FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 1998
==============================================================
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaction period from to
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Commission file number
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FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
=======================================================
(Exact name of registrant as specified in its charter)
New York 93-1225432
=============================================== ===========================
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
125 Wolf Road, Albany, New York 12205
=================================================================
(Address of principal executive offices)
(Zip Code)
[518] 437-1816
=================================================================
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
========= =========
As of September 30, 1998, 2,500 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.
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TABLE OF CONTENTS
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Page
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Part I FINANCIAL INFORMATION
<S> <C>
Item 1 Financial Statements
Statements of Income 3
Balance Sheets 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
Part II OTHER INFORMATION
Item 1 Legal Proceeding 9
Item 6 Exhibits and Reports on Form 8-K 9
Signatures 10
</TABLE>
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<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
<TABLE>
- -----------------------------------------------------------------------------------------------
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------
(Unaudited)
Three Months Nine Months Period From
Ended Ended April 4,
1997
September 30, September [Inception]
30, to
---------------------------
1998 1997 1998 Sept. 30,
1997
------------ ------------- ---------------------------
REVENUES:
<S> <C> <C> <C> <C>
Premium and fee income $ 39 $ 5 $ 94 $ 5
Net investment income 1,280 84 2,078 161
Realized gains on investments 90 74
------------ ------------- ------------- ------------
1,409 89 2,246 166
------------ ------------- ------------- ------------
BENEFITS AND EXPENSES:
Life & other policy benefits 30 75
Interest paid or credited to 737 829
contractholders
General and administrative expenses 159 46 288 59
------------ ------------- ------------- ------------
926 46 1,192 59
------------ ------------- ------------- ------------
INCOME BEFORE INCOME TAXES 483 43 1,054 107
PROVISION FOR INCOME TAXES:
Current 483 15 1,722 37
Deferred (283) (1,281)
------------ ------------- ------------- ------------
200 15 441 37
------------ ------------- ------------- ------------
NET INCOME $ 283 $ 28 $ 613 $ 70
============ ============= ============= ============
</TABLE>
See notes to financial statements.
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<PAGE>
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
- -----------------------------------------------------------------------------------------------
September 30, December 31,
ASSETS 1998 1997
- ------
-------------- --------------
(Unaudited)
INVESTMENTS:
Fixed maturies:
<S> <C> <C>
Held-to-maturity at amortized cost $ 14,500 $
(fair value $15,237 and $0)
Available-for-sale, at fair value 60,430 4,995
(amortized cost $58,390 and $4,987)
Short-term investments, available-for-sale 386
(cost approximates fair value)
-------------- --------------
Total Investments 74,930 5,381
Cash 9,473 1,648
Deferred policy acquisition costs 267
Investment income due and accrued 610 24
Other assets 13 6
Deferred income taxes 904 50
Separate account assets 19,621 9,045
-------------- --------------
TOTAL ASSETS $ 105,818 $ 16,154
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves $ 63,428 $ 84
Policy and contract claims 75
GENERAL LIABILITIES:
Due to Parent Corporation 2,092 155
Other liabilities 4,071 332
Separate account liabilities 19,621 9,045
-------------- --------------
Total Liabilities 89,287 9,616
-------------- --------------
STOCKHOLDER'S EQUITY:
Common stock, $1,000 par value,
2,500 shares authorized, issued and outstanding 2,500 2,500
Additional paid-in capital 12,600 4,000
Accumulated other comprehensive income 785 5
Retained earnings 646 33
-------------- --------------
Total Stockholder's Equity 16,531 6,538
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 105,818 $ 16,154
============== ==============
</TABLE>
See notes to financial statements.
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<PAGE>
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
- -----------------------------------------------------------------------------------------------
(Unaudited)
Nine Months Period From
Ended April 4,
1997
September 30, [Inception]
to
1998 Sept. 30,
1997
------------- -------------
OPERATING ACTIVITIES:
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Net income $ 613 $ 70
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of investments (15) (12)
Realized gains on disposal of investments (74)
Deferred income taxes (1,281)
Changes in assets and liabilities:
Accrued interest and other receivables (586) (90)
Life insurance and annuity reserves 904
Other, net 2,672 (6)
------------- -------------
Net cash provided (used) by operating 2,233 (38)
activities
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INVESTING ACTIVITIES:
Proceeds from maturities and redemptions of fixed maturity
investments available-for-sale 73,261
Purchases of investments:
Fixed maturities:
Held-to-maturity (14,500)
Available-for-sale (126,208) (4,968)
------------- -------------
Net cash used in investing activities (67,447) (4,968)
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FINANCING ACTIVITIES:
Contract deposits, net of withdrawals 62,502 76
Due to Parent Corporation 1,937 16
Capital contributions 8,600 6,000
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Net cash provided by financing activities 73,039 6,092
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NET INCREASE IN CASH 7,825 1,086
CASH, BEGINNING OF YEAR 1,648
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CASH, END OF PERIOD $ 9,473 $ 1,086
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</TABLE>
See notes to financial statements.
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<PAGE>
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
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(Amounts in Thousands)
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(Unaudited)
1. GENERAL
First Great-West Life & Annuity Insurance Company (the Company) is a
wholly-owned subsidiary of Great-West Life & Annuity Insurance Company
(the Parent Corporation). The Company was incorporated as a stock life
insurance company in the State of New York and was capitalized on April
4, 1997. The Company was licensed as an insurance company in the State
of New York on May 28, 1997.
The financial statements and related notes of First Great-West Life &
Annuity Insurance Company (the Company) have been prepared in accordance
with generally accepted accounting principles applicable to interim
financial reporting and do not include all of the information and
footnotes required for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. These
financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31,
1997. The results of operations for the interim periods are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1998.
On June 19, 1998 the Company received an additional paid-in-capital
contribution of $8,600.
2. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income".
This Statement establishes new rules for reporting and display of
comprehensive income and its components; however, the adoption of this
Statement had no impact on the Company's net income or shareholders'
equity. This Statement requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were
reported separately in shareholders' equity, to be included in other
comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130. During the
three months ended September 30, 1998 and 1997, total other
comprehensive income amounted to $547 and $(3), respectively. During the
nine months ended September 30, 1998, and the period from April 4, 1997
(inception) to September 30, 1997, total other comprehensive income
amounted to $780 and $9, respectively.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting
for Derivative Instruments and for Hedging Activities". This Statement
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. This Statement
requires that all derivative financial instruments be recorded on the
balance sheet at fair value. If the derivative is not designated as a
hedging instrument changes in fair value are to be recognized in
earnings in the period of change. If certain conditions are met, a
derivative may be designated as a hedge, in which case the accounting
for a change in fair value will depend on the specific exposure being
hedged. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999, and earlier adoption is encouraged.
The Company has not adopted this Statement as of September 30, 1998.
Management estimates the effect of the change will not have a material
affect on the Company's financial statements.
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<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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Nine Months Period From
Three Months Ended Ended April 4, 1997
September 30, Sept. 30, [Inception]
to
-----------------------
Operating Summary 1998 1997 1998 Sept. 30,
1997
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(Thousands)
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Premiums and fee income $ 39 $ 5 $ 94 $ 5
Net investment income 1,280 84 2,078 161
Realized (losses) on 90 74
investments
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Total Revenues 1,409 89 2,246 166
Total benefits and expenses 926 46 1,192 59
Income tax expense 200 15 441 37
=========== ========== ============= ==============
Net income $ 283 $ 28 $ 613 $ 70
=========== ========== ============= ==============
Sept. 30, December 31,
Balance Sheet (Thousands) 1998 1997
------------- --------------
Investment assets $ 74,930 $ 5,381
Separate account assets 19,621 9,045
Total assets 105,818 16,154
Total policyholder 63,503 84
liabilities
Total shareholder's equity 16,531 6,538
</TABLE>
The following discussion addresses the financial condition of the
Company as of September 30, 1998, compared with December 31, 1997, and
its results of operations for the quarter and nine months ended
September 30, 1998, compared with the same periods last year. The
discussion should be read in conjunction with the Management's
Discussion and Analysis section included in the Company's report on Form
10-K for the year-ended December 31, 1997 to which the reader is
directed for additional information.
During the nine months ended September 30, 1998 the Company sold $62.5
million in single premium Bank-owned Life Insurance (BOLI) policies. The
remainder of the sales is individual variable annuites sold through a
marketing agreement with Charles Schwab & Co. The contributions received
for the variable annuities included in the Separate Account are over
$11.4 million compared to $6.2 million in 1997.
In the months ahead, the Company will continue to focus its efforts on
new sales while continuing to develop other products for submission to
the New York Department of Insurance for approval.
General Account Investments - The Company's primary investment objective
is to acquire assets whose durations and cash flows reflect the
characteristics of the Company's liabilities, while meeting industry,
size, issuer, and geographic diversification standards and maintaining a
competitive rate of return. Formal liquidity and credit quality
parameters have also been established. The fixed maturities in the
Company's portfolio are generally rated by external rating agencies, and
if not externally rated, are rated by the Company on a basis believed to
be similar to that used by rating agencies. The credit rating on the
fixed maturity portfolio at September 30, 1998 is AAA.
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<PAGE>
The Company follows rigorous procedures to control interest rate risk
and observes strict asset and liability matching guidelines. These
guidelines are designed to ensure that even in changing interest rate
environments, the Company's assets will always be able to meet the cash
flow and income requirements of its liabilities. Through dynamic
modeling, using state-of-the-art software to analyze the effects of a
wide range of possible market changes upon investments and policyholder
benefits, the Company seeks to ensure that its investment portfolio is
appropriately structured to fulfill financial obligations to its
policyholders.
During the nine months ended September 30, 1998, net unrealized gains on
fixed maturities included in stockholders' equity, which is net of
policyholder-related amounts and deferred income taxes, increased
surplus by $780 resulting in accumulated other comprehensive income of
$785.
Liquidity and Capital Resources - The Company's operations have
liquidity requirements that vary among the principal product lines. Life
insurance and pension plan reserves are primarily long-term liabilities.
Life insurance and pension plan reserves are usually stable and
predictable, and are supported primarily by long-term, fixed income
investments.
Generally, the Company has met its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and through
utilization of overall positive cash flows from operations. Liquidity
for the Company has remained strong, as evidenced by significant amounts
of short-term investments and cash, which totaled $9,473 million and
$2,034 million as of September 30, 1998 and December 31, 1997,
respectively.
Funds provided from 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
Company's capital resources represent funds available for long-term
business commitments and primarily consist of stockholder's equity.
Capital resources provide protection for policyholders and the 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.
Year 2000 Issue - The Year 2000 ("Y2K") problem arises when a computer
performing date-based computations or operations produces erroneous
results due to the historical practice of using two digit years within
computer hardware and software. This causes errors or misinterpretations
of the century in date calculations. Virtually all businesses, including
the Company, are required to determine the extent of their Y2K problems.
Systems that have a Y2K problem must then be converted or replaced by
systems that will operate correctly with respect to the year 2000 and
beyond.
The Company obtains all of its Information Systems Services from the Parent
Corporation.
The Parent Corporation has a written plan that encompasses all computer
hardware, software, networks, facilities (embedded systems) and
telephone systems. The plan also includes provisions for identifying and
verifying that major vendors and business partners are Y2K compliant.
The Parent Corporation is developing contingency plans to address the
possibility of both internal and external failures as well. The plan
calls for full Y2K compliance for core systems by March 31, 1999 and
full Y2K compliance for all Company systems by October 31, 1999.
- 8 -
<PAGE>
The Parent Corporation's plan establishes five phases for becoming Y2K
compliant. Phase 1 is "impact analysis" which includes initial inventory
and preliminary assessment of Y2K impact. Phase 2 is "solution planning"
which includes system by system planning to outline the approach and
timing for reaching compliance. Phase 3 is "conversion/renovation" which
means the actual process of replacing ore repairing non-compliant
systems. Phase 4 is "testing" to ensure that the systems function
correctly under a variety of different date scenarios including current
dates, year 2000 and leap year dates. Phase 5 is "implementation" which
means putting Y2K compliant systems back into production.
As of September 30, 1998, the Parent Corporation had completed impact
analysis (phase 1) and solution planning (phase 2) for all of its core
systems and was more than 95% complete for phase 1 and 2 with respect to
its systems as a whole. In addition, the Company was approximately 71%
complete with respect to conversion and renovation (phase 3), 55%
complete with respect to testing (phase 4), and 40% complete with
respect to implementation (phase 5).
In addition to ensuring that the Company's own systems are Y2K
compliant, the Company has identified third parties with which the
Company has significant business relationships in order to assess the
potential impact on the Company of the third parties' Y2K issues and
plans. The company expects to complete this process during he first
quarter of 1999 and will conduct system testing with third parties
throughout 1999. The Company does not have control over these third
parties and cannot make any representations as to what extent the
Company's future operating results may be adversely affected by the
failure of any third party to address successfully its own Y2K issues.
On the basis of currently available information, the expense incurred by
the Company, including anticipated future expenses, related to the Y2K
issue has not and is not expected to be material to the Company's
financial condition or results of operations. The Parent Corporation has
spent approximately $7.5 million on its Y2K project through the end of
September 1998 and expects to spend up to approximately $15.3 million on
its Y2K project by the end of 2000. All of these funds will come from
the Parent Corporation's cash flow from operations. The Parent
Corporation has continued other scheduled non-Y2K information systems
changes and upgrades. Although work on Y2K issues may have resulted in
minor delays on the other projects, the delays are not expected to have
a material adverse effect on the Company's consolidated financial
condition or results of operations.
The most reasonably likely worst case Y2K scenario is that the Company
will experience isolated internal or third party computer failures and
will be temporarily unable to process insurance and annuity benefit
transactions. All of the Parent Corporation's Y2K efforts have been
designed to prevent such an occurrence. However, if the Company
identifies internal or third party Y2K issues which cannot be timely
corrected, there can be no assurance that the Company can avoid Y2K
problems or that the cost of curing the problem will not be material.
In an effort to mitigate risks associated with Y2K failures, the Parent
Corporation is in the process of developing contingency plans to address
core functions, including relations with third parties. It is the
Company's expectation that contingency plans will address possible
failures generated internally, by vendors or business partners, and by
customers. Possible general approaches include manual processing,
payments on an estimated basis and use of disaster recovery facilities.
- 9 -
<PAGE>
Part II OTHER INFORMATION
Item 1 Legal Proceedings
There are no material pending legal proceedings to which the
Company is a party or of which any of their property is the
subject.
Item 6 Exhibits and Reports on Form 8-K
(a) Index to Exhibits
Exhibit Number Title Page
---------------- --------------------- -----------
27 Financial Data 11
Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the third
quarter of 1998.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
DATE: BY:
November 13, 1998 /s/
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Glen R. Derback, Vice President & Treasurer
(Duly authorized officer & chief accounting
Officer)
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<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Exhibit 27 Financial Data Schedule
First Great-West Life & Annuity Insurance Company as of and for the period ended
September 30, 1998 (000s)
</LEGEND>
<CIK> 0001036213
<NAME> First Great-West Life & Annuity Insurance Company
<MULTIPLIER> 1,000
<CURRENCY> U.S.>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 60430
<DEBT-CARRYING-VALUE> 14500
<DEBT-MARKET-VALUE> 15237
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 74930
<CASH> 9473
<RECOVER-REINSURE> 267
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 105818
<POLICY-LOSSES> 63503
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2500
<OTHER-SE> 14031
<TOTAL-LIABILITY-AND-EQUITY> 105818
94
<INVESTMENT-INCOME> 2078
<INVESTMENT-GAINS> 74
<OTHER-INCOME> 0
<BENEFITS> 904
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 288
<INCOME-TAX> 1054
<INCOME-CONTINUING> 441
<DISCONTINUED> 613
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 613
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
