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, 1999
==============================================================
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaction period from to
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Commission file number 333-1173
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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
Number) or organization)
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 March 31, 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: 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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8
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 9
Condition and Results of Operations
Part II OTHER INFORMATION
Item 1 Legal Proceedings 15
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 16
Signatures 16
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
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(Dollars in Thousands)
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(Unaudited)
Three Months Ended
March 31,
---------------------------
1999 1998
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REVENUES:
Premiums $ 317,754 188,210
Fee income 154,036 117,228
Net investment income 216,113 223,534
Net realized gains (losses) on (6,043) 13,973
investments
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681,860 542,945
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BENEFITS AND EXPENSES:
Life and other policy benefits 240,389 152,921
Increase in reserves 35,075 27,373
Interest paid or credited to 109,965 124,788
contractholders
Provision for policyholders' share
of
earnings on participating business 1,452 1,969
Dividends to policyholders 21,893 19,820
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408,774 326,871
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Commissions 45,034 27,482
Operating expenses 150,122 115,626
Premium taxes 7,138 5,539
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611,068 475,518
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INCOME BEFORE INCOME TAXES 70,792 67,427
PROVISION FOR INCOME TAXES:
Current 15,854 11,940
Deferred 9,534 9,352
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25,388 21,292
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NET INCOME $ 45,404 46,135
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</TABLE>
See notes to consolidated financial statements.
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
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March 31, December 31,
ASSETS 1999 1998
- ------
-------------- --------------
(Unaudited)
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost
(fair value $2,178,395 and $2,298,936) $ 2,117,130 $ 2,199,818
Available-for-sale, at fair value
(amortized cost $6,890,232 and $6,752,532) 6,972,586 6,936,726
Mortgage loans on real estate, net 1,085,320 1,133,468
Common stock 49,472 48,640
Real estate, net 78,370 73,042
Policy loans 2,571,412 2,858,673
Short-term investments, available-for-sale
(cost approximates fair value) 247,177 420,169
-------------- --------------
Total Investments 13,121,467 13,670,536
Cash 242,325 176,119
Reinsurance receivable 180,034 192,958
Deferred policy acquisition costs 251,370 238,901
Investment income due and accrued 147,455 157,587
Other assets 367,558 311,078
Premiums in course of collection 95,381 84,940
Deferred income taxes 201,157 191,483
Separate account assets 10,560,135 10,099,543
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TOTAL ASSETS $ 25,166,882 $ 25,123,145
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</TABLE>
See notes to consolidated financial statements. (Continued)
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
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(Dollars in Thousands)
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March 31, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1999 1998
- ------------------------------------
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(Unaudited)
POLICY BENEFIT LIABILITIES:
Policy reserves $ 11,648,442 $ 11,839,714
Policy and contract claims 477,018 491,932
Policyholders' funds 197,576 181,779
Provision for policyholders' dividends 70,640 69,530
GENERAL LIABILITIES:
Due to Parent Corporation 49,457 52,877
Repurchase agreements 68,971 244,258
Commercial paper 39,703 39,731
Other liabilities 722,081 761,505
Undistributed earnings on
participating business 144,529 143,717
Separate account liabilities 10,560,135 10,099,543
-------------- --------------
Total Liabilities 23,978,552 23,924,586
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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, none outstanding
Series B, cumulative, 1,500 shares authorized, liquidation value of
$100,000 per share, 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, liquidation value of $20.90
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 26,677 61,560
Retained earnings 455,065 430,411
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Total Stockholder's Equity 1,188,330 1,198,559
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 25,166,882 $ 25,123,145
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</TABLE>
See notes to consolidated financial statements.
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Dollars in Thousands)
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(Unaudited)
Three Months Ended
March 31,
-----------------------------
1999 1998
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OPERATING ACTIVITIES:
Net income $ 45,404 $ 46,135
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain allocated to participating policyholders 1,452 1,969
Amortization of investments 820 (1,415)
Realized losses (gains) on disposal of investments
and write-downs of mortgage loans and real estate 6,043 (13,975)
Amortization 8,065 11,496
Deferred income taxes 9,534 16,803
Changes in assets and liabilities:
Policy benefit liabilities 392,918 121,920
Reinsurance receivable 12,924 (10,077)
Accrued interest and other receivables (309) (1,757)
Other, net (86,024) (1,099)
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Net cash provided by operating activities 390,827 170,000
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INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to-maturity
Maturities and redemptions 190,330 85,666
Available-for-sale
Sales 1,205,592 3,163,353
Maturities and redemptions 204,750 261,015
Mortgage loans 46,148 48,878
Real estate 13,641
Common stock 3,842 1,409
Purchases of investments:
Fixed maturities
Held-to-maturity (104,092) (58,626)
Available-for-sale (1,380,429) (3,353,522)
Mortgage loans (744) (5,322)
Real estate (6,399) (1,480)
Common stock (3,678) (2,268)
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Net cash provided by investing activities 155,320 152,744
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</TABLE>
(Continued)
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Dollars in Thousands)
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(Unaudited)
Three Months Ended
March 31,
-----------------------------
1999 1998
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FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (280,456) $ (207,680)
Net Parent Corporation borrowings (repayments) (3,420) 9,825
Dividends paid (20,750) (17,440)
Net commercial paper borrowings (repayments) (28) 9,842
Net repurchase agreements borrowings (repayments) (175,287) (138,244)
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Net cash used in financing activities (479,941) (343,697)
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NET INCREASE (DECREASE) IN CASH 66,206 (20,953)
CASH, BEGINNING OF YEAR 176,119 126,278
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CASH, END OF PERIOD $ 242,325 $ 105,325
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</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 audited 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 three months ended March 31, 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
of Financial Accounting Standards 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 is
effective for the Company beginning January 1, 2000, and earlier
adoption is encouraged. The Company has not adopted this Statement as of
March 31, 1999. Management has not determined the impact of the
Statement on the Company's financial position or results of operations.
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
quarter ended March 31, 1999, the Company capitalized $4,718 in internal
use software costs related to the adoption of SOP 98-1.
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>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31,
-----------------------------
Operating Summary (Millions) 1999 1998
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Premiums $ 318 $ 188
Fee income 154 117
Net investment income 216 224
Realized investment gains (6) 14
(losses)
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Total revenues 682 543
Total benefits and expenses 611 476
Income tax expense 26 21
============= ==============
Net income $ 45 $ 46
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Deposits for investment-type contracts $ 106 $ 191
Deposits to separate accounts 670 535
Self-funded premium equivalents 718 536
March 31, December 31,
Balance Sheet (Millions) 1999 1998
------------- --------------
Investment assets $ 13,121 $ 13,671
Separate account assets 10,560 10,100
Total assets 25,167 25,123
Total policy benefit 12,394 12,583
liabilities
Long-term debt - due to
Parent Corporation 36 35
Total shareholder's equity 1,188 1,199
</TABLE>
GENERAL
The following discussion addresses the financial condition of the
Company as of March 31, 1999, compared with December 31, 1998, and its
results of operations for the quarter ended March 31, 1999, compared
with the same period 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.
CONSOLIDATED RESULTS
The Company's consolidated net income decreased $1 million or 2% for the
first three months of 1999 when compared to the first three months of
1998. The decrease reflects a decrease of $2 million in the Financial
Services segment, which resulted primarily from net realized investment
losses in 1999 as compared to net realized investment gains in 1998. The
Employee Benefits segment's net income increased $1 million in 1999,
which reflected improved morbidity and mortality gains being partially
offset by net realized investment losses.
Total revenues increased $139 million or 26% for the first three months
of 1999 when compared to the first three months of 1998. The growth in
revenues for the first three months of 1999 was comprised of increased
premium income of $130 million, increased fee income of $37 million,
decreased net investment income of $8 million and decreased realized
gains on investments of $20 million.
The increased premium income in 1999 was comprised of growth in Employee
Benefits premium income of $133 million offset by a decrease in
Financial Services premium income of $3 million. The growth in Employee
Benefits primarily reflects premium income of $110 million derived from
the business obtained through the acquisition of Anthem Health & Life
Insurance Company ("AH&L") in July 1998.
The growth in fee income is also primarily in the Employee Benefits
segment, where fee income derived from the acquisition of AH&L was $16
million during the first quarter 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 March 31, 1999 was 7.01% compared to 7.27% at
March 31, 1998.
Realized investment gains decreased from a realized investment gain of
$14 million in the first three months of 1998 to a realized investment
loss of $6 million in the first three months of 1999. The rise in
interest rates in 1999 resulted in losses on sales of fixed maturities
totaling $9 million, while lower interest rates contributed to $15
million of fixed maturity gains in 1998. Increases (decreases) in the
provision for asset losses of $(3) million and $1 million were
recognized for the first three months of 1999 and 1998, respectively.
The benefits and expenses increased $135 million or 28% for the first
three months of 1999 when compared to the first three months of 1998.
The growth in benefits and expenses was primarily in the Employee
Benefits segment, which increased $152 million, of which $134 million
related to benefits and expenses generated by AH&L. The Financial
Services segment reflected a decrease in benefits and expenses of $17
million.
Income tax expense increased $5 million or 24% for the first three
months of 1999 when compared to the first three months of 1998. The
increase reflects higher pre-tax earnings for the first three 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 $85 million or 44% for
the first three months of 1999 when compared to the first three months
of 1998. This decrease is primarily attributable to the Financial
Services segment, where decreases in deposits of Corporate Owned Life
Insurance ("COLI") totaled $55 million. Additionally, Bank Owned Life
Insurance ("BOLI") deposits decreased slightly, from $65 million for the
first three months of 1998 to $50 million for the first three months of
1999.
Deposits for separate accounts increased $135 million or 25% for the
first three months of 1999 when compared to the first three months of
1998 in both segments due to a continuing movement toward variable funds
and away from fixed options.
Self-funded premium equivalents increased $182 million or 34% for the
first three months of 1999 when compared to the first three months of
1998. The increase was due to the acquisition of AH&L ($82 million),
with the remainder coming from the growth in business in the Employee
Benefits segment.
Total assets increased $43 million or 0.2% in the first three months of
1999 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 March 31,
-----------------------------
Operating Summary (Millions) 1999 1998
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Premiums $ 265 $ 132
Fee income 134 101
Net investment income 19 22
Realized investment gains (losses) (3) 2
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Total revenues 415 257
Total benefits and expenses 376 224
Income tax expense 14 9
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Net income $ 25 $ 24
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Deposits for investment-type contracts $ - $ 5
Deposits to separate accounts 494 392
Self-funded premium equivalents 718 536
</TABLE>
Net income for Employee Benefits increased $1 million or 4% for the
first three months of 1999 when compared to the first three months of
1998.
401(k) premiums and deposits increased 25% for the first three months of
1999, as a result of higher recurring deposits from existing customers.
Assets under administration (including third-party administration) in
401(k) increased 3% for the first three months of 1999 when compared to
the first three months of 1998, primarily due to strong equity markets.
The number of contributing participants increased from 477,000 at
December 31, 1998 to 493,000 at March 31, 1999.
Equivalent premium revenue and fee income for group life and health
increased 46% for the first three months of 1999 when compared to the
first three 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 March 31,
-----------------------------
Operating Summary (Millions) 1999 1998
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Premiums $ 53 $ 56
Fee income 20 16
Net investment income 197 202
Realized investment gains (losses) (3) 12
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Total revenues 267 286
Total benefits and expenses 235 252
Income tax expense 12 12
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Net income $ 20 $ 22
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Deposits for investment-type contracts $ 106 $ 186
Deposits to separate accounts 176 143
</TABLE>
Net income for Financial Services decreased $2 million or 9% for the
first three months of 1999 when compared to the first three months of
1998.
Savings
Savings equivalent premiums and deposits increased $21 million or 10%
for the first three months of 1999 when compared to the first three
months of 1998, which reflects a 23% growth in deposits to separate
accounts offset by a decrease in premium and deposits to traditional
annuity products. This reflects the continuing trend of policyholders
selecting variable annuity options (separate accounts) as opposed to the
more traditional fixed annuity products.
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, increased 2% from December 31, 1998. The increase
was due growth in the separate accounts.
Customer demand for investment diversification continued to grow during
1999. New contributions to variable business represented 64% of the
total deposits received in the first three months of 1999 compared to
54% for the first three months of 1998.
Customer participation in guaranteed separate accounts increased and
assets under management for guaranteed separate account funds were $622
million at March 31, 1999 compared to $562 at December 31, 1998.
Life Insurance
The Company continued its conservative approach of the manufacture and
distribution of traditional life insurance products, while focusing on
customer retention and expense management.
Individual life insurance revenue premiums and deposits decreased $68
million or 38% for the first three months of 1999 when compared to the
first three months of 1998, which is primarily due to a decrease in
deposits of COLI of $55 million and a decrease in deposits of BOLI of
$15 million for the first three months of 1999.
GENERAL ACCOUNT INVESTMENTS
The Company's primary investment objective is to acquire assets whose
durations and cash flows reflect the characteristics of the Company's
liabilities, while meeting industry, size, issuer and geographic
diversification standards. Formal liquidity and credit quality
parameters have also been established.
The Company follows rigorous procedures to control interest rate risk
and observes strict asset and liability matching guidelines. These
guidelines are designed to ensure that even in changing market
conditions, the Company's assets will meet the cash flow and income
requirements of its liabilities. Through dynamic modeling, using
state-of-the-art software to analyze the effects of a wide range of
possible market changes upon investments and policyholder benefits, the
Company ensures that its investment portfolio is appropriately
structured to fulfill financial obligations to its policyholders.
Fixed Maturities
Fixed maturity investments include public and privately placed corporate
bonds, public and privately placed structured assets and government
bonds. This latter category contains both asset-backed and
mortgage-backed securities, including collateralized mortgage
obligations ("CMOs"). The Company's strategy related to structured
assets is to focus on those with lower volatility and minimal credit
risk. The Company does not invest in higher risk CMOs such as
interest-only and principal-only strips, and currently has no plans to
invest in such securities.
Private placement investments, which are primarily in the
held-to-maturity category, are generally less marketable than publicly
traded assets, yet they typically offer covenant protection which allows
the Company, if necessary, to take appropriate action to protect its
investment. The Company believes that the cost of the additional
monitoring and analysis required by private placements is more than
offset by their enhanced yield.
One of the Company's primary objectives is to ensure that its fixed
maturity portfolio is maintained at a high average quality, so as to
limit credit risk. If not externally rated, the securities are rated by
the Company on a basis intended to be similar to that of rating
agencies.
The distribution of the fixed maturity portfolio (both
available-for-sale and held-to-maturity) by credit rating is summarized
as follows:
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March 31, December 31,
1999 1998
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AAA 46.8% 45.6%
AA 9.4% 9.4%
A 22.2% 23.8%
BBB 21.2% 20.7%
BB and below (non-investment grade) 0.4% 0.5%
------------------ ------------------
TOTAL 100.0% 100.0%
</TABLE>
During the first three months of 1999, 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 $35 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have liquidity requirements that vary among the
principal product lines. Life insurance and pension plan reserves are
primarily long-term liabilities. Accident and health reserves, including
long-term disability, consist of both short-term and long-term
liabilities. Life insurance and pension plan reserve requirements are
usually stable and predictable, and are supported primarily by
long-term, fixed income investments. Accident and health claim demands
are stable and predictable but generally shorter term, requiring greater
liquidity.
Generally, the Company has met its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio utilizing
positive cash flows from operations. Liquidity for the Company has
remained strong, as evidenced by significant amounts of short-term
investments and cash, which totaled $490 million and $596 million as of
March 31, 1999 and December 31, 1998, respectively.
Funds provided from premiums and fees, investment income and maturities
of investment assets are reasonably predictable and normally exceed
liquidity requirements for payment of claims, benefits and expenses.
However, since the timing of available funds cannot always be matched
precisely to commitments, imbalances may arise when demands for funds
exceed those on hand. Also, a demand for funds may arise as a result of
the Company taking advantage of current investment opportunities. The
Company's capital resources represent funds available for long-term
business commitments and primarily consist of retained earnings and
proceeds from the issuance of commercial paper and equity securities.
Capital resources provide protection for policyholders and the financial
strength to support the underwriting of insurance risks, and allow for
continued business growth. The amount of capital resources that may be
needed is determined by the Company's senior management and Board of
Directors, as well as by regulatory requirements. The allocation of
resources to new long-term business commitments is designed to achieve
an attractive return, tempered by considerations of risk and the need to
support the Company's existing business.
The Company's financial strength provides the capacity and flexibility
to enable it to raise funds in the capital markets through the issuance
of commercial paper. The Company continues to be well capitalized, with
sufficient borrowing capacity to meet the anticipated needs of its
business. The Company had $40 million of commercial paper outstanding at
March 31, 1999 and December 31, 1998. The commercial paper has been
given a rating of A-1+ by Standard & Poor's Ratings Services and a
rating of P-1 by Moody's Investors Service, Inc., 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 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.
As of March 31, 1999, the Company had completed impact analysis (phase
1) and solution planning (phase 2) for all of its core systems and was
99% complete for phases 1 and 2 with respect to its systems as a whole.
In addition, the Company was approximately 95% complete with respect to
conversion and renovation (phase 3), 88% complete with respect to
testing (phase 4), and 86% 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. As of March 31, 1999, the Company had completed most of this
assessment process. The Company will continue investigating third party
readiness and will conduct system testing with selected 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 $11.3 million on its Y2K project through the end of March
1999 and expects to spend up to approximately $15.3 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
is in the process of developing contingency plans to address 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.
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 5. OTHER INFORMATION
On May 4, 1999, the Company's parent corporation, GWL&A Financial
Inc., a Delaware corporation ("GWL&A Financial"), through a
Delaware business trust (the "Trust"), completed an offering to
the public of 7,000,000 shares of the Trust's 7.25% Subordinated
Capital Income Securities with an aggregate liquidation amount of
$175,000,000 (the "Capital Securities"). The proceeds from the
offering of the Capital Securities were subsequently transferred
to the Company for general corporate purposes, in exchange for a
surplus note. The issuance of the Capital Securities was
registered by the Trust and GWL&A Financial pursuant to a
registration statement on Form S-3 (Nos. 333-64473 and
333-64473-01), filed with the Securities and Exchange Commission
on September 28, 1998, which, as amended, was declared effective
on April 28, 1999.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
Exhibit Number Title Page
---------------- --------------------- --------------
27 Financial Data 17
Schedule
(b) Reports on Form 8-K
No reports on 8K were filed during the first 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
<TABLE>
<S> <C> <C>
DATE: May 14, 1999 BY: Glen R. Derback
/s/
------------------------------- -------------------------------------------
Glen R. Derback, Vice President &
Controller
(Duly authorized officer and chief
accounting officer)
</TABLE>
<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, 1999 (000s)
</LEGEND>
<CIK> 0000744455
<NAME> Great-West Life & Annuity Insurance Company
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