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, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaFction period from to
Comission file number 333-1173
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Colorado 84-0467907
(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 September 30, 1999, 7,032,000 shares of the registrant's common stock were
outstanding, all of which were owned by the registrant's parent company.
NOTE: The registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format. 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.
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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
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 Proceedings 20
Item 6 Exhibits and Reports on Form 8-K 20
Signatures 20
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
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(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
REVENUES:
Premiums $ 298,227 $ 349,042 $ 909,703 $ 699,929
Fee income 162,396 145,920 466,702 390,610
Net investment income 219,159 222,294 651,217 669,719
Net realized gains (losses)
on investments 3,796 13,512 (130) 32,827
------------ ------------ ------------ ------------
683,578 730,768 2,027,492 1,793,085
------------ ------------ ------------ ------------
BENEFITS AND EXPENSES:
Life and other policy benefits 272,030 244,721 784,459 537,189
Increase in reserves 15,811 71,989 38,160 120,152
Interest paid or credited to
contractholders 107,364 125,071 333,005 372,066
Provision for policyholders' share
of
earnings (losses) on participating
business (237) 1,953 2,408 5,312
------------ ------------ ------------ ------------
Dividends to policyholders 16,271 17,354 49,951 51,479
------------ ------------ ------------ ------------
411,239 461,088 1,207,983 1,086,198
------------ ------------ ------------ ------------
------------ ------------
Commissions 41,072 41,872 131,405 98,708
Operating expenses 148,367 141,448 442,542 373,271
Premium taxes 7,829 11,031 25,701 24,215
------------ ------------ ------------ ------------
608,507 655,439 1,807,631 1,582,392
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 75,071 75,329 219,861 210,693
PROVISION FOR INCOME TAXES:
Current 13,748 28,322 53,411 69,611
Deferred 9,046 (2,148) 19,064 1,598
------------ ------------ ------------ ------------
22,794 26,174 72,475 71,209
------------ ------------ ------------ ------------
NET INCOME $ 52,277 $ 49,155 $ 147,386 $ 139,484
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
ASSETS 1999 1998
- ------
-------------- --------------
(Unaudited)
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost
(fair value $2,312,845 and $2,298,936) $ 2,314,819 $ 2,199,818
Available-for-sale, at fair value
(amortized cost $6,979,776 and $6,752,532) 6,845,174 6,936,726
Mortgage loans on real estate, net 995,274 1,133,468
Common stock 52,024 48,640
Real estate, net 93,663 73,042
Policy loans 2,634,991 2,858,673
Short-term investments, available-for-sale
(cost approximates fair value) 186,584 420,169
-------------- --------------
Total Investments 13,122,529 13,670,536
Cash 112,649 176,119
Reinsurance receivable 195,575 192,958
Deferred policy acquisition costs 290,913 238,901
Investment income due and accrued 139,007 157,587
Other assets 378,284 311,078
Premiums in course of collection 130,457 84,940
Deferred income taxes 233,403 191,483
Separate account assets 10,760,763 10,099,543
-------------- --------------
TOTAL ASSETS $ 25,363,580 $ 25,123,145
============== ==============
</TABLE>
See notes to consolidated financial statements. (Continued)
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
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CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1999 1998
- ------------------------------------
-------------- --------------
(Unaudited)
POLICY BENEFIT LIABILITIES:
Policy reserves $ 11,611,617 $ 11,839,714
Policy and contract claims 469,158 491,932
Policyholders' funds 181,922 181,779
Provision for policyholders' dividends 69,760 69,530
GENERAL LIABILITIES:
Due to Parent Corporation 41,715 52,877
Surplus note - due to Parent Corporation 175,000
Repurchase agreements 80,749 244,258
Commercial paper 54,702 39,731
Other liabilities 606,999 761,505
Undistributed earnings on
participating business 131,206 143,717
Separate account liabilities 10,760,763 10,099,543
-------------- --------------
Total Liabilities 24,183,591 23,924,586
-------------- --------------
STOCKHOLDER'S EQUITY:
Preferred stock, $1 par value,
50,000,000 shares authorized:
Series A, cumulative, 1,500 shares authorized,
none outstanding
Series B, cumulative, 1,500 shares authorized,
none outstanding
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, none 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 699,556 699,556
Accumulated other comprehensive income (loss) (39,067) 61,560
Retained earnings 512,468 430,411
-------------- --------------
Total Stockholder's Equity 1,179,989 1,198,559
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 25,363,580 $ 25,123,145
============== ==============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
-------------------------------
1999 1998
-------------- ---------------
OPERATING ACTIVITIES:
Net income $ 147,386 $ 139,484
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain allocated to participating policyholders 2,404 5,312
Amortization of investments (13,798) (5,447)
Realized losses (gains) on disposal of investments
and write-downs of mortgage loans and real estate 130 (32,827)
Amortization 33,653 60,590
Deferred income taxes 19,064 (9,035)
Changes in assets and liabilities:
Policy benefit liabilities 537,562 771,818
Reinsurance receivable (2,617) 4,669
Accrued interest and other receivables (26,937) 25,742
Other, net (245,854) (353,675)
-------------- ---------------
Net cash provided by operating activities 450,993 606,631
-------------- ---------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to-maturity
Maturities and redemptions 413,320 385,071
Available-for-sale
Sales 2,640,214 5,137,042
Maturities and redemptions 610,044 990,923
Mortgage loans 142,473 168,777
Real estate 5,114 16,456
Common stock 12,598 3,183
Purchases of investments:
Fixed maturities
Held-to-maturity (515,776) (471,514)
Available-for-sale (3,233,049) (5,940,683)
Mortgage loans (2,311) (95,788)
Real estate (28,256) (3,075)
Common stock (15,400) (3,235)
-------------- ---------------
Net cash provided by investing activities 28,971 187,157
-------------- ---------------
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(Continued)
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
------------------------------
1999 1998
-------------- --------------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (493,405) $ (366,309)
Net Parent Corporation borrowings (repayments) 163,838 41,136
Dividends paid (65,329) (59,404)
Net commercial paper borrowings (repayments) 14,971 45,648
Net repurchase agreements borrowings (repayments) (163,509) (225,435)
-------------- --------------
Net cash used in financing activities (543,434) (564,364)
-------------- --------------
NET INCREASE (DECREASE) IN CASH (63,470) 229,424
CASH, BEGINNING OF YEAR 176,119 126,278
-------------- --------------
CASH, END OF PERIOD $ 112,649 $ 355,702
============== ==============
</TABLE>
See notes to consolidated financial statements. (Concluded)
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands)
(Unaudited)
1. BASIS OF PRESENTATION
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. However, in the opinion of management, these
statements include all normal recurring adjustments necessary for a fair
presentation of the results. These financial statements should be read in
conjunction with the audited consolidated financial statements and the
accompanying notes included in the Company's latest annual report on Form 10-K,
as amended, for the year ended December 31, 1998.
Operating results for the nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 1999.
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.
In March 1998, the Accounting Standards Executive Committee of the AIPCA issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". The SOP, which was adopted as of
January 1, 1999, requires the capitalization of certain costs incurred in
connection with developing or obtaining internal use software. Prior to the
adoption of SOP 98-1, the Company expensed all internal use software related
costs as incurred. During the nine months ended September 30, 1999, the Company
capitalized $8,068 in internal use software costs related to the adoption of SOP
98-1.
<PAGE>
3. OTHER
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.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
Operating Summary (Millions) 1999 1998 1999 1998
---------- ----------- ---------- ----------
Premiums $ 298 $ 349 $ 910 $ 700
Fee income 162 146 466 390
Net investment income 219 222 651 670
Realized investment gains
(losses) 4 13 0 33
---------- ----------- ---------- ----------
Total revenues 683 730 2,027 1,793
Total benefits and expenses 608 655 1,808 1,582
Income tax expense 23 26 72 71
========== =========== ========== ==========
Net income $ 52 $ 49 $ 147 $ 140
========== =========== ========== ==========
Deposits for investment-type
contracts $ 137 $ 616 $ 412 $ 1,071
Deposits to separate accounts 551 584 1,916 1,693
Self-funded premium
equivalents 746 658 2,252 1,784
September 30, December 31,
Balance Sheet (Millions) 1999 1998
---------------- ---------------
Investment assets $ 13,123 $ 13,671
Separate account assets 10,761 10,100
Total assets 25,364 25,123
Total policy benefit liabilities 12,332 12,583
Long-term debt - due to
Parent Corporation 32 35
Surplus note 175
Total shareholder's equity $ 1,180 $ 1,199
</TABLE>
GENERAL
The following discussion addresses the financial condition of the Company as of
September 30, 1999, compared with December 31, 1998, and its results of
operations for the three and nine months ended September 30, 1999, compared with
the same periods last year. The discussion should be read in conjunction with
the Management's Discussion and Analysis section included in the Company's
report on Form 10-K, as amended, for the year ended December 31, 1998, to which
the reader is directed for additional information.
<PAGE>
CONSOLIDATED RESULTS
The Company's consolidated net income increased $3 million or 6% and $7 million
or 5% for the third quarter and nine months of 1999 when compared to the third
quarter and nine months of 1998. The increases reflect an increase of $3 million
in the Financial Services segment for the third quarter of 1999. The Employee
Benefits segment's net income increased $7 million for the nine months of 1999,
which reflected improved morbidity gains being partially offset by net realized
investment losses.
Total revenues increased/(decreased) $(47) million or (6)% and $234 million or
13% for the third quarter and for the nine months of 1999 when compared to the
same periods of 1998. The increase/(decrease) in revenues for the third quarter
and nine months of 1999 was comprised of increased/(decreased) premium income of
$(51) million and $210 million, increased fee income of $16 million and $76
million, decreased net investment income of $3 million and $19 million and
decreased realized gains on investments of $9 million and $33 million.
The increased/(decreased) premium income in 1999 was comprised of growth in
Employee Benefits premium income of $8 million and $278 million for the third
quarter and nine months of 1999, offset by a decrease in Financial Services
premium income of $59 million and $68 million for the third quarter and nine
months of 1999. The growth in 1999 in Employee Benefits is related to its
acquisition of Anthem Health & Life Insurance Company ("AH&L") in July 1998. The
financial results of AH&L are included for the full nine months of 1999 versus
only the period from acquisition in 1998. The majority of the growth in Employee
Benefits in 1999 reflects increased premium income of $216 million derived from
AH&L. The decrease in Financial Services premium is related to lower sales of
Bank Owned Life Insurance ("BOLI").
The growth in fee income is also primarily in the Employee Benefits segment,
where the increase in fee income derived from the acquisition of AH&L was $7
million and $38 million during the third quarter and nine months of 1999. The
remaining increase was the result of new sales and increased fees on variable
funds related to growth in equity markets.
The decrease in net investment income was the result of a combination of
declining interest rates and a reduction in general account assets. The actual
earned rate at September 30, 1999 was 6.93% compared to 7.17% at September 30,
1998.
Realized gains on investments decreased $9 million and $33 million for the third
quarter and for the nine months of 1999 when compared to the same periods of
1998. The rise in interest rates in 1999 resulted in losses on sales of fixed
maturities totaling $8 million, while lower interest rates contributed to $33
million of fixed maturity gains in 1998. Increases (decreases) in the provision
for asset losses of $(6) million and $.6 million were recognized for the nine
months of 1999 and 1998, respectively.
<PAGE>
Benefits and expenses increased/(decreased) $(47) million or (7)% and $226
million or 14% for the third quarter and nine months of 1999 when compared to
the third quarter and nine months of 1998. The increased/(decreased) benefits
and expenses in 1999 were comprised of an increase in Employee Benefits benefits
and expenses of $17 million and $316 million for the third quarter and nine
months of 1999, offset by a decrease in Financial Services benefits and expenses
of $64 million and $90 million for the third quarter and nine months of 1999.
The increase in Employee Benefits primarily reflects benefits and expenses of
$255 million for the nine months of 1999 derived from the acquisition of AH&L in
July 1998. The decrease in Financial Services represents a decrease in the
change in policy reserves related to lower sales of BOLI.
Income tax expense increased/(decreased) $(3) million or (12)% and $1 million or
1% for the third quarter and nine months of 1999 when compared to the third
quarter and nine months of 1998. The decrease of the third quarter is
attributable to the tax deduction associated with the dividends received in the
Company's separate accounts. The increase for the nine months reflects higher
pre-tax earnings for the nine months of 1999 and the use of net operating loss
carryforwards related to the subsidiaries during 1998.
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 decreased $479 million or 78% and $659
million or 62% for the third quarter and nine months of 1999 when compared to
the third quarter and nine months of 1998. This decrease is primarily
attributable to the Financial Services segment, and is primarily due to an
indemnity reinsurance agreement with Great-West Life, whereby the Company
reinsured by coinsurance certain Great-West Life individual non-participating
life insurance policies during the third quarter of 1998. This transaction
increased deposits in 1998 by $410 million. The additional decrease is due
primarily to decreased deposits related to BOLI sales ($100 million and $240
million for the third quarter and nine months of 1999 when compared to the same
periods last year).
Deposits for separate accounts increased/(decreased) $(33) million or (6)% and
$223 million or 13% for the third quarter and nine months of 1999 when compared
to the third quarter and nine months of 1998. The increase for the nine months
of 1999 is due to a continuing movement toward variable funds and away from
fixed options. During the second quarter of 1999, the Company began distributing
a BOLI separate account product, resulting in $100 million in deposits during
the second quarter.
<PAGE>
Self-funded premium equivalents increased $88 million or 13% and $468 million or
26% for the third quarter and nine months of 1999 when compared to the third
quarter and nine months of 1998. The increase was due to the acquisition of AH&L
($115 million and $267 million for third quarter and nine months of 1999), with
the additional growth for the nine months of 1999 coming from growth in business
in the remainder of the Employee Benefits segment.
Total assets increased $241 million or 1% when compared to the year ended
December 31, 1998.
<PAGE>
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 Nine Months Ended
September 30, September 30,
------------------------ -----------------------
Operating Summary (Millions) 1999 1998 1999 1998
---------- ----------- ---------- ----------
Premiums $ 266 $ 258 $ 778 $ 500
Fee income 141 126 402 337
Net investment income 21 26 60 69
Realized investment gains
(losses) 3 (2) 6
---------- ----------- ---------- ----------
Total revenues 428 413 1,238 912
Total benefits and expenses 389 372 1,118 802
Income tax expense 12 14 39 36
========== =========== ========== ==========
Net income $ 27 $ 27 $ 81 $ 74
========== =========== ========== ==========
Deposits for investment-type
contracts $ $ 29 $ 18 $ 44
Deposits to separate accounts 395 401 1,320 1,190
Self-funded premium
equivalents 746 658 2,252 1,784
</TABLE>
Net income for Employee Benefits increased $7 million or 9% for the nine months
of 1999 when compared to the nine months of 1998. The increase was primarily due
to improved morbidity experience offset somewhat by net realized investment
losses.
401(k) premiums and deposits decreased 7% (from $449 million to $418 million)
and increased 9% (from $1,291 million to $1,407 million) for the third quarter
and nine months of 1999, as a result of higher recurring deposits from existing
customers. Assets under administration (including third-party administration) in
401(k) increased 8% over the nine months of 1998, primarily due to strong equity
markets. The number of contributing participants increased from 477,000 at
December 31, 1998 to 512,000 at September 30, 1999.
Equivalent premium revenue and fee income for group life and health increased
11% (from $1,022 million to $1,130 million) and 31% (from $2,565 million to
$3,364 million) from the third quarter and nine months of 1998, primarily due to
the acquisition of AH&L.
<PAGE>
Financial Services
The following is a summary of certain financial data of the Financial Services
segment:
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Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
Operating Summary (Millions) 1999 1998 1999 1998
---------- ----------- ---------- -----------
Premiums $ 32 $ 91 $ 132 $ 200
Fee income 21 20 64 53
Net investment income 198 196 591 601
Realized investment gains
(losses) 4 10 2 27
---------- ----------- ---------- -----------
Total revenues 255 317 789 881
Total benefits and expenses 219 283 690 780
Income tax expense 11 12 33 35
========== =========== ========== ===========
Net income $ 25 $ 22 $ 66 $ 66
========== =========== ========== ===========
Deposits for investment-type
contracts $ 137 $ 587 $ 394 $ 1,027
Deposits to separate accounts 156 183 596 503
</TABLE>
Net income for Financial Services increased $3 million or 14% for the third
quarter of 1999 when compared to the third quarter of 1998 and was flat for the
nine months of 1999 when compared to the nine months of 1998. The reduction in
realized gains in 1999 has been offset with increased investment margins and fee
income on separate accounts.
Savings
Savings equivalent premiums and deposits decreased 13% (from $271 million to
$236 million) and 1% (from $747 million to $739 million) for the third quarter
and nine months of 1999. The in quarter decrease is related to separate account
activity.
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, decreased 4% from December 31, 1998.
New contributions to variable business represented 59% of the total deposits
received in the nine months of 1999 compared to 59% for the nine months of 1998.
Customer participation in guaranteed separate accounts increased and assets
under management for guaranteed separate account funds were $628 million at
September 30, 1999 compared to $562 million at December 31, 1998.
<PAGE>
Life Insurance
Individual life insurance revenue premiums and deposits of $110 million and $446
million for the third quarter and nine months of 1999 represented a decrease of
$500 million or 82% and $590 million or 57% from the third quarter and nine
months of 1998, which is primarily due to a coinsurance agreement in the prior
year, which resulted in increased deposits of $410 million. The additional
decrease is due primarily to decreased deposits related to BOLI sales ($100
million and $240 million for the third quarter and nine months of 1999 when
compared to the same periods last year).
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.
<PAGE>
The distribution of the fixed maturity portfolio (both available-for-sale and
held-to-maturity) by credit rating is summarized as follows:
September 30, December 31,
1999 1998
----------------- -----------------
AAA 48.2% 45.6%
AA 8.8% 9.4%
A 20.2% 23.8%
BBB 22.4% 20.7%
BB and Below (non-investment grade) .4% 0.5%
----------------- -----------------
TOTAL 100.0% 100.0%
During the third quarter and nine months of 1999, net unrealized gains (losses)
on fixed maturities included in stockholder's equity, which is net of
policyholder-related amounts and deferred income taxes, decreased surplus by $12
million and $101 million, respectively.
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 $299 million and $596 million as of September 30, 1999 and December 31,
1998, respectively.
<PAGE>
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 $55
million and $40 million of commercial paper outstanding at September 30, 1999
and December 31, 1998. 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.
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 June 30, 1999 and full
Y2K compliance for all Company systems by October 31, 1999.
The Company's plan established five phases for becoming Y2K ready. 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-ready 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 ready systems back into production.
As of September 30, 1999, we believe that the Company is Y2K ready.
In addition to ensuring that the Company's own systems are Y2K ready, 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. As of September 30, 1999, the Company
had completed most of this assessment process. The Company will continue
investigating third party readiness 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 $13.6 million on its
Y2K project through the end of September 30, 1999 and expects to spend up to
approximately $14.8 million on its Y2K project. 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 has
developed contingency plans to address core functions, including relations with
third parties. The contingency plans address possible failures generated
internally, by vendors or business partners, and by customers. General
contingency plan approaches include manual processing, payments on an estimated
basis and use of disaster recovery facilities.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
Exhibit Number Title Page
---------------- ---------------------------- -------------
27 Financial Data Schedule 21
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the third quarter of 1999.
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: November 12, 1999 BY: /s/ Glen R. Derback
Glen R. Derback, Vice President and Controller
(Duly authorized officer and chief accounting officer)
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27 Financial Data Schedule
<ARTICLE> 7
<LEGEND>
Great-West Life & Annuity Insurance Company as of and for the period ended
September 30, 1999 (000s)
</LEGEND>
<CIK> 0000744455
<NAME> Great-West Life & Annuity Insurance Company
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0
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1376405
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