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, 1998
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
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Colorado 84-0467907
(State or other jurisdiction of incorporation I.R.S. Employer Identification
or organization) 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 September 30, 1998, 7,032,000 shares of the registrant's common stock were
outstanding, all of which were owned by the registrant's parent company.
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page
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Part I FINANCIAL INFORMATION
<S> <C>
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 Proceeding 16
Item 6 Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
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<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------- -------------
REVENUES:
<S> <C> <C> <C> <C>
Premium and fee income $ 494,962 $ 297,633 $ 1,090,539 1,016,382
Net investment income 222,294 223,496 669,719 653,891
Net realized gains (losses) on 13,512 5,332 32,827 (1,828)
investments
------------ ------------ ------------- -------------
730,768 526,461 1,793,085 1,668,445
------------ ------------ ------------- -------------
BENEFITS AND EXPENSES:
Life and other policy benefits 244,721 144,125 537,189 395,967
Increase in reserves 71,989 37,313 120,152 220,687
Interest paid or credited to 125,071 131,986 372,066 402,582
contractholders
Provision for policyholders' share
of
earnings on participating business 1,953 211 5,312 4,725
Dividends to policyholders 17,354 10,967 51,479 44,980
------------ ------------ ------------- -------------
461,088 324,602 1,086,198 1,068,941
Commissions 41,872 25,659 98,708 75,690
Operating expenses 141,448 110,583 373,271 315,912
Premium taxes 11,031 6,360 24,215 15,656
------------ ------------ ------------- -------------
655,439 467,204 1,582,392 1,476,199
------------ ------------ ------------- -------------
INCOME BEFORE INCOME TAXES 75,329 59,257 210,693 192,246
PROVISION FOR INCOME TAXES:
Current 28,322 30,252 69,611 62,357
Deferred (2,148) (10,284) 1,598 12,649
------------ ------------ ------------- -------------
26,174 19,968 71,209 75,006
------------ ------------ ------------- -------------
NET INCOME $ 49,155 $ 39,289 $ 139,484 117,240
============ ============ ============= =============
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------
September 30, December 31,
ASSETS 1998 1997
- ------
-------------- --------------
(Unaudited)
INVESTMENTS:
Fixed Maturities:
<S> <C> <C>
Held-to-maturity, at amortized cost $ 2,180,369 $ 2,082,716
(fair value $2,309,203 and $2,151,476)
Available-for-sale, at fair value 7,053,513 6,698,629
(amortized cost $6,743,525 and $6,541,422)
Mortgage loans on real estate, net 1,170,519 1,235,594
Common stock 39,216 39,021
Real estate, net 72,494 93,775
Policy loans 2,703,053 2,657,116
Short-term investments, available-for-sale
(cost approximates fair value) 262,342 399,131
-------------- --------------
Total Investments 13,481,506 13,205,982
Cash 149,262 126,278
Reinsurance receivable 140,078 84,364
Deferred policy acquisition costs 240,511 255,442
Investment income due and accrued 157,280 165,827
Other assets 211,018 121,543
Premiums in course of collection 87,972 77,008
Deferred income taxes 181,089 193,820
Separate account assets 8,549,187 7,847,451
-------------- --------------
TOTAL ASSETS $ 23,197,903 $ 22,077,715
============== ==============
See notes to consolidated financial statements. (Continued)
</TABLE>
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<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------
September 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1998 1997
- ------------------------------------
-------------- --------------
(Unaudited)
POLICY BENEFIT LIABILITIES:
<S> <C> <C>
Policy reserves $ 11,752,129 $ 11,102,719
Policy and contract claims 445,551 375,499
Policyholders' funds 175,262 165,106
Experience refunds 89,417 84,935
Provision for policyholders' dividends 68,476 62,937
GENERAL LIABILITIES:
Due to Parent Corporation 165,301 126,656
Repurchase agreements 100,103 325,538
Commercial paper 99,706 54,058
Other liabilities 405,449 605,032
Undistributed earnings on
participating business 148,898 141,865
Separate account liabilities 8,549,187 7,847,451
-------------- --------------
Total Liabilities 21,999,479 20,891,796
-------------- --------------
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,
0 and 600 shares issued and outstanding 60,000
Series B, cumulative, 1,500 shares authorized,
liquidation value of $100,000 per share,
0 and 200 shares issued and outstanding 20,000
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 41,800
per share, 0 and 2,000,000 issued, and
outstanding
Common stock, $1 par value; 50,000,000 shares
authorized;
7,032,000 shares issued and outstanding 7,032 7,032
Additional paid-in capital 693,948 690,748
Accumulated other comprehensive income 103,832 52,807
Retained earnings 393,612 313,532
-------------- --------------
Total Stockholder's Equity 1,198,424 1,185,919
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 23,197,903 $ 22,077,715
============== ==============
</TABLE>
See notes to consolidated financial statements.
- 5 -
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------
(Unaudited)
Nine Months Ended
September 30,
-----------------------------
1998 1997
------------- -------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 139,484 $ 117,240
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain allocated to participating policyholders 5,312 7,479
Amortization of investments (5,447) 2,150
Realized losses (gains) on disposal of investments
and write-downs of mortgage loans and real estate (32,827) 1,828
Amortization 60,590 36,233
Deferred income taxes (9,035) 15,445
Changes in assets and liabilities:
Policy benefit liabilities 771,818 351,264
Reinsurance receivable 4,669 127,350
Accrued interest and other receivables 25,742 29,186
Other, net (353,675) (216,353)
------------- -------------
Net cash provided by operating activities 606,631 471,822
------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to-maturity
Maturities and redemptions 385,071 287,314
Available-for-sale
Sales 5,137,042 1,820,194
Maturities and redemptions 990,923 528,737
Mortgage loans 168,777 176,767
Real estate 16,456 13,809
Common stock 3,183 12,578
Purchases of investments:
Fixed maturities
Held-to-maturity (471,514) (415,248)
Available-for-sale (5,940,683) (2,518,279)
Mortgage loans (95,788) (2,226)
Real estate (3,075) (5,144)
Common stock (3,235) (28,317)
Acquisition of subsidiary (87,840)
------------- -------------
Net cash provided by (used in) investing 99,317 (129,815)
activities
------------- -------------
(Continued)
</TABLE>
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<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------
(Unaudited)
Nine Months Ended
September 30,
-----------------------------
1998 1997
------------- -------------
FINANCING ACTIVITIES:
<S> <C> <C>
Contract withdrawals, net of deposits $ (366,309) $ (440,199)
Net Parent Corporation borrowings (repayments) 41,136 (16,872)
Dividends paid (59,404) (54,040)
Net commercial paper borrowings (repayments) 45,648 (10,165)
Net repurchase agreements borrowings (repayments) (225,435) 155,297
Capital contributions 3,200
Redemption of preferred shares (121,800)
------------- -------------
Net cash used in financing activities (682,964) (365,979)
------------- -------------
NET DECREASE IN CASH 22,984 (23,972)
CASH, BEGINNING OF YEAR 126,278 125,182
------------- -------------
CASH, END OF PERIOD $ 149,262 $ 101,210
============= =============
See notes to consolidated financial statements. (Concluded)
</TABLE>
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<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands)
- --------------------------------------------------------------------------------
(Unaudited)
1. GENERAL
The consolidated financial statements and related notes of Great-West
Life & Annuity Insurance Company (the Company) have been prepared in
accordance with generally accepted accounting principles applicable to
interim financial reporting and do not include all of the information
and footnotes required for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. These
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended
December 31, 1997. The results of operations for the interim periods are
not necessarily indicative of the results that may be expected for the
year ended December 31, 1998.
Effective September 30, 1998, the Company repurchased all of its
outstanding preferred stock held by The Great-West Life Assurance
Company (the Parent Corporation) for $121.8 million.
Certain reclassifications have been made to the 1997 financial
statements to conform with the basis of presentation in 1998.
2. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income".
This Statement establishes new rules for reporting and display of
comprehensive income and its components; however, the adoption of this
Statement had no impact on the Company's net income or shareholder's
equity. This Statement requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were
reported separately in shareholder's equity, to be included in other
comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130. During the
three and nine months ended September 30, 1998 and 1997, total other
comprehensive income amounted to $44,933 and $51,025 for 1998 and
$29,334 and $33,250 for 1997, respectively.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting
for Derivative Instruments and for Hedging Activities". This Statement
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. This Statement
requires that all derivative financial instruments be recorded on the
balance sheet at fair value. If the derivative is not designated as a
hedging instrument, changes in fair value are to be recognized in
earnings in the period of change. If certain conditions are met, a
derivative may be designated as a hedge, in which case the accounting
for a change in fair value will depend on the specific exposure being
hedged. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999, and earlier adoption is encouraged.
The Company has not adopted this Statement as of September 30, 1998.
Management estimates the effect of the change will not have a material
affect on the Company's financial statements.
- 8 -
<PAGE>
3. RELATED PARTY TRANSACTIONS
On September 30, 1998, the Company and the Parent Corporation entered
into an Indemnity Reinsurance Agreement pursuant to which the Company
will reinsure by coinsurance certain Parent Corporation individual
non-participating life insurance policies. The Company recorded, at
estimated fair value, the following at September 30, 1998 as a result of
this transaction:
<TABLE>
Assets Liabilities and Stockholder's Equity
--------------------------------------------- -----------------------------------------
<S> <C> <C>
Bonds $ 147,475 Policy reserves $ 437,022
Mortgages 82,637 Due to Parent Corporation 17,620
Cash 134,900 Stockholder's equity 3,200
Deferred policy acquisition 18,595
costs
Deferred income taxes 15,762
Policy loans 56,209
Other 2,264
--------------
=============
$ 457,842 $ 457,842
============== =============
</TABLE>
4. OTHER
On July 8, 1998, the Company acquired all of the outstanding shares of
Anthem Health & Life Insurance Company (AH&L) of Piscataway, NJ. The
purchase price of $87.8 million was based on AH&L's adjusted book value,
and is subject to further minor adjustments. This acquisition was
recorded using the purchase method of accounting and accordingly, the
results of operations have been included in the Company's consolidated
financial statements from July 8, 1998. The Company is in the process of
allocating the purchase price to the fair value of assets acquired and
liabilities assumed.
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.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
<TABLE>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
----------------------------- -----------------------------
Operating Summary (Millions) 1998 1997 1998 1997
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Premiums and fee income $ 495 $ 298 $ 1,090 $ 1,016
Net investment income 222 223 670 654
Realized investment gains 14 5 33 (2)
(losses)
-------------- ------------- ------------- --------------
Total revenues 731 526 1,793 1,668
Total benefits and expenses 656 467 1,583 1,476
Income tax expense 26 20 71 75
============== ============= ============= ==============
Net income $ 49 $ 39 $ 139 $ 117
============== ============= ============= ==============
September December 31,
30,
Balance Sheet (Millions) 1998 1997
------------- --------------
Investment assets $ 13,482 $ 13,206
Separate account assets 8,549 7,847
Total assets 23,198 22,078
Total policyholder liabilities 12,531 11,791
Long-term debt - due to
Parent Corporation 117 118
Total shareholder's equity 1,198 1,186
</TABLE>
Introduction
The following discussion addresses the financial condition of the
Company as of September 30, 1998, compared with December 31, 1997, and
its results of operations for the quarter and nine months ended
September 30, 1998, 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, 1997 to which the reader is
directed for additional information.
First Nine Months 1998 v. First Nine Months 1997
Net income increased 19% from $117 million in the first nine months of
1997 to $139 million in the first nine months of 1998. Net income for
the third quarter of 1998 increased 25% from the same time period in
1997. During the second quarter of 1997, the Company's results of
operations included a release of $48 million from the tax contingency
liability to reflect the resolution of certain tax matters with the IRS
related to the 1990 and 1991 audit years. The $48 million liability
release in 1997 included $15 million which was attributable to the
participating policyholders and is reflected as a liability on the
balance sheet, thus, only $33 million of the release directly impacts
net income. In addition to the contingent liability release, the Company
also in the normal course of business reviewed its deferred tax assets
and liabilities and increased its liability by $21 million (of which $10
million is attributable to participating policyholders), which resulted
in an $11 million impact to net income during the first nine months of
1997. The net impact of these transactions is an increase in net income
of $22 million in the first nine months of 1997. Excluding the effect of
these transactions, the growth in net income for the third quarter and
first nine months of 1998 is 25% and 46%, respectively, which reflects
realized capital gains on investments (versus losses in 1997), higher
fee income from assets under management, higher margins on investment
products, and better mortality.
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<PAGE>
The premium and fee income increase of $197 million or 66% during the
third quarter of 1998 includes $123 million in premiums generated by
AH&L subsequent to its acquisition on July 8, 1998, and higher fee
income from assets under management. The year to date premium and fee
income increased only 7% over the corresponding period of 1997 due to a
significant 1997 reinsurance transaction which resulted in $156 million
of premium income and benefit expense, and the release of a $48 million
contingent liability, through premium income, both of which are more
fully described in the 1997 10-K.
Net investment income decreased 1% for the third quarter of 1998, and
increased 2% for the first nine months of 1998. The growth in net
investment income for the nine month period is a result of improved
performance on the mortgage portfolio. The actual earned rate for the
first nine months of 1998 was 7.14% versus 7.15% for the first nine
months of 1997 as the increased investment income partially offset the
impact of declining interest rates.
Realized investment gains (losses) changed from a net realized loss of
$2 million in the first nine months of 1997 to a net realized gain of
$33 million in 1998. The decrease in interest rates in 1998 and the
second half of 1997 resulted in realized gains totaling $33 million
and $4 million, respectively, on the sale of fixed maturities for the
first nine months of 1998 and 1997. Provisions for asset losses were
$.6 million in 1998 versus $6 million in 1997.
Total benefits and expenses increased 40% and 7% for the third quarter
and the first nine months of 1998. Operating expenses increased 28% and
18% for the third quarter and the first nine months of 1998 from the
first nine months of 1997, respectively, as a result of the expenses
associated with AH&L, costs associated with systems development,
development of health maintenance organizations (HMOs) and the growth in
pension plan administrative services provided by a subsidiary.
The effective income tax rate in the first nine months of 1998 was lower
than the rate for the first nine months of 1997 due to the recognition
of net operating loss carryforwards of subsidiaries in 1998 and the tax
reserves strengthening in 1997.
Investment assets increased $276 million to $13.5 billion from December
31, 1997 to September 30, 1998 reflecting the reinsurance transactions
previously discussed in the Notes to the Consolidated Financial
Statements. At the same time, separate account assets increased $702
million, bringing the total to $8.5 billion. This reflects the continued
trend of contractholders moving away from the more traditional
guaranteed products to variable options.
Effective September 30, 1998, the Company repurchased all of its
outstanding preferred stock held by the Parent Corporation for $121.8
million.
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<PAGE>
Major Business Units Results
Employee Benefits
First Nine Months 1998 v. First Nine Months 1997
Total premium and fee income for group life and health increased 31% to
$781 million for the first nine months of 1998 from 1997 levels, which
is primarily related to AH&L (21%). Total premium equivalents increased
20% to $1,784 million for the first nine months of 1998 from 1997
levels. Case sales in the Company's group life and health business
increased 11% for the first nine months of 1998 over the same period in
1997, resulting in a net case growth of 312 cases.
Of the total 401(k) cash flow received during the first nine months of
1998, 92% was allocated to variable funds. Total assets under
administration (including third-party administration) grew from $5.4
billion at December 31, 1997 to $5.7 billion at September 30, 1998. The
number of contributing participants increased from 430,000 at December
31, 1997 to more than 481,000 at September 30, 1998.
Financial Services
Savings
First Nine Months 1998 v. First Nine Months 1997
Assets under administration in the public non-profit (P/NP) business,
including Separate Accounts but excluding Guaranteed Investment
Contracts (GICS), increased .5% during the first nine months of 1998 to
$7.2 billion. New contributions to variable business represented 59% of
the total deposits received in the first nine months of 1998 compared to
65% for the nine months of 1997. The higher percentage in 1997 was due
to a large rollover in one particular case.
Life Insurance
First Nine Months 1998 v. First Nine Months 1997
Excluding the effect of the insurance recapture, individual life
insurance premiums increased 15% in the first nine months of 1998 to
$187 million. Deposits for investment-type contracts increased 81% in
the first nine months of 1998 to $850 million, which is primarily due to
sales of the Company's Bank-Owned Life Insurance (BOLI) product ($385
million in 1998 versus $64 million in 1997).
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 and maintaining a competitive rate of return.
Formal liquidity and credit quality parameters have also been
established. The fixed maturities in the Company's portfolio are
generally rated by external rating agencies and if not externally rated,
are rated by the Company on a basis believed to be similar to that used
by rating agencies.
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<PAGE>
The Company follows rigorous procedures to control interest rate risk
and observes strict asset and liability matching guidelines. These
guidelines are designed to ensure that even in changing interest rate
environments, the Company's assets will always be able to meet the cash
flow and income requirements of its liabilities. Through dynamic
modeling, using state-of-the-art software to analyze the effects of a
wide range of possible market changes upon investments and policyholder
benefits, the Company seeks to ensure that its investment portfolio is
appropriately structured to fulfill financial obligations to its
policyholders.
Fixed Maturities
Fixed maturity investments include publicly traded bonds, privately
placed bonds and public and private structured assets. This latter
category contains both asset-backed and mortgage-backed securities,
including 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.
The distribution of the fixed maturity portfolio by credit rating is
summarized as follows:
<TABLE>
September 30, December 31,
1998 1997
------------------ ------------------
<S> <C> <C>
AAA 45.5% 45.7%
AA 9.2% 8.8%
A 24.5% 23.8%
BBB 20.2% 20.7%
BB and Below (non-investment grade) .6% 1.0%
------------------ ------------------
100.0% 100.0%
</TABLE>
During the first nine months of 1998, net unrealized gains (losses) on
fixed maturities included in stockholders' equity, which is net of
policyholder-related amounts and deferred income taxes, increased
surplus by $51 million resulting in accumulated other comprehensive
income of $104 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. The Company currently does not have any material commitments
for capital expenditures
- 13 -
<PAGE>
Generally, the Company has met its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and through
utilization of overall 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 $412 million and $526
million as of September 30, 1998 and December 31, 1997, 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. 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 continues to conduct strategic and financial
reviews of its businesses to deploy its capital resources most
efficiently. The Company's outstanding commercial paper totaled $100
million and $54 million at September 30, 1998 and December 31, 1997,
respectively. The Company's 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.
The Company 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. The Company 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 March 31, 1999 and full Y2K compliance for all
Company systems by October 31, 1999.
The Company'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.
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<PAGE>
As of September 30, 1998, the Company had completed impact analysis
(phase 1) and solution planning (phase 2) for all of core systems
and was more than 95% complete for phase 1 and 2 with respect to its
systems as a whole. In addition, the Company was approximately 71%
complete with respect to conversion and renovation (phase 3), 55%
complete with respect to testing (phase 4), and 40% complete with
respect to implementation (phase 5).
In addition to ensuring that the Company's own systems are Y2K
compliant, the Company has identified third parties with which the
Company has significant business relationships in order to assess the
potential impact on the Company of the third parties' Y2K issues and
plans. The Company expects to complete this process during the first
quarter of 1999 and will conduct system testing with third parties
throughout 1999. The Company does not have control over these third
parties and cannot make any representations as to what extent 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
the Company, including anticipated future expenses, related to the Y2K
issue has not and is not expected to be material to the Company's
financial condition or results of operations. The Company has spent
approximately $7.5 million on its Y2K project through the end of
September 1998 and expects to spend up to approximately $15.3 million
on its Y2K project by the end of 2000. All of these funds will come
from the Company's cash flow from operations.The Company has continued
other scheduled non-Y2K information systems changes and upgrades.
Although work on Y2K issues may have resulted in minor delays on
the other projects, the delays are not expected to have a material
adverse effect on the Company's consolidated financial condition
or results of operations.
The most reasonably likely worst case Y2K scenario is that the Company
will experience isolated internal or third party computer failures and
will be temporarily unable to process insurance and annuity benefit
transactions. All of the Company's Y2K efforts have been designed to
prevent such an occurrence. However, if the Company identifies internal
or third party Y2K issues which cannot be timely corrected, there can be
no assurance that the Company can avoid Y2K problems or that the cost of
curing the problem will not be material.
In an effort to mitigate risks associated with Y2K failures, the Company
is in the process of developing contingency plans to address its core
functions, including relations with third parties. It is the Company'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.
- 15 -
<PAGE>
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 15
Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on July 23, 1998, disclosing
the completion of the Company's purchase of all of the
outstanding shares of Anthem Health & Life Insurance
Company of Piscataway, New Jersey.
- 16 -
<PAGE>
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.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
DATE: BY:
/s/
November 13, 1998
- ------------------------------- --------------------------------------
Glen R. Derback, Vice President &
Controller
(Duly authorized officer and chief
accounting officer)
- 17 -
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Exhibit 27 Financial Data Schedule
Great-West Life & Annuity Insurance Company as of and for the period ended
September 30, 1998 (000s)
- --------------------------------------------------------------------------------
</LEGEND>
<CIK> 0000744455
<NAME> Great-West Life & Annuity Insurance Company
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