UNITED        STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

**FORM        10-Q**

 

(Mark        One)

 

> 
**[X]**

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR                        15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**
                     
For the quarterly period ended September 30,                        2007

**[  ]**

**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 ] | Noo |
|---------------------|-----|

 

 

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 filero | Accelerated filero | Non-accelerated filer [ X ] |
|--------------------------|--------------------|---------------------------------------|

 

 

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

 

| Yeso | No [ X ] |
|------|--------------------|

 

 

As of        November 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. |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

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** | **21.** |
|        |                                                                                                                                                                                                                                                                     |    |
|        | **Item 3**  **Quantitative and Qualitative Disclosures About Market                        Risk**                                                                                                                                                              | **39.** |
|        |                                                                                                                                                                                                                                                                     |    |
|        | **Item 4**  **Controls and Procedures**                                                                                                                                                                                                                        | **39.** |
|        |                                                                                                                                                                                                                                                                     |    |
| **Part II** | **Other Information**                                                                                                                                                                                                                                                    | **39.** |
|        |                                                                                                                                                                                                                                                                     |    |
|        | **Item 1**  **Legal Proceedings**                                                                                                                                                                                                                              | **39.** |
|        |                                                                                                                                                                                                                                                                     |    |
|        | **Item 1A Risk Factors**                                                                                                                                                                                                                                                 | **40.** |
|        |                                                                                                                                                                                                                                                                     |    |
|        | **Item 4 Submission of Matters to a Vote of Security                        Holders**                                                                                                                                                                                    | **40.** |
|        |                                                                                                                                                                                                                                                                     |    |
|        | **Item 6**  **Exhibits**                                                                                                                                                                                                                                       | **40.** |
|        |                                                                                                                                                                                                                                                                     |    |
|        | **Signature**                                                                                                                                                                                                                                                            | **40.** |

 

**Part I Financial Information**

         

**Item 1. Financial Statements**

         

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

Condensed        Consolidated Balance Sheets

September        30, 2007 and December 31, 2006

(In        Thousands, Except Share Amounts)

(Unaudited)

         

         

|                                                                             |   | September 30, |   | December 31, |
|----------------------------------------------------------------------------------|--------|---------------|--------|--------------|
| **Assets**                                                                       |   | 2007          |   | 2006         |
| **Investments:**                                                                 |   |          |   |         |
| Fixed maturities available-for-sale, at fair                        value        |   |          |   |         |
| (amortized cost $13,929,367 and $15,546,700)                                     | $      | 13,834,320    | $      | 15,486,655   |
| Fixed maturities held for trading, at fair value                                 |   |          |   |         |
| (amortized cost $9,598 and $0)                                                   |   | 9,662         |   | -            |
| Mortgage loans on real estate (net of allowances                                 |   |          |   |         |
| of $9,448 and $15,661)                                                           |   | 1,149,726     |   | 1,338,193    |
| Equity investments available-for-sale, at fair                                   |   |          |   |         |
| value (cost $17,628 and $17,875)                                                 |   | 29,807        |   | 28,268       |
| Policy loans                                                                     |   | 3,679,892     |   | 3,797,649    |
| Short-term investments, available-for-sale                                       |   |          |   |         |
| (cost approximates fair value)                                                   |   | 445,106       |   | 1,056,705    |
| Other limited partnership interests                                              |   | 323,268       |   | 345,192      |
| Other investments                                                                |   | 4,230         |   | 4,413        |
| Total investments                                                                |   | 19,476,011    |   | 22,057,075   |
|                                                                             |   |          |   |         |
| **Other assets:**                                                                |   |          |   |         |
| Cash                                                                             |   | 27,050        |   | 33,572       |
| Reinsurance receivable:                                                          |   |          |   |         |
| Related party                                                                    |   | 351,765       |   | 531,389      |
| Other                                                                            |   | 202,607       |   | 258,355      |
| Deferred acquisition costs and value of                                          |   |          |   |         |
| business acquired                                                                |   | 426,745       |   | 505,134      |
| Investment income due and accrued                                                |   | 148,628       |   | 161,146      |
| Receivables related to uninsured accident                                        |   |          |   |         |
| and health plan claims (net of allowances of                                     |   |          |   |         |
| $11,325 and $14,299)                                                             |   | 160,413       |   | 150,854      |
| Premiums in course of collection (net of                        allowances       |   |          |   |         |
| of $3,489 and $4,351)                                                            |   | 99,075        |   | 107,874      |
| Deferred income taxes                                                            |   | 233,523       |   | 173,059      |
| Collateral under securities lending agreements                                   |   | 86,332        |   | 382,423      |
| Due from parent and affiliates                                                   |   | 33,785        |   | 10,650       |
| Goodwill                                                                         |   | 153,623       |   | 146,030      |
| Other intangible assets                                                          |   | 50,344        |   | 47,112       |
| Other assets                                                                     |   | 657,938       |   | 627,207      |
| **Separate account assets**                                                      |   | 18,179,020    |   | 16,289,974   |
| **Total assets**                                                                 | $      | 40,286,859    | $      | 41,481,854   |
|                                                                             |   |          |   |         |
|                                                                             |   |          |   |         |
| See notes to condensed consolidated financial                        statements. |   |          |   | (Continued)  |

         

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

Condensed        Consolidated Balance Sheets

September        30, 2007 and December 31, 2006

(In        Thousands, Except Share Amounts)

(Unaudited)

         

|                                                                        |   | September 30, |   | December 31, |
|-----------------------------------------------------------------------------|--------|---------------|--------|--------------|
|                                                                        |   | 2007          |   | 2006         |
| **Policy benefit liabilities:**                                             |   |          |   |         |
| Policy reserves:                                                            |   |          |   |         |
| Related party                                                               | $      | 2,525,631     | $      | 4,639,829    |
| Other                                                                       |   | 14,863,993    |   | 14,695,926   |
| Policy and contract claims                                                  |   | 388,276       |   | 413,022      |
| Policyholders’ funds                                                  |   | 386,008       |   | 386,301      |
| Provision for policyholders’ dividends                                |   | 78,201        |   | 109,700      |
| Undistributed earnings on participating business                            |   | 207,102       |   | 188,198      |
| Total policy benefit liabilities                                            |   | 18,449,211    |   | 20,432,976   |
|                                                                        |   |          |   |         |
| **General liabilities:**                                                    |   |          |   |         |
| Due to parent and affiliates                                                |   | 546,553       |   | 547,951      |
| Repurchase agreements                                                       |   | 242,475       |   | 763,779      |
| Commercial paper                                                            |   | 97,594        |   | 95,020       |
| Payable under securities lending agreements                                 |   | 86,332        |   | 382,423      |
| Other liabilities                                                           |   | 807,107       |   | 840,776      |
| **Separate account liabilities**                                            |   | 18,179,020    |   | 16,289,974   |
| Total liabilities                                                           |   | 38,408,292    |   | 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                                                  |   | 742,876       |   | 737,857      |
| Accumulated other comprehensive income (loss)                               |   | (68,703)      |   | (46,537)     |
| Retained earnings                                                           |   | 1,197,362     |   | 1,430,603    |
| Total stockholder’s equity                                            |   | 1,878,567     |   | 2,128,955    |
| **Total liabilities and stockholder’s                        equity** | $      | 40,286,859    | $      | 41,481,854   |
|                                                                        |   |          |   |         |

 

| See notes to condensed consolidated financial                        statements. |   |   | (Concluded) |
|----------------------------------------------------------------------------------|--------|--------|-------------|

 

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

Condensed Consolidated Statements of        Income        Three and Nine Months Ended September 30, 2007 and 2006        (In Thousands)        (Unaudited)

 

|                                                                                                                             |   | Three months ended |    | Nine months ended |    |
|----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------|---------|
|                                                                                                                             |   | September 30,      |    | September 30,     |    |
|                                                                                                                             |   | 2007               |    | 2006              |    | 2007 |   | 2006 |   |
| **Revenues:**                                                                                                                    |   |               |    |              |    |   |   |   |   |   |   |   |   |
| Premium income:                                                                                                                  |   |               |    |              |    |   |   |   |   |   |   |   |   |
| Related party (net of related party premiums ceded of                        $93,695, $988, $1,638,017 and $3,268)          |   | $                  | (19,252 | )                 | $       | 72,782 |   | $ | (1,418,612 | ) | $ | 192,569 |   |
| Other (net of premiums ceded of $8,097, $10,158, $37,358 and                        $46,385)                                     |   |               | 317,536 |              |    | 301,729 |   |   | 904,433 |   |   | 865,560 |   |
| Fee income                                                                                                                       |   |               | 285,298 |              |    | 254,756 |   |   | 879,968 |   |   | 768,844 |   |
| Net investment income                                                                                                            |   |               | 274,247 |              |    | 299,758 |   |   | 928,797 |   |   | 850,826 |   |
| Net realized gains (losses) on                                                                                                   |   |               |    |              |    |   |   |   |   |   |   |   |   |
| investments                                                                                                                      |   |               | 9,028   |              |    | (10,069 | ) |   | 1,283 |   |   | (32,826 | ) |
| Total revenues                                                                                                                   |   |               | 866,857 |              |    | 918,956 |   |   | 1,295,869 |   |   | 2,644,973 |   |
| **Benefits and expenses:**                                                                                                       |   |               |    |              |    |   |   |   |   |   |   |   |   |
| Life and other policy benefits (net of reinsurance                        recoveries of $101,884, $12,635, $262,948 and $41,489) |   |               | 258,472 |              |    | 327,063 |   |   | 866,681 |   |   | 1,027,777 |   |
| Increase (decrease) in reserves:                                                                                                 |   |               |    |              |    |   |   |   |   |   |   |   |   |
| Related party                                                                                                                    |   |               | 35,037  |              |    | 11,461 |   |   | (1,523,629 | ) |   | 13,802 |   |
| Other                                                                                                                            |   |               | (8,146  | )                 |    | 19,728 |   |   | 30,404 |   |   | 22,032 |   |
| Interest paid or credited to contractholders                                                                                     |   |               |    |              |    |   |   |   |   |   |   |   |   |
|                                                                                                                             |   | 121,551            |    |              | 126,574 |   |   | 371,911 |   |   | 357,297 |   |
| Provision for policyholders’ share of earnings on                        participating business                            |   |               | 3,544   |              |    | 124 |   |   | 18,753 |   |   | 2,889 |   |
| Dividends to policyholders                                                                                                       |   |               | 16,406  |              |    | 22,286 |   |   | 71,309 |   |   | 73,234 |   |
| Total benefits                                                                                                                   |   |               | 426,864 |              |    | 507,236 |   |   | (164,571 | ) |   | 1,497,031 |   |
| General insurance expenses                                                                                                       |   |               | 269,932 |              |    | 242,151 |   |   | 805,215 |   |   | 713,139 |   |
| Amortization of deferred acquisition costs and value of                        business acquired                                 |   |               | 15,276  |              |    | 21,064 |   |   | 128,305 |   |   | 37,294 |   |
| Interest expense                                                                                                                 |   |               | 10,323  |              |    | 10,824 |   |   | 31,169 |   |   | 23,050 |   |
| Total benefits and expenses                                                                                                      |   |               | 722,395 |              |    | 781,275 |   |   | 800,118 |   |   | 2,270,514 |   |
| **Income before income taxes**                                                                                                   |   |               | 144,462 |              |    | 137,681 |   |   | 495,751 |   |   | 374,459 |   |
| **Provision for income taxes:**                                                                                                  |   |               |    |              |    |   |   |   |   |   |   |   |   |
| Current                                                                                                                          |   |               | 36,304  |              |    | 49,574 |   |   | 124,679 |   |   | 106,366 |   |
| Deferred                                                                                                                         |   |               | 14,651  |              |    | (6,488 | ) |   | 50,373 |   |   | 6,973 |   |
| Total income taxes                                                                                                               |   |               | 50,955  |              |    | 43,086 |   |   | 175,052 |   |   | 113,339 |   |
| **Net income**                                                                                                                   |   | $                  | 93,507  |              | $       | 94,595 |   | $ | 320,699 |   | $ | 261,120 |   |

 

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

Condensed        Consolidated Statements of Stockholder’s Equity

Year        Ended December 31, 2006 and Nine Months Ended September 30, 2007

(In        Thousands)

(Unaudited)

 

|                                                               |   |         |   |                                                             |   | **Accumulated                    Other                    Comprehensive Income (Loss)** |   |                                                                         |     |              |   |          |
|--------------------------------------------------------------------|--------|--------------|--------|------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------|----------|-------------------|--------|----------|
|                                                               |   | Common Stock |   | Additional                    Paid-in                    Capital |   | Unrealized                    Gains (Losses)                    on Securities           |   | Employee                    Benefit Plan                    Adjustments |     | Retained 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                      |   |         |   |                                                             |   |                                                                                              |   |                                                                         |     |              |   |     |   |   |   |   |   | 314,217 |   |
| Impact of adoption of 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-based 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                                                         |   |         |   |                                                             |   |                                                                                              |   |                                                                         |     |              |   |     |   |   | 320,699 |   |   | 320,699 |   |
| Other comprehensive income                    (loss):              |   |         |   |                                                             |   |                                                                                              |   |                                                                         |     |              |   |     |   |   |   |   |   |   |   |
| Net change in unrealized                    losses                 |   |         |   |                                                             |   |                                                                                              |   |                                                                         | (22,663  | )                 |   |     |   |   |   |   |   | (22,663 | ) |
| Minimum pension liability                    adjustments           |   |         |   |                                                             |   |                                                                                              |   |                                                                         |     |              |   | 379      |   |   |   |   |   | 379 |   |
| Total comprehensive income                    (loss)               |   |         |   |                                                             |   |                                                                                              |   |                                                                         |     |              |   |     |   |   |   |   |   | 298,415 |   |
| Impact of adoption of SFAS                    No. 155              |   |         |   |                                                             |   |                                                                                              |   |                                                                         | 118      |              |   |     |   |   | (3 | ) |   | 115 |   |
| Impact of adoption of FIN                    No. 48                |   |         |   |                                                             |   |                                                                                              |   |                                                                         |     |              |   |     |   |   | (6,195 | ) |   | (6,195 | ) |
| Dividends                                                          |   |         |   |                                                             |   |                                                                                              |   |                                                                         |     |              |   |     |   |   | (547,742 | ) |   | (547,742 | ) |
| Capital contribution -                    stock-based compensation |   |         |   |                                                             |   | 2,887                                                                                             |   |                                                                         |     |              |   |     |   |   |   |   |   | 2,887 |   |
| Income tax benefit on                    stock-based compensation  |   |         |   |                                                             |   | 2,132                                                                                             |   |                                                                         |     |              |   |     |   |   |   |   |   | 2,132 |   |
| **Balances, September 30, 2007**                    |   | $            | 7,032  |                                                             | $      | 742,876                                                                                           |   | $                                                                            | (38,253) |              | $      | (30,450) |   | $ | 1,197,362 |   | $ | 1,878,567 |   |

 

| See notes to condensed consolidated financial                        statements. |
|----------------------------------------------------------------------------------|

 

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

Condensed        Consolidated Statements of Cash Flows

Nine        Months Ended September 30, 2007 and 2006

(In        Thousands)

(Unaudited)

 

|                                                                                         |   | Nine months ended September 30, |   |
|----------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
| **Operating activities:**                                                                    |   | 2007                            |   | 2006 |   |
| Net income                                                                                   |   | $320,699                        |   | $261,120 |   |
| Adjustments to reconcile net income to net cash                                              |   |                            |   |   |   |
| provided by (used in) operating activities:                                                  |   |                            |   |   |   |
| Earnings allocated to participating policyholders                                            |   | 18,753                          |   | 2,889 |   |
| Amortization of (premiums) accretion of discounts on                        investments, net |   | (45,023                         | )      | (40,596 | ) |
| Net realized (gains) losses on investments                                                   |   | (1,283                          | )      | 32,826 |   |
| Net purchases of trading securities                                                          |   | (8,634                          | )      | — |   |
| Depreciation and amortization                                                                |   | 157,361                         |   | 57,321 |   |
| Deferral of acquisition costs                                                                |   | (52,153                         | )      | (43,481 | ) |
| Deferred income taxes                                                                        |   | 50,373                          |   | 6,973 |   |
| Changes in assets and liabilities, net of effects                                            |   |                            |   |   |   |
| of acquisitions:                                                                             |   |                            |   |   |   |
| Policy benefit liabilities                                                                   |   | 119,937                         |   | 16,232 |   |
| Reinsurance receivable                                                                       |   | (142,552                        | )      | 76,546 |   |
| Accrued interest and other receivables                                                       |   | (6,455                          | )      | (6,436 | ) |
| Other, net                                                                                   |   | (134,267                        | )      | (61,741 | ) |
| Net cash provided by operating activities                                                    |   | 276,756                         |   | 301,653 |   |
|                                                                                         |   |                            |   |   |   |
| **Investing activities:**                                                                    |   |                            |   |   |   |
| Proceeds from sales, maturities and redemptions                                              |   |                            |   |   |   |
| of investments:                                                                              |   |                            |   |   |   |
| Fixed maturities available-for-sale                                                          |   | 3,272,407                       |   | 4,312,204 |   |
| Mortgage loans on real estate                                                                |   | 127,361                         |   | 246,451 |   |
| Equity investments and other limited                                                         |   |                            |   |   |   |
| partnership interests                                                                        |   | 40,707                          |   | 196,702 |   |
| Purchases of investments:                                                                    |   |                            |   |   |   |
| Fixed maturities available-for-sale                                                          |   | (3,296,907                      | )      | (4,904,804 | ) |
| Mortgage loans on real estate                                                                |   | (137,188                        | )      | (151,520 | ) |
| Equity investments and other limited                                                         |   |                            |   |   |   |
| partnership interests                                                                        |   | (18,198                         | )      | (49,101 | ) |
| Net change in short-term investments                                                         |   | 1,121,595                       |   | 116,414 |   |
| Change in repurchase agreements                                                              |   | (521,304                        | )      | 114,472 |   |
| Other, net                                                                                   |   | (60,235                         | )      | (12,336 | ) |
| Net cash provided by (used in) investing                        activities                   |   | 528,238                         |   | (131,518 | ) |
|                                                                                         |   |                            |   |   |   |

 

| See notes to condensed consolidated financial                        statements. |   |   | (Continued) |
|----------------------------------------------------------------------------------|--------|--------|-------------|

 

 

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

Condensed        Consolidated Statements of Cash Flows

Nine        Months Ended September 30, 2007 and 2006

(In        Thousands)

(Unaudited)

 

|                                                                                                                           | **Nine months ended                    September 30,** |                |
|--------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------|---------------------|
| **Financing                    Activities:**                                                                                   | 2007                                                   |                | **2006** |   |
| Contract deposits                                                                                                              | $                                                      | 910,555             |   | $ | 762,816 |   |
| Contract withdrawals                                                                                                           |                                                   | (1,135,321          | ) |   | (1,103,227 | ) |
| Change in due to parent and                    affiliates                                                                      |                                                   | (24,533             | ) |   | 337,913 |   |
| Dividends paid                                                                                                                 |                                                   | (547,742            | ) |   | (187,654 | ) |
| Net commercial paper borrowings                    (repayments)                                                                |                                                   | 2,574               |   |   | 393 |   |
| Change in bank overdrafts                                                                                                      |                                                   | (17,049             | ) |   | (7,783 | ) |
| Net cash used in financing                    activities                                                                       |                                                   | (811,516            | ) |   | (197,542 | ) |
|                                                                                                                           |                                                   |                |   |   |   |   |
| Net decrease in cash                                                                                                           |                                                   | (6,522              | ) |   | (27,407 | ) |
| Cash, beginning of period                                                                                                      |                                                   | 33,572              |   |   | 57,903 |   |
| Cash, end of period                                                                                                            | $                                                      | 27,050              |   | $ | 30,496 |   |
|                                                                                                                           |                                                   |                |   |   |   |   |
|                                                                                                                           |                                                   |                |   |   |   |   |
|        Supplemental disclosures of cash flow                    information                 |                                                   |
| Net cash paid during the periods                    for:                                                                       |                                                   |                |   |   |   |   |
| Income taxes                                                                                                                   | $                                                      | 45,117              |   | $ | 78,085 |   |
| Interest                                                                                                                       |                                                   | 21,911              |   |   | 11,328 |   |
|                                                                                                                           |                                                   |                |   |   |   |   |
|        Non-cash investing and financing                    transactions during the periods: |                                                   |
| Amounts included in due to broker related                    to                                                                |                                                   |                |   |   |   |   |
| reinsurance acquisition                                                                                                        | $                                                      | —   |   | $ | 1,413,347 |   |
| Share-based compensation expense                                                                                               |                                                   | 2,887               |   |   | 3,518 |   |
| Return of invested reinsurance assets to The                    Canada                                                         |                                                   |                |   |   |   |   |
| Life Assurance Company (See Note                    4)                                                                         |                                                   | 1,608,909           |   |   | 87,622 |   |

         

         

         

| See notes to condensed consolidated financial                        statements. |   |   | (Concluded) |
|----------------------------------------------------------------------------------|--------|--------|-------------|

         

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

Notes to Condensed Consolidated Financial        Statements        Nine Months Ended September 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 and the value of business acquired, 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 nine months ended September 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 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.

 

During the nine months ended September 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 reported in net        investment income.

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

Notes to Condensed        Consolidated Financial Statements        Nine Months Ended September 30, 2007 and 2006        (Dollars In Thousands)        (Unaudited)

****

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

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

Notes to Condensed            Consolidated Financial Statements            Nine Months Ended September 30, 2007 and 2006            (Dollars In Thousands)            (Unaudited)

|   | **3.** | **Acquisitions** |
|--------|--------|------------------|

         

On May 31, 2007, the Company acquired an 80% equity interest in Benefits        Management Corp. (“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 Plan 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 that 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.

         

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 under management.

         

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

         

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

Notes            to Condensed Consolidated Financial Statements            Nine Months Ended September 30, 2007 and 2006            (Dollars In Thousands)            (Unaudited)

**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 (“LLIRC”), to cede 50% of                        direct written stop loss and excess loss health insurance business on a                        coinsurance with funds withheld basis. Premiums ceded to LLIRC were $91,506                        and $243,078 during the three and nine months ended September 30, 2007,                        respectively. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

|   | **•** | 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                                                 | $                                                | (1,177,180)                                |   | 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                                           |                                             | (310,865)                                  |   | Provision for policyholder dividends |   | (31,841) |
| Deferred policy acquisition costs and value of business acquired |                                             | (68,809)                                   |   |   |   |   |
|                                                             | Undistributed earnings on participating business |                                       | 8,161 |
| Investment income due and accrued                                |                                             | (15,837)                                   |   |   |   |   |
|                                                             | Other liabilities                                |                                       | 103 |
| Premiums in course of collection                                 |                                             | (3,540)                                    |   | Total liabilities |   | (2,040,325) |
| Deferred income taxes                                            |                                             | (18,274)                                   |   |   |   |   |
|                                                             |                                             |                                       |   | Accumulated other comprehensive income |   | 7,684 |
|                                                             |                                             |                                       |   |
|                                                             |                                             |                                       |   | Retained earnings |   | 22,244 |
|                                                             |                                             |                                       |   | Total stockholder’s equity |   | 29,928 |
|                                                             |                                             |                                       |   | Total liabilities and stockholder’s equity | $ | (2,010,397) |
| Total assets                                                     | $                                                | (2,010,397)                                |   |

         

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                                                                         | $      | (1,387,179) |
|-------------------------------------------------------------------------------------------------------|--------|-------------|
| Net investment income                                                                                 |   | 58,569      |
| Net realized gains (losses) on investments                                                            |   | (14,797)    |
| Total revenues                                                                                        |   | (1,343,407) |
| 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                                                                            |   | 38,616      |
| Total income taxes                                                                                    |   | 16,372      |
| Net income                                                                                            | $      | 22,244      |

         

|   | **•** | On July 3, 2007, a wholly-owned subsidiary of the Company                        and CLAC amended their reinsurance agreement pursuant to which the Company                        assumed additional term life insurance from CLAC. As a result of this                        amendment, on July 3, 2007 the Company recorded $33,677 in both premium                        income and increase in reserves. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

As a result of this amendment, the Company also recorded the following on        July 3, 2007.

         

| Assets                                        |   | Liabilities and                        Stockholder’s Equity |
|-----------------------------------------------|--------|-------------------------------------------------------------------|
| Reinsurance                        receivable | $      | 33,677                                                            |   | Policy reserves | $ | 33,677 |
|                                          | $      | 33,677                                                            |   |   | $ | 33,677 |

         

|   | **•** | 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 nine-month periods ended September 30, 2007 and 2006, these                        purchases totaled $12,485, $57,448, $8,321 and $43,193, 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                        $373,019 and $356,992 at September 30, 2007 and December 31, 2006,                        respectively, to eliminate these amounts in its condensed consolidated                        balance sheets at those dates. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

                Notes to Condensed Consolidated Financial Statements                Nine Months Ended September 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 September 30, 2007 and December 31, 2006. The Company considers these        investments to be only temporarily impaired.

         

|                                            |   | September 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.governmentdirectobligationsand U.S.agencies | $      | 519,529                                    | $ | 3,663 | $ | 861,420 | $ | 17,774 | $ | 1,380,949 | $ | 21,437 |
| Obligationsof U.S. statesand theirsub-divisions |   | 20,616                                     |   | 287 |   | 128,570 |   | 1,291 |   | 149,186 |   | 1,578 |
| Foreigngovernments                              |   | -                                          |   | - |   | 1,765 |   | 53 |   | 1,765 |   | 53 |
| Corporate debtsecurities                        |   | 719,015                                    |   | 15,587 |   | 2,394,556 |   | 89,458 |   | 3,113,571 |   | 105,045 |
| Mortgage-backed andasset-backedsecurities       |   | 1,030,294                                  |   | 28,241 |   | 2,258,788 |   | 98,093 |   | 3,289,082 |   | 126,334 |
| Total fixedmaturities                           | $      | 2,289,454                                  | $ | 47,778 | $ | 5,645,099 | $ | 206,669 | $ | 7,934,553 | $ | 254,447 |
| Equity                    investments           | $      | 1                                          | $ | 1 | $ | 2 | $ | 1 | $ | 3 | $ | 2 |

         

         

         

|                                                                    |   | 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 September 30, 2007 and December 31, 2006,            there were 202 and 980 securities, respectively, that had been in a loss position for            less than twelve months with carrying values in the amounts of $2,289,454 and            $3,706,657, respectively, and unrealized losses in the amounts of $47,778 and $38,919,            respectively. At September 30, 2007 and December 31, 2006, less than 1% of these            securities were rated non-investment grade. At September 30, 2007 and December 31,            2006, there were 811 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            $5,645,099 and $5,707,123, respectively, and unrealized losses in the amounts of            $206,669 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 September 30, 2007.

**Equity investments**- At September 30, 2007 and        December 31, 2006, the Company had unrealized losses on equity investments with carrying        values in the amounts of $3 and $388, respectively, and unrealized losses in the amounts of        $2 and $5, respectively. The decrease in the unrealized losses is primarily due to        securities that are no longer in a loss position due to improved market conditions. Of the        total unrealized losses, $1 and $1 have been in loss positions for less than twelve months.        At September 30, 2007, the Company does not consider any of these investments to be        other-than-temporarily impaired.

         

**Other-than-temporary impairment**- During the        three months ended September 30, 2007 and 2006, the Company recorded other-than-temporary        impairments on fixed maturity investments in the amounts of $6,766 and $4,237,        respectively. During the nine months ended September 30, 2007 and 2006, the Company        recorded other-than-temporary impairments on fixed maturity investments of $29,049 and        $4,237, respectively. Of the $29,049, $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. During the three months ended        September 30, 2007 and 2006, the Company recorded other-than-temporary impairments on        equity securities in the amount of $0 and $83, respectively. During the nine months ended        September 30, 2007 and 2006, the Company recorded other-than-temporary impairments on        equity securities in the amounts of $23 and $456, 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        nine-month periods ended September 30, 2007 and 2006, the Company recognized $969, $2,887,        $1,042 and $3,518, respectively, in its condensed consolidated statements of income related        to share-based compensation expense.

         

During the nine months ended September 30, 2007, Lifeco granted 760,000        stock options to employees of the Company. The stock options vest over five and seven and        one half year periods ending in August 2012 and August 2014, respectively. Compensation        expense relating to these stock option grants in the amount of $4,815, computed using the        accelerated method of recognition, will be recognized in the Company’s financial        statements over the vesting periods. 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 of recognition.

         

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

                Notes to Condensed Consolidated Financial Statements                Nine Months Ended September 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 nine-month  periods ended September 30, 2007 and 2006        are as follows.

 

|                                                               |   | **Three months ended                    September 30,** |   | **Three months ended                    September 30,** |   |
|--------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|
|                                                               |   | **2007**                                                          |   | **2006**                                                          |   | **2007** |   | **2006** |   |
|                                                               |   | **Pension                    Benefits**                           |   | **Post-Retirement                    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 transitionobligation                               |   |                                                              | (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) |   |

|                                                               |   | **Nine months ended                    September 30,** |    | **Nine months ended                    September 30,**       |   |
|--------------------------------------------------------------------|--------|------------------------------------------------------------------|---------|------------------------------------------------------------------------|--------|
|                                                               |   | **2007**                                                         |    | **2006**                                                               |   | **2007** |   | **2006** |   |
|                                                               |   | **Pension                    Benefits**                          |    | **Post                    Retirement                    Medical Plan** |   |
| Service cost                                                       |   | $                                                                | 7,298   |                                                                   | $      | 6,947 |   | $ | 1,536 |   | $ | 1,359 |   |
| Interest cost                                                      |   |                                                             | 12,993  |                                                                   |   | 11,969 |   |   | 1,114 |   |   | 1,006 |   |
| Expected return on plan assets                                     |   |                                                             | (15,125 | )                                                                      |   | (12,600 | ) |   | — |   |   | — |   |
| Amortization of transition                    obligation           |   |                                                             | (1,137  | )                                                                      |   | (1,137 | ) |   | — |   |   | — |   |
| Amortization of unrecognized prior service                    cost |   |                                                             | 165     |                                                                   |   | 345 |   |   | (2,796 | ) |   | (2,794 | ) |
| Amortization of losses from earlier                    periods     |   |                                                             | 3,669   |                                                                   |   | 3,911 |   |   | 484 |   |   | 455 |   |
| Net periodic benefit cost                                          |   | $                                                                | 7,863   |                                                                   | $      | 9,435 |   | $ | 338 |   | $ | 26 |   |

The Company made a contribution to its pension plan in the amount of $3,300        during the three months ended September 30, 2007 and does not expect to make any additional        contributions during the remainder of the year ending December 31, 2007.

         

**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 September 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,  |   | 11,620   |
| Increase in deferred tax asset related to implementation of                        FIN 48    |   | 99,201   |
| Reduction in deferred tax asset related to the                        consolidated           |   |     |
| statement of income                                                                          |   | (50,373) |
| Other, net                                                                                   |   | 16       |
| Deferred tax asset, September 30, 2007                                                       | $      | 233,523  |

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

                Notes to Condensed Consolidated Financial Statements                Nine Months Ended September 30, 2007 and 2006                (Dollars In Thousands)                (Unaudited)

     **10****.        Segment Information**         

        On January 1, 2007, the Company’s business segments were 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 ofGreat-West Life&AnnuityInsurance 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.

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

|                                                          |   | Three months ended                    September 30, |   | Nine months ended                    September 30, |
|---------------------------------------------------------------|--------|-----------------------------------------------------|--------|----------------------------------------------------|
|                                                          |   | 2007                                                |   | 2006                                               |   | 2007 |   | 2006 |
| Premium income                                                | $      | 178,961                                             | $      | 259,341                                            | $ | 515,191 | $ | 702,190 |
| Fee income                                                    |   | 175,169                                             |   | 172,937                                            |   | 532,916 |   | 522,317 |
| Net investment income                               |   | 23,105                                              |   | 19,088                                             |   | 69,077 |   | 59,814 |
| Net realized gains (losses)                    on investments |   | (800)                                               |   | (944)                                              |   | 4,345 |   | 156 |
| Total revenues                                                |   | 376,435                                             |   | 450,422                                            |   | 1,121,529 |   | 1,284,477 |
| Policyholder                    benefits                      |   | 151,453                                             |   | 222,931                                            |   | 421,597 |   | 626,124 |
| Operating                    expenses                         |   | 170,521                                             |   | 165,477                                            |   | 505,995 |   | 501,116 |
| Total benefits and                    expenses                |   | 321,974                                             |   | 388,408                                            |   | 927,592 |   | 1,127,240 |
| Income before income                    taxes                 |   | 54,461                                              |   | 62,014                                             |   | 193,937 |   | 157,237 |
| Income tax                    expense                         |   | 18,948                                              |   | 20,747                                             |   | 66,465 |   | 52,552 |
| Net income                                                    | $      | 35,513                                              | $      | 41,267                                             | $ | 127,472 | $ | 104,685 |

         

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 nine-month periods ended September 30, 2007 and        2006.

|                                                  |   | Three months                    ended |   | Nine months ended |
|-------------------------------------------------------|--------|---------------------------------------|--------|-------------------|
| September 30,                                         |   | September 30,                         |
|                                                  |   | 2007                                  |   | 2006              |   | 2007 |   | 2006 |
| Premium income                                        | $      | 44,459                                | $      | 74,591            | $ | (1,166,111) | $ | 285,062 |
| Fee income                                            |   | 12,837                                |   | 11,184            |   | 56,389 |   | 33,433 |
| Net investment                    income              |   | 155,087                               |   | 198,715           |   | 570,692 |   | 554,310 |
| Net realized losses on                    investments |   | 4,413                                 |   | (11,930)          |   | (8,320) |   | (27,247) |
| Total revenues                                        |   | 216,796                               |   | 272,560           |   | (547,350) |   | 845,558 |
| Policyholder                    benefits              |   | 162,796                               |   | 214,572           |   | (862,733) |   | 691,537 |
| Operating                    expenses                 |   | 21,913                                |   | 28,974            |   | 154,204 |   | 58,966 |
| Total benefits and                    expenses        |   | 184,709                               |   | 243,546           |   | (708,529) |   | 750,503 |
| Income before income                    taxes         |   | 32,087                                |   | 29,014            |   | 161,179 |   | 95,055 |
| Income tax                    expense                 |   | 11,616                                |   | 9,068             |   | 58,789 |   | 31,241 |
| Net income                                            | $      | 20,471                                | $      | 19,946            | $ | 102,390 | $ | 63,814 |

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

|                                                  |   | Three months                    ended |   | Nine months ended |
|-------------------------------------------------------|--------|---------------------------------------|--------|-------------------|
| September 30,                                         |   | September 30,                         |
|                                                  |   | 2007                                  |   | 2006              |   | 2007 |   | 2006 |
| Premium income                                        | $      | 2,139                                 | $      | 2,482             | $ | 5,837 | $ | 8,045 |
| Fee income                                            |   | 96,274                                |   | 69,347            |   | 287,126 |   | 209,512 |
| Net investment                    income              |   | 88,432                                |   | 69,431            |   | 262,541 |   | 211,172 |
| Net realized losses on                    investments |   | 5,209                                 |   | 2,765             |   | 4,585 |   | (4,886) |
| Total revenues                                        |   | 192,054                               |   | 144,025           |   | 560,089 |   | 423,843 |
| Policyholder                    benefits              |   | 56,270                                |   | 47,382            |   | 166,821 |   | 136,569 |
| Operating                    expenses                 |   | 81,373                                |   | 56,832            |   | 245,316 |   | 168,732 |
| Total benefits and                    expenses        |   | 137,643                               |   | 104,214           |   | 412,137 |   | 305,301 |
| Income before income                    taxes         |   | 54,411                                |   | 39,811            |   | 147,952 |   | 118,542 |
| Income tax                    expense                 |   | 19,179                                |   | 10,860            |   | 47,627 |   | 27,454 |
| Net income                                            | $      | 35,232                                | $      | 28,951            | $ | 100,325 | $ | 91,088 |

         

         

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

|                                     |   | Three months                    ended |   | Nine months ended |
|------------------------------------------|--------|---------------------------------------|--------|-------------------|
| September 30,                            |   | September 30,                         |
|                                     |   | 2007                                  |   | 2006              |   | 2007 |   | 2006 |
| Premium income                      | $      | 72,725                                | $      | 38,097            | $ | 130,904 | $ | 62,832 |
| Fee income                               |   | 1,018                                 |   | 1,288             |   | 3,537 |   | 3,582 |
| Net investment income                    |   | 7,623                                 |   | 12,524            |   | 26,487 |   | 25,530 |
| Net realized losses on investments       |   |                                  |   |              |   |   |   |   |
|                                     | 206    |                                  | 40     |              | 673 |   | (849) |
| Total revenues                           |   | 81,572                                |   | 51,949            |   | 161,601 |   | 91,095 |
| Policyholder                    benefits |   | 56,345                                |   | 22,351            |   | 109,744 |   | 42,801 |
| Operating                    expenses    |   | 21,724                                |   | 22,756            |   | 59,174 |   | 44,669 |
| Total benefits and expenses              |   | 78,069                                |   | 45,107            |   | 168,918 |   | 87,470 |
| Income before income taxes               |   | 3,503                                 |   | 6,842             |   | (7,317) |   | 3,625 |
| Income tax                    expense    |   | 1,212                                 |   | 2,411             |   | 2,171 |   | 2,092 |
| Net income                               | $      | 2,291                                 | $      | 4,431             | $ | (9,488) | $ | 1,533 |

 

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

        Notes to Condensed Consolidated Financial Statements        Nine Months Ended September 30, 2007 and 2006        (Dollars In Thousands)        (Unaudited)

**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        the Company’s consolidated financial position or the results of its        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 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 September 30, 2007 or December 31, 2006 and was in compliance with all        covenants.

         

The Company makes commitments to fund partnership interests and other        investments in the normal course of its business. The amount of these unfunded commitments        at September 30, 2007 was $151,006, all of which is due within one year.

         

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.

         

 

|   | **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 consolidated results        of operations for the three and nine-month periods ended September 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.

 

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

         

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

 

| Income Statement Data                      |   | Three months ended September 30, |
|--------------------------------------------|--------|----------------------------------|
| (In millions)                              |   | 2007                             |   | 2006 |
| Premium income                             | $      | 299                              | $ | 374 |
| Fee income                                 |   | 285                              |   | 255 |
| Net investment income                      |   | 274                              |   | 300 |
| Net realized gains (losses) on investments |   | 9                                |   | (10) |
| Total revenues                             |   | 867                              |   | 919 |
| Policyholder benefits                      |   | 427                              |   | 507 |
| Operating expenses                         |   | 296                              |   | 274 |
| Total benefits and expenses                |   | 723                              |   | 781 |
| Income before income taxes                 |   | 144                              |   | 138 |
| Income tax expense                         |   | 51                               |   | 43 |
| Net income                                 | $      | 93                               | $ | 95 |

 

         

| Operating Data                             |   | Three months ended September 30, |
|--------------------------------------------|--------|----------------------------------|
| (In millions)                              |   | 2007                             |   | 2006 |
| Deposits to separate accounts              | $      | 665                              | $ | 590 |
| Deposits to investment-type contracts**1** |   | 275                              |   | 295 |
| Withdrawals from investment-type contracts |   | 357                              |   | 472 |
| Self funded premium equivalents            |   | 1,142                            |   | 1,103 |

         

1Includes $12 million and $8 million during the three months        ended September 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 decreased by $2 million, or        2.1%, to $93 million for the three months ended September 30, 2007 when compared to        2006.

         

Premium income decreased by $75 million, or 20.1%, to $299 million during        the three months ended September 30, 2007 when compared to 2006. The decrease is largely        due to $92 million of premiums ceded to an affiliate, London Life International Reinsurance        Corporation (“LLIRC”), in the Healthcare segment under a February 1, 2007        reinsurance agreement. The decrease was partially offset by strong renewal pricing on        individual stop loss business.

         

Fee income has increased by $30 million, or 11.8%, to $285 million during        the three months ended September 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 as well        as fees generated from improvement in the United States equities market.

         

Net investment income decreased by $26 million, or 8.7%, to $274 million        during the three months ended September 30, 2007 when compared to 2006. The decrease is        primarily attributable to the impact of the return of invested assets under the termination        of the CLAC reinsurance agreement partially offset by changes in invested assets due to the        MetLife acquisition.

         

Benefits and expenses decreased by $58 million during the three months ended        September 30, 2007 when compared to 2006. The decrease is attributable to the February 1,        2007 cession of benefits and expenses to London Life International Reinsurance Corporation        (“LLIRC”) partially offset by additional benefits and expenses incurred due to        the MetLife acquisition.

         

Deposits to separate accounts increased by $75 million, or 12.7%, to $665        million during the three months ended September 30, 2007 when compared to 2006. The        increase is due primarily due to a combination of higher sales and transfers from        unaffiliated retail investment options.

         

Deposits to investment-type contracts decreased by $20 million, or 6.8%, to        $275 million during the three months ended September 30, 2007 when compared to 2006. The        decrease was primarily attributable to a $43 million decrease due to the termination of the        CLAC reinsurance agreement, partially offset by an increase to deposits to participant        accounts that were acquired from MetLife.

         

Withdrawals from investment-type contracts decreased by $115 million, or        24.4%, to $357 million during the three months ended September 30, 2007 when compared to        2006. Of this amount, $107 million was as a result of the termination of the CLAC        reinsurance agreement.

         

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

         

**Nine months ended September 30, 2007 compared with the nine months ended        September 30, 2006**

         

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

         

| Income Statement Data                      |   | Nine months ended September 30, |
|--------------------------------------------|--------|---------------------------------|
| (In millions)                              |   | 2007                            |   | 2006 |
| Premium income                             | $      | (514)                           | $ | 1,058 |
| Fee income                                 |   | 880                             |   | 769 |
| Net investment income                      |   | 928                             |   | 851 |
| Net realized gains (losses) on investments |   | 2                               |   | (33) |
| Total revenues                             |   | 1,296                           |   | 2,645 |
| Policyholder benefits                      |   | (165)                           |   | 1,497 |
| Operating expenses                         |   | 965                             |   | 774 |
| Total benefits and expenses                |   | 800                             |   | 2,271 |
| Income before income taxes                 |   | 496                             |   | 374 |
| Income tax expense                         |   | 175                             |   | 113 |
| Net income                                 | $      | 321                             | $ | 261 |

         

| Operating Data                             |   | Nine months ended September 30, |
|--------------------------------------------|--------|---------------------------------|
| (In millions)                              |   | 2007                            |   | 2006 |
| Deposits to separate accounts              | $      | 2,178                           | $ | 1,803 |
| Deposits to investment-type contracts**1** |   | 917                             |   | 681 |
| Withdrawals from investment-type contracts |   | 1,667                           |   | 1,275 |
| Self funded premium equivalents            |   | 3,499                           |   | 3,485 |

         

1Includes $57 million and $43 million during the nine months        ended September 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 $60 million, or        23.0%, to $321 million for the nine months ended September 30, 2007 when compared to 2006.        The increase in net income is primarily due to a combination of a $22 million gain as a        result of the termination of the CLAC reinsurance agreement within the Individual Markets        segment, higher fee income throughout all operating segments and a large decrease in waiver        of premium policy reserves, improved specific stop loss margins, pharmacy benefit        management revenue and increased investment gains 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 $185 million, or        17.5%, to $873 million during the nine months ended September 30, 2007 when compared to        2006. The decrease is largely due to $243million of premiums ceded        to LLIRC in the Healthcare segment under the reinsurance agreement. This decrease was        partially offset by both strong renewal pricing on individual stop loss business and        increased Healthcare segment membership as a result of the Benefits Management Corp.        (“BMC”) and IHN, Inc. (“IHN”) acquisitions. In addition, the offset        was impacted by one large participating policyholder whose policy was converted from        premium paying to reduced paid up during the three months ended March 31, 2007 within the        Individual Markets segment.

         

Fee income has increased by $111 million, or 14.4%, to $880 million during        the nine months ended September 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 $77 million, or 9.0%, to $928 million        during the nine months ended September 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 an 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 $81 million, or 3.6%, to $2,190 million during the nine months ended        September 30, 2007 when compared to 2006.

         

Deposits to separate accounts increased by $375 million, or 20.8%, to $2,178        million during the nine months ended September 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 $236 million, or 34.7%,        to $917 million during the nine months ended September 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 within the Retirement Services segment and from increases        in the sale of BOLI products.

         

Withdrawals from investment-type contracts increased by $392 million, or        30.7%, to $1,667 million during the nine months ended September 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 segment information below further discusses the reasons for these        changes.

 

**Segment Results**

         

**Great-West Healthcare Segment**

         

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

         

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

         

| Income Statement Data                      |   | Three months ended September 30, |
|--------------------------------------------|--------|----------------------------------|
| (In millions)                              |   | 2007                             |   | 2006 |
| Premium income                             | $      | 179                              | $ | 259 |
| Fee income                                 |   | 175                              |   | 173 |
| Net investment income                      |   | 23                               |   | 19 |
| Net realized gains (losses) on investments |   | (1)                              |   | (1) |
| Total revenues                             |   | 376                              |   | 450 |
| Policyholder benefits                      |   | 151                              |   | 223 |
| Operating expenses                         |   | 171                              |   | 165 |
| Total benefits and expenses                |   | 322                              |   | 388 |
| Income before income taxes                 |   | 54                               |   | 62 |
| Income tax expense                         |   | 19                               |   | 21 |
| Net income                                 | $      | 35                               | $ | 41 |

         

| Operating Data                  |   | Three months ended September 30, |
|---------------------------------|--------|----------------------------------|
| (In millions)                   |   | 2007                             |   | 2006 |
| Self funded premium equivalents | $      | 1,142                            | $ | 1,103 |

         

         

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

         

| (In thousands)                                        |   | September 30, 2007 |   | June 30, 2007 |   | Percent Change |
|-------------------------------------------------------|--------|--------------------|--------|---------------|--------|----------------|
| Select and Mid Market                    Groups       |   | 1,170              |   | 1,219         |   | (4.0%)         |
| National and Specialty Risk                    Groups |   | 1,031              |   | 1,045         |   | (1.3%)         |
| Total membership                                      |   | 2,201              |   | 2,264         |   | (2.8%)         |

         

Net income for the three months ended September 30, 2007 decreased by $6        million, or 14.6%, to $35 million when compared to 2006. This decrease is due primarily to        a $6.4 million reduction in net income due to the February 1, 2007 reinsurance cession to        LLIRC. The decrease is partially offset by improved stop loss margins, primarily in the Mid        Market segment, and increased investment income.

         

Premium income decreased by $80 million, or 30.9%, to $179 million during        the three months ended September 30, 2007 when compared to 2006. The decrease is largely        due to $92 million of premiums ceded to LLIRC. The decrease was partially offset by strong        renewal pricing on individual stop loss business.

         

Fee income increased by $2 million, or 1.2%, to $175 during the three months        ended September 30, 2007 when compared to 2006 primarily resulting from $5.1 million of fee        income related to the 2007 acquisition of BMC and the acquisition of IHN in the fourth        quarter of 2006.

         

Benefits and expenses decreased by $66 million, or 17.0%, to $322 million        during the three months ended September 30, 2007 when compared to 2006. The decrease is due        primarily to $84 million of benefits and expenses ceded to LLIRC, partially offset by        higher operating expenses associated with acquisitions.

         

The decline in membership is primarily driven by declines in the Select and        Mid Market groups.

         

**Nine months ended September 30, 2007 compared with the nine months ended        September 30, 2006**

         

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

         

| Income Statement Data                      |   | Nine months ended September 30, |
|--------------------------------------------|--------|---------------------------------|
| (In millions)                              |   | 2007                            |   | 2006 |
| Premium income                             | $      | 515                             | $ | 702 |
| Fee income                                 |   | 533                             |   | 522 |
| Net investment income                      |   | 69                              |   | 60 |
| Net realized gains (losses) on investments |   | 4                               |   | - |
| Total revenues                             |   | 1,121                           |   | 1,284 |
| Policyholder benefits                      |   | 421                             |   | 626 |
| Operating expenses                         |   | 506                             |   | 501 |
| Total benefits and expenses                |   | 927                             |   | 1,127 |
| Income before income taxes                 |   | 194                             |   | 157 |
| Income tax expense                         |   | 66                              |   | 53 |
| Net income                                 | $      | 128                             | $ | 104 |

         

| Operating Data                  |   | Nine months ended September 30, |
|---------------------------------|--------|---------------------------------|
| (In millions)                   |   | 2007                            |   | 2006 |
| Self funded premium equivalents | $      | 3,499                           | $ | 3,485 |

         

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

         

| Membership                         |   | September 30, |   | Percent |
|------------------------------------|--------|---------------|--------|---------|
| (In thousands)                     |   | 2007          |   | 2006    |   | Change |
| Select and Mid Market Groups       |   | 1,170         |   | 1,215   |   | (3.7%) |
| National and Specialty Risk Groups |   | 1,031         |   | 887     |   | 16.2% |
| Total membership                   |   | 2,201         |   | 2,102   |   | 4.7% |

         

Net income for the nine months ended September 30, 2007 increased by $24        million, or 23.1%, to $128 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 $17 million reduction in net income due to the February 1, 2007        reinsurance cession to LLIRC.

         

Premium income decreased by $187 million, or 26.6%, to $515 million during        the nine months ended September 30, 2007 when compared to 2006. The decrease is largely due        to $243 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 $11 million, or 2.1%, to $533 million during the        nine months ended September 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 $5.4        million and $3.0 million, respectively.

         

Benefits and expenses decreased by $200 million, or 17.7%, to $927 million        during the nine months ended September 30, 2007 when compared to 2006. The decrease is due        primarily to $222 million of benefits and expenses ceded to LLIRC. Also contributing to the        decrease was a $24 million decrease in waiver of premium policy reserves that resulted from        updated mortality and termination rates. These decreases were partially offset by higher        specific and fully insured claims.

         

The increase in membership is primarily the result of approximately 90,000        additional members from the second quarter 2007 acquisition of BMC, 66,000 members from the        November 2006 acquisition of IHN 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 September 30, 2007 compared with the three months        ended September 30, 2006**

         

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

         

| Income Statement Data                      |   | Three months ended September 30, |
|--------------------------------------------|--------|----------------------------------|
| (In millions)                              |   | 2007                             |   | 2006 |
| Premium income                             | $      | 45                               | $ | 75 |
| Fee income                                 |   | 13                               |   | 11 |
| Net investment income                      |   | 155                              |   | 199 |
| Net realized gains (losses) on investments |   | 5                                |   | (12) |
| Total revenues                             |   | 218                              |   | 273 |
| Policyholder benefits                      |   | 163                              |   | 215 |
| Operating expenses                         |   | 22                               |   | 29 |
| Total benefits and expenses                |   | 185                              |   | 244 |
| Income before income taxes                 |   | 33                               |   | 29 |
| Income tax expense                         |   | 12                               |   | 9 |
| Net income                                 | $      | 21                               | $ | 20 |

         

| Operating Data                             |   | Three months ended September 30, |
|--------------------------------------------|--------|----------------------------------|
| (In millions)                              |   | 2007                             |   | 2006 |
| Deposits to separate accounts              | $      | 134                              | $ | 134 |
| Deposits to investment-type contracts      |   | 59                               |   | 172 |
| Withdrawals from investment-type contracts |   | 98                               |   | 211 |

         

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

> 
(In thousands)

September 30, 2007

June 30, 2007

Percent Change

Policy and Participant                        Accounts

428

430

(0.1)%
Net income for the Individual Markets segment increased by $1 million,            or 5.0%, to $21 million during the three months ended September 30, 2007 when compared            to 2006.

Premium income decreased by $30 million, or 40.0%, to $45 million during the        three months ended September 30, 2007 when compared to 2006. The decrease is primarily due        to the termination of the CLAC reinsurance agreement in the amount of $29        million.

         

Fee income increased by $2 million, or 18.2%, to $13 million during the        three months ended September 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 the individual annuity separate account product. Variable asset-based        fees fluctuate with changes in participant account balances. Participantaccount balances change due to cash flow and unrealized market gains and        losses associated with changes in the United States equities market.

         

Net investment income decreased by $44 million, or 22.1%, to $155 million        during the three months ended September 30, 2007 when compared to 2006. The decrease is        primarily due to the termination of the CLAC reinsurance agreement in the amount of $43        million.

         

Benefits decreased by $52 million, or $24.2%, to $163 million during the        three months ended September 30, 2007 when compared to 2006. The decrease is primarily due        to the termination of the CLAC reinsurance agreement in the amount of $50        million.

         

Operating expenses decreased by $7 million, or 24.1%, to $22 million during        the three months ended September 30, 2007 when compared to 2006. The decrease is primarily        due to the termination of the CLAC reinsurance agreement in the amount of $8        million.

         

Deposits to separate accounts remained constant at $134 million during the        three months ended September 30, 2007 when compared to 2006.

         

Deposits to investment-type contracts decreased by $113 million, or 65.7%,        to $59 million. The decrease is primarily attributable to the termination of the CLAC        reinsurance agreement in the amount of $43 million along with a decrease in the amount of        $70 million related to a decrease in individual insurance.

         

Withdrawals from investment-type contracts decreased by $113 million to $98        million during the three months ended September 30, 2007 when compared to 2006. This        decrease is primarily attributable to the termination of the CLAC reinsurance agreement in        the amount of $107 million.

         

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

         

**Nine months ended September 30, 2007 compared with the nine months ended        September 30, 2006**

         

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

         

| Income Statement Data                      |   | Nine months ended September 30, |
|--------------------------------------------|--------|---------------------------------|
| (In millions)                              |   | 2007                            |   | 2006 |
| Premium income                             | $      | (1,166)                         | $ | 285 |
| Fee income                                 |   | 56                              |   | 33 |
| Net investment income                      |   | 571                             |   | 555 |
| Net realized gains (losses) on investments |   | (8)                             |   | (27) |
| Total revenues                             |   | (547)                           |   | 846 |
| Policyholder benefits                      |   | (863)                           |   | 691 |
| Operating expenses                         |   | 154                             |   | 60 |
| Total benefits and expenses                |   | (709)                           |   | 751 |
| Income before income taxes                 |   | 162                             |   | 95 |
| Income tax expense                         |   | 59                              |   | 31 |
| Net income                                 | $      | 103                             | $ | 64 |

         

| Operating Data                             |   | Nine months ended September 30, |
|--------------------------------------------|--------|---------------------------------|
| (In millions)                              |   | 2007                            |   | 2006 |
| Deposits to separate accounts              | $      | 422                             | $ | 285 |
| Deposits to investment-type contracts      |   | 228                             |   | 238 |
| Withdrawals from investment-type contracts |   | 774                             |   | 463 |

 

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

         

|                              |   | September 30, |   | Percent |
|-----------------------------------|--------|---------------|--------|---------|
| (In thousands)                    |   | 2007          |   | 2006    |   | Change |
| Policies and Participant Accounts |   | 428           |   | 446     |   | (4.0%) |

         

Net income for the Individual Markets segment increased by $39 million, or        60.9%, to $103 million during the nine months ended September 30, 2007 when compared to        2006. The increase is primarily due to a gain of $22 million resulting from the termination        of the CLAC reinsurance agreement and increased fee income.

         

Excluding the one time recording of negative premium revenue of $1,387        million resulting from the termination of the CLAC reinsurance agreement, total premiums        decreased by $64 million, or 22.5%, to $221 million during the nine months ended September        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 $23 million, or 69.7%, to $56 million during the        nine months ended September 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 the individual annuity separate account product.

         

Net investment income increased by $16 million, or 2.9%, to $571 million        during the nine months ended September 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, partially offset by        unrealized investment losses in the amount of $46 million.

         

Excluding the one time recording of a 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        decreased by $70 million, or 9.3%, to $681 million during the nine months ended September        30, 2007 when compared to 2006. This decrease is due to the absence of life, health and        annuity business activity that was recaptured by CLAC upon the termination of the        reinsurance agreement.

         

Deposits to separate accounts increased by $137 million, or 48.1%, to $422        million during the nine months ended September 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 $311 million, or        67.2%, to $774 million during the nine months ended September 30, 2007 when compared to        2006. This increase is primarily attributable $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 the result of        policy maturities and policy surrenders.

         

**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 September 30, 2007 compared with the three months        ended September 30, 2006**

         

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

         

| Income Statement Data                      |   | Three months ended September 30, |
|--------------------------------------------|--------|----------------------------------|
| (In millions)                              |   | 2007                             |   | 2006 |
| Premium income                             | $      | 2                                | $ | 2 |
| Fee income                                 |   | 96                               |   | 70 |
| Net investment income                      |   | 88                               |   | 69 |
| Net realized gains (losses) on investments |   | 5                                |   | 3 |
| Total revenues                             |   | 191                              |   | 144 |
| Policyholder benefits                      |   | 57                               |   | 47 |
| Operating expenses                         |   | 81                               |   | 57 |
| Total benefits and expenses                |   | 138                              |   | 104 |
| Income before income taxes                 |   | 53                               |   | 40 |
| Income tax expense                         |   | 19                               |   | 11 |
| Net income                                 | $      | 34                               | $ | 29 |

         

| Operating Data                             |   | Three months ended September 30, |
|--------------------------------------------|--------|----------------------------------|
| (In millions)                              |   | 2007                             |   | 2006 |
| Deposits to separate accounts              | $      | 531                              | $ | 456 |
| Deposits to investment-type contracts**1** |   | 216                              |   | 123 |
| Withdrawals from investment-type contracts |   | 259                              |   | 261 |

         

1Includes $12 million and $8 million during the three months        ended September 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 September 30, 2007 and June 30, 2007.

> 
(In                        thousands)
                     
September 30, 2007
                     
June 30, 2007
                     
Percent                        Change

Participant                        Accounts
                     
3,523
                     
3,494
                     
0.8%

Net income for the Retirement Services segment increased by $5 million, or        17.2%, to $34 million during the three months ended September 30, 2007 when compared to        2006. The increase is primarily due to net income resulting from the business acquired from        MetLife during the second half of 2006.

         

Premium income remained constant at $2 million during the three months ended        September 30, 2007 when compared to 2006.

         

Fee income has increased by $26 million, or 37.1%, to $96 million during the        three months ended September 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 $19 million, or 27.5%, to $88 million during        the three months ended September 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 $34 million, or 32.7%, to $138        million during the three months ended September 30, 2007 when compared to 2006. This        increase is primarily related to the blocks of business obtained in the MetLife and U.S.        Bank acquisitions.

         

Deposits to separate accounts increased by $75 million, or 16.4%, to $531        million during the three months ended September 30, 2007 when compared to 2006. The        increase is due primarily due to a combination of higher 401(k) sales and transfers from        unaffiliated retail investment options.

         

Deposits to investment-type contracts increased by $93 million, or 75.6%, to        $216 million during the three months ended September 30, 2007 when compared to 2006. This        increase was primarily due to a $35 million increase in deposits from participant accounts        that were acquired from MetLife.

         

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

         

**Nine months ended September 30, 2007 compared with the nine months ended        September 30, 2006**

         

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

         

| Income Statement Data                      |   | Nine months ended September 30, |
|--------------------------------------------|--------|---------------------------------|
| (In millions)                              |   | 2007                            |   | 2006 |
| Premium income                             | $      | 6                               | $ | 8 |
| Fee income                                 |   | 287                             |   | 210 |
| Net investment income                      |   | 262                             |   | 211 |
| Net realized gains (losses) on investments |   | 5                               |   | (5) |
| Total revenues                             |   | 560                             |   | 424 |
| Policyholder benefits                      |   | 167                             |   | 137 |
| Operating expenses                         |   | 246                             |   | 169 |
| Total benefits and expenses                |   | 413                             |   | 306 |
| Income before income taxes                 |   | 147                             |   | 118 |
| Income tax expense                         |   | 48                              |   | 27 |
| Net income                                 | $      | 99                              | $ | 91 |

 

| Operating Data                             |   | Nine months ended September 30, |
|--------------------------------------------|--------|---------------------------------|
| (In millions)                              |   | 2007                            |   | 2006 |
| Deposits to separate accounts              | $      | 1,757                           | $ | 1,518 |
| Deposits to investment-type contracts**1** |   | 689                             |   | 443 |
| Withdrawals from investment-type contracts |   | 893                             |   | 812 |

         

1Includes $57 million and $43 million during the nine months        ended September 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 September 30, 2007 and 2006.

         

|                 |   | September 30, |   | Percent |
|----------------------|--------|---------------|--------|---------|
| (In thousands)       |   | 2007          |   | 2006    |   | Change |
| Participant Accounts |   | 3,523         |   | 2,999   |   | 17.5% |

         

Net income for the Retirement Services segment increased by $8 million, or        8.8%, to $99 million during the nine months ended September 30, 2007 when compared to 2006.        The increase is primarily due to net income resulting from the business acquired from        MetLife during the second half of 2006. This increase is partially offset by a $6 million        prior year tax benefit recorded in the nine months ended September 30, 2006.

 

Premium income decreased by $2 million to $6 million during the nine months        ended September 30, 2007 when compared to 2006.

         

Fee income has increased by $77 million, or 36.7%, to $287 million during        the nine months ended September 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.

         

Investment income increased by $51 million, or 24.2%, to $262 million during        the nine months ended September 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 $107 million, or 35.0%, to $413        million during the nine months ended September 30, 2007 when compared to 2006. This        increase is primarily related to the blocks of business obtained in the MetLife and U.S.        Bank acquisitions.

         

Deposits to separate accounts increased by $239 million, or 15.7%, to $1,757        million during the nine months ended September 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 $246 million, or 55.5%,        to $689 million during the nine months ended September 30, 2007 when compared to 2006. This        increase was primarily due to a $144 million increase in deposits from participant accounts        that were acquired from MetLife with the remainder primarily attributable to higher 401(k)        sales.

         

Withdrawals from investment-type contracts increased by $81 million, or        10.0%, to $893 million during the nine months ended September 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 the result of the MetLife        and U.S. Bank acquisitions and new institutional record keeping clients.

         

The following table provides information for the Retirement Services’        customer account values at September 30, 2007 and 2006.

         

|                                                                         |   | September 30, |   | Percent |
|------------------------------------------------------------------------------|--------|---------------|--------|---------|
| (In millions)                                                                |   | 2007          |   | 2006    |   | change |
| General Account –                        Fixed Options: |   |          |   |    |   |   |
| Public / Non-profit                                                          | $      | 3,392         | $      | 3,584   |   | (5.4%) |
| 401(k)                                                                       |   | 2,619         |   | 1,125   |   | 132.8% |
|                                                                         | $      | 6,011         | $      | 4,709   |   | 27.6% |
| Separate Accounts – Variable Options               |   |          |   |    |   |   |
| Public / Non-profit                                                          | $      | 6,464         | $      | 5,732   |   | 12.8% |
| 401(k)                                                                       |   | 7,136         |   | 5,943   |   | 20.1% |
|                                                                         | $      | 13,600        | $      | 11,675  |   | 16.5% |
| Unaffiliated Retail:                                                         |   |          |   |    |   |   |
| Investment Options and                                                       |   |          |   |    |   |   |
| Administrative Services Only:                                                |   |          |   |    |   |   |
| Public / Non-profit                                                          | $      | 46,171        | $      | 39,959  |   | 15.5% |
| 401(k)                                                                       |   | 21,459        |   | 6,497   |   | 230.3% |
| Institutional                                                                |   | 29,659        |   | 24,872  |   | 19.2% |
|                                                                         | $      | 97,289        | $      | 71,328  |   | 36.4% |

         

Participant account values invested in the general account fixed investment        options have increased by 27.6% at September 30, 2007 to $6,011 million when compared to        September 30, 2006 due primarily to the MetLife acquisition.

         

Participant account values invested in the segregated variable investment        options have increased by 16.5% at September 30, 2007 to $13,600 million when compared to        September 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 36.4% at September 30, 2007 to $97,289 when compared        to September 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 Segment**

         

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

         

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

         

| Income Statement Data                      |   | Three months ended September 30, |
|--------------------------------------------|--------|----------------------------------|
| (In millions)                              |   | 2007                             |   | 2006 |
| Premium income                             | $      | 73                               | $ | 38 |
| Fee income                                 |   | 1                                |   | 1 |
| Net investment income                      |   | 8                                |   | 13 |
| Net realized gains (losses) on investments |   | -                                |   | - |
| Total revenues                             |   | 82                               |   | 52 |
| Policyholder benefits                      |   | 56                               |   | 22 |
| Operating expenses                         |   | 22                               |   | 23 |
| Total benefits and expenses                |   | 78                               |   | 45 |
| Income before income taxes                 |   | 4                                |   | 7 |
| Income tax expense                         |   | 1                                |   | 2 |
| Net income                                 | $      | 3                                | $ | 5 |

         

**Nine months ended September 30, 2007 compared with the nine months ended        September 30, 2006**

         

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

         

| Income Statement Data                      |   | Nine months ended September 30, |
|--------------------------------------------|--------|---------------------------------|
| (In millions)                              |   | 2007                            |   | 2006 |
| Premium income                             | $      | 131                             | $ | 63 |
| Fee income                                 |   | 4                               |   | 4 |
| Net investment income                      |   | 26                              |   | 25 |
| Net realized gains (losses) on investments |   | 1                               |   | (1) |
| Total revenues                             |   | 162                             |   | 91 |
| Policyholder benefits                      |   | 110                             |   | 43 |
| Operating expenses                         |   | 59                              |   | 44 |
| Total benefits and expenses                |   | 169                             |   | 87 |
| Income before income taxes                 |   | (7)                             |   | 4 |
| Income tax expense                         |   | 2                               |   | 2 |
| Net income                                 | $      | (9)                             | $ | 2 |

         

Net income for the Company’s Other segment for the three month period        ended September 30, 2007 when compared to 2006 decreased by $2 million. Net income for the        Company’s Other segment for the nine month period ended September 30, 2007 when        compared to 2006 decreased by $11 million to a 2007 net loss of $9 million. These        fluctuations and the increases in premium income and benefits and expenses are primarily        attributed to increased activity under Great-West Life & Annuity Insurance Company of        South Carolina’s assumption reinsurance agreement with CLAC.

         

**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.

         

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

 

|                                |   | September 30, |   | December 31, |   |
|-------------------------------------|--------|--------------------|--------|-------------------|--------|
| Credit rating                       |   | 2007               |   | 2006              |   |
| AAA                                 |   | 59.8               | %      | 61.7              | %      |
| AA                                  |   | 7.6                | %      | 7.4               | %      |
| A                                   |   | 15.0               | %      | 14.5              | %      |
| BBB                                 |   | 16.0               | %      | 14.6              | %      |
| BB and below (non-investment grade) |   | 1.6                | %      | 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        withgross 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        have little bearing on whether or not the investment will be ultimately recoverable.        Therefore, the Company considers these declines in value as temporary. During the first        nine months of 2007, interest rates have decreased, however there has been general credit        tightening in the financial markets which has caused an increase in unrealized losses        within the Company’s investment portfolio. During the three and nine-month periods        ended September 30, 2007, the Company recorded other-than-temporary impairments on fixed        maturity investments in the amounts of $7 million and $29 million, respectively. At        September 30, 2007, the Company’s unrealized losses were $254 million compared to        $215 million at December 31, 2006. Investments in a loss position for less than twelve        months had losses that totaled $48 million, which was an increase of $9 million from        December 31, 2006. Investments in a loss position for greater than twelve months had losses        that totaled $207 million, which was an increase of $31 million from December 31, 2006. 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.

         

**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 48.0% and 51.9% of        total liabilities at September 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 rated 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 underexcess 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.

         

**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 in 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        September 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.

         

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 further information on 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 further information on 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.

         

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 $472.2 million and $1,090.3 million        as of September 30, 2007 and December 31, 2006, respectively. In addition, as of September        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 $97.6 million and $95.0 million        of commercial paper outstanding at September 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.

         

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 September 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.

         

**Item 4. Controls and Procedures**

         

Based on their evaluation as of September 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 4. Submission of Matters to a Vote of Security        Holders**

         

On July 9,2007, the Company held an annual meeting of its shareholders at        which all of the directors as reported in the Company’s annual report on Form 10-K        for the period ended December 31, 2006, were unanimously re-elected.

         

**Item 6. Exhibits**

 

Index to Exhibits:

         

| Exhibit Number |   | Title                                  |   | Page |
|----------------|--------|----------------------------------------|--------|------|
| 31.1           |   | Rule 13a-14(a)/15d-14(a) Certification |   | 41   |
| 31.2           |   | Rule 13a-14(a)/15d-14(a) Certification |   | 42   |
| 32             |   | 18 U.S.C. 1350 Certification           |   | 43   |

         

         

**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:  | November 14, 2007 |
|--------|-------------------------------------------------------------------------------|--------|-------------------|
|   | Glen R. Derback, Senior Vice President and                        Controller  |   |              |
|   | (Duly authorized officer and chief accounting                        officer) |   |              |

 

 

 

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: November 14, 2007

 

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

 

 

 

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: November 14, 2007

 

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

 

 

 

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

 

 

| Dated: | November 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.