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 March 31, 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
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
=================================================================
(Exact name of registrant as specified in its charter)
Colorado 84-0467907
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
8515 East Orchard Road, Englewood, CO 80111
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(Address of principal executive offices)
(Zip Code)
[303] 689-4128
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(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 March 31, 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
<TABLE>
Page
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Part I FINANCIAL INFORMATION
Item 1 Financial Statements
<S> <C>
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
</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
March 31,
-----------------------------
1998 1997
------------- -------------
REVENUES:
<S> <C> <C>
Premium and fee income $ 305,438 $ 266,315
Net investment income 223,534 214,767
Net realized gains (losses) on investments 13,973 (4,943)
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542,945 476,139
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BENEFITS AND EXPENSES:
Life and other policy benefits 152,921 123,821
Increase in reserves 27,373 15,829
Interest paid or credited to contractholders 124,788 138,865
Provision for policyholders' share of earnings
on participating business 1,969 857
Dividends to policyholders 19,820 19,460
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326,871 298,832
Commissions 27,482 25,577
Operating expenses 115,626 97,105
Premium taxes 5,539 3,791
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475,518 425,303
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INCOME BEFORE INCOME TAXES 67,427 50,836
PROVISION FOR INCOME TAXES:
Current 11,940 13,369
Deferred 9,352 5,618
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21,292 18,987
------------- -------------
NET INCOME $ 46,135 $ 31,849
============= =============
</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)
- -----------------------------------------------------------------------------------------------
March 31, December 31,
ASSETS 1998 1997
- ------
--------------- --------------
(Unaudited)
INVESTMENTS:
Fixed Maturities:
<S> <C> <C>
Held-to-maturity, at amortized cost $ 2,059,105 $ 2,082,716
(fair value $2,118,505 and $2,151,476)
Available-for-sale, at fair value 6,752,529 6,698,629
(amortized cost $6,601,636 and $6,541,422)
Mortgage loans on real estate, net 1,189,642 1,235,594
Common stock 42,137 39,021
Real estate, net 83,348 93,775
Policy loans 2,673,130 2,657,116
Short-term investments, available-for-sale
(cost approximates fair value) 280,074 399,131
--------------- --------------
Total Investments 13,079,965 13,205,982
Cash 105,325 126,278
Reinsurance receivable 94,441 84,364
Deferred policy acquisition costs 250,190 255,442
Investment income due and accrued 171,718 165,827
Other assets 131,601 121,543
Premiums in course of collection 72,874 77,008
Deferred income taxes 179,492 193,820
Separate account assets 8,627,253 7,847,451
--------------- --------------
TOTAL ASSETS $ 22,712,859 $ 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)
- -----------------------------------------------------------------------------------------------
March 31, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1998 1997
- ------------------------------------
--------------- --------------
(Unaudited)
POLICY BENEFIT LIABILITIES:
<S> <C> <C>
Policy reserves $ 11,037,553 $ 11,102,719
Policy and contract claims 384,325 375,499
Policyholders' funds 179,232 165,106
Experience refunds 58,587 84,935
Provision for policyholders' dividends 63,485 62,937
GENERAL LIABILITIES:
Due to Parent Corporation 136,481 126,656
Repurchase agreements 187,294 325,538
Commercial paper 63,900 54,058
Other liabilities 620,896 605,032
Undistributed earnings on
participating business 143,522 141,865
Separate account liabilities 8,627,253 7,847,451
--------------- --------------
Total Liabilities 21,502,528 20,891,796
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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 value of 41,800 41,800
$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 48,524 52,807
Retained earnings 342,227 313,532
--------------- --------------
Total Stockholder's Equity 1,210,331 1,185,919
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 22,712,859 $ 22,077,715
=============== ==============
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
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(Unaudited)
Three Months Ended
March 31,
-----------------------------
1998 1997
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OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 46,135 $ 31,849
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain allocated to participating policyholders 1,969 4,466
Amortization of investments (1,415) 2,165
Realized losses (gains) on disposal of investments
and write-downs of mortgage loans and real estate (13,975) 4,943
Amortization 11,496 8,627
Deferred income taxes 16,803 5,869
Changes in assets and liabilities:
Policy benefit liabilities 121,920 156,118
Reinsurance receivable (10,077) (7,893)
Accrued interest and other receivables (1,757) 28,857
Other, net (1,099) (129,792)
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Net cash provided by operating activities 170,000 105,209
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INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to-maturity
Maturities and redemptions 85,666 82,772
Available-for-sale
Sales 3,163,353 649,743
Maturities and redemptions 261,015 209,557
Mortgage loans 48,878 50,485
Real estate 13,641 3,898
Common stock 1,409 842
Purchases of investments:
Fixed maturities
Held-to-maturity (58,626) (129,067)
Available-for-sale (3,353,522) (712,737)
Mortgage loans (5,322)
Real estate (1,480) (1,486)
Common stock (2,268) (26,961)
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Net cash provided by investing activities 152,744 127,046
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(Continued)
</TABLE>
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<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------
(Unaudited)
Three Months Ended
March 31,
-----------------------------
1998 1997
------------- -------------
FINANCING ACTIVITIES:
<S> <C> <C>
Contract withdrawals, net of deposits $ (207,680) $ (224,566)
Net Parent Corporation borrowings (repayments) 9,825 (25,277)
Dividends paid (17,440) (17,548)
Net commercial paper borrowings 9,842 4,637
Net repurchase agreements repayments (138,244) (1,602)
Capital contributions 15,483
------------- -------------
Net cash used in financing activities (343,697) (248,873)
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NET DECREASE IN CASH (20,953) (16,618)
CASH, BEGINNING OF YEAR 126,278 125,182
------------- -------------
CASH, END OF PERIOD $ 105,325 $ 108,564
============= =============
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 quarter ended 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.
During the first quarter of 1998 and 1997, total other comprehensive
loss amounted to $4,283 and $29,712, 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.
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<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
<TABLE>
Three Months Ended March 31,
-------------------------------
Operating Summary (Millions) 1998 1997
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<S> <C> <C>
Premiums and fee income $ 305 $ 266
Net investment income 224 215
Realized investment gains (losses) 14 (5)
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Total revenues 543 476
Total benefits and expenses 476 425
Income tax expense 21 19
============== =============
Net income $ 46 $ 32
============== =============
March 31, December 31,
Balance Sheet (Millions) 1998 1997
-------------- -------------
Investment assets $ 13,080 $ 13,206
Separate account assets 8,627 7,847
Total assets 22,713 22,078
Total policyholder liabilities 11,723 11,791
Total shareholder's equity 1,210 1,186
</TABLE>
Comparison of Three Months Ended March 31, 1998 and 1997
Net income increased 44% from $32 million in 1997 to $46 million in 1998
primarily due to higher realized gains on investments, higher fee income
from assets under management, and better mortality experience.
Premiums and other income increased 15% from $266 million in 1997 to
$305 million in 1998. The majority of the increase is related to group
health ($20 million) where case sales for the three months ended March
31, 1998, are 433 versus 376 for the same period in 1997.
Individual insurance premiums have also grown $16 million over the same
period in 1997 primarily due to current year activity associated with
the recapture in June 1997 of a block of business that was previously
reinsured to the Parent Corporation.
Net investment income increased from $215 million in 1997 to $224
million in 1998. This growth in net investment income is a result of
improved performance on the mortgage portfolio. The actual earned rate
for the first quarter of 1998 was 7.22% versus 7.03% for the first
quarter of 1997.
Realized investment gains (losses) changed from a net realized capital
loss of $5 million in 1997 to a net realized capital gain of $14 million
in 1997. The decrease in interest rates in the first quarter of 1998
resulted in realized gains totaling $14 million on the sale of fixed
maturities, while higher interest rates in the first quarter of 1997
contributed to $3 million of fixed maturity losses. Provisions for asset
losses were $0.4 million in 1998 versus $2.3 million in 1997.
- 9 -
<PAGE>
Total benefits and expenses increased 12% in 1998. Policyholder benefits
increased 9% due to the growth in group life and health business and the
increased activity on the individual insurance block of business due to
the recapture of previously reinsured business. Operating expenses
increased 19% 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.
Investment assets decreased $126 million to $13.1 billion from December
31, 1997 to March 31, 1998. At the same time separate account assets
increased $780 million bringing the total to $8.6 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:
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 15% over the same
period in 1997 and persistency improved.
The Company has continued to emphasize the development of its HMO
subsidiaries during the first three months of 1998. The Company now has
licensed HMOs in eleven states.
Of the total 401(k) cash flow received during the first quarter 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 $5.8 billion at March 31, 1998. The number of
participants contributing increased from 430,000 at December 31, 1997 to
more than 447,000 at March 31, 1998.
Financial Services
Savings
Assets under administration in the public non-profit (P/NP) business,
including separate accounts increased 2% during the first quarter of
1998 to $7.8 billion. New contributions to variable business represented
54% of the total deposits received in 1998 compared to 77% for the first
three months of 1997. The higher percentage in 1997 was due to one large
rollover case.
- 10 -
<PAGE>
Insurance
Individual life insurance premiums and deposits of $177 million in the
first quarter of 1998 increased significantly from 1997. Sales of the
Company's Bank-Owned Life Insurance (BOLI) product during the first
quarter of 1998 were $65 million versus $24 million in 1997. Renewal
premiums on Corporate-Owned Life Insurance (COLI) products were $56
million in 1998 versus $6 million in 1997. The renewal premiums in 1998
are attributable to one large policy. New sales of COLI products have
been discontinued due to legislation which phases out the tax
deductibility of interest on policy loans on COLI products. The Company
continues to work closely with existing customers to determine options
available to them. The Company does not expect the effect of these
legislative changes to be material to the Company's operations.
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:
<TABLE>
March 31, December 31,
1998 1997
------------------ ------------------
<S> <C> <C>
AAA 45.2% 45.7%
AA 9.3% 8.8%
A 23.9% 23.8%
BBB 20.6% 20.7%
BB and Below (non-investment grade) 1.0% 1.0%
------------------ ------------------
100.0% 100.0%
</TABLE>
During the first three 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, decreased
surplus by $4 million resulting in accumulated other comprehensive
income of $48 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.
- 11 -
<PAGE>
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.
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<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 first
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 and Controller
(Duly authorized officer and chief accounting
officer)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Exhibit 27 Financial Data Schedule
Great-West Life & Annuity Insurance Company as of and for the period ended
March 31, 1998
</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> JAN-1-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 6752529
<DEBT-CARRYING-VALUE> 2059105
<DEBT-MARKET-VALUE> 2118505
<EQUITIES> 42137
<MORTGAGE> 1189642
<REAL-ESTATE> 0
<TOTAL-INVEST> 13079965
<CASH> 105325
<RECOVER-REINSURE> 94441
<DEFERRED-ACQUISITION> 250190
<TOTAL-ASSETS> 22712859
<POLICY-LOSSES> 11421878
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 444826
<NOTES-PAYABLE> 63900
0
121800
<COMMON> 7032
<OTHER-SE> 1081499
<TOTAL-LIABILITY-AND-EQUITY> 22712859
305438
<INVESTMENT-INCOME> 223534
<INVESTMENT-GAINS> 13973
<OTHER-INCOME> 0
<BENEFITS> 326871
<UNDERWRITING-AMORTIZATION> 10540
<UNDERWRITING-OTHER> 138107
<INCOME-PRETAX> 67427
<INCOME-TAX> 21292
<INCOME-CONTINUING> 46135
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46135
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
