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, 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] 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, 2000, 50,025 shares of the registrant's common stock were
outstanding, all of which were owned by the registrant's parent company.
<PAGE>
21
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
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 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)
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(Unaudited)
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Three Months Ended Six Months Ended
June 30, June 30,
--------------------------
----------- ------------
2000 1999 2000 1999
----------- ------------ ------------ -------------
REVENUES:
Premiums $ 318,407 $ 293,721 $ 671,143 $ 611,476
Fee income 213,229 150,270 424,863 304,306
Net investment income 228,019 215,984 458,419 432,102
Net realized gains (losses) on 9,154 2,117 10,491 (3,926)
investments
----------- ------------ ------------ -------------
768,809 662,092 1,564,916 1,343,958
----------- ------------ ------------ -------------
BENEFITS AND EXPENSES:
Life and other policy benefits 287,725 272,040 569,096 512,429
Increase in reserves 3,953 (12,726) 29,511 22,349
Interest paid or credited to 109,235 115,676 234,929 225,641
contractholders
Provision for policyholders' share of
earnings on participating business 2,176 1,193 4,454 2,645
Dividends to policyholders 15,341 11,787 37,972 33,680
----------- ------------ ------------ -------------
418,430 387,970 875,962 796,744
----------- ------------ ------------ -------------
------------ -------------
Commissions 52,660 45,299 99,080 90,333
Operating expenses 176,309 144,053 378,241 294,175
Premium taxes 15,683 10,734 24,432 17,872
----------- ------------ ------------ -------------
663,082 588,056 1,377,715 1,199,124
----------- ------------ ------------ -------------
INCOME BEFORE INCOME TAXES 105,727 74,036 187,201 144,834
PROVISION FOR INCOME TAXES:
Current 24,531 25,884 37,144 41,738
Deferred 12,817 484 28,962 10,018
----------- ------------ ------------ -------------
37,348 26,368 66,106 51,756
----------- ------------ ------------ -------------
NET INCOME $ 68,379 $ 47,668 $ 121,095 $ 93,078
=========== ============ ============ =============
</TABLE>
See notes to consolidated financial statements.
GWL&A FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
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June 30, December 31,
ASSETS 2000 1999
------
-------------- --------------
(Unaudited)
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost
(fair value $2,106,954 and $2,238,581) $ 2,146,935 $ 2,260,581
Available-for-sale, at fair value
(amortized cost $7,205,026 and $6,953,383) 6,945,778 6,727,922
Mortgage loans on real estate, net 908,775 974,645
Common stock 102,813 69,240
Real estate, net 113,674 103,731
Policy loans 2,791,283 2,681,132
Short-term investments, available-for-sale
(cost approximates fair value) 213,174 243,709
-------------- --------------
Total Investments 13,222,432 13,060,960
Cash 344,014 267,986
Reinsurance receivable 177,281 173,322
Deferred policy acquisition costs 271,303 282,295
Investment income due and accrued 129,411 137,810
Uninsured claims receivable 153,112 132,333
Other assets 370,684 308,450
Premiums in course of collection 202,383 142,199
Deferred income taxes 236,559 253,323
Separate account assets 13,167,303 12,476,256
-------------- --------------
TOTAL ASSETS $ 28,274,482 $ 27,234,934
============== ==============
See notes to consolidated financial statements. (Continued)
</TABLE>
GWL&A FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
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June 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2000 1999
------------------------------------
-------------- --------------
(Unaudited)
POLICY BENEFIT LIABILITIES:
Policy reserves $ 11,699,265 $ 11,737,683
Policy and contract claims 509,916 391,968
Policyholders' funds 236,885 185,623
Provision for policyholders' dividends 71,781 70,726
GENERAL LIABILITIES:
Due to Parent Corporation 35,338 35,985
Repurchase agreements 80,579
Commercial paper 99,128
Other liabilities 934,930 780,502
Undistributed earnings on
participating business 133,396 130,638
Separate account liabilities 13,167,303 12,476,256
-------------- --------------
Total Liabilities 26,887,942 25,889,960
-------------- --------------
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE 175,000 175,000
COMPANY'S JUNIOR SUBORDINATED DEBENTURES
STOCKHOLDER'S EQUITY:
Preferred stock, $1 par value, 50,000,000 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 707,348 707,348
Accumulated other comprehensive loss (103,615) (84,861)
Retained earnings 607,557 547,237
-------------- --------------
Total Stockholder's Equity 1,211,540 1,169,974
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 28,274,482 $ 27,234,934
============== ==============
</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,
-----------------------------
2000 1999
------------- -------------
OPERATING ACTIVITIES:
Net income $ 121,095 $ 93,078
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain allocated to participating policyholders 4,454 2,642
Amortization of investments (25,395) (6,703)
Realized losses (gains) on disposal of investments
and write-downs of mortgage loans and real estate (10,491) 3,926
Amortization 25,361 17,752
Deferred income taxes 28,962 10,018
Changes in assets and liabilities:
Policy benefit liabilities 300,142 409,073
Reinsurance receivable (3,959) 13,049
Accrued interest and other receivables (51,783) 3,436
Other, net 56,568 (232,435)
------------- -------------
Net cash provided by operating activities 444,954 313,836
------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to-maturity
Maturities and redemptions 212,164 325,750
Available-for-sale
Sales 666,969 2,009,783
Maturities and redemptions 436,865 434,630
Mortgage loans 67,751 94,307
Real estate 6,863 2,015
Common stock 12,102 6,842
Purchases of investments:
Fixed maturities
Held-to-maturity (85,433) (352,190)
Available-for-sale (1,312,520) (2,429,062)
Mortgage loans (1,917) (949)
Real estate (20,439) (14,351)
Common stock (24,796) (4,005)
------------- -------------
Net cash provided by (used in) investing (42,391) 72,770
activities
------------- -------------
</TABLE>
(Continued)
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,
-----------------------------
2000 1999
------------- -------------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (283,662) $ (365,423)
Net Parent Corporation borrowings (repayments) (647) (10,612)
Dividends paid (60,775) (41,566)
Net commercial paper borrowings (repayments) 99,128 (9,887)
Net repurchase agreements borrowings (repayments) (80,579) (161,273)
Issuance of junior subordinated debentures 175,000
------------- -------------
Net cash used in financing activities (326,535) (413,761)
------------- -------------
NET INCREASE (DECREASE) IN CASH 76,028 (27,155)
CASH, BEGINNING OF YEAR 267,986 176,369
------------- -------------
CASH, END OF PERIOD $ 344,014 $ 149,214
============= =============
</TABLE>
See notes to consolidated financial statements. (Concluded)
<PAGE>
GWL&A FINANCIAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
(Dollars in Thousands)
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Accumulated
Additional Other
Preferred Stock Common Stock Paid-in Comprehensive Retained
----------------------- -------------------------
Shares Amount Shares Amount Capital Income (Loss) Earnings Total
------- ------- ------------ ----------- ------------ ---------------- ---------- ----------
BALANCE, DECEMBER 31, 1998 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 loss 59,355
----------
Capital contributions
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 121,095 121,095
Other comprehensive loss
Change in unrealized gains (18,754) (18,754)
----------
Comprehensive income 102,341
----------
Dividends (60,775) (60,775)
------- ------- ------------ ----------- ------------ ---------------- ---------- ----------
BALANCE, JUNE 30, 2000 0 $ 0 50,025 $ 250 $ 707,348 $ (103,615) $ 607,557 $ 1,211,540
======= ======= ============ =========== ============ ================ ========== ==========
</TABLE>
See notes to consolidated financial statements.
<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 audited consolidated
financial statements and the accompanying notes included in the
Company's latest annual report on Form 10-K for the year ended December
31, 1999.
Operating results for the six months ended June 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 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.
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
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. ANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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Three Months Ended Six Months Ended
Operating Summary June 30, June 30,
---------------------------- ---------------------------
(Millions) 2000 1999 2000 1999
------------------------------------ ------------ ------------ ------------ ------------
Premiums $ 318 $ 294 $ 671 $ 612
Fee income 213 150 425 304
Net investment income 228 216 458 432
Realized investment
gains (losses) 10 2 11 (4)
------------ ------------ ------------ ------------
Total revenues 769 662 1,565 1,344
Total benefits
and expenses 664 588 1,378 1,199
Income tax expenses 37 26 66 52
------------ ------------ ------------ ------------
Net income $ 68 $ 48 $ 121 $ 93
============ ============ ============ ============
Deposits for investment
type contracts $ 184 $ 169 $ 354 $ 275
Deposits to separate
accounts $ 1,010 $ 695 $ 1,671 $ 1,365
Self-funded premium
equivalents $ 1,309 $ 788 $ 2,497 $ 1,506
Balance Sheet June 30, Dec. 31,
(Millions) 2000 1999
--------------------------------------------- ------------ ------------
Investment assets $ 13,222 $ 13,061
Separate account assets 13,167 12,476
Total assets 28,274 27,235
Total policy benefit liabilities 12,518 12,386
Due to Parent Corporation 35 36
Guaranteed preferred beneficial interests
in the 175 175
Company's junior subordinated debentures
Total stockholder's equity 1,212 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 condition of the
Company as of June 30, 2000, compared with December 31, 1999, and its
results of operations for the three and six months ended June 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 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 $18 million or 36% and
$26 million or 27% for the second quarter and first six months of 2000
when compared to the second quarter and first six months of 1999. The
increase reflects an increase of $10 million and $15 million for the
second quarter and first six months of 2000 in the Financial Services
segment, which resulted primarily from higher fee income and realized
gains on investments and favorable individual life insurance mortality.
The Employee Benefits segment's net income increased $8 million and $11
million for the second quarter and first six months of 2000, primarily
due to favorable morbidity experience which more than offset unfavorable
mortality experience.
Total revenues increased $107 million or 16% and $221 million or 16% for
the second quarter and first six months of 2000 when compared to the
second quarter and first six months of 1999. The growth in revenues for
the second quarter and first six months of 2000 was comprised of
increased premium income of $24 million and $59 million, increased fee
income of $63 million and $121 million, increased net investment income
of $12 million and $26 million, and increased realized gains on
investments of $8 million and $15 million.
The increased premium income in 2000 was comprised of growth in Employee
Benefits premium income of $30 million and $67 million for the second
quarter and first six months of 2000 offset by a decrease in Financial
Services premium income of $6 million and $8 million for the second
quarter and first six months of 2000. The growth in Employee Benefits
primarily reflects premium income of $43 million and $86 million for the
second quarter and first six months of 2000 derived from the acquisition
of business from General American.
The growth in fee income is also primarily in the Employee Benefits
segment, where fee income derived from the acquisition of the General
American business was $30 million and $61 million during the second
quarter and first six 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 $6 million and $15 million during the second
quarter and first six 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 of higher interest
rates and a higher earned rate. The actual earned rate at June 30, 2000
was 7.04% compared to 6.93% at June 30, 1999.
Realized investment gains increased $8 million during the second
quarter of 2000 compared to the same period last year. Realized
investment gains increased from a realized investment loss of $4 million
in the first six months of 1999 to a realized investment gain of $11
million in 2000. The majority of the increase is from gains of $7
million and $8 million from the sale of common stock during the second
quarter and first six months of 2000 compared to none during the same
periods last year. The rise in interest rates resulted in losses on
sales of fixed maturities totaling $3 million and $9 million for the
first six months of 2000 and 1999, respectively. Decreases in the
provision for asset losses of $5 million and $4 million were recognized
for the first six months of 2000 and 1999, respectively.
The benefits and expenses increased $76 million or 13% and $179 million
or 15% for the second quarter and first six months of 2000 when compared
to the second quarter and first six months of 1999. The growth in
benefits and expenses was primarily in the Employee Benefits segment,
which increased $70 million and $159 million during the second quarter
and first six months of 2000, of which $75 million and $147 million
related to benefits and expenses generated by the General American
business. The Financial Services segment reflected an increase in
benefits and expenses of $5 million and $20 million for the second
quarter and first six months of 2000.
Income tax expense increased $16 million or 32% for the first six months
of 2000 when compared to the first six months of 1999. The increase
reflects higher pre-tax earnings for the first six months of 2000.
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 $15 million or 9% and
$79 million or 29% for the second quarter and first six months of 2000
when compared to the same periods of 1999. This 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 for separate accounts increased $315 million or 45% and $306
million or 22% for the second quarter and first six months of 2000 when
compared to the second quarter and first six months of 1999. The
majority of the increase is from Bank Owned Life Insurance ("BOLI")
deposits, which increased from $100 million for the first six months of
1999 to $302 million for the first six months of 2000.
Self-funded premium equivalents increased $521 million or 66% and $991
million or 66% for the second quarter and first six months of 2000 when
compared to the same periods of 1999. The General American acquisition
resulted in increases of $454 million and $804 million for the second
quarter and first six months of 2000.
Total assets increased $1 billion or 4% 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:
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Three Months Ended Six Months Ended
Operating Summary June 30, June 30,
---------------------------- ----------------------------
(Millions) 2000 1999 2000 1999
-------------------------- ------------ ------------ ------------ ------------
Premiums $ 277 $ 247 $ 579 $ 512
Fee income 182 127 365 261
Net investment income 22 20 46 39
Realized investment
gains (losses) (1) 1 (3) (2)
------------ ------------ ------------ ------------
Total revenues 480 395 987 810
Total benefits
and expenses 423 353 888 729
Income tax expenses 20 13 34 27
------------ ------------ ------------ ------------
Net income $ 37 $ 29 $ 65 $ 54
============ ============ ============ ============
Deposits for investment
type contracts $ 5 $ 18 $ 20 $ 18
Deposits to separate
accounts $ 503 $ 431 $ 967 $ 925
Self-funded premium
equivalents $ 1,309 $ 788 $ 2,497 $ 1,506
</TABLE>
Net income for Employee Benefits increased $8 million or 28% and $11
million or 20% for the second quarter and first six months of 2000 when
compared to the second quarter and first six months of 1999. The
increase is due to expense gains associated with higher recoveries and
favorable morbidity which more than offset poor mortality experience.
401(k) premiums and deposits increased 13% (from $472 million to $534
million) and 5% (from $988 million to $1,038 million) for the second
quarter and first six months of 2000. Assets under administration
(including third-party administration) in 401(k) increased 1% over the
first six months of 2000. The number of contributing participants
increased from 501,000 at December 31, 1999 to 529,000 at June 30, 2000.
Premiums, fee income and equivalent premiums for group life and health
increased 53% (from $1,140 million to $1,742 million) and 52% (from
$2,234 million to $3,390 million) from the second quarter and first six
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:
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Three Months Ended Six Months Ended
Operating Summary June 30, June 30,
---------------------------- ----------------------------
(Millions) 2000 1999 2000 1999
-------------------------- ------------ ------------ ------------ ------------
Premiums $ 41 $ 47 $ 92 $ 100
Fee income 31 23 59 43
Net investment income 206 196 413 393
Realized investment
gains (losses) 10 1 14 (2)
------------ ------------ ------------ ------------
Total revenues 288 267 578 534
Total benefits
and expenses 240 235 490 470
Income tax expenses 17 11 32 23
------------ ------------ ------------ ------------
Net income $ 31 $ 21 $ 56 $ 41
============ ============ ============ ============
Deposits for investment
type contracts $ 178 $ 151 $ 334 $ 257
Deposits to separate
accounts $ 507 $ 264 $ 704 $ 440
</TABLE>
Net income for Financial Services increased $10 million or 48% and $15
million or 37% for the second quarter and first six 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 12% (from $257 million to $287
million) and 26% (from $503 million to $631 million) for the second
quarter and first six months of 2000, which reflects growth in deposits
to separate accounts ($62 million) and in deposits to traditional fixed
annuity products ($57 million) for the first six 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, remained relatively unchanged from December 31,
1999.
New contributions to variable business represented 54% of the total
deposits received in the first six months of 2000 compared to 59% for
the first six months of 1999.
Customer participation in guaranteed separate accounts increased as
assets under management for guaranteed separate account funds were $698
million at June 30, 2000 compared to $654 million at December 31, 1999.
Life Insurance
Individual life insurance revenue premiums and deposits of $471 million
and $559 million for the second quarter and first six months of 2000
represent an increase of $244 million or 108% and $223 million or 66%
from the same periods last year. The increases are primarily due to an
increase in BOLI separate account deposits of $202 million for the
second quarter and first six 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:
<TABLE>
<S> <C> <C>
June 30, December 31,
2000 1999
------------------ ------------------
AAA 50.6% 48.9%
AA 9.8% 8.9%
A 17.5% 19.6%
BBB 21.4% 22.3%
BB and Below (non-investment grade) 0.7% 0.3%
------------------ ------------------
TOTAL 100.0% 100.0%
</TABLE>
During the first six months of 2000, 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 $19 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 $557 million and $512 million as of
June 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
June 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 second 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.
DATE: August 10, 2000 BY:/s/ Glen R. Derback
----------------------------------------------------
Glen R. Derback, Vice President and Controller
(Duly authorized officer and chief accounting officer)
