussed in Note 4 to the accompanying            condensed consolidated financial statements.

 

24

 

The Company’s consolidated net income increased by $61 million, or            36.7%, to $227 million for the six months ended June 30, 2007 when compared to 2006.            The increase in net income is primarily due to a gain of $23 million resulting from the            termination of the CLAC reinsurance agreement within the Individual Markets segment.            Also contributing to the increase in net income is higher fee income throughout all            operating segments and a large decrease in waiver of premium policy reserves in the            Healthcare segment.

             

Excluding the negative premium revenue of $1,387 million resulting from            the termination of the CLAC reinsurance agreement, total premiums decreased by $109            million, or 15.9%, to $575 million during the six months ended June 30, 2007 when            compared to 2006. The decrease is largely due to $152 million of premiums ceded to            LLIRC in the Healthcare segment under the reinsurance agreement. This decrease was            partially offset by strong renewal pricing on individual stop loss business and            increased Healthcare segment membership.

             

Fee income has increased by $81 million, or 15.8%, to $595 million            during the six months ended June 30, 2007 when compared to 2006. This increase is            primarily the result of the addition of participant accounts and the related account            balances from the 2006 acquisitions of business from MetLife and U.S. Bank in the            Retirement Services segment.

             

Net investment income increased by $103 million, or 18.7%, to $654            million during the six months ended June 30, 2007 when compared to 2006. The increase            is primarily due to $59 million of income in the Individual Markets segment from the            settlement of the embedded derivative as the result of the termination of the CLAC            reinsurance agreement. The remaining increase is primarily due to a $32 million            increase in the Retirement Services segment resulting from increased investment assets            related to the MetLife acquisition.

             

Excluding the decrease in policy reserves of $1,453 million and            additional amortization of deferred acquisition costs of $63 million resulting from the            termination of the CLAC reinsurance agreement, total benefits and expenses remained            relatively constant, decreasing by $21 million, or 1.4%, to $1,468 million during the            six months ended June 30, 2007 when compared to 2006.

             

Deposits to separate accounts increased by $301 million, or 24.8%, to            $1,513 million during the six months ended June 30, 2007 when compared to 2006. This            increase was primarily due to increased sales of the BOLI separate account product            within the Individual Markets segment and higher sales and transfers from unaffiliated            retail investment options in the Retirement Service segment.

             

Deposits to investment-type contracts increased by $256 million, or            66.3%, to $642 million during the six months ended June 30, 2007 when compared to 2006.            This increase was primarily due to a $108 million increase in deposits from participant            accounts that were acquired from MetLife and from increases in BOLI sales.

             

Withdrawals from investment-type contracts increased by $507 million, or            63.1%, to $1,310 million during the six months ended June 30, 2007 when compared to            2006. This increase is primarily attributable to $497 million of withdrawals as a            result of the termination of the CLAC reinsurance agreement.

             

The segment information below further discusses the reasons for these            changes.

             

             

             

             

 

25

 

**Segment Results**

             

**Great-West Healthcare Segment**

             

**Three months ended June 30, 2007 compared with the three months ended            June 30, 2006**

             

The following is a summary of certain financial data of the Great-West            Healthcare segment for the three months ended June 30, 2007 and 2006.

             

| Income Statement Data                      |   | Three months ended June 30, |
|--------------------------------------------|--------|-----------------------------|
| (In millions)                              |   | 2007                        |   | 2006 |
| Premium income                             | $      | 126                         | $ | 208 |
| Fee income                                 |   | 178                         |   | 175 |
| Net investment income                      |   | 21                          |   | 19 |
| Net realized gains (losses) on investments |   | 3                           |   | 2 |
| Total revenues                             |   | 328                         |   | 404 |
| Policyholder benefits                      |   | 100                         |   | 195 |
| Operating expenses                         |   | 168                         |   | 169 |
| Total benefits and expenses                |   | 268                         |   | 364 |
| Income before income taxes                 |   | 60                          |   | 40 |
| Income tax expense                         |   | 21                          |   | 14 |
| Net income                                 | $      | 39                          | $ | 26 |

             

| Operating Data                  |   | Three months ended June 30, |
|---------------------------------|--------|-----------------------------|
| (In millions)                   |   | 2007                        |   | 2006 |
| Self funded premium equivalents |   | 1,164                       |   | 1,189 |

             

The following is a summary of the Great-West Healthcare membership at            June 30, 2007 and March 31, 2007.

             

|                               |   |          |   | Percent        |
|------------------------------------|--------|---------------|--------|----------------|
| In thousands                       |   | June 30, 2007 |   | March 31, 2007 |   | Change |
| Select and Mid Market Groups       |   | 1,219         |   | 1,165          |   | 4.6% |
| National and Specialty Risk Groups |   | 1,045         |   | 1,040          |   | 0.5% |
| Total membership                   |   | 2,264         |   | 2,205          |   | 2.7% |

             

Net income for the three months ended June 30, 2007 increased by $13            million, or 50.0%, to $39 million when compared to 2006. This increase is due primarily            to improved stop loss margins, primarily in the Mid Market segment, and increased            investment income. These increases are partially offset by a $4.1 million reduction in            net income due to the February 1, 2007, reinsurance cession to LLIRC.

             

Premium income decreased by $82 million, or 39.4%, to $126 million            during the three months ended June 30, 2007 when compared to 2006. The decrease is            largely due to $96 million of premiums ceded to LLIRC. The decrease was partially            offset by strong renewal pricing on individual stop loss business and increased            membership.

             

Fee income increased by $3 million, or 1.7%, to $178 during the three            months ended June 30, 2007 when compared to 2006 primarily resulting from $2.4 million            of fee income related to the 2007 acquisition of Benefits Management Corporation            (“BMC”) and the acquisition of IHN, Inc. (“IHN”) in the fourth            quarter of 2006.

             

Benefits and expenses decreased by $96 million, or 26.4%, to $268            million during the three months ended June 30, 2007 when compared to 2006. The decrease            is due primarily to $89 million of benefits and expenses ceded to LLIRC.

 

26

 

The increase in membership is primarily as the result of approximately            90,000 additional members from the acquisition of BMC during the second quarter of            2007. This increase is partially offset by membership declines in the Select and Mid            Market segments due to lower sales volume.

             

**Six months ended June 30, 2007 compared with the six months ended            June 30, 2006**

             

The following is a summary of certain financial data of the Great-West            Healthcare segment for the six months ended June 30, 2007 and 2006.

             

| Income Statement Data                      |   | Six months ended June 30, |
|--------------------------------------------|--------|---------------------------|
| (In millions)                              |   | 2007                      |   | 2006 |
| Premium income                             | $      | 336                       | $ | 443 |
| Fee income                                 |   | 358                       |   | 350 |
| Net investment income                      |   | 46                        |   | 40 |
| Net realized gains (losses) on investments |   | 5                         |   | 1 |
| Total revenues                             |   | 745                       |   | 834 |
| Policyholder benefits                      |   | 270                       |   | 403 |
| Operating expenses                         |   | 336                       |   | 335 |
| Total benefits and expenses                |   | 606                       |   | 738 |
| Income before income taxes                 |   | 139                       |   | 96 |
| Income tax expense                         |   | 47                        |   | 32 |
| Net income                                 | $      | 92                        | $ | 64 |

             

| Operating Data                  |   | Six months ended June 30, |
|---------------------------------|--------|---------------------------|
| (In millions)                   |   | 2007                      |   | 2006 |
| Self funded premium equivalents |   | 2,357                     |   | 2,383 |

             

The following is a summary of the Great-West Healthcare segment            membership at June 30, 2007 and 2006:

             

| Membership                         |   | June 30, |   | Percent |
|------------------------------------|--------|----------|--------|---------|
| in thousands                       |   | 2007     |   | 2006    |   | Change |
| Select and Mid Market Groups       |   | 1,219    |   | 1,234   |   | (1.2%) |
| National and Specialty Risk Groups |   | 1,045    |   | 843     |   | 24.0% |
| Total membership                   |   | 2,264    |   | 2,077   |   | 9.0% |

             

Net income for the six months ended June 30, 2007 increased by $28            million, or 43.8%, to $92 million when compared to 2006. This increase is due primarily            to a large decrease in waiver of premium policy reserves, improved specific stop loss            margins, pharmacy benefit management revenue and increased investment gains. These            increases are partially offset by a $10.6 million reduction in net income due to the            February 1, 2007, reinsurance cession to LLIRC.

             

Premium income decreased by $107 million, or 24.2%, to $336 million            during the six months ended June 30, 2007 when compared to 2006. The decrease is            largely due to $152 million of premiums ceded to LLIRC. This decrease was partially            offset by strong renewal pricing on individual stop loss business and increased            membership in the National and Specialty Markets segments.

             

Fee income increased by $8 million, or 2.3%, to $358 million during the            six months ended June 30, 2007 when compared to 2006 as a result of higher pharmacy            benefits management revenue as well as the BMC and IHN acquisitions, which contributed            $1.4 million and $1.9 million, respectively.

             

Benefits and expenses decreased by $132 million, or 17.9%, to $606            million during the six months ended June 30, 2007 when compared to 2006. The decrease            is due primarily to $134 million of benefits and expenses ceded to LLIRC. Also            contributing to the decrease was a $23 million decrease in waiver of premium policy            reserves that resulted from updated mortality and termination

             

27

             

rates. These decreases were partially offset by higher specific, fully            insured and life claims experience.

             

The increase in membership is primarily as the result of approximately            90,000 additional members from the second quarter 2007 acquisition of BMC, 66,000            members from the November 2006 IHN acquisition and expansion of other third party            administration relationships. These increases are partially offset by membership            declines in the Select and Mid Market segments due to lower sales volume.

             

**Individual Markets Segment**

             

**Three months ended June 30, 2007 compared with the three months ended            June 30, 2006**

             

The following is a summary of certain financial data of the Individual            Markets segment for the three months ended June 30, 2007 and 2006.

             

| Income Statement Data                      |   | Three months ended June 30, |
|--------------------------------------------|--------|-----------------------------|
| (In millions)                              |   | 2007                        |   | 2006 |
| Premium income                             | $      | (1,307)                     | $ | 88 |
| Fee income                                 |   | 22                          |   | 11 |
| Net investment income                      |   | 232                         |   | 186 |
| Net realized gains (losses) on investments |   | (16)                        |   | (12) |
| Total revenues                             |   | (1,069)                     |   | 273 |
| Policyholder benefits                      |   | (1,236)                     |   | 220 |
| Operating expenses                         |   | 88                          |   | 14 |
| Total benefits and expenses                |   | (1,148)                     |   | 234 |
| Income before income taxes                 |   | 79                          |   | 39 |
| Income tax expense                         |   | 28                          |   | 13 |
| Net income                                 | $      | 51                          | $ | 26 |

             

| Operating Data                             |   | Three months ended June 30, |
|--------------------------------------------|--------|-----------------------------|
| (In millions)                              |   | 2007                        |   | 2006 |
| Deposits to separate accounts              | $      | 202                         | $ | 85 |
| Deposits to investment-type contracts      |   | 75                          |   | 61 |
| Withdrawals from investment-type contracts |   | 581                         |   | 116 |

             

The following is a summary of the Individual Markets segment participant            accounts at June 30, 2007 and March 31, 2007.

             

|                            |   |          |   | Percent        |
|---------------------------------|--------|---------------|--------|----------------|
| (In thousands)                  |   | June 30, 2007 |   | March 31, 2007 |   | Change |
| Policy and Participant Accounts |   | 430           |   | 437            |   | (1.6 )% |

             

Net income for the Individual Markets segment increased by $25 million,            or 96.2%, to $51 million during the three months ended June 30, 2007 when compared to            2006. The increase is primarily due to a gain of $23 million resulting from the            termination of the CLAC reinsurance agreement.

             

Excluding the negative premium revenue of $1,387 million resulting from            the termination of the CLAC reinsurance agreement, total premiums decreased by $8            million, or 9.1%, to $80 million during the three months ended June 30, 2007 when            compared to 2006. The decrease is primarily due to one large participating policyholder            whose policy was converted from premium paying to reduced paid up during the three            months ended March 31, 2007.

             

 

28

 

Fee income increased by $11 million, or 100.0%, to $22 million during            the three months ended June 30, 2007 when compared to 2006. The increase is related to            higher participant account balances primarily due to increased sales of the BOLI            separate account product and individual annuity separate account product. Variable            asset-based fees fluctuate with changes in participant account balances. Participant            account balances change due to cash flow and unrealized market gains and losses            associated with changes in the United States equities market.

             

Net investment income increased by $46 million, or 24.7%, to $232            million during the three months ended June 30, 2007 when compared to 2006. The increase            is primarily due to $59 million of income from the settlement of the embedded            derivative as the result of the termination of the CLAC reinsurance            agreement.

             

Excluding the decrease in policy reserves of $1,453 million and            additional amortization of deferred acquisition costs of $63 million resulting from the            termination of the CLAC reinsurance agreement, total benefits and expenses remained            relatively constant, decreasing by $8 million, or 3.4%, to $249 million during the            three months ended June 30, 2007 when compared to 2006.

             

Deposits to separate accounts increased by $117 million, or 137.6%, to            $202 million during the three months ended June 30, 2007 when compared to 2006. This            increase was primarily due to increased sales of the BOLI separate account            product.

             

Withdrawals from investment-type contracts increased by $465 million to            $581 million during the three months ended June 30, 2007 when compared to 2006. This            increase is primarily attributable to $497 million of withdrawals as a result of the            termination of the CLAC reinsurance agreement which was partially offset by a decrease            in contractually scheduled maturities of guaranteed investment contracts.

             

The slight decrease in participant accounts is primarily as the result            of policy maturities and policy surrenders.

             

**Six months ended June 30, 2007 compared with the six months ended            June 30, 2006**

             

The following is a summary of certain financial data of the Individual            Markets segment for the six months ended June 30, 2007 and 2006.

             

| Income Statement Data                      |   | Six months ended June 30, |
|--------------------------------------------|--------|---------------------------|
| (In millions)                              |   | 2007                      |   | 2006 |
| Premium income                             | $      | (1,210)                   | $ | 210 |
| Fee income                                 |   | 44                        |   | 22 |
| Net investment income                      |   | 415                       |   | 356 |
| Net realized gains (losses) on investments |   | (13)                      |   | (15) |
| Total revenues                             |   | (764)                     |   | 573 |
| Policyholder benefits                      |   | (1,025)                   |   | 477 |
| Operating expenses                         |   | 132                       |   | 30 |
| Total benefits and expenses                |   | (893)                     |   | 507 |
| Income before income taxes                 |   | 129                       |   | 66 |
| Income tax expense                         |   | 47                        |   | 22 |
| Net income                                 | $      | 82                        | $ | 44 |

             

| Operating Data                             |   | Six months ended June 30, |
|--------------------------------------------|--------|---------------------------|
| (In millions)                              |   | 2007                      |   | 2006 |
| Deposits to separate accounts              | $      | 288                       | $ | 151 |
| Deposits to investment-type contracts      |   | 168                       |   | 66 |
| Withdrawals from investment-type contracts |   | 676                       |   | 252 |

             

 

29

 

The following is a summary of the Individual Markets segment participant            accounts at June 30, 2007 and 2006.

             

|                              |   | June 30, |   | Percent |
|-----------------------------------|--------|----------|--------|---------|
| (In thousands)                    |   | 2007     |   | 2006    |   | Change |
| Policies and Participant Accounts |   | 430      |   | 451     |   | (4.7%) |

             

Net income for the Individual Markets segment increased by $38 million,            or 86.4%, to $82 million during the six months ended June 30, 2007 when compared to            2006. The increase is primarily due to a gain of $23 million resulting from the            termination of the CLAC reinsurance agreement and increased fee income.

             

Excluding the negative premium revenue of $1,387 million resulting from            the termination of the CLAC reinsurance agreement, total premiums decreased by $33            million, or 15.7%, to $177 million during the six months ended June 30, 2007 when            compared to 2006. The decrease is primarily due to one large participating policyholder            whose policy was converted from premium paying to reduced paid up during the three            months ended March 31, 2007.

             

Fee income increased by $22 million, or 100.0%, to $44 million during            the six months ended June 30, 2007 when compared to 2006. The increase is primarily            related to increased sales of the BOLI separate account product. Sales of the            individual annuity separate account product were also increasing beginning in late 2006            through the first quarter of 2007. Variable asset-based fees fluctuate with changes in            participant account balances. Participant account balances change due to cash flow and            unrealized market gains and losses associated with changes in the United States            equities market.

             

Net investment income increased by $59 million, or 16.6%, to $415            million during the six months ended June 30, 2007 when compared to 2006. The increase            is primarily due to $59 million of income from the settlement of the embedded            derivative as the result of the termination of the CLAC reinsurance            agreement.

             

Excluding the decrease in policy reserves of $1,453 million and            additional amortization of deferred acquisition costs of $63 million resulting from the            termination of the CLAC reinsurance agreement, total benefits and expenses remained            relatively constant, decreasing by $10 million, or 2.0%, to $497 million during the six            months ended June 30, 2007 when compared to 2006.

             

Deposits to separate accounts increased by $137 million, or 90.7%, to            $288 million during the six months ended June 30, 2007 when compared to 2006. This            increase was primarily due to increased sales of the BOLI separate account            product.

             

Deposits to investment-type contracts increased by $102 million, or            154.5%, to $168 million during the six months ended June 30, 2007 when compared to            2006. This increase was primarily due to increases in BOLI sales.

             

Withdrawals from investment-type contracts increased by $424 million, or            168.3%, to $676 million during the six months ended June 30, 2007 when compared to            2006. This increase is primarily attributable to $497 million of withdrawals as a            result of the termination of the CLAC reinsurance agreement which was partially offset            by a decrease in contractually scheduled maturities of guaranteed investment            contracts.

             

The slight decrease in participant accounts is primarily as the result            of policy maturities and policy surrenders.

             

             

 

30

 

**Retirement Services Segment**

             

As discussed in the Company’s Annual Report on Form 10-K for the            year ended December 31, 2006, the Retirement Services segment closed on two separate            agreements to acquire certain 401(k) business in the fourth quarter of 2006. The first            of these agreements closed on October 2, 2006. The agreement was a 100% reinsurance            transaction to acquire several parts of the full service-bundled, small and midsized            401(k) as well as some defined benefit plan business from MetLife. The second            agreement, which closed on December 29, 2006, acquired the bundled, full-service            defined contribution business from U.S. Bank. The combination of the two agreements            resulted in the addition of nearly 4,300 plans and 440,000 participant accounts with            participant account values in excess of $16.7 billion.

             

**Three months ended June 30, 2007 compared with the three months ended            June 30, 2006**

             

The following is a summary of certain financial data of the Retirement            Services segment for the three months ended June 30, 2007 and 2006.

             

| Income Statement Data                      |   | Three months ended June 30, |
|--------------------------------------------|--------|-----------------------------|
| (In millions)                              |   | 2007                        |   | 2006 |
| Premium income                             | $      | 2                           | $ | 2 |
| Fee income                                 |   | 97                          |   | 69 |
| Net investment income                      |   | 86                          |   | 71 |
| Net realized gains (losses) on investments |   | (3)                         |   | (3) |
| Total revenues                             |   | 182                         |   | 139 |
| Policyholder benefits                      |   | 56                          |   | 44 |
| Operating expenses                         |   | 80                          |   | 55 |
| Total benefits and expenses                |   | 136                         |   | 99 |
| Income before income taxes                 |   | 46                          |   | 40 |
| Income tax expense                         |   | 14                          |   | 5 |
| Net income                                 | $      | 32                          | $ | 35 |

             

| Operating Data                             |   | Three months ended June 30, |
|--------------------------------------------|--------|-----------------------------|
| (In millions)                              |   | 2007                        |   | 2006 |
| Deposits to separate accounts              | $      | 540                         | $ | 521 |
| Deposits to investment-type contracts**1** |   | 200                         |   | 132 |
| Withdrawals from investment-type contracts |   | 302                         |   | 238 |

             

**1**Includes $19 million and $8 million            during the three months ended June 30, 2007 and 2006, respectively, of the            Company’s guaranteed interest annuity contracts purchased by affiliated funds or            other separate account investment options as discussed in Note 4 to the accompanying            condensed consolidated financial statements.

             

The following is a summary of the Retirement Services segment            participant accounts at June 30, 2007 and March 31, 2007.

             

|                 |   |          |   | Percent        |
|----------------------|--------|---------------|--------|----------------|
| (In thousands)       |   | June 30, 2007 |   | March 31, 2007 |   | Change |
| Participant Accounts |   | 3,924         |   | 3,483          |   | 12.7% |

             

Net income for the Retirement Services segment decreased by $3 million,            or 8.6%, to $32 million during the three months ended March 31, 2007 when compared to            2006. The decrease is primarily due to a $6 million prior year tax benefit recorded in            the three months ended June 30, 2006. This decrease was partially offset by net income            resulting from the business acquired from MetLife and U.S. Bank during the second half            of 2006.

             

31

 

Fee income has increased by $28 million, or 40.6%, to $97 million during            the three months ended June 30, 2007 when compared to 2006. The increase is primarily            related to increased participant accounts and participant account balances from the            blocks of business acquired and improvement in United States equity markets. Variable            asset-based fees fluctuate with changes in the participant account balances.            Participant account balances change due to cash flow and unrealized market gains and            losses associated with changes in the United States equities market.

             

Investment income increased by $15 million, or 21.1%, to $86 million            during the three months ended June 30, 2007 when compared to 2006. This increase is            primarily due to increased investment assets related to the MetLife acquisition in            October 2006.

             

Total benefits and expenses increased by $37 million, or 37.4%, to $136            million during the three months ended June 30, 2007 when compared to 2006. This            increase is primarily due to increased operating expenses related to the MetLife and            U.S. Bank acquisitions.

             

Deposits to separate accounts increased by $19 million, or 3.6%, to $540            million during the three months ended June 30, 2007 when compared to 2006. The increase            is due primarily to a combination of higher sales and transfers from unaffiliated            retail investment options.

             

Deposits to investment-type contracts increased by $68 million, or            51.5%, to $200 million during the three months ended June 30, 2007 when compared to            2006. This increase was primarily due to a $33 million increase in deposits from            participant accounts that were acquired from MetLife.

             

Withdrawals from investment-type contracts increased by $64 million, or            26.9%, to $302 million during the three months ended June 30, 2007 when compared to            2006. This increase is primarily attributable to withdrawals from participant accounts            that were acquired from MetLife.

             

The increase in participant accounts is primarily as the result of the            MetLife and U.S. Bank acquisitions and new institutional record keeping            clients.

             

**Six months ended June 30, 2007 compared with the six months ended            June 30, 2006**

             

The following is a summary of certain financial data of the Retirement            Services segment for the six months ended June 30, 2007 and 2006.

             

| Income Statement Data                      |   | Six months ended June 30, |
|--------------------------------------------|--------|---------------------------|
| (In millions)                              |   | 2007                      |   | 2006 |
| Premium income                             | $      | 4                         | $ | 6 |
| Fee income                                 |   | 191                       |   | 140 |
| Net investment income                      |   | 174                       |   | 142 |
| Net realized gains (losses) on investments |   | (1)                       |   | (8) |
| Total revenues                             |   | 368                       |   | 280 |
| Policyholder benefits                      |   | 111                       |   | 89 |
| Operating expenses                         |   | 163                       |   | 112 |
| Total benefits and expenses                |   | 274                       |   | 201 |
| Income before income taxes                 |   | 94                        |   | 79 |
| Income tax expense                         |   | 29                        |   | 17 |
| Net income                                 | $      | 65                        | $ | 62 |

 

| Operating Data                             |   | Six months ended June 30, |
|--------------------------------------------|--------|---------------------------|
| (In millions)                              |   | 2007                      |   | 2006 |
| Deposits to separate accounts              | $      | 1,225                     | $ | 1,061 |
| Deposits to investment-type contracts**1** |   | 473                       |   | 320 |
| Withdrawals from investment-type contracts |   | 634                       |   | 551 |

             

 

32

 

**1**Includes $45 million and $35 million            during the six months ended June 30, 2007 and 2006, respectively, of the            Company’s guaranteed interest annuity contracts purchased by affiliated funds or            other separate account investment options as discussed in Note 4 to the accompanying            condensed consolidated financial statements.

             

The following is a summary of the Retirement Services segment            participant accounts at June 30, 2007 and 2006.

             

|                 |   | June 30, |   | Percent |
|----------------------|--------|----------|--------|---------|
| (In thousands)       |   | 2007     |   | 2006    |   | Change |
| Participant Accounts |   | 3,494    |   | 2,968   |   | 17.7% |

             

Net income for the Retirement Services segment increased by $3 million,            or 4.8%, to $65 million during the six months ended June 30, 2007 when compared to            2006. The increase is primarily due to net income resulting from the business acquired            from MetLife and U.S. Bank during the second half of 2006. This increase is partially            offset by a $6 million prior year tax benefit recorded in the six months ended June 30,            2006.

             

Fee income has increased by $51 million, or 36.4%, to $191 million            during the six months ended June 30, 2007 when compared to 2006. The increase is            primarily related to increased participant accounts and participant account balances            from the blocks of business acquired and improvement in United States equity markets.            Variable asset-based fees fluctuate with changes in the participant account balances.            Participant account balances change due to cash flow and unrealized market gains and            losses associated with changes in the United States equities market.

             

Investment income increased by $32 million, or 22.5%, to $174 million            during the six months ended June 30, 2007 when compared to 2006. This increase is            primarily due to increased investment assets related to the MetLife acquisition in            October 2006.

             

Total benefits and expenses increased by $73 million, or 36.3%, to $274            million during the six months ended June 30, 2007 when compared to 2006. This increase            is primarily due to increased operating expenses related to the MetLife and U.S. Bank            acquisitions.

             

Deposits to separate accounts increased by $164 million, or 15.6%, to            $1,225 million during the six months ended June 30, 2007 when compared to 2006. The            increase is due primarily to a combination of higher sales and transfers from            unaffiliated retail investment options.

             

Deposits to investment-type contracts increased by $153 million, or            47.8%, to $473 million during the six months ended June 30, 2007 when compared to 2006.            This increase was primarily due to a $108 million increase in deposits from participant            accounts that were acquired from MetLife.

             

Withdrawals from investment-type contracts increased by $83 million, or            15.1%, to $634 million during the six months ended June 30, 2007 when compared to 2006.            This increase is primarily attributable to withdrawals from participant accounts that            were acquired from MetLife.

             

The increase in participant accounts is primarily as the result of the            MetLife and U.S. Bank acquisitions and new institutional record keeping            clients.

             

             

             

             

             

33

 

The following table provides information for the Retirement            Services’ customer account values.

             

|                                       |   | June 30, |   | Percent |
|--------------------------------------------|--------|----------|--------|---------|
| (In millions)                              |   | 2007     |   | 2006    |   | change |
| General Account – Fixed Options:     |   |     |   |    |   |   |
| Public / Non-profit                        | $      | 3,428    | $      | 3,636   |   | (5.7%) |
| 401(k)                                     |   | 2,579    |   | 1,116   |   | 131.1% |
|                                       | $      | 6,007    | $      | 4,752   |   | 26.4% |
| Separate Accounts – Variable Options |   |     |   |    |   |   |
| Public / Non-profit                        | $      | 6,365    | $      | 5,517   |   | 15.4% |
| 401(k)                                     |   | 6,937    |   | 5,796   |   | 19.7% |
|                                       | $      | 13,302   | $      | 11,313  |   | 17.6% |
| Unaffiliated Retail:                       |   |     |   |    |   |   |
| Investment Options and                     |   |     |   |    |   |   |
| Administrative Services Only:              |   |     |   |    |   |   |
| Public / Non-profit                        | $      | 44,901   | $      | 38,529  |   | 16.5% |
| 401(k)                                     |   | 23,632   |   | 6,455   |   | 266.1% |
| Institutional                              |   | 28,930   |   | 24,022  |   | 20.4% |
|                                       | $      | 97,463   | $      | 69,006  |   | 41.2% |

             

Participant account values invested in the general account fixed            investment options have increased by 26.4% at June 30, 2007 to $6,007 million when            compared to June 30, 2006 due primarily to the MetLife acquisition.

             

Participant account values invested in the segregated variable            investment options have increased by 17.6% at June 30, 2007 to $13,302 million when            compared to June 30, 2006 due to higher sales and improvement in the United States            equities market.

             

Participant account values invested in unaffiliated retail investment            options and participant account values where only administrative services and            recordkeeping functions are provided have increased 41.2% at June 30, 2007 compared to            June 30, 2006. The increase is primarily attributable to the MetLife and U.S. Bank            acquisitions, an increase in participants from institutional cases and improvement in            the United States equity markets.

             

**Other Results of Operations**

             

**Three months ended June 30, 2007 compared with the three months ended            June 30, 2006**

             

The following is a summary of certain financial data of the            Company’s Other segment for the three months ended June 30, 2007 and            2006.

             

| Income Statement Data                      |   | Three months ended June 30, |
|--------------------------------------------|--------|-----------------------------|
| (In millions)                              |   | 2007                        |   | 2006 |
| Premium income                             | $      | 37                          | $ | 18 |
| Fee income                                 |   | 1                           |   | 1 |
| Net investment income                      |   | 10                          |   | 9 |
| Net realized gains (losses) on investments |   | -                           |   | (1) |
| Total revenues                             |   | 48                          |   | 27 |
| Policyholder benefits                      |   | 36                          |   | 14 |
| Operating expenses                         |   | 20                          |   | 14 |
| Total benefits and expenses                |   | 56                          |   | 28 |
| Income before income taxes                 |   | (8)                         |   | (1) |
| Income tax expense                         |   | -                           |   | - |
| Net income                                 | $      | (8)                         | $ | (1) |

             

 

34

 

**Six months ended June 30, 2007 compared with the six months ended            June 30, 2006**

             

The following is a summary of certain financial data of the            Company’s Other segment for the six months ended June 30, 2007 and            2006.

             

| Income Statement Data                      |   | Six months ended June 30, |
|--------------------------------------------|--------|---------------------------|
| (In millions)                              |   | 2007                      |   | 2006 |
| Premium income                             | $      | 58                        | $ | 25 |
| Fee income                                 |   | 2                         |   | 2 |
| Net investment income                      |   | 19                        |   | 13 |
| Net realized gains (losses) on investments |   | 1                         |   | (1) |
| Total revenues                             |   | 80                        |   | 39 |
| Policyholder benefits                      |   | 53                        |   | 21 |
| Operating expenses                         |   | 38                        |   | 22 |
| Total benefits and expenses                |   | 91                        |   | 43 |
| Income before income taxes                 |   | (11)                      |   | (4) |
| Income tax expense                         |   | 1                         |   | - |
| Net income                                 | $      | (12)                      | $ | (4) |

             

The net loss for the Company’s Other segment for the three and six            months periods ended June 30, 2007 when compared to 2006 increased by $7 million and $8            million, respectively. The increases in premium income and benefits and expenses are            primarily attributed to increased activity under the Great-West Life & Annuity            Insurance Company of South Carolina reinsurance agreement.

             

**General Account Investments**

             

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

             

The Company follows rigorous procedures to control interest rate risk            and observes strict asset and liability matching guidelines. These guidelines ensure            that even under changing market conditions, the Company’s assets will 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.

             

**Fixed Maturity Investments**

             

Fixed maturity investments include public and privately placed corporate            bonds, government bonds, and mortgage-backed and asset-backed securities. The            Company’s strategy related to mortgage-backed and asset-backed securities is to            focus on those investments with low prepayment risk and minimal credit risk. The            Company does not invest in higher-risk collateralized mortgage obligations such as            interest-only and principal-only strips, and currently has no plans to invest in such            securities.

             

Private placement investments are generally less marketable than            publicly traded assets, yet they typically offer enhanced covenant protection that            allows the Company, if necessary, to take appropriate action to protect its investment.            The Company believes that the cost of the additional monitoring and analysis required            by private placements 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 quality so as to limit credit            risk. If not externally rated, the securities are rated by the Company on a basis            intended to be similar to that of the rating agencies.

             

35

 

The following table contains the rating distribution of the            Company’s fixed maturity investment portfolio at June 30, 2007 and December 31,            2006.

             

|                                |   | June 30, |   | December 31, |
|-------------------------------------|--------|----------|--------|--------------|
| Credit rating                       |   | 2007     |   | 2006         |
| AAA                                 |   | 60.5%    |   | 61.7%        |
| AA                                  |   | 7.8%     |   | 7.4%         |
| A                                   |   | 14.7%    |   | 14.5%        |
| BBB                                 |   | 15.3%    |   | 14.6%        |
| BB and below (non-investment grade) |   | 1.7%     |   | 1.8%         |
| Total                               |   | 100.0%   |   | 100.0%       |

             

**Impairment of Available-for-Sale Fixed Maturity and Equity            Investments**

             

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

             

The Company’s portfolio of fixed maturities fluctuates in value            based upon interest rates in financial markets and other economic factors. These            fluctuations, caused by market interest rate changes, have little bearing on whether or            not the investment will be ultimately recoverable. Therefore, the Company considers            these declines in value as temporary. At June 30, 2007, the Company’s unrealized            losses were $317 million compared to $215 million at December 31, 2006. Investments in            a loss position for less than twelve months had losses that totaled $72 million, which            was an increase of $33 million from December 31, 2006. Investments in a loss position            for greater than twelve months had losses that totaled $245 million, which was an            increase of $69 million from December 31, 2006. The increase in losses was generally            attributable to the rise in interest rates during the first six months of the year. The            Company considers these investments to be only temporarily impaired.

             

**Critical Accounting Policies and Estimates**

             

The preparation of financial statements in conformity with accounting            principles generally accepted in the United States of America (“GAAP”)            requires the Company’s management to adopt accounting policies to make a            significant variety of estimates and assumptions. These estimates and assumptions            affect, among other things, the reported amounts of assets and liabilities, the            disclosure of contingent liabilities and the reported amounts of revenues and expenses.            Actual results can differ from the amounts previously estimated, which were based on            information available at the time the estimates were made.

             

The critical accounting policies are those that the Company believes are            important to the portrayal of its results of operations and financial condition and            which require management to make difficult, subjective and/or complex judgments.            Critical accounting policies cover accounting matters that are inherently uncertain            because the future resolution of such matters is unknown. The Company believes that the            most critical accounting policies include the reported amounts of policy reserves,            allowances for credit losses on mortgage loans, deferred acquisition costs and value of            business acquired, derivative instruments, valuation of privately placed fixed maturity            investments, employee benefit plans, and taxes on income. Many of these policies,            estimates and related judgments are common in the insurance and financial services            industries.

             

             

 

36

 

**1. Policy Reserves**

             

**Life Insurance and Annuity Reserves**- The            Company’s liability for contract and policy benefits is the largest liability            included in its condensed consolidated balance sheets, representing 47.5% and 51.9% of            total liabilities at June 30, 2007 and December 31, 2006, respectively. Life insurance            and annuity policy reserves with life contingencies are computed on the basis of            estimated mortality, investment yield, withdrawals, future maintenance and settlement            expenses and retrospective experience rating premium refunds. If actual experience is            different than estimated, adjustments to such reserves may be required. Annuity            contract reserves without life contingencies are established at the            contractholder’s account value.

             

**Reinsurance**- The Company enters into            reinsurance transactions as both a provider and a purchaser of reinsurance. Policy            reserves ceded to other insurance companies are carried as reinsurance receivables in            the Company’s condensed consolidated balance sheets. The cost of reinsurance            related to long-duration contracts is accounted for over the life of the underlying            reinsured policies using assumptions consistent with those used to account for the            underlying policies. Ceded reinsurance contracts do not relieve the Company from its            obligations to policyholders. Failure of reinsurers to honor their obligations under            these contracts could result in losses to the Company. The Company evaluates the            financial condition of its reinsurers and monitors concentrations of credit risk            arising from similar geographic regions, activities, or economic characteristics of the            reinsurers to minimize its exposure to significant losses from reinsurer defaults. In            the normal course of business, the Company seeks to limit its exposure to loss on any            single insured and to recover a portion of benefits paid by ceding risks to other            insurance enterprises under excess coverage and coinsurance contracts. The Company            retains a maximum of $3.5 million of coverage per individual life.

             

**Policy and Contract Claims**- Policy and            contract claims include provisions for reported life and health claims in process of            settlement, valued in accordance with the terms of the related policies and contracts,            as well as provisions for claims incurred and unreported based primarily on the            Company’s prior experience.

             

**2. Allowance for Credit Losses on Mortgage Loans**

             

The Company maintains an allowance for credit losses on mortgage loans            at a level that, in management’s opinion, is sufficient to absorb credit losses            on its impaired mortgage loans which are measured based on the fair value of the            related collateral. Management considers several factors in determining the appropriate            level of allowance for credit loss. These include past loss experience, current and            projected economic conditions and extensive situational analysis of each individual            mortgage loan. In determining the ultimate adequacy of the allowance for mortgage loans            heavier consideration is given to the individual mortgage characteristics and related            collateral.

             

**3. Deferred Acquisition Costs (“DAC”) and Value of            Business Acquired (“VOBA”)**

             

Policy acquisition costs, which primarily consist of sales commissions,            costs of policy issuance and underwriting and costs associated with the Company’s            sales representatives related to the production of new business have been deferred to            the extent recoverable. VOBA represents the present value of future profits embedded in            acquired insurance, annuity and investment-type business. The recoverability of DAC and            VOBA is dependent upon the future profitability of the related business. The amount of            future profit is primarily dependent on investment returns, mortality, morbidity,            persistency, interest crediting rates and the expenses incurred to administer the            business. DAC and VOBA associated with annuity products are being amortized over the            life of the contracts in proportion to the emergence of gross profits. Retrospective            adjustments of these amounts are made when the Company revises its estimates of current            or future gross profits, which can be affected by such factors as investment yield,            realized investment gains and losses and policyholder retention. DAC and VOBA            associated with traditional life insurance are amortized over the premium-paying period            of the related policies in proportion to premium revenues recognized.

 

37

 

**4. Derivative Instruments**

             

Derivatives are financial instruments whose values are derived from            interest rates, foreign exchange rates, financial indices or the values of securities            or commodities. The Company uses certain derivative instruments, such as futures,            options and swaps, for purposes of hedging its risk exposure to changes in interest            rates and market exchanges. The Company designates its derivative financial instruments            as (i) fair value hedges, (ii) cash flow hedges and (iii) derivatives not qualifying            for hedge accounting.

             

|   | **•** | Fair value hedges - Changes in the fair value of a                            derivative instrument that is designated as a fair value hedge are                            recorded in current period earnings. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | Cash flow hedges - The effective portion of the changes                            in the fair value of a derivative instrument that is designated as a                            cash flow hedge is recorded in accumulated other comprehensive income                            on the condensed consolidated balance sheet and is reclassified to                            earnings when the cash flow of the hedged item impacts earnings. The                            ineffective portion of the changes in the fair value of cash flow                            hedges is recorded as an adjustment to net investment                            income. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | Derivatives not qualifying for hedge accounting -                            Changes in the fair value of a derivative instrument that does not                            qualify for hedge accounting treatment are recorded in current period                            earnings. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

The Company generally enters into derivative transactions only with high            quality institutions, as such; no losses associated with non-performance have occurred            or are expected to occur. Derivative instruments are not used for speculative            purposes.

             

**5. Valuation of Privately Placed Fixed Maturity            Investments**

             

A large portion of the Company’s invested assets is stated at fair            value in the condensed consolidated balance sheets based on quoted market prices.            However, when such information is not available, fair value is estimated. The estimated            fair values of financial instruments have been determined using available information            and established valuation methodologies. To determine fair value for fixed maturity            investments not actively traded, the Company utilizes discounted cash flows calculated            at current market rates on investments of similar quality and term. However,            considerable judgment is required to interpret market data to develop estimates of fair            value. Accordingly, the estimates presented are not necessarily indicative of the            amounts the Company could realize in a current market exchange. The use of different            market assumptions and/or estimation methodologies may have a material effect on the            estimated fair value amounts. The fair value of approximately 30% and 34% of the            Company’s fixed maturity investments at June 30, 2007 and December 31, 2006,            respectively, are valued using these types of estimates.

             

**6. Employee Benefit Plans**

             

The Company sponsors pension and other retirement plans in various forms            covering employees who meet specific eligibility requirements. Expenses and liabilities            reported in connection with these plans require an extensive use of estimates and            assumptions. The estimates and assumptions include the expected interest rate used to            determine the expected return on plan assets, the rate of future employee compensation            increases and compensation levels and general trends in healthcare costs. Management            determines these estimates and assumptions based upon currently available market data,            historical performance of the plan assets and consultation with an independent            actuarial consulting firm.

             

38

 

The estimates and assumptions utilized by the Company may differ            materially from actual results obtained due to changes in market and economic            conditions, higher or lower withdrawal rates or longer or shorter life spans of the            various plan’s participants.

             

See Note 8 to the accompanying condensed consolidated financial            statements for a further discussion of the Company’s employee benefit            plans.

             

**7. Taxes on Income**

             

The Company’s effective tax rate is based upon expected income and            statutory income tax rates and available tax planning opportunities. In the            determination of the Company’s effective income tax rate, management considers            judgments regarding its business plans, planning opportunities and expectations about            their future outcomes. Certain changes or future events, such as changes in tax            legislation and the commencement or completion of tax audits, could have an impact on            management’s estimates and the Company’s effective tax rate.

             

Accounting and tax regulations require that items be included in income            tax returns at different times from when they are reflected in financial statements.            These timing differences give rise to deferred tax assets and liabilities. A deferred            tax liability is recognized for temporary differences that will result in taxable            amounts or nondeductible expenses in future years. A deferred tax asset is recognized            for temporary differences that will result in tax deductible amounts or nontaxable            income in future years, including carryforwards.

             

The application of GAAP requires management to evaluate the            recoverability of its deferred tax assets. Although realization is not assured,            management believes that it is more likely than not that the deferred tax assets will            be realized.

             

The amount of income taxes paid by the Company is subject to ongoing            audits in the various jurisdictions in which it carries on business. The Internal            Revenue Service (the “IRS”) has completed audits of the Company’s            income tax returns through 2001. IRS audits of the Company’s income tax returns            for the years 2002 through 2004 are in various stages of completion. Although the            results of these audits are not final, based upon available information, management            believes provisions for potential audit assessments are adequate.

             

See Note 9 to the accompanying condensed consolidated financial            statements for a further discussion of taxes on income.

             

**New Accounting Pronouncements**

             

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

             

**Liquidity and Capital Resources**

             

Liquidity refers to a company’s ability to generate sufficient            cash flows to meet the needs of its operations. The Company manages its operations to            ensure stable, reliable and cost-effective sources of cash flows to meet all of its            obligations.

             

The principal sources of the Company’s liquidity are premium and            annuity considerations, investment and fee income and investment maturities and sales.            The principal uses of the Company’s liquidity relate to benefit payments, claim            payments, payments to policy and contract holders in connection with policy surrenders            and withdrawals, purchase of investments, commissions and general and administrative            expenses.

             

39

 

The Company’s operations have liquidity requirements that vary            among its principal product lines. Life insurance and pension plan reserves are            primarily long-term liabilities. Accident and health reserves, including long-term            disability, consist of both short-term and long-term liabilities. Life insurance and            pension plan reserve requirements are usually stable and predictable and are supported            primarily by long-term, fixed income investments. Accident and health claim demands are            stable and predictable but generally shorter in term, requiring greater            liquidity.

             

Generally, the Company has met its operating requirements by maintaining            appropriate levels of liquidity in its investment portfolio and utilizing cash flows            from operations. Liquidity for the Company has remained strong, as evidenced by            significant amounts of short-term investments and cash that totaled $1,221.9 million            and $1,090.3 million as of June 30, 2007 and December 31, 2006, respectively. In            addition, as of June 30, 2007 and December 31, 2006, approximately 98% of the bond            portfolio carried an investment grade rating, thereby providing significant liquidity            to the Company's overall investment portfolio.

             

Funds provided by premiums and fees, investment income and maturities of            investment assets are reasonably predictable and normally exceed liquidity requirements            for payment of claims, benefits and 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. Also, 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            and equity securities. Management believes that the liquidity profile of its assets is            sufficient to satisfy the liquidity requirements of reasonably foreseeable            scenarios.

             

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 continues to be well capitalized, with sufficient            borrowing capacity to meet the anticipated needs of its business. The Company had $71.7            million and $95.0 million of commercial paper outstanding at June 30, 2007 and December            31, 2006, respectively. The commercial paper has been given a rating of A-1+ by            Standard & Poor’s Rating Services and a rating of P-1 by Moody’s            Investors Services, each being the highest rating available.

             

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

             

**Item 3. Quantitative and Qualitative Disclosures About Market            Risk**

             

The Company’s assets are purchased to fund future benefit payments            to its policyholders and contractholders. The primary risk of these assets is exposure            to rising interest rates. However, when the asset and liability payments are considered            together, the primary risk is exposure to falling interest rates due to minimum            credited rate guarantees in the liabilities. The Company’s exposure to foreign            currency exchange rate fluctuations is minimal as only a nominal amount of foreign            investments are held.

             

To manage interest rate risk, the Company invests in assets that are            suited to the products that it sells. For products with fixed and highly predictable            benefit payments such as certificate annuities and payout annuities, the Company            invests in fixed income assets with cash flows that closely match these products’            liability cash flows. The Company is then protected against interest rate changes, as            any change in the fair value of the assets will be offset by a similar change in the            fair value of the liabilities. For products with uncertain timing of benefit payments            such as portfolio annuities and life insurance, the Company invests in fixed income            assets with expected cash flows that are earlier than the expected timing of the            benefit payments.

 

40

 

The Company may also manage risk from time to time with interest rate            derivatives such as interest rate caps that would pay it investment income if interest            rates rise above the level specified in the cap, or interest rate floors that would pay            it if interest rates fall below the level specified in the floor. These derivatives are            only used to reduce risk and are not used for speculative purposes. As of June 30,            2007, the Company did not own any interest rate caps or interest rate            floors.

             

As a result of the coinsurance with funds withheld agreement with CLAC,            the Company had recorded a derivative financial instrument to account for the different            credit risks and other characteristics of the reinsurance receivable and the investment            assets of the affiliate that were underlying that receivable. This reinsurance            agreement with CLAC was terminated on June 1, 2007. During its existence, the            derivative was carried at fair value and changes in fair value were included in net            investment income as a non-cash charge or credit. This exposed the Company’s            operating results to volatility, reflecting changes in the fair value of the underlying            investment portfolio, which was exposed to interest rate, market and credit risk. Due            to the termination of the reinsurance agreement, the Company is no longer exposed to            the interest rate, market and credit risk associated with this embedded derivative.            Losses related to the embedded derivative in the amount of $1.7 million and $5.9            million, net of policyholder related amounts and deferred taxes, were included in net            income for the six months ended June 30, 2007 and 2006, respectively.

             

**Item 4. Controls and Procedures**

             

Based on their evaluation as of June 30, 2007, the Chief Executive            Officer and Chief Financial Officer have concluded that the Company’s disclosure            controls and procedures are effective at the reasonable assurance level in ensuring            that information relating to the Company and its subsidiaries which is required to be            disclosed in reports filed under the Securities Exchange Act of 1934 is (i) recorded,            processed, summarized and reported in a timely manner; and is (ii) accumulated and            communicated to the Company’s senior management, including the President and            Chief Executive Officer and the Executive Vice President and Chief Financial Officer,            so that timely decisions may be made regarding disclosure.

             

The Chief Executive Officer and Chief Financial Officer hereby confirm            that no significant changes in the Company’s internal control over financial            reporting occurred during the Company’s most recent fiscal quarter that have            materially affected, or are reasonably likely to materially affect, the            registrant’s internal control over financial reporting.

 

**Part II – Other Information**

 

**Item 1. Legal Proceedings**

 

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

             

**Item 1A. Risk Factors**

             

There are no material changes from Risk Factors as previously disclosed            in the Registrant’s Annual Report on Form 10-K for the year ended December 31,            2006.

             

**Item 6. Exhibits**

 

Index to Exhibits:

                

| Exhibit Number |   | Title                                  |   | Page |
|----------------|--------|----------------------------------------|--------|------|
| 31.1           |   | Rule 13a-14(a)/15d-14(a) Certification |   | 43   |
| 31.2           |   | Rule 13a-14(a)/15d-14(a) Certification |   | 44   |
| 32             |   | 18 U.S.C. 1350 Certification           |   | 45   |

             

 

41

 

**Signature**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the            registrant has duly caused this report to be signed on its behalf by the undersigned            thereunto duly authorized.

 

Great-West Life & Annuity Insurance Company

 

| By:    | /s/Glen R. Derback                                                                | Date:  | August 14, 2007 |
|--------|-----------------------------------------------------------------------------------|--------|-----------------|
|   | Glen R. Derback, Senior Vice President and                            Controller  |   |            |
|   | (Duly authorized officer and chief accounting                            officer) |   |            |

 

42

 

Exhibit 31.1

 

**Certification**

 

I,            Raymond L. McFeetors, certify that:

 

|   | 1. | I have reviewed this quarterly report on Form 10-Q of                            Great-West Life & Annuity Insurance Company (the                            “Registrant”); |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 2. | Based on my knowledge, this quarterly report does not                            contain any untrue statement of a material fact or omit to state a                            material fact necessary to make the statements made, in light of the                            circumstances under which such statements were made, not misleading                            with respect to the period covered by this quarterly report; |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 3. | Based on my knowledge, the financial statements, and                            other financial information included in this quarterly report, fairly                            present in all material respects the financial condition, results of                            operations and cash flows of the registrant as of, and for, the periods                            presented in this quarterly report; |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 4. | The registrant’s other certifying officer and I                            are responsible for establishing and maintaining disclosure controls                            and procedures (as defined in Exchange Act Rules 13a-15(e) and                            15d-15(e)) for the registrant and we have: |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | a) | designed such disclosure controls and procedures, or                            caused such disclosure controls and procedures to be designed under our                            supervision, to ensure that material information relating to the                            registrant, including its consolidated subsidiaries, is made known to                            us by others within those entities, particularly during the period in                            which this quarterly report is being prepared; |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | b) | evaluated the effectiveness of the registrant’s                            disclosure controls and procedures and presented in this quarterly                            report our conclusion about the effectiveness of the disclosure                            controls and procedures, as of the end of the period covered by this                            quarterly report based on such evaluation; and |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | c) | disclosed in this quarterly report any change in the                            registrant’s internal control over financial reporting that                            occurred during the registrant’s most recent fiscal quarter that                            has materially affected, or is reasonably likely to materially affect,                            the registrant’s internal control over financial reporting;                            and |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 5. | The registrant’s other certifying officer and I                            have disclosed, based on our most recent evaluation of internal control                            over financial reporting, to the registrant’s auditors and the                            audit committee of registrant’s board of directors (or persons                            performing the equivalent function): |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | a) | all significant deficiencies and material weaknesses in                            the design or operation of internal control over financial reporting                            which are reasonably likely to adversely affect the registrant’s                            ability to record, process, summarize and report financial information;                            and |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | b) | any fraud, whether or not material, that involves                            management or other employees who have a significant role in the                            registrant’s internal control over financial                            reporting. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Date: August 14, 2007

 

| /s/    | Raymond L. McFeetors                  |
|--------|---------------------------------------|
|   | Raymond L. McFeetors                  |
|   | President and Chief Executive Officer |

 

 

43

 

Exhibit 31.2

 

**Certification**

 

I,            Mitchell T.G. Graye, certify that:

 

|   | 1. | I have reviewed this quarterly report on Form 10-Q of                            Great-West Life & Annuity Insurance Company (the                            “Registrant”); |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 2. | Based on my knowledge, this quarterly report does not                            contain any untrue statement of a material fact or omit to state a                            material fact necessary to make the statements made, in light of the                            circumstances under which such statements were made, not misleading                            with respect to the period covered by this quarterly report; |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 3. | Based on my knowledge, the financial statements, and                            other financial information included in this quarterly report, fairly                            present in all material respects the financial condition, results of                            operations and cash flows of the registrant as of, and for, the periods                            presented in this quarterly report; |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 4. | The registrant’s other certifying officer and I                            are responsible for establishing and maintaining disclosure controls                            and procedures (as defined in Exchange Act Rules 13a-15(e) and                            15d-15(e)) for the registrant and we have: |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | a) | designed such disclosure controls and procedures, or                            caused such disclosure controls and procedures to be designed under our                            supervision, to ensure that material information relating to the                            registrant, including its consolidated subsidiaries, is made known to                            us by others within those entities, particularly during the period in                            which this quarterly report is being prepared; |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | b) | evaluated the effectiveness of the registrant’s                            disclosure controls and procedures and presented in this quarterly                            report our conclusion about the effectiveness of the disclosure                            controls and procedures, as of the end of the period covered by this                            quarterly report based on such evaluation; and |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | c) | disclosed in this quarterly report any change in the                            registrant’s internal control over financial reporting that                            occurred during the registrant’s most recent fiscal quarter that                            has materially affected, or is reasonably likely to materially affect,                            the registrant’s internal control over financial reporting;                            and |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 5. | The registrant’s other certifying officers and I                            have disclosed, based on our most recent evaluation of internal control                            over financial reporting, to the registrant’s auditors and the                            audit committee of registrant’s board of directors (or persons                            performing the equivalent function): |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | a) | all significant deficiencies and material weaknesses in                            the design or operation of internal control over financial reporting                            which are reasonably likely to adversely affect the registrant’s                            ability to record, process, summarize and report financial information;                            and |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | b) | any fraud, whether or not material, that involves                            management or other employees who have a significant role in the                            registrant’s internal control over financial                            reporting. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Date: August 14, 2007

 

| /s/    | Mitchell T.G. Graye                                                             |
|--------|---------------------------------------------------------------------------------|
|   | Mitchell T.G. Graye                                                             |
|   | Executive Vice President and Chief Financial                            Officer |

 

 

44

 

Exhibit 32

 

**Certification**

 

**Pursuant to Section 906 of the Sarbanes-Oxley Act of            2002**

**(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18,            United States Code)**

 

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections            (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the            undersigned officers of Great-West Life & Annuity Insurance Company, a Colorado            corporation (the “Company”), does hereby certify, to such officer’s            knowledge, that:

 

The            Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (the “Form            10-Q”) of the Company fully complies with the requirements of section 13(a) or            15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q            fairly presents, in all material respects, the financial condition and results of            operations of the Company.

 

 

| Dated: | August 14, 2007 | /s/    | Raymond L. McFeetors                  |
|--------|-----------------|--------|---------------------------------------|
|   |            |   | Raymond L. McFeetors                  |
|   |            |   | President and Chief Executive Officer |

 

 

| Dated: | August 14, 2007 | /s/    | Mitchell T.G. Graye                                                             |
|--------|-----------------|--------|---------------------------------------------------------------------------------|
|   |            |   | Mitchell T.G. Graye                                                             |
|   |            |   | Executive Vice President and Chief Financial                            Officer |

 

 

The            foregoing certification is being furnished solely pursuant to section 906 of the            Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of            title 18, United States Code) and is not being filed as part of this Form 10-Q or as a            separate disclosure document.

 

 

 

 

 

 

 

 

 

 

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