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 March 31, 1999
==============================================================
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaction period from to
========================== ===========================
Commission file number 333-25269
============================================================
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
Number) or organization)
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 March 31, 1999, 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.
<PAGE>
13
TABLE OF CONTENTS
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Page
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Part I FINANCIAL INFORMATION
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 Proceedings 10
Item 5 Other Information 10
Item 6 Exhibits and Reports on Form 8-K 10
Signatures 10
</TABLE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands)
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- -----------------------------------------------------------------------------------------------
(Unaudited)
Three Months Ended
March 31,
-----------------------------------
1999 1998
----------------- ----------------
REVENUES:
Premium and fee income $ 345 $ 24
Net investment income 1,286 85
Realized gains (losses) on investments (21)
----------------- ----------------
1,610 109
----------------- ----------------
BENEFITS AND EXPENSES:
Interest paid or credited to contractholders 1,190 1
General and administrative expenses 368 90
----------------- ----------------
1,558 91
----------------- ----------------
INCOME BEFORE INCOME TAXES 52 18
PROVISION FOR INCOME TAXES:
Current 280 27
Deferred (258) (19)
----------------- ----------------
22 8
----------------- ----------------
NET INCOME $ 30 $ 10
================= ================
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See notes to financial statements.
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FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
BALANCE SHEETS
(Dollars in Thousands)
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- -----------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998
-------------- --------------
ASSETS (Unaudited)
INVESTMENTS:
Fixed maturies:
Held-to-maturity at amortized cost
(fair value $14,395 and $15,044) $ 14,284 $ 14,500
Available-for-sale, at fair value
(amortized cost $63,205 and $63,321) 63,253 65,154
Short-term investments, available-for-sale
(cost approximates fair value) 699
-------------- --------------
Total Investments 77,537 80,353
Cash 6,620 705
Reinsurance receivable 149 123
Deferred policy acquisition costs 1,381 381
Investment income due and accrued 735 695
Due from Parent Corporation 383
Other assets 20 19
Deferred income taxes 1,618 983
Separate account assets 27,267 23,836
-------------- --------------
TOTAL ASSETS $ 115,710 $ 107,095
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves $ 70,258 $ 64,320
Policy and contract claims 125 125
GENERAL LIABILITIES:
Due to Parent Corporation 2,077
Other liabilities 2,083 95
Separate account liabilities 27,267 23,836
-------------- --------------
Total Liabilities 99,733 90,453
-------------- --------------
STOCKHOLDER'S EQUITY:
Common stock, $1,000 par value, 10,000 shares
authorized,
2,500 shares issued and outstanding 2,500 2,500
Additional paid-in capital 12,600 12,600
Accumulated other comprehensive income 22 717
Retained earnings 855 825
-------------- --------------
Total Stockholder's Equity 15,977 16,642
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 115,710 $ 107,095
============== ==============
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See notes to financial statements.
<PAGE>
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
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(Unaudited)
Three Months Ended
March 31,
-----------------------------
1999 1998
------------- -------------
OPERATING ACTIVITIES:
Net income $ 30 $ 10
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of investments 14 (7)
Realized gains on disposal of investments 21
Deferred income taxes (258) (19)
Changes in assets and liabilities:
Accrued interest and other receivables (40) (66)
Life insurance and annuity reserves 1,383
Reinsurance recoverable (26)
Other, net 1,698 (242)
------------- -------------
Net cash provided by (used in) operating 2,822 (324)
activities
------------- -------------
INVESTING ACTIVITIES:
Proceeds from maturities and redemptions investments:
Fixed maturities:
Held-to-maturity 216
Available-for-sale 5,215
Purchases of investments:
Fixed maturities:
Available-for-sale (4,435) (5)
------------- -------------
Net cash provided by (used in) investing 996 (5)
activities
------------- -------------
FINANCING ACTIVITIES:
Contract deposits, net of withdrawals 4,557
Due to Parent Corporation (2,460) (129)
------------- -------------
Net cash provided by (used in) financing 2,097 (129)
activities
------------- -------------
NET INCREASE (DECREASE) IN CASH 5,915 (458)
CASH, BEGINNING OF YEAR 705 1,648
------------- -------------
CASH, END OF PERIOD $ 6,620 $ 1,190
============= =============
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See notes to financial statements.
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1. BASIS OF PRESENTATION
First Great-West Life & Annuity Insurance Company (the Company) is a
wholly-owned subsidiary of Great-West Life & Annuity Insurance Company
(the Parent Corporation or GWL&A). 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. However, in the
opinion of management, these statements include all normal recurring
adjustments necessary for a fair presentation of the results. These
financial statements should be read in conjunction with the audited
financial statements and the accompanying notes included in the
Company's latest annual report on Form 10-K, as amended, for the year
ended December 31, 1998.
Operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the full
year ending December 31, 1999.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards 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 is
effective for the Company beginning January 1, 2000, and earlier
adoption is encouraged. The Company has not adopted this Statement as of
March 31, 1999. Management has not determined the impact of the
Statement on the Company's financial position or results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Three Months Ended
March 31,
-----------------------------------
Operating Summary (Thousands) 1999 1998
----------------- -----------------
Premiums and fee income $ 345 $ 24
Net investment income 1,286 85
Realized (losses) on investments (21)
----------------- -----------------
Total Revenues 1,610 109
Total benefits and expenses 1,558 91
Income tax expense 22 8
================= =================
Net income $ 30 $ 10
================= =================
Deposits for investment-type contracts $ 4,725 $ -
Deposits to separate accounts 2,473 3,500
March 31, December 31,
Balance Sheet (Thousands) 1999 1998
----------------- -----------------
Investment assets $ 77,537 $ 80,353
Separate account assets 27,267 23,836
Total assets 115,710 107,095
Total policyholder liabilities 70,383 64,445
Total shareholder's equity 15,977 16,642
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GENERAL
The following discussion addresses the financial condition of the
Company as of March 31, 1999, compared with December 31, 1998, and its
results of operations for the three months ended March 31, 1999,
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, as amended, for the
year-ended December 31, 1998 to which the reader is directed for
additional information.
RESULTS OF OPERATIONS
The Company's net income increased $20 thousand or 200% for the first
three months of 1999 when compared to the first three months of 1998.
This increase was primarily due to higher net investment income on
surplus.
During the second quarter of 1998, the Company received approval from
the New York Department of Insurance to market its Bank Owned Life
Insurance ("BOLI") product. This approval resulted in BOLI deposits
during the second half of 1998 of $62.5 million. Additionally, the
Company received a capital contribution of $8.6 million during the
second half of 1998. The combination of these activities resulted in a
large increase in invested assets in the second half of 1998, which in
turn increased net investment income significantly in the first quarter
of 1999 ($1.2 million at March 31, 1999 versus $85 thousand at March 31,
1998).
Premiums and fee income increased $321 thousand for the first three
months of 1999 when compared to the first three months of 1998, which is
due to increased premiums and fees related to BOLI products.
Net investment income increased $1.2 million, primarily due to BOLI
sales as well as a capital infusion from GWL&A of $8.6 million in
December 1998.
The Company had a realized investment loss of $21 thousand during the
first three months of 1999. The increase in interest rates in 1999
resulted in losses on sales of fixed maturities totaling $21 thousand.
Total benefits and expenses have increased primarily due to interest
paid or credited to BOLI policyholders ($1.2 million in 1999 versus $2
thousand in 1998). Expenses have also increased as the Company matures
and additional costs are incurred to administer the additional sales.
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. Formal liquidity and credit quality
parameters have also been established. 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 distribution of the fixed maturity portfolio (both
available-for-sale and held-to-maturity) by credit rating is summarized
as follows:
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March 31, December 31,
Credit Rating 1999 1998
------------------------------------- ------------------- -------------------
AAA 62.5% 62.7%
AA 6.5% 6.5%
A 6.1% 13.1%
BBB 24.9% 17.7%
=================== ===================
TOTAL 100.0% 100.0%
=================== ===================
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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 ensures that its investment portfolio is
appropriately structured to fulfill financial obligations to its
policyholders.
During the three months ended March 31, 1999, net unrealized gains on
fixed maturities included in stockholders' equity, which is net of
policyholder-related amounts and deferred income taxes, decreased
surplus by $695 thousand.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have liquidity requirements that are dependent
upon the principal product lines. Life insurance and pension plan
reserves are primarily 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.
Generally, the Company has met its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio. Liquidity
for the Company is strong, as evidenced by significant amounts of
short-term investments and cash, which totaled $6.6 million and $1.4
million as of March 31, 1999 and December 31, 1998, respectively.
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.
Great-West Life & Annuity Insurance Company ("GWL&A") provides all
administrative services to the Company. GWL&A 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. GWL&A 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 June 30, 1999
and full Y2K compliance for all Company systems by October 31, 1999.
GWL&A'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 or 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 March 31, 1999, GWL&A had completed impact analysis (phase 1) and
solution planning (phase 2) for all of its core systems and was 99%
complete for phases 1 and 2 with respect to its systems as a whole. In
addition, GWL&A was approximately 95% complete with respect to
conversion and renovation (phase 3), 88% complete with respect to
testing (phase 4), and 86% complete with respect to implementation
(phase 5).
In addition to ensuring that GWL&A's own systems are Y2K compliant,
GWL&A has identified third parties with which GWL&A has significant
business relationships in order to assess the potential impact on GWL&A
of the third parties' Y2K issues and plans. As of March 31, 1999, GWL&A
had completed most of this assessment process. GWL&A will continue to
investigate third party readiness and will conduct system testing with
selected third parties throughout 1999. GWL&A does not have control over
these third parties and cannot make any representations as to what
extent GWL&A's and 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
GWL&A, including anticipated future expenses, related to the Y2K issue
has not and is not expected to be material to GWL&A's financial
condition or results of operations. GWL&A has spent approximately $11.3
million on its Y2K project through the end of March 1999 and expects to
spend up to approximately $15.3 million on its Y2K project. All of these
funds will come from GWL&A's cash flow from operations. GWL&A 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 financial condition or results of
operations.
The most reasonably likely worst case Y2K scenario is that GWL&A and/or
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 GWL&A's Y2K efforts have been designed to
prevent such an occurrence. However, if GWL&A identifies internal or
third party Y2K issues which cannot be timely corrected, there can be no
assurance that GWL&A and/or 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, GWL&A is in the process of
developing contingency plans to address core functions, including
relations with third parties. It is GWL&A'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.
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 5. OTHER INFORMATION
On April 30, 1999, Great-West Life & Annuity Insurance Company made a
capital contribution to the Company of $16,000,000 to support the
Company's projected individual and group health and life business.
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 were filed during the first quarter
of 1999.
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
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DATE: May 14, 1999 BY: Glen R. Derback
/s/
--------------------------- ------------------------------------------------
Glen R. Derback, Vice President & Treasurer
(Duly authorized officer & chief accounting
officer)
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<LEGEND>
Exhibit 27 Financial Data Schedule
First Great-West Life & Annuity Insurance Company as of and for the period ended
March 31, 1999 (000s)
- -------------------------------------------------------------------------------
</LEGEND>
<CIK> 0001036213
<NAME> First Great-West Life & Annuity Insurance Company
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<PERIOD-TYPE> 3-MOS
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