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, 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 or organization)
(I.R.S. Employer Identification 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, 1999, 2,500 shares of the registrant's common stock were
outstanding, all of which were owned by the registrant's parent company.
NOTE: The registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format. 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
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 12
Item 6 Exhibits and Reports on Form 8-K 12
Signatures 12
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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)
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Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- -------------- ------------- ------------
REVENUES:
Premium and fee income $ 67 $ 39 $ 411 $ 94
Net investment income 1,653 1,280 4,468 2,078
Realized gains (losses) on
investments 0 90 (21) 74
------------- -------------- ------------- ------------
1,720 1,409 4,858 2,246
------------- -------------- ------------- ------------
BENEFITS AND EXPENSES:
Life and other policy 11 30 29 75
benefits
Interest paid or credited to
contractholders 1,208 737 3,302 829
General and administrative
expenses 238 159 717 288
------------- -------------- ------------- ------------
1,457 926 4,048 1,192
------------- -------------- ------------- ------------
INCOME BEFORE INCOME
TAXES 263 483 810 1,054
PROVISION FOR
INCOME TAXES:
Current 72 483 280 1,722
Deferred 2 (283) 23 (1,281)
------------- -------------- ------------- ------------
74 200 303 441
------------- -------------- ------------- ------------
NET INCOME $ 189 $ 283 $ 507 $ 613
============= ============== ============= ============
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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 except for share information)
September 30, December 31,
1999 1998
-------------- ------------
ASSETS (Unaudited)
INVESTMENTS:
Fixed maturies:
Held-to-maturity at amortized cost
(fair value $29,351 and $15,044) 30,139 $ 14,500
Available-for-sale, at fair value
(amortized cost $67,854 and $63,321) 65,266 65,154
Short-term investments, available-for-sale
(cost approximates fair value) 7,197 699
-------------- ------------
Total Investments 102,602 80,353
Cash 658 705
Reinsurance receivable 167 123
Deferred policy acquisition costs 2,474 381
Investment income due and accrued 1,174 695
Other assets 3 19
Deferred income taxes 1,892 983
Current income taxes 226
Separate account assets 32,958 23,836
-------------- ------------
TOTAL ASSETS 142,154 $ 107,095
============== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves 72,391 $ 64,320
Policy and contract claims 175 125
GENERAL LIABILITIES:
Due to Parent Corporation 151 2,077
Other liabilities 5,059 95
Separate account liabilities 32,958 23,836
-------------- ------------
Total Liabilities 110,734 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 28,600 12,600
Accumulated other comprehensive income (1,012) 717
Retained earnings 1,332 825
-------------- ------------
Total Stockholder's Equity 31,420 16,642
-------------- ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY 142,154 $ 107,095
============== ============
See notes to financial statements.
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FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
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(Unaudited)
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Nine Months Ended
September 30,
-----------------------------
1999 1998
------------- -------------
OPERATING ACTIVITIES:
Net income $ 507 $ 613
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of investments 46 (16)
Realized losses on disposal of investments 21 (73)
Deferred income taxes 23 (1,281)
Changes in assets and liabilities:
Accrued interest and other receivables (479) (586)
Life insurance and annuity reserves 3,816 904
Reinsurance recoverable (44)
Other, net 4,421 2,672
------------- -------------
Net cash provided by (used in) operating 8,311 2,233
activities
------------- -------------
INVESTING ACTIVITIES:
Proceeds from maturities and redemptions investments:
Fixed maturities:
Held-to-maturity 359
Available-for-sale 5,537 73,261
Purchases of investments:
Fixed maturities:
Held-to-maturity (16,000) (14,500)
Available-for-sale (16,633) (126,208)
------------- -------------
Net cash provided by (used in) investing (26,737) (67,447)
activities
------------- -------------
FINANCING ACTIVITIES:
Contract deposits, net of withdrawals 4,305 62,502
Due to Parent Corporation (1,926) 1,937
Capital contributions 16,000 8,600
------------- -------------
Net cash provided by (used in) financing 18,379 73,039
activities
------------- -------------
NET INCREASE (DECREASE) IN CASH (47) 7,825
CASH, BEGINNING OF YEAR 705 1,648
------------- -------------
CASH, END OF PERIOD $ 658 $ 9,473
============= =============
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See notes to financial statements.
<PAGE>
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Amounts in Thousands)
(Unaudited)
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 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 nine months ended September 30, 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
No. 133, "Accounting for Derivative Instruments and for Hedging
Activities", which is required to be adopted in years beginning after
June 15, 1999. This Statement provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. In June 1999, the Financial Accounting Standards Board
issued Statement No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 133", which delays the effective date of Statement No. 133 for one
year, to fiscal years beginning after June 15, 2000. Because of the
Company's minimal use of derivatives, management does not anticipate
that the adoption of the new Statement will have a significant effect on
earnings or the financial position of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Three Months Nine Months
Ended Ended
September 30, September 30,
----------------------- -----------------------
Operating Summary (Thousands) 1999 1998 1999 1998
---------- ---------- ---------- -----------
Premiums and fee income $ 67 $ 39 $ 411 $ 94
Net investment income 1,653 1,280 4,468 2,078
Realized (losses) on
investments 90 (21) 74
---------- ---------- ---------- -----------
Total revenues 1,720 1,409 4,858 2,246
Total benefits and expenses 1,457 926 4,048 1,192
Income tax expense 74 200 303 441
========== ========== ========== ===========
Net income $ 189 $ 283 $ 507 $ 613
========== ========== ========== ===========
Deposits for investment-type
contracts $ $ 12,528 $ 4,725 $ 62,528
Deposits to separate accounts 1,855 3,765 8,345 11,411
September 30, December 31,
Balance Sheet (Thousands) 1999 1998
----------------- ------------------
Investment assets $ 102,602 $ 80,353
Separate account assets 32,958 23,836
Total assets 142,154 107,095
Total policyholder liabilities 72,566 64,445
Total stockholder's equity 31,420 16,642
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GENERAL
The following discussion addresses the financial condition of the
Company as of September 30, 1999, compared with December 31, 1998, and
its results of operations for the three and nine months ended September
30, 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.
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RESULTS OF OPERATIONS
The Company's net income decreased $94 thousand or 33% and $106 thousand
or 17% for the third quarter and nine months of 1999 when compared to
the third quarter and nine months of 1998. This decrease was primarily
due to increased expenses associated with the growth and further
development of the Company.
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.
During 1999, the Company has received BOLI deposits of $4.7 million. The
large deposits in 1998 related to only two cases. The Company continues
to market its BOLI product. Additionally, the Company received a capital
contribution of $8.6 million and $16.0 million during 1998 and 1999,
respectively. The combination of these activities resulted in a large
increase in invested assets at the end of 1998 and during 1999, which in
turn increased net investment income significantly. The $16.0 million
capital infusion is related to the Company's acquisition by reinsurance
of the group life and health business of Anthem Health & Life Insurance
Company of New York, anticipated to become effective in the fourth
quarter of 1999.
Premiums and fee income increased $28 thousand and $317 thousand for the
third quarter and nine months of 1999 when compared to the third quarter
and nine months of 1998. The increase is due to increased fees and
premiums from separate accounts and BOLI products.
Net investment income increased $373 thousand and $2.4 million for the
third quarter and nine months of 1999 when compared to the third quarter
and nine months of 1998, primarily due to BOLI sales, as well as a
capital infusion from GWL&A of $8.6 million in December 1998 and $16
million in 1999.
The Company had a realized investment loss of $21 thousand during the
nine 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 ($3.3 million in 1999 versus $.8
million in 1998). Expenses have also increased as the Company matures
and additional costs are incurred to administer the additional business
being written.
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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:
September 30, December 31,
Credit Rating 1999 1998
---------------------------------------------- -------------------
AAA 61.5% 62.7%
AA 9.2% 6.5%
A 4.5% 13.1%
BBB 24.8% 17.7%
================== ===================
TOTAL 100.0% 100.0%
================== ===================
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 nine months ended September 30, 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 $1.7 million.
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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 $7.9 million and $1.4
million as of September 30, 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 September 30,
1999 and full Y2K compliance for all GWL&A 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 September 30, 1999, we believe that GWL&A is Y2K ready.
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 September 30, 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 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 $13.6
million on its Y2K project through the end of September 30, 1999 and
expects to spend up to approximately $14.8 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 GWL&A's or the Company's financial condition
or results of operations.
The most reasonably likely worst case Y2K scenario is that GWL&A 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 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.
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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 13
Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the third 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
DATE: November 12, 1999 BY: /s/ Glen R. Derback
Glen R. Derback, Vice President and Treasurer
(Duly authorized officer and chief accounting officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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Exhibit 27 Financial Data Schedule
<ARTICLE> 7
<LEGEND>
First Great-West Life & Annuity Insurance Company as of and for the period ended
September 30, 1999 (000s)
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</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-31-1999
<PERIOD-START> JUL-1-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 65266
<DEBT-CARRYING-VALUE> 30139
<DEBT-MARKET-VALUE> 29351
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 102602
<CASH> 658
<RECOVER-REINSURE> 167
<DEFERRED-ACQUISITION> 2474
<TOTAL-ASSETS> 142154
<POLICY-LOSSES> 72566
<UNEARNED-PREMIUMS> 0
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0
0
<COMMON> 2500
<OTHER-SE> 28920
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411
<INVESTMENT-INCOME> 4468
<INVESTMENT-GAINS> (21)
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<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 3331
<INCOME-PRETAX> 717
<INCOME-TAX> 810
<INCOME-CONTINUING> 303
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</TABLE>
