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 June 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 333-64473
GWL&A FINANCIAL INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1474245
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
8515 East Orchard Road, Englewood, CO 80111 (Address of
principal executive offices)
(Zip Code)
[303] 689-4128
(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 June 30, 1999, 50,025 shares of the registrant's common stock were
outstanding, all of which were owned by the registrant's parent company.
<PAGE>
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TABLE OF CONTENTS
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Page
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Part I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Part II OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Changes to Securities and Use of Proceeds 19
Item 6 Exhibits and Reports on Form 8-K 20
Signatures 20
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
<TABLE>
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------ ------------ ------------
REVENUES:
Premiums $ 293,721 $ 162,678 $ 611,476 $ 350,887
Fee income 150,270 127,461 304,306 244,690
Net investment income 215,984 223,891 432,102 447,425
Net realized gains (losses) on 2,117 5,342 (3,926) 19,315
investments
------------- ------------ ------------ ------------
662,092 519,372 1,343,958 1,062,317
------------- ------------ ------------ ------------
BENEFITS AND EXPENSES:
Life and other policy benefits 272,040 139,547 512,429 292,468
Increase in reserves (12,726) 20,790 22,349 48,163
Interest paid or credited to 115,676 122,207 225,641 246,995
contractholders
Provision for policyholders' share
of
earnings on participating business 1,193 1,390 2,645 3,359
Dividends to policyholders 11,787 14,305 33,680 34,125
------------- ------------ ------------ ------------
387,970 298,239 796,744 625,110
------------- ------------ ------------ ------------
------------ ------------
Commissions 45,299 29,354 90,333 56,836
Operating expenses 144,053 116,197 294,175 231,823
Premium taxes 10,734 7,645 17,872 13,184
------------- ------------ ------------ ------------
588,056 451,435 1,199,124 926,953
------------- ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 74,036 67,937 144,834 135,364
PROVISION FOR INCOME TAXES:
Current 25,884 29,349 41,738 41,289
Deferred 484 (5,606) 10,018 3,746
------------- ------------ ------------ ------------
26,368 23,743 51,756 45,035
------------- ------------ ------------ ------------
NET INCOME $ 47,668 $ 44,194 $ 93,078 $ 90,329
============= ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GWL&A FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<S> <C> <C>
June 30, December 31,
ASSETS 1999 1998
- ------
-------------- --------------
(Unaudited)
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost
(fair value $2,243,060 and $2,298,936) $ 2,234,038 $ 2,199,818
Available-for-sale, at fair value
(amortized cost $6,949,328 and $6,752,532) 6,869,952 6,936,726
Mortgage loans on real estate, net 1,040,155 1,133,468
Common stock 48,144 48,640
Real estate, net 83,345 73,042
Policy loans 2,650,951 2,858,673
Short-term investments, available-for-sale
(cost approximates fair value) 205,152 420,169
-------------- --------------
Total Investments 13,131,737 13,670,536
Cash 149,214 176,369
Reinsurance receivable 179,909 192,958
Deferred policy acquisition costs 276,399 238,901
Investment income due and accrued 133,593 157,587
Other assets 408,519 311,078
Premiums in course of collection 105,498 84,940
Deferred income taxes 231,269 191,483
Separate account assets 10,891,986 10,099,543
-------------- --------------
TOTAL ASSETS $ 25,508,124 $ 25,123,395
============== ==============
</TABLE>
See notes to consolidated financial statements. (Continued)
<PAGE>
GWL&A FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<S> <C> <C>
June 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1999 1998
- ------------------------------------
-------------- --------------
(Unaudited)
POLICY BENEFIT LIABILITIES:
Policy reserves $ 11,616,522 $ 11,839,714
Policy and contract claims 472,542 491,932
Policyholders' funds 199,932 181,779
Provision for policyholders' dividends 68,941 69,530
GENERAL LIABILITIES:
Due to Parent Corporation 42,265 52,877
Repurchase agreements 82,985 244,258
Commercial paper 29,844 39,731
Other liabilities 629,059 761,505
Undistributed earnings on
participating business 138,488 143,717
Separate account liabilities 10,891,986 10,099,543
-------------- --------------
Total Liabilities 24,172,564 23,924,586
-------------- --------------
Guaranteed preferred beneficial interests in the Company's
junior
subordinated debentures 175,000
STOCKHOLDER'S EQUITY:
Preferred stock, $1 par value,
50,000,000 shares authorized:
Series A, cumulative, 1,500 shares authorized;
liquidation
value of $100,000 per share; none outstanding
Series B, cumulative, 1,500 shares authorized;
liquidation
value of $100,000 per share; none outstanding
Series C, cumulative, 1,500 shares authorized;
none outstanding
Series D, cumulative, 1,500 shares authorized;
none outstanding
Series E, non-cumulative, 2,000,000 shares
authorized;
liquidation value of $20.90; none outstanding
Preferred stock, $0 par value; 500,000 shares
authorized;
0 shares issued and outstanding Common stock, $0 par value; 500,000
shares authorized;
50,025 shares issued and outstanding 250 250
Additional paid-in capital 706,588 706,588
Accumulated other comprehensive income (28,200) 61,560
Retained earnings 481,922 430,411
-------------- --------------
Total Stockholder's Equity 1,160,560 1,198,809
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 25,508,124 $ 25,123,395
============== ==============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
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(Unaudited)
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Six Months Ended
June 30,
-----------------------------
1999 1998
------------- -------------
OPERATING ACTIVITIES:
Net income $ 93,078 $ 90,329
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain allocated to participating policyholders 2,642 3,359
Amortization of investments (6,703) (3,001)
Realized losses (gains) on disposal of investments
and write-downs of mortgage loans and real estate 3,926 (19,315)
Amortization 17,752 28,717
Deferred income taxes 10,018 11,125
Changes in assets and liabilities:
Policy benefit liabilities 409,073 172,304
Reinsurance receivable 13,049 (20,061)
Accrued interest and other receivables 3,436 5,331
Other, net (232,435) (123,642)
------------- -------------
Net cash provided by operating activities 313,836 145,146
------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to-maturity
Maturities and redemptions 325,750 214,104
Available-for-sale
Sales 2,009,783 4,197,431
Maturities and redemptions 434,630 584,264
Mortgage loans 94,307 117,099
Real estate 2,015 16,456
Common stock 6,842 1,983
Purchases of investments:
Fixed maturities
Held-to-maturity (352,190) (193,416)
Available-for-sale (2,429,062) (4,674,954)
Mortgage loans (949) (11,100)
Real estate (14,351) (2,323)
Common stock (4,005) (3,126)
------------- -------------
Net cash provided by investing activities 72,770 246,418
------------- -------------
</TABLE>
(Continued)
<PAGE>
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended
June 30,
-----------------------------
1999 1998
------------- -------------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (365,423) $ (257,870)
Net Parent Corporation borrowings (repayments) (10,612) (2,993)
Dividends paid (41,566) (36,775)
Net commercial paper borrowings (repayments) (9,887) 5,596
Net repurchase agreements borrowings (repayments) (161,273) (136,293)
Issuance of junior subordinated debentures 175,000
------------- -------------
Net cash used in financing activities (413,761) (428,335)
------------- -------------
NET INCREASE (DECREASE) IN CASH (27,155) (36,771)
CASH, BEGINNING OF YEAR 176,369 126,278
------------- -------------
CASH, END OF PERIOD $ 149,214 $ 89,507
============= =============
</TABLE>
See notes to consolidated financial statements. (Concluded)
<PAGE>
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands)
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements and related notes of GWL&A
Financial Inc. (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 Company's registration
statement on Form S-3 (File No. 333-64473), effective April 28, 1999,
which registration statement includes the audited consolidated financial
statements and the accompanying notes for the year ended December 31,
1998.
Operating results for the six months ended June 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
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. During the second
quarter, the Financial Accounting Standards Board delayed the effective
date of this Statement for one year, to fiscal years beginning after
June 15, 2000. Earlier adoption is encouraged. The Company has not
adopted this Statement as of June 30, 1999. Management has not
determined the impact of the Statement on the Company's financial
position or results of operations.
In March 1998, the Accounting Standards Executive Committee of the AIPCA
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". The SOP,
which was adopted as of January 1, 1999, requires the capitalization of
certain costs incurred in connection with developing or obtaining
internal use software. Prior to the adoption of SOP 98-1, the Company
expensed all internal use software related costs as incurred. During the
quarter ended June 30, 1999, the Company capitalized $8,068 in internal
use software costs related to the adoption of SOP 98-1.
3. OTHER
Great-West Life & Annuity Insurance Company is involved in various legal
proceedings that arise in the ordinary course of its business. In the
opinion of management, after consultation with counsel, the resolution
of these proceedings should not have a material adverse effect on its
financial position or results of operations.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended Six Months
Ended
June 30, June 30,
------------------------ ------------------------
Operating Summary (Millions) 1999 1998 1999 1998
----------- ---------- ----------- ----------
Premiums $ 294 $ 163 $ 612 $ 351
Fee income 150 127 304 245
Net investment income 216 224 432 447
Realized investment gains
(losses) 2 5 (4) 19
----------- ---------- ----------- ----------
Total revenues 662 519 1,344 1,062
Total benefits and expenses 588 451 1,199 927
Income tax expense 26 24 52 45
=========== ========== =========== ==========
Net income $ 48 $ 44 $ 93 $ 90
=========== ========== =========== ==========
Deposits for investment-type
contracts $ 169 $ 264 $ 275 $ 455
Deposits to separate accounts 695 575 1,365 1,109
Self-funded premium
equivalents 788 591 1,506 1,126
June 30, December 31,
Balance Sheet (Millions) 1999 1998
----------------- -----------------
Investment assets $ 13,132 $ 13,671
Separate account assets 10,892 10,100
Total assets 25,508 25,123
Total policy benefit liabilities 12,358 12,583
Long-term debt - due to
Parent Corporation 35 35
Total shareholder's equity $ 1,161 $ 1,199
</TABLE>
GENERAL
The following discussion addresses the financial condition of the Company as of
June 30, 1999, compared with December 31, 1998, and its results of operations
for the three and six months ended June 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 registration statement
on Form S-3 (File No. 333-64473), effective April 28, 1999, to which the reader
is directed for additional information.
CONSOLIDATED RESULTS
The Company's consolidated net income increased $4 million or 9% and $3 million
or 3% for the second quarter and first six months of 1999 when compared to the
second quarter and first six months of 1998. The increases reflect a decrease of
$1 million and $2 million in the Financial Services segment for the second
quarter and first six months of 1999, which resulted primarily from net realized
investment losses in 1999 as compared to net realized investment gains in 1998.
The Employee Benefits segment's net income increased $5 million in both the
second quarter and first six months of 1999, which reflected improved morbidity
gains being partially offset by net realized investment losses.
Total revenues increased $143 million or 28% and $282 million or 27% for the
second quarter and for the first six months of 1999 when compared to the same
periods of 1998. The growth in revenues for the second quarter and first six
months of 1999 was comprised of increased premium income of $131 million and
$261 million, increased fee income of $23 million and $59 million, decreased net
investment income of $8 million and $15 million and decreased realized gains on
investments of $3 million and $23 million.
The increased premium income in 1999 was comprised of growth in Employee
Benefits premium income of $137 million and $270 million for the second quarter
and first six months of 1999, offset by a decrease in Financial Services premium
income of $6 million and $9 million for the second quarter and first six months
of 1999. The growth in Employee Benefits primarily reflects premium income of
$111 million and $222 million for the second quarter and first six months of
1999 derived from the acquisition of Anthem Health & Life Insurance Company
("AH&L") in July 1998.
The growth in fee income is also primarily in the Employee Benefits segment,
where fee income derived from the acquisition of AH&L was $14 million and $30
million during the second quarter and first six months of 1999. The remaining
increase was the result of new sales and increased fees on variable funds
related to growth in equity markets.
The decrease in net investment income was the result of a combination of
declining interest rates and a reduction in general account assets. The actual
earned rate at June 30, 1999 was 6.93% compared to 7.25% at June 30, 1998.
Realized investment gains decreased $3 million during the second quarter of 1999
compared to the same period last year. Realized investment gains decreased from
a realized investment gain of $19 million in the first six months of 1998 to a
realized investment loss of $4 million in 1999. The rise in interest rates in
1999 resulted in losses on sales of fixed maturities totaling $9 million, while
lower interest rates contributed to $21 million of fixed maturity gains in 1998.
Increases (decreases) in the provision for asset losses of $(4.0) million and
$.7 million were recognized for the first six months of 1999 and 1998,
respectively.
Benefits and expenses increased $137 million or 30% and $272 million or 29% for
the second quarter and first six months of 1999 when compared to the second
quarter and first six months of 1998. The growth in benefits and expenses was
primarily in the Employee Benefits segment, which increased $146 million and
$299 million during the second quarter and first six months of 1999, of which
$125 million and $259 million related to benefits and expenses generated by
AH&L. The Financial Services segment was essentially flat with a decrease in
benefits and expenses of $9 million and $27 million for the second quarter and
first six months of 1999 when compared to the same periods last year.
Income tax expense increased $2 million or 8% and $7 million or 16% for the
second quarter and first six months of 1999 when compared to the second quarter
and first six months of 1998. The increase reflects higher pre-tax earnings for
the first six months of 1999 and the use of net operating loss carryforwards
related to the subsidiaries during 1998.
In evaluating its results of operations, the Company also considers net changes
in deposits received for investment-type contracts, deposits to separate
accounts and self-funded equivalents. Self-funded equivalents represent paid
claims under minimum premium and administrative services only contracts, which
amounts approximate the additional premiums that would have been earned under
such contracts if they had been written as traditional indemnity or HMO
programs.
Deposits for investment-type contracts decreased $95 million or 36% and $180
million or 40% for the second quarter and first six months of 1999 when compared
to the second quarter and first six months of 1998. This decrease is primarily
attributable to the Financial Services segment, where decreases in deposits of
Corporate Owned Life Insurance ("COLI") totaled $0 and $56 million for the
second quarter and first six months of 1999 when compared to the same periods
last year. Additionally, Bank Owned Life Insurance ("BOLI") deposits decreased,
from $165 million and $230 million for the second quarter and first six months
of 1998 to $40 million and $90 million for the second quarter and first six
months of 1999.
Deposits for separate accounts increased $120 million or 21% and $256 million or
23% for the second quarter and first six months of 1999 when compared to the
second quarter and first six months of 1998 in both segments due to a continuing
movement toward variable funds and away from fixed options. During the second
quarter of 1999, the Company began distributing a BOLI separate account product,
resulting in $100 million in deposits during the second quarter.
Self-funded premium equivalents increased $197 million or 33% and $380 million
or 34% for the second quarter and first six months of 1999 when compared to the
second quarter and first six months of 1998. The increase was due to the
acquisition of AH&L ($129 million and $211 million for second quarter and first
six months of 1999), with the remainder coming from the growth in business in
the remainder of the Employee Benefits segment.
Total assets increased $385 million or 2% when compared to the year ended
December 31, 1998.
SEGMENT RESULTS
Employee Benefits
The following is a summary of certain financial data of the Employee Benefits
segment:
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Three Months Ended Six Months
Ended
June 30, June 30,
------------------------ ------------------------
Operating Summary (Millions) 1999 1998 1999 1998
----------- ---------- ----------- ----------
Premiums $ 247 $ 110 $ 512 $ 242
Fee income 127 110 261 212
Net investment income 20 21 39 43
Realized investment gains
(losses) 1 (2) 2
----------- ---------- ----------- ----------
Total revenues 395 241 810 499
Total benefits and expenses 353 206 729 430
Income tax expense 14 12 28 21
=========== ========== =========== ==========
Net income $ 28 $ 23 $ 53 $ 48
=========== ========== =========== ==========
Deposits for investment-type
contracts $ 18 $ 10 $ 18 $ 15
Deposits to separate accounts 431 398 925 789
Self-funded premium
equivalents 788 591 1,506 1,126
</TABLE>
Net income for Employee Benefits increased $5 million or 22% and $5 million or
10% for the second quarter and first six months of 1999 when compared to the
second quarter and the first six months of 1998. The increase was primarily due
to improved morbidity experience.
401(k) premiums and deposits increased 10% (from $428 million to $472 million)
and 17% (from $842 million to $988 million) for the second quarter and first six
months of 1999, as a result of higher recurring deposits from existing
customers. Assets under administration (including third-party administration) in
401(k) increased 10% over the first six months of 1998, primarily due to strong
equity markets. The number of contributing participants increased from 477,000
at December 31, 1998 to 497,000 at June 30, 1999.
Equivalent premium revenue and fee income for group life and health increased
44% (from $791 million to $1,140 million) and 45% (from $1,542 million to $2,234
million) from the second quarter and first six months of 1998, primarily due to
the acquisition of AH&L.
Financial Services
The following is a summary of certain financial data of the Financial Services
segment:
<TABLE>
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Three Months Ended Six Months
Ended
June 30, June 30,
------------------------ ------------------------
Operating Summary (Millions) 1999 1998 1999 1998
----------- ---------- ----------- ----------
Premiums $ 47 $ 53 $ 100 $ 109
Fee income 23 17 43 33
Net investment income 196 203 393 404
Realized investment gains
(losses) 1 5 (2) 17
----------- ---------- ----------- ----------
Total revenues 267 278 534 563
Total benefits and expenses 235 245 470 497
Income tax expense 12 12 24 24
=========== ========== =========== ==========
Net income $ 20 $ 21 $ 40 $ 42
=========== ========== =========== ==========
Deposits for investment-type
contracts $ 151 $ 254 $ 257 $ 440
Deposits to separate accounts 264 177 440 320
</TABLE>
Net income for Financial Services decreased $1 million or 5% and $2 million or
5% for the second quarter and first six months of 1999 when compared to the
second quarter and first six months of 1999.
Savings
Savings equivalent premiums and deposits increased 2% (from $252 million to $257
million) and 6% (from $476 million to $503 million) for the second quarter and
first six months of 1999, which reflects the continuing trend of policyholders
selecting variable annuity options (separate accounts) as opposed to the more
traditional fixed annuity products.
The Financial Services segment's core savings business is in the
public/non-profit pension market. The assets of the public/non-profit pension
business, including separate accounts but excluding Guaranteed Investment
Contracts, decreased 1% from December 31, 1998.
Customer demand for investment diversification continued to grow during 1999.
New contributions to variable business represented 59% of the total deposits
received in the first six months of 1999 compared to 58% for the first six
months of 1998.
Customer participation in guaranteed separate accounts increased and assets
under management for guaranteed separate account funds were $613 million at June
30, 1999 compared to $562 million at December 31, 1998.
Life Insurance
Individual life insurance revenue premiums and deposits of $227 million and $337
million for the second quarter and first six months of 1999 represented a
decrease of $22 million or 9% and $90 million or 21% from the second quarter and
first six months of 1998, which is primarily due to a decrease in deposits for
COLI of $56 million for the first six months of 1999 and a decrease in deposits
for BOLI of $25 million and $40 million for the second quarter and first six
months of 1999.
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.
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 market conditions, the Company's assets
will 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.
Fixed Maturities
Fixed maturity investments include public and privately placed corporate bonds,
public and privately placed structured assets and government bonds. This latter
category contains both asset-backed and mortgage-backed securities, including
collateralized mortgage obligations ("CMOs"). The Company's strategy related to
structured assets is to focus on those with lower volatility and minimal credit
risk. The Company does not invest in higher risk CMOs such as interest-only and
principal-only strips, and currently has no plans to invest in such securities.
Private placement investments, which are primarily in the held-to-maturity
category, are generally less marketable than publicly traded assets, yet they
typically offer covenant protection which 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 rating agencies.
The distribution of the fixed maturity portfolio (both
available-for-sale and held-to-maturity) by credit rating is summarized as
follows:
<TABLE>
<S> <C> <C>
June 30, December 31,
1999 1998
------------------- ------------------
AAA 48.8% 45.6%
AA 8.8% 9.4%
A 20.7% 23.8%
BBB 21.2% 20.7%
BB and Below (non-investment grade) .5% 0.5%
------------------- ------------------
TOTAL 100.0% 100.0%
</TABLE>
During the first six months of 1999, net unrealized gains (losses) on
fixed maturities included in stockholders' equity, which is net of
policyholder-related amounts and deferred income taxes, decreased surplus by $89
million.
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. 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 term,
requiring greater liquidity.
Generally, the Company has met its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio utilizing 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 $354 million and $596 million as of June 30, 1999 and December 31, 1998,
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 retained
earnings and proceeds from the issuance of commercial paper and equity
securities. 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.
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 $30
million and $40 million of commercial paper outstanding at June 30, 1999 and
December 31, 1998. The commercial paper has been given a rating of A-1+ by
Standard & Poor's Corporation and a rating of P-1 by Moody's Investors Service,
each being the highest rating available.
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
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 June 30, 1999, GWL&A is essentially Y2K ready (99% complete for all
phases). Only five minor systems require additional work, and that work will be
completed by October 1, 1999.
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 June 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 $12.5 million on its Y2K project
through the end of June 30, 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 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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
ITEM 2. CHANGES TO SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds
Pursuant to a registration statement on Form S-3 (File Nos. 333-64473,
333-64473-01) and a registration statement on Form S-3 (Nos. 333-77405 and
333-77405-01) (the "Registration Statements") filed by the Company and a
subsidiary trust, Great-West Life & Annuity Insurance Capital I (the "Trust"),
which were declared effective by the Securities and Exchange Commission on April
28, 1999 and April 29, 1999, respectively, the Company and the Trust registered
for sale (i) $175 million in aggregate liquidation amount of the Trust's 7.25%
Subordinated Capital Income Securities (the "Capital Securities"), (ii) the
Company's 7.25% Junior Subordinated Debentures due 2029 (the "Debentures") and
(iii) the guarantee of the Capital Securities by the Company for the benefit of
the holders from time to time of the Capital Securities.
Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated
acted as the managing underwriters in connection with the offering of the
Capital Securities (the "Offering"). The Capital Securities were offered at the
aggregate price of $175 million. The Offering commenced on April 29, 1999 and
was completed on May 4, 1999. All of the Capital Securities were sold in the
Offering.
The expenses incurred by the Trust in connection with the Offering were paid by
the Company. The Company estimates that, from the effective date of the
Registration Statements to June 30, 1999, it incurred an aggregate of $6,316,803
in fees and expenses in connection with the Offering, as follows: (i) $5,397,500
in underwriters' compensation and (ii) $919,303 of miscellaneous other expenses.
The proceeds of $175 million from the Offering were invested by the Trust in the
Debentures. The Company's net proceeds from the sale of the Debentures, after
deducting the above-listed expenses of the Offering, were $168,683,197. These
net proceeds were invested by the Company in a surplus note of GWL&A. The net
proceeds will be used by GWL&A for general corporate purposes and have been
invested in bonds with maturities equal to the maturity of the Subordinated
Capital Income Securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
Exhibit Number
Title Page
---------------- ------------------------------- -------------
27 Financial Data Schedule 21
(b) Reports on Form 8-K
GWL&A filed a Form 8-K on April 27, 1999, disclosing its second quarter results.
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.
GWL&A FINANCIAL INC.
DATE: August 12, 1999 BY: /s/ Glen R. Derback
-----------------------------------------------------
Glen R. Derback, Vice President and Controller
(Duly authorized officer and chief accounting officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27 Financial Data Schedule
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GWL&A Financial Inc. as of and for the period ended June 30, 1999 (000s)
- --------------------------------------------------------------------------------
</LEGEND>
<CIK> 0001070940
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