DRAFT 9:33 AM 11/10/00
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, 2000
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] 737-4128
(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 September 30, 2000, 50,025 shares of the registrant's common stock were
outstanding, all of which were owned by the registrant's parent company.
- 25 -
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Page
-----------
Part I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Consolidated Statements of Stockholder's Equity 8
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Part II OTHER INFORMATION
Item 1 Legal Proceedings 20
Item 2 Changes to Securities and Use of Proceeds 20
Item 6 Exhibits and Reports on Form 8-K 20
Signatures 20
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
====================================================================================================
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
REVENUES:
Premiums $ 339,059 $ 298,227 $ 1,010,202 $ 909,703
Fee income 223,160 162,396 648,023 466,702
Net investment income 238,090 219,176 696,509 651,278
Net realized gains (losses)
on investments 3,618 3,796 14,109 (130)
------------ ------------ ------------ ------------
803,927 683,595 2,368,843 2,027,553
------------ ------------ ------------ ------------
BENEFITS AND EXPENSES:
Life and other policy benefits 272,453 272,030 841,549 784,459
Increase in reserves 37,173 15,811 66,684 38,160
Interest paid or credited to
Contractholders 124,669 107,364 359,598 333,005
Provision for policyholders' share
of
earnings (losses) on participating
business 1,226 (237) 5,680 2,408
Dividends to policyholders 16,029 16,271 54,001 49,951
------------ ------------ ------------ ------------
451,550 411,239 1,327,512 1,207,983
------------ ------------ ------------ ------------
------------ ------------
Commissions 48,310 41,072 147,390 131,405
Operating expenses 185,234 148,367 563,475 442,542
Premium taxes 9,024 7,829 33,456 25,701
------------ ------------ ------------ ------------
694,118 608,507 2,071,833 1,807,631
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 109,809 75,088 297,010 219,922
PROVISION FOR INCOME TAXES:
Current 37,988 11,741 75,132 53,479
Deferred 503 12,271 29,465 22,289
------------ ------------ ------------ ------------
38,491 24,012 104,597 75,768
------------ ------------ ------------ ------------
NET INCOME $ 71,318 $ 51,076 $ 192,413 $ 144,154
============ ============ ============ ============
See notes to consolidated financial statements.
GWL&A FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
===============================================================================================
September 30, December 31,
ASSETS 2000 1999
------
-------------- --------------
(Unaudited)
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost
(fair value $2,035,974 and $2,238,581) $ 2,044,851 $ 2,260,581
Available-for-sale, at fair value
(amortized cost $7,416,731 and $6,953,383) 7,247,005 6,727,922
Mortgage loans on real estate, net 879,616 974,645
Common stock 111,477 69,240
Real estate, net 113,537 103,731
Policy loans 2,742,265 2,681,132
Short-term investments, available-for-sale
(cost approximates fair value) 226,598 243,709
-------------- --------------
Total Investments 13,365,349 13,060,960
Cash 222,889 267,986
Reinsurance receivable 174,244 173,322
Deferred policy acquisition costs 274,122 282,295
Investment income due and accrued 138,539 137,810
Uninsured claims receivable 216,118 181,333
Other assets 425,743 308,450
Premiums in course of collection 142,203 93,199
Deferred income taxes 209,751 253,323
Separate account assets 13,366,637 12,476,256
-------------- --------------
TOTAL ASSETS $ 28,535,595 $ 27,234,934
============== ==============
See notes to consolidated financial statements. (Continued)
GWL&A FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
===============================================================================================
September 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2000 1999
------------------------------------
-------------- --------------
(Unaudited)
POLICY BENEFIT LIABILITIES:
Policy reserves $ 11,837,633 $ 11,737,683
Policy and contract claims 488,959 391,968
Policyholders' funds 207,542 185,623
Provision for policyholders' dividends 72,067 70,726
GENERAL LIABILITIES:
Due to Parent Corporation 41,320 35,985
Repurchase agreements 80,579
Commercial paper 98,923
Other liabilities 804,478 780,502
Undistributed earnings on
participating business 144,824 130,638
Separate account liabilities 13,366,637 12,476,256
-------------- --------------
Total Liabilities 27,062,383 25,889,960
-------------- --------------
Guaranteed preferred beneficial interests in the Company's
junior
subordinated debentures 175,000 175,000
STOCKHOLDER'S EQUITY:
Preferred stock, $1 par value, 50,000,000 shares
authorized,
0 shares issued and outstanding
Preferred stock, $0 par value, 500,000 shares
authorized,
50,025 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 708,083 707,348
Accumulated other comprehensive loss (58,629) (84,861)
Retained earnings 648,508 547,237
-------------- --------------
Total Stockholder's Equity 1,298,212 1,169,974
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 28,535,595 $ 27,234,934
============== ==============
See notes to consolidated financial statements. (Concluded)
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
===============================================================================================
(Unaudited)
Nine Months Ended
September 30,
-----------------------------
2000 1999
------------- -------------
OPERATING ACTIVITIES:
Net income $ 192,413 $ 144,154
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain allocated to participating policyholders 5,680 2,408
Amortization of investments (41,073) (13,798)
Realized (gains) losses on disposal of investments
and write-downs of mortgage loans and real estate (20,109) 130
Amortization 37,044 33,653
Deferred income taxes 29,465 22,289
Changes in assets and liabilities:
Policy benefit liabilities 454,282 537,562
Reinsurance receivable (922) (2,617)
Accrued interest and other receivables (84,518) (26,937)
Other, net (116,761) (249,079)
------------- -------------
Net cash provided by operating activities 455,501 447,765
------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to-maturity
Sales 8,571
Maturities and redemptions 323,728 413,320
Available-for-sale
Sales 784,829 2,640,214
Maturities and redemptions 638,396 610,044
Mortgage loans 98,991 142,473
Real estate 6,996 5,114
Common stock 20,988 12,598
Purchases of investments:
Fixed maturities
Held-to-maturity (100,524) (515,776)
Available-for-sale (1,847,645) (3,233,049)
Mortgage loans (1,968) (2,311)
Real estate (23,117) (28,256)
Common stock (33,912) (15,400)
------------- -------------
Net cash (used in) provided by investing (124,667) 28,971
activities
------------- -------------
See notes to consolidated financial statements. (Continued)
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
===============================================================================================
(Unaudited)
Nine Months Ended
September 30,
-----------------------------
2000 1999
------------- -------------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (308,468) $ (493,405)
Net Parent Corporation borrowings (repayments) 5,335 (11,197)
Dividends paid (91,142) (62,227)
Net commercial paper borrowings 98,923 14,971
Net repurchase agreements repayments (80,579) (163,509)
Issuance of junior subordinated debentures 175,000
------------- -------------
Net cash used in financing activities (375,931) (540,367)
------------- -------------
NET (DECREASE) IN CASH (45,097) (63,631)
CASH, BEGINNING OF YEAR 267,986 176,369
------------- -------------
CASH, END OF PERIOD $ 222,889 $ 112,738
============= =============
</TABLE>
See notes to consolidated financial statements. (Concluded)
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2000 (Unaudited) AND YEAR ENDED DECEMBER 31,
1999 (Dollars in Thousands)
==============================================================================
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Additional Other
Preferred Stock Common Stock Paid-in Comprehensive Retained
------------------------ -------------------------
Shares Amount Shares Amount Capital Loss Earnings Total
----------- ---------- ----------- ---------- ----------- ---------------- ----------- ---------
BALANCE, January 1, 1999 0 $ 0 50,025 $ 250 $ 706,588 $ 61,560 $ 430,411 $ 1,198,809
Net income 205,776 205,776
Other comprehensive loss (146,421) (146,421)
-----------
Total comprehensive income 59,355
-----------
Dividends (88,950) (88,950)
Income tax benefit on stock
Compensation 760 760
----- ---------- ----------- ---------- ----------- ---------------- ----------- -----------
BALANCE, DECEMBER 31, 1999 0 $ 0 50,025 $ 250 $ 707,348 $ (84,861) $ 547,237 $ 1,169,974
----- ---------- ----------- ---------- ----------- ---------------- ----------- -----------
Net income 192,413 192,413
Other comprehensive income
Change in unrealized gains 26,232 26,232
-----------
Comprehensive income 218,645
-----------
Dividends (91,142) (91,142)
Income tax benefit on stock
compensation 735 735
----- ---------- ----------- ---------- ----------- ---------------- ----------- -----------
BALANCE, SEPTEMBER 30, 2000 0 $ 0 50,025 $ 250 $ 708,083 $ (58,629) $ 648,508 $ 1,298,212
===== ========== =========== ========== =========== ================ =========== ===========
</TABLE>
See notes to consolidated financial statements.
GWL&A FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
(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 accounting principles
generally accepted in the United States of America 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 consolidated 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, 1999.
Operating results for the nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 2000.
2. NEW ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities - A replacement of FASB Statement No. 125",
which revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures.
Statement No. 140 will be effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001.
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.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which provides guidance with respect to revenue recognition issues
and disclosures. As amended by SAB No. 101B, the Company is required to
implement the provisions of SAB No. 101 no later than the fourth quarter of the
fiscal year ending December 30, 2000. Management does not believe SAB No. 101
will have a material impact on its financial statements.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which was effective for all fiscal years
beginning after June 15, 1999. In June 1999, the FASB 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.
The Company has not completed its evaluation of the impact of this Statement,
and therefore the Company is unable to disclose the impact that the adoption of
Statement No. 133 will have on the Company's financial statements.
3. OTHER
Effective January 1, 2000, the Company coinsured the majority of General
American Life Insurance Company's ("General American") group life and health
insurance business, which primarily consists of administrative services only and
stop loss policies. The agreement is expected to convert to an assumption
reinsurance agreement by January 1, 2001, pending regulatory approval. The
Company assumed approximately $150,000,000 of policy reserves and miscellaneous
liabilities in exchange for an equal amount of cash and miscellaneous assets
from General American.
On October 6, 1999, the Company entered into an agreement with Allmerica
Financial Corporation ("Allmerica") to acquire Allmerica's group life and health
insurance business on March 1, 2000. This business primarily consists of
administrative services only and stop loss policies. The in-force business is
expected to be underwritten and retained by the Company upon each policy renewal
date. The purchase price is based on a percentage of the premium and
administrative fees in-force at March 1, 2000 and March 1, 2001.
The Company is involved in various legal proceedings that arise in the ordinary
course of its business. In the opinion of management, after consultation with
counsel, the resolution of these proceedings should not have a material adverse
effect on its financial position or results of operations.
Certain reclassifications have been made to the 1999 financial statements to
conform to the 2000 presentation.
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 Nine Months Ended
September 30, September 30,
------------------------ -----------------------
Operating Summary (Millions) 2000 1999 2000 1999
---------- ----------- ---------- ----------
Premiums $ 339 $ 298 $ 1,010 $ 910
Fee income 223 162 648 466
Net investment income 238 219 697 651
Realized investment gains 4 4 14 0
---------- ----------- ---------- ----------
Total revenues 804 683 2,369 2,027
Total benefits and expenses 694 608 2,072 1,808
Income tax expense 39 24 105 75
---------- ----------- ---------- ----------
Net income $ 71 $ 51 $ 192 $ 144
========== =========== ========== ==========
Deposits for investment-type
contracts $ 229 $ 137 $ 583 $ 412
Deposits to separate accounts 780 551 2,452 1,916
Self-funded premium
equivalents 1,346 746 3,843 2,252
Balance Sheet September 30, December 31,
(Millions) 2000 1999
------------------------------------------------ ---------------- ---------------
Investment assets $ 13,365 $ 13,061
Separate account assets 13,367 12,476
Total assets 28,534 27,232
Total policy benefit liabilities 12,606 12,386
Due to Parent Corporation 39 36
Guaranteed preferred beneficial interests in 175 175
the
Company's junior subordinated debentures
Total shareholder's equity $ 1,298 $ 1,170
</TABLE>
GENERAL
This Form 10-Q contains forward-looking statements. Forward-looking statements
are statements not based on historical information and which relate to future
operations, strategies, financial results or other developments. In particular,
statements using verbs such as "expect," "anticipate," "believe" or words of
similar import generally involve forward-looking statements. Without limiting
the foregoing, forward-looking statements include statements which represent the
Company's beliefs concerning future or projected levels of sales of the
Company's products, investment spreads or yields, or the earnings or
profitability of the Company's activities. Forward-looking statements are
necessarily based upon estimates and assumptions that are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond the Company's control and many of which, with respect
to future business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company. Whether or not actual results differ
materially from forward-looking statements may depend on numerous foreseeable
and unforeseeable events or developments, some of which may be national in
scope, such as general economic conditions and interest rates, some of which may
be related to the insurance industry generally, such as pricing competition,
regulatory developments and industry consolidation, and others of which may
relate to the Company specifically, such as credit, volatility and other risks
associated with the Company's investment portfolio, and other factors. Readers
are also directed to consider other risks and uncertainties discussed in
documents filed by the Company and certain of its subsidiaries with the
Securities and Exchange Commission.
The following discussion addresses the financial position of the Company as of
September 30, 2000, compared with December 31, 1999, and its results of
operations for the three and nine months ended September 30, 2000, 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, 1999, to which
the reader is directed for additional information.
CONSOLIDATED RESULTS
The Company's consolidated net income increased $20 million or 39% and $48
million or 33% for the third quarter and first nine months of 2000 when compared
to the third quarter and first nine months of 1999. The increase reflects an
increase of $7 million and $24 million for the third quarter and first nine
months of 2000 in the Financial Services segment, which resulted primarily from
higher fee income and favorable individual life insurance mortality. The
Employee Benefits segment's net income increased $12 million and $24 million for
the third quarter and first nine months of 2000, primarily due to improved
morbidity results.
Total revenues increased $121 million or 18% and $342 million or 17% for the
third quarter and first nine months of 2000 when compared to the same periods of
1999. The increase in revenues for the third quarter and first nine months of
2000 was comprised of increased premium income of $41 million and $100 million,
increased fee income of $61 million and $182 million, increased net investment
income of $13 million and $40 million and increased realized gains on
investments of $6 million and $20 million.
The increased premium income was primarily comprised of growth in the Employee
Benefits premium income of $33 million and $101 million for the third quarter
and first nine months of 2000. The growth in Employee Benefits primarily
reflects premium income of $42 million and $128 million for the third quarter
and first nine months of 2000 derived from the acquisition of the group life and
health business from General American.
The growth in fee income is also primarily in the Employee Benefits segment,
where the increase in fee income was primarily from the acquisition of the
General American business totaling $34 million and $95 million during the third
quarter and first nine months of 2000. Additionally, the increase in fee income
derived from the acquisition of Alta Health and Life Insurance Company ("Alta")
in June 1998 (formerly known as Anthem Health & Life Insurance Company) was $4
million and $20 million during the third quarter and first nine months of 2000.
The remaining increase was the result of new sales and increased fees on
variable funds related to growth in equity markets.
The increase in net investment income was the result higher of interest rates
and a slight growth in general account assets. The actual earned rate at
September 30, 2000 was 7.28% compared to 6.93% at September 30, 1999.
Realized gains on investments decreased $0.2 million and $14 during the third
quarter and first nine months of 2000 when compared to the same period of 1999.
The majority of the increases are due to gains of $9 million and $17 million
from the sale of common stock during the third quarter and first nine months of
2000 compared to the same periods of 1999. The rise in interest rates resulted
in losses on sales of fixed maturities totaling $4 million and $8 million for
the first nine months of 2000 and 1999, respectively. Decreases in the provision
for asset losses of $1 million and $6 million were recognized for the first nine
months of 2000 and 1999, respectively.
Benefits and expenses increased $86 million or 14% and $264 million or 15% for
the third quarter and first nine months of 2000 when compared to the third
quarter and first nine months of 1999. The growth in benefits and expenses was
primarily in the Employee Benefits segment, which increased $69 million and $229
million during the third quarter and first nine months of 2000, of which $77
million and $224 million related to benefits and expenses associated with the
General American business acquisition. The Financial Services segment reflected
an increase in benefits and expenses of $17 million and $35 million for the
third quarter and first nine months of 2000. The increase was primarily due to
growth in FasCorp's administrative services business.
Income tax expense increased $30 million or 44% for the first nine months of
2000 when compared to the first nine months of 1999. The increase reflects
higher pre-tax earnings for the first nine months of 2000, as the tax rate of
35.2% is slightly higher than the 35% statutory rate.
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 increased $92 million or 67% and $171
million or 42% for the third quarter and first nine months of 2000 when compared
to the same periods of 1999. The increase is primarily attributable to the
Financial Services segment, where the Company has experienced growth in premium
for fixed annuity products due to higher interest crediting rates being offered
to customers and the volatility in the variable marketplace. Deposits to
separate accounts increased $229 million or 42% and $536 million or 30% for the
third quarter and first nine months of 2000 when compared to the third quarter
and first nine months of 1999. The majority of the increase is from Bank Owned
Life Insurance ("BOLI") deposits, which increased from $100 million for the
first nine months of 1999 to $345 million for the first nine months of 2000.
Self-funded premium equivalents increased $600 million or 80% and $1.6 billion
or 71% for the third quarter and first nine months of 2000 when compared to the
third quarter and first nine months of 1999. The General American acquisition
resulted in increases of $463 million and $1.3 billion for the third quarter and
first nine months of 2000.
Total assets increased $1.3 billion or 5% when compared to the year ended
December 31, 1999, which is attributable to the separate account business.
SEGMENT RESULTS
Employee Benefits
The following is a summary of certain financial data of the Employee Benefits
segment:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
Operating Summary (Millions) 2000 1999 2000 1999
---------- ----------- ---------- ----------
Premiums $ 299 $ 266 $ 878 $ 778
Fee income 192 141 557 401
Net investment income 28 20 74 60
Realized investment losses (1) (5) (2)
---------- ----------- ---------- ----------
Total revenues 518 427 1,504 1,238
Total benefits and expenses 459 389 1,347 1,119
Income tax expense 21 12 55 40
---------- ----------- ---------- ----------
Net income $ 38 $ 26 $ 102 $ 79
========== =========== ========== ==========
Deposits for investment-type
Contracts $ $ $ 20 $ 18
Deposits to separate accounts 524 395 1,491 1,320
Self-funded premium
Equivalents 1,346 746 3,843 2,252
</TABLE>
Net income for Employee Benefits increased $12 million or 44% and $23 million or
29% for the third quarter and first nine months of 2000 when compared to the
third quarter and first nine months of 1999. The increase is due primarily to
favorable morbidity experience in large case business, the acquisition of
General American's group life and health business, and expense gains, which more
than offset poor mortality experience.
401(k) premiums and deposits increased 31% (from $418 million to $550 million)
and 13% (from $1,407 million to $1,589 million) for the third quarter and first
nine months of 2000. Assets under administration (including third-party
administration) in 401(k) increased 1% over the first nine months of 2000. The
number of contributing participants increased from 501,000 at December 31, 1999
to 549,000 at September 30, 2000.
Premiums, fee income and equivalent premiums for group life and health increased
60% (from $1,130 million to $1,812 million) and 55% (from $3,364 million to
$5,202 million) from the third quarter and first nine months of 1999, primarily
due to the acquisition of the General American business.
Financial Services
The following is a summary of certain financial data of the Financial Services
segment:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
Operating Summary (Millions) 2000 1999 2000 1999
---------- ----------- ---------- -----------
Premiums $ 40 $ 32 $ 132 $ 132
Fee income 31 21 91 65
Net investment income 210 199 623 591
Realized investment gains 5 4 19 2
---------- ----------- ---------- -----------
Total revenues 286 256 865 790
Total benefits and expenses 235 219 725 689
Income tax expense 18 12 50 35
---------- ----------- ---------- -----------
Net income $ 33 $ 25 $ 90 $ 66
========== =========== ========== ===========
Deposits for investment-type
contracts $ 229 $ 137 $ 563 $ 394
Deposits to separate accounts 257 156 961 596
</TABLE>
Net income for Financial Services increased $8 million or 32% and $24 million or
36% for the third quarter and first nine months of 2000 when compared to the
same periods of 1999, due primarily to higher fee income, favorable individual
life mortality experience, and realized gains on investments.
Savings
Savings premiums and deposits increased 64% (from $236 million to $386 million)
and 38% (from $739 million to $1,017 million) for the third quarter and first
nine months of 2000. The increase primarily reflects growth in deposits to
separate accounts ($120 million) and in deposits to traditional fixed annuity
products ($131 million) for the first nine months of 2000.
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, increased 2% from December 31, 1999.
New contributions to variable business represented 51% of the total deposits
received in the first nine months of 2000 compared to 59% for the first nine
months of 1999.
Customer participation in guaranteed separate accounts increased as assets under
management for guaranteed separate account funds were $732 million at September
30, 2000 compared to $654 million at December 31, 1999.
Life Insurance
Individual life insurance revenue premiums and deposits of $170 million and $729
million for the third quarter and first nine months of 2000 represented an
increase of $60 million or 54% and $283 million or 63% from the same periods in
1999. The increases are primarily due to an increase in BOLI separate account
deposits of $43 million and $245 million for the third quarter and first nine
months of 2000.
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:
September 30, December 31,
2000 1999
----------------- --------------
AAA 51.5% 48.2%
AA 10.1% 8.8%
A 17.1% 20.2%
BBB 20.4% 22.4%
BB and Below (non-investment grade) 0.9% .4%
----------------- --------------
TOTAL 100.0% 100.0%
During the first nine months of 2000, net unrealized gains on fixed maturities
included in stockholder's equity, which is net of policyholder-related amounts
and deferred income taxes, increased surplus by $26 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 are generally shorter term,
requiring greater liquidity.
Generally, the Company has met its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and 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 $449 million and $512 million as of September 30, 2000 and
December 31, 1999, 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 $99
million of commercial paper outstanding at September 30, 2000. There was no
commercial paper outstanding at December 31, 1999. 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.
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 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
No reports on Form 8-K have been filed during the third quarter of 2000.
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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DATE: November 10, 2000 BY:/s/ Glen R. Derback
--------------------------------------------------
Glen R. Derback, Vice President and Controller
(Duly authorized officer & chief accounting officer)
</TABLE>
