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 June 30, 1998
ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaction period to
from
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 (I.R.S. Employer Identification
incorporation 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 June 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.
NOTE: This Form 10-Q is filed by the registrant only as a consequence of
the sale by the registrant of a market value adjusted annuity product.
<PAGE>
TABLE OF CONTENTS
Page
---------
Part I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Part II OTHER INFORMATION
Item 1 Legal Proceeding 13
Item 6 Exhibits and Reports on Form 8-K 13
Signatures 14
- 2 -
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
- -------------------------------------------------------------------------------
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
REVENUES:
Premium and fee income 290,139 $ 452,434 $ 595,577 $ 718,749
Net investment income 223,891 215,627 447,425 430,395
Net realized gains (losses) 5,342 (2,216) 19,315 (7,160)
on investments
---------- ---------- ---------- ----------
519,372 665,845 1,062,317 1,141,984
---------- ---------- ---------- ----------
BENEFITS AND EXPENSES:
Life and other policy benefits 139,547 128,022 292,468 251,842
Increase in reserves 20,790 167,545 48,163 183,374
Interest paid or credited to 122,207 131,731 246,995 270,596
contractholders
Provision for policyholders'
share of
Earnings on participating 1,390 3,657 3,359 4,514
business
Dividends to policyholders 14,305 14,552 34,125 34,013
---------- ---------- ---------- ----------
298,239 445,507 625,110 744,339
Commissions 29,354 24,453 56,836 50,031
Operating expenses 116,197 108,225 231,823 205,329
Premium taxes 7,645 5,506 13,184 9,297
---------- ---------- ---------- ----------
451,435 583,691 926,953 1,008,996
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 67,937 82,154 135,364 132,988
PROVISION FOR INCOME TAXES:
Current 29,349 18,736 41,289 32,105
Deferred (5,606) 17,314 3,746 22,932
---------- ---------- ---------- ----------
23,743 36,050 45,035 55,037
---------- ---------- ---------- ----------
NET INCOME 44,194 $ 46,104 $ 90,329 $ 77,951
========== ========== ========== ==========
See notes to consolidated financial statements.
-3-
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
- -------------------------------------------------------------------------------
June 30, December
31,
ASSETS 1998 1997
- ------
------------ ------------
(Unaudited)
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost $ 2,068,487 $ 2,082,716
(fair value $2,146,865 and $2,151,476)
Available-for-sale, at fair value 6,665,040 6,698,629
(amortized cost $6,482,598 and $6,541,422)
Mortgage loans on real estate, net 1,135,750 1,235,594
Common stock 42,401 39,021
Real estate, net 72,700 93,775
Policy loans 2,784,178 2,657,116
Short-term investments, available-for-sale
(cost approximates fair value) 368,698 399,131
------------ ------------
Total Investments 13,137,254 13,205,982
Cash 89,507 126,278
Reinsurance receivable 104,425 84,364
Deferred policy acquisition costs 238,390 255,442
Investment income due and accrued 160,808 165,827
Other assets 156,695 121,543
Premiums in course of collection 76,696 77,008
Deferred income taxes 179,420 193,820
Separate account assets 9,087,909 7,847,451
------------ ------------
TOTAL ASSETS $ 23,231,104 $ 22,077,715
============ ============
See notes to consolidated financial statements. (Continued)
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<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
- -------------------------------------------------------------------------------
June 30, December
31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1998 1997
- ------------------------------------
------------ ------------
(Unaudited)
POLICY BENEFIT LIABILITIES:
Policy reserves $ 11,150,948 $ 11,102,719
Policy and contract claims 378,084 375,499
Policyholders' funds 184,887 165,106
Experience refunds 67,228 84,935
Provision for policyholders' dividends 64,007 62,937
GENERAL LIABILITIES:
Due to Parent Corporation 123,663 126,656
Repurchase agreements 189,245 325,538
Commercial paper 59,654 54,058
Other liabilities 534,699 605,032
Undistributed earnings on
participating business 145,215 141,865
Separate account liabilities 9,087,909 7,847,451
------------ ------------
Total Liabilities 21,985,539 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,
600 shares issued and outstanding 60,000 60,000
Series B, cumulative, 1,500 shares
authorized,
liquidation value of $100,000 per
share,
200 shares issued and outstanding 20,000 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 41,800 41,800
value of $20.90
per share, 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 690,748 690,748
Accumulated other comprehensive income 58,899 52,807
Retained earnings 367,086 313,532
------------ ------------
Total Stockholder's Equity 1,245,565 1,185,919
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 23,231,104 $ 22,077,715
============ ============
See notes to consolidated financial statements.
- 5 -
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
- -------------------------------------------------------------------------------
(Unaudited)
Six Months Ended
June 30,
------------------------
1998 1997
----------- -----------
OPERATING ACTIVITIES:
Net income $ 90,329 $ 77,951
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain allocated to participating 3,359 7,268
policyholders
Amortization of investments (3,001) 3,408
Realized losses (gains) on disposal of
investments
and write-downs of mortgage loans and (19,315) 7,160
real estate
Amortization 28,717 23,995
Deferred income taxes 11,125 25,810
Changes in assets and liabilities:
Policy benefit liabilities 172,304 265,372
Reinsurance receivable (20,061) 115,346
Accrued interest and other receivables 5,331 31,057
Other, net (123,642) (188,507)
----------- -----------
Net cash provided by operating 145,146 368,860
activities
----------- -----------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to-maturity
Maturities and redemptions 214,104 197,412
Available-for-sale
Sales 4,197,431 1,181,648
Maturities and redemptions 584,264 395,902
Mortgage loans 117,099 100,311
Real estate 16,456 11,366
Common stock 1,983 2,365
Purchases of investments:
Fixed maturities
Held-to-maturity (193,416) (257,448)
Available-for-sale (4,674,954) (1,721,380)
Mortgage loans (11,100) (1,033)
Real estate (2,323) (2,675)
Common stock (3,126) (27,688)
----------- -----------
Net cash provided by (used in) 246,418 (121,220)
investing activities
----------- -----------
(Continued)
- 6 -
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
- -------------------------------------------------------------------------------
(Unaudited)
Six Months Ended
June 30,
------------------------
1998 1997
---------- -----------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (257,870) $ (343,184)
Net Parent Corporation borrowings (repayments) (2,993) (1,303)
Dividends paid (36,775) (34,669)
Net commercial paper borrowings (repayments) 5,596 (5,268)
Net repurchase agreements borrowings (repayments) (136,293) 103,335
Capital contributions 26,483
---------- -----------
Net cash used in financing activities (428,335) (254,606)
---------- -----------
NET DECREASE IN CASH (36,771) (6,966)
CASH, BEGINNING OF YEAR 126,278 125,182
---------- -----------
CASH, END OF PERIOD $ 89,507 $ 118,216
========== ===========
See notes to consolidated financial statements. (Concluded)
- 7 -
<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.
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 shareholders'
equity. This Statement requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were
reported separately in shareholders' equity, to be included in other
comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
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 June 30, 1998. Management estimates the effect of the
change will not have a material affect on the Company's financial
statements.
During the three and six months ended June 30, 1998 and 1997, total other
comprehensive income amounted to $4,283 and $6,092 for 1998 and $29,712
and $3,917 for 1997, respectively.
3. OTHER
The Company is involved in various legal proceedings which 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.
- 8 -
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three Months Ended Six Months Ended June
June 30, 30,
------------------------ ------------------------
Operating Summary 1998 1997 1998 1997
(Millions)
----------- ------------ ----------- -----------
Premiums and fee income $ 290 $ 452 $ 596 $ 719
Net investment income 224 216 447 430
Realized investment 5 (2) 19 (7)
gains (losses)
----------- ------------ ----------- -----------
Total revenues 519 666 1,062 1,142
Total benefits and 451 584 927 1,009
expenses
Income tax expense 24 36 45 55
=========== ============ =========== ===========
Net income $ 44 $ 46 $ 90 $ 78
=========== ============ =========== ===========
June 30, December
31,
Balance Sheet (Millions) 1998 1997
----------- ------------
Investment assets $ 13,137 $ 13,206
Separate account assets 9,088 7,847
Total assets 23,231 22,078
Total policyholder 11,845 11,791
liabilities
Total shareholder's 1,246 1,186
equity
Introduction
The following discussion addresses the financial condition of the Company
as of June 30, 1998, compared with December 31, 1997, and its results of
operations for the quarter and six months ended June 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.
Comparison of Six Months Ended June 30, 1998 and 1997
On June 30, 1997, the Company recaptured from The Great-West Life
Assurance Company (the "Parent Corporation") an individual participating
insurance block of business previously ceded in December 1992. The Company
recorded various assets and liabilities related to the recapture as
discussed in Footnote 2 to the Company's December 31, 1997 financial
statements. In addition, in the process of recording the recapture both
life insurance premiums and increases in reserves were increased by the
amount of the policy reserves recaptured ($156 million).
Pursuant to a December 1993 agreement between the Company and the Parent
Corporation whereby the Company assumed responsibility for the Parent
Corporation's income tax liability for the fiscal years prior to 1994, the
Company had previously recorded a contingent liability provision. During
the second quarter of 1997, the Company's results of operations included a
release of $48 million from the provision to reflect the resolution of
certain tax matters with the Internal Revenue Service related to the 1990
and 1991 audit years. Audits of tax years 1992 and 1993 are currently in
process. In the opinion of Company management, the amounts paid or accrued
are adequate, however, it is possible that the Company's accrued amounts
may change as a result of the completion of the IRS audits.
- 9 -
<PAGE>
Net income increased 16% from $78 million in 1997 to $90 million in 1998.
Net income for the second quarter of 1998 decreased 4% from the same time
period in 1997. The fluctuation in the in-quarter amount relates to
several non-recurring transactions discussed above. 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
a $11 million impact to net income during the second quarter of 1997. The
net impact of these transactions is an increase in income of $22 million
in the second quarter of 1997. Excluding the affect of these transactions,
the growth in net income for the second quarter and six months of 1998 is
81% and 60% 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.
Premiums and other income decreased 36% and 17% for the second quarter and
six months of 1998, respectively. These decreases also reflect the
insurance recapture and the contingent tax provision release discussed in
the preceding two paragraphs. Excluding these items from 1997, the
increase would have been 17% and 16% for the second quarter and six months
of 1998 which primarily reflects higher fee income from assets under
management and group health premiums where case sales for the six months
ended June 30, 1998 are 797 versus 656 for the same period in 1997.
Net investment income increased 4% during both the second quarter and six
months of 1998. This growth in net investment income is a result of
improved performance on the mortgage portfolio. The actual earned rate for
the second quarter of 1998 was 7.21% versus 7.07% for the second quarter
of 1997.
Realized investment gains (losses) changed from a net realized capital
loss of $7 million in 1997 to a net realized capital gain of $19 million
in 1998. The decrease in interest rates in the second quarter of 1998
resulted in realized gains totaling $20 million on the sale of fixed
maturities, while higher interest rates in the second quarter of 1997
contributed to $4 million of fixed maturity losses. Provisions for asset
losses were $1 million in 1998 versus $4 million in 1997.
Total benefits and expenses decreased 23% and 8% for the second quarter
and six months of 1998. Excluding the insurance recapture discussed
previously, the growth for these periods is 6% and 9% respectively.
Operating expenses increased 7% and 13% for the second quarter and six
months of 1998 as a result of costs associated with systems development,
development of health maintenance organizations (HMOs), and the
internalization of managed care.
The effective income tax rate in 1998 is lower than 1997 due to the
recognition of net operating loss carryforwards of subsidiaries in 1998
and the tax strengthening in 1997 previously discussed.
Investment assets decreased $68 million to $13.1 billion from December 31,
1997 to June 30, 1998. At the same time separate account assets increased
$1.3 billion bringing the total to $9.1 billion. This reflects the
continued trend of contractholders moving away from the more traditional
guaranteed products to variable options.
Business Units Results from Operations
The following discussion of results from operations is presented in terms
of the major business units of the company:
- 10 -
<PAGE>
Employee Benefits
Total revenue premium (including premium equivalents) for group life and
health increased 13% from 1997 levels. As discussed above, case sales in
the Company's group life and health business increased 22% over the same
period in 1997 resulting in a net case growth of 232 cases.
Of the total 401(k) cash flow received during 1998, 94% was allocated to
variable funds. Total assets under administration (including third-party
administration) grew from $5.4 billion at December 31, 1997 to $6.1
billion at June 30, 1998. The number of participants contributing
increased from 430,000 at December 31, 1997 to more than 458,000 at June
30, 1998.
Financial Services
Savings
Assets under administration in the public non-profit (P/NP) business,
including separate accounts, increased 2% during 1998 to $7.8 billion. New
contributions to variable business represented 58% of the total deposits
received in 1998 compared to 70% for the six months of 1997. The higher
percentage in 1997 was due to a large rollover on one particular case.
Insurance
Excluding the effect of the insurance recapture, individual life insurance
premiums and deposits of $424 million in 1998 increased 77% from 1997
which is primarily due to sales of the Company's Bank-Owned Life Insurance
(BOLI) product ($229 million in 1998 versus $64 million in 1997).
General Account Investments
The Company's investment strategies and portfolios are intended to match
the duration of the related liabilities and provide sufficient cash flow
to meet obligations while maintaining a competitive rate of return. The
duration of these investments is monitored, and investment purchases and
sales are executed with the objective of having adequate funds available
to satisfy the Company's maturing liabilities.
It is management's philosophy that the portfolio of fixed maturities be of
high quality. 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.
The distribution of the fixed maturity portfolio by credit rating is
summarized as follows:
June 30, December 31,
1998 1997
---------------- ----------------
AAA 44.8% 45.7%
AA 9.4% 8.8%
A 24.3% 23.8%
BBB 21.0% 20.7%
BB and Below (non-investment .5% 1.0%
grade)
---------------- ----------------
100.0% 100.0%
- 11 -
<PAGE>
During the first six 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 $6 million resulting in accumulated other comprehensive income of $59
million.
Liquidity and Capital Resources
Liquidity for the Company has remained strong as evidenced by significant
amounts of short-term investments and cash in the aggregate. 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.
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 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.
- 12 -
<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 Title Page
Number
------------- ------------------ ------------
27 Financial Data 15
Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the second
quarter of 1998.
- 13 -
<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/
--------------------------- -------------------------------------
Glen R. Derback, Vice President &
Controller
(Duly authorized officer & chief
accounting officer)
- 14 -
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Exhibit 27 Financial Data Schedule
Great-West Life & Annuity Insurance Company as of and for the period ended June
30, 1998 (000s)
- --------------------------------------------------------------------------------
</LEGEND>
<CIK> 0000744455
<NAME> Great-West Life & Annuity Insurance Company
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 6665040
<DEBT-CARRYING-VALUE> 2068487
<DEBT-MARKET-VALUE> 2146865
<EQUITIES> 42401
<MORTGAGE> 1135750
<REAL-ESTATE> 0
<TOTAL-INVEST> 13137254
<CASH> 89507
<RECOVER-REINSURE> 104425
<DEFERRED-ACQUISITION> 238390
<TOTAL-ASSETS> 23231104
<POLICY-LOSSES> 11529032
<UNEARNED-PREMIUMS> 0
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<POLICY-HOLDER-FUNDS> 461337
<NOTES-PAYABLE> 59654
0
121800
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595577
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</TABLE>
