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 June 30, 1999
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 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 June 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.
<PAGE>
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TABLE OF CONTENTS
Page
-----------
Part I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Part II OTHER INFORMATION
Item 1 Legal Proceedings 18
Item 6 Exhibits and Reports on Form 8-K 19
Signatures 19
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
------------ ----------- ------------ -----------
REVENUES:
Premiums $ 293,721 $ 162,678 $ 611,476 $ 350,887
Fee income 150,270 127,461 304,306 244,690
Net investment income 215,946 223,891 432,058 447,425
Net realized gains (losses) on 2,117 5,342 (3,926) 19,315
investments
------------ ----------- ------------ -----------
662,054 519,372 1,343,914 1,062,317
------------ ----------- ------------ -----------
BENEFITS AND EXPENSES:
Life and other policy benefits 272,040 139,547 512,429 292,468
Increase in reserves (12,726) 20,790 22,349 48,163
Interest paid or credited to 115,674 122,207 225,641 246,995
contractholders
Provision for policyholders' share
of
earnings on participating business 1,193 1,390 2,645 3,359
Dividends to policyholders 11,787 14,305 33,680 34,125
------------ ----------- ------------ -----------
387,968 298,239 796,744 625,110
------------ ----------- ------------ -----------
------------ -----------
Commissions 45,300 29,354 90,333 56,836
Operating expenses 144,054 116,197 294,175 231,823
Premium taxes 10,734 7,645 17,872 13,184
------------ ----------- ------------ -----------
588,056 451,435 1,199,124 926,953
------------ ----------- ------------ -----------
INCOME BEFORE INCOME TAXES 73,998 67,937 144,790 135,364
PROVISION FOR INCOME TAXES:
Current 23,809 29,349 39,663 41,289
Deferred 484 (5,606) 10,018 3,746
------------ ----------- ------------ -----------
24,293 23,743 49,681 45,035
------------ ----------- ------------ -----------
NET INCOME $ 49,705 $ 44,194 $ 95,109 $ 90,329
============ =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
ASSETS 1999 1998
- ------
-------------- ------------
(Unaudited)
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost
(fair value $2,243,060 and $2,298,936) 2,234,038 $ 2,199,818
Available-for-sale, at fair value
(amortized cost $6,949,328 and $6,752,532) 6,869,952 6,936,726
Mortgage loans on real estate, net 1,040,155 1,133,468
Common stock 48,144 48,640
Real estate, net 83,345 73,042
Policy loans 2,650,951 2,858,673
Short-term investments, available-for-sale
(cost approximates fair value) 204,894 420,169
-------------- ------------
Total Investments 13,131,479 13,670,536
Cash 149,214 176,119
Reinsurance receivable 179,909 192,958
Deferred policy acquisition costs 276,399 238,901
Investment income due and accrued 133,593 157,587
Other assets 408,518 311,078
Premiums in course of collection 105,498 84,940
Deferred income taxes 231,269 191,483
Separate account assets 10,891,986 10,099,543
-------------- ------------
TOTAL ASSETS 25,507,865 $ 25,123,145
============== ============
See notes to consolidated financial statements. (Continued)
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
June 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1999 1998
- ------------------------------------
-------------- --------------
(Unaudited)
POLICY BENEFIT LIABILITIES:
Policy reserves $ 11,616,522 $ 11,839,714
Policy and contract claims 472,542 491,932
Policyholders' funds 199,932 181,779
Provision for policyholders' dividends 68,941 69,530
GENERAL LIABILITIES:
Due to Parent Corporation 217,300 52,877
Repurchase agreements 82,985 244,258
Commercial paper 29,844 39,731
Other liabilities 626,984 761,505
Undistributed earnings on
participating business 138,488 143,717
Separate account liabilities 10,891,986 10,099,543
-------------- --------------
Total Liabilities 24,345,524 23,924,586
-------------- --------------
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 (28,200) 61,560
Retained earnings 483,953 430,411
-------------- --------------
Total Stockholder's Equity 1,162,341 1,198,559
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 25,507,865 $ 25,123,145
============== ==============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended
June 30,
-----------------------------
1999 1998
------------- -------------
OPERATING ACTIVITIES:
Net income $ 95,109 $ 90,329
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain allocated to participating policyholders 2,642 3,359
Amortization of investments (6,703) (3,001)
Realized losses (gains) on disposal of investments
and write-downs of mortgage loans and real estate 3,926 (19,315)
Amortization 17,752 28,717
Deferred income taxes 10,018 11,125
Changes in assets and liabilities:
Policy benefit liabilities 409,073 172,304
Reinsurance receivable 13,049 (20,061)
Accrued interest and other receivables 3,436 5,331
Other, net (234,509) (123,642)
------------- -------------
Net cash provided by operating activities 313,793 145,146
------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to-maturity
Maturities and redemptions 325,750 214,104
Available-for-sale
Sales 2,009,783 4,197,431
Maturities and redemptions 434,630 584,264
Mortgage loans 94,307 117,099
Real estate 2,015 16,456
Common stock 6,842 1,983
Purchases of investments:
Fixed maturities
Held-to-maturity (352,190) (193,416)
Available-for-sale (2,428,804) (4,674,954)
Mortgage loans (949) (11,100)
Real estate (14,351) (2,323)
Common stock (4,005) (3,126)
------------- -------------
Net cash provided by investing activities 73,028 246,418
------------- -------------
</TABLE>
(Continued)
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended
June 30,
-----------------------------
1999 1998
------------- -------------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (365,423) $ (257,870)
Net Parent Corporation borrowings (repayments) 164,423 (2,993)
Dividends paid (41,566) (36,775)
Net commercial paper borrowings (repayments) (9,887) 5,596
Net repurchase agreements borrowings (repayments) (161,273) (136,293)
------------- -------------
Net cash used in financing activities (413,726) (428,335)
------------- -------------
NET INCREASE (DECREASE) IN CASH (26,905) (36,771)
CASH, BEGINNING OF YEAR 176,119 126,278
------------- -------------
CASH, END OF PERIOD $ 149,214 $ 89,507
============= =============
</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 six months ended June 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 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. During the second quarter, the Financial Accounting
Standards Board delayed the effective date of this Statement for one year, to
fiscal years beginning after June 15, 2000. Earlier adoption is encouraged. The
Company has not adopted this Statement as of June 30, 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 June 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
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
Operating Summary (Millions) 1999 1998 1999 1998
---------- ----------- ---------- ----------
Premiums $ 294 $ 163 $ 612 $ 351
Fee income 150 127 304 245
Net investment income 216 224 432 447
Realized investment gains
(losses) 2 5 (4) 19
---------- ----------- ---------- ----------
Total revenues 662 519 1,344 1,062
Total benefits and expenses 588 451 1,199 927
Income tax expense 24 24 50 45
========== =========== ========== ==========
Net income $ 50 $ 44 $ 95 $ 90
========== =========== ========== ==========
Deposits for investment-type
contracts $ 169 $ 264 $ 275 $ 455
Deposits to separate accounts 695 575 1,365 1,109
Self-funded premium
equivalents 788 591 1,506 1,126
June 30, December 31,
Balance Sheet (Millions) 1999 1998
------------- ---------------
Investment assets $ 13,131 $ 13,671
Separate account assets 10,892 10,100
Total assets 25,508 25,123
Total policy benefit liabilities 12,358 12,583
Long-term debt - due to
Parent Corporation 210 35
Total shareholder's equity $ 1,162 $ 1,199
</TABLE>
GENERAL
The following discussion addresses the financial condition of the Company as of
June 30, 1999, compared with December 31, 1998, and its results of operations
for the three and six months ended June 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.
CONSOLIDATED RESULTS
The Company's consolidated net income increased $6 million or 14% and $5 million
or 6% for the second quarter and first six months of 1999 when compared to the
second quarter and first six months of 1998. The increases reflect a decrease of
$2 million in the Financial Services segment for the first six months of 1999,
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 $6 million and $7 million in the second quarter and first six
months of 1999, which reflected improved morbidity gains being partially offset
by net realized investment losses.
Total revenues increased $143 million or 28% and $282 million or 27% for the
second quarter and for the first six months of 1999 when compared to the same
periods of 1998. The growth in revenues for the second quarter and first six
months of 1999 was comprised of increased premium income of $131 million and
$261 million, increased fee income of $23 million and $59 million, decreased net
investment income of $8 million and $15 million and decreased realized gains on
investments of $3 million and $23 million.
The increased premium income in 1999 was comprised of growth in Employee
Benefits premium income of $137 million and $270 million for the second quarter
and first six months of 1999, offset by a decrease in Financial Services premium
income of $6 million and $9 million for the second quarter and first six months
of 1999. The growth in Employee Benefits primarily reflects premium income of
$111 million and $222 million for the second quarter and first six months of
1999 derived from 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 $14 million and $30
million during the second quarter and first six 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 June 30, 1999 was 6.93% compared to 7.25% at June 30, 1998.
Realized investment gains decreased $3 million during the second quarter of 1999
compared to the same period last year. Realized investment gains decreased from
a realized investment gain of $19 million in the first six months of 1998 to a
realized investment loss of $4 million in 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 $21 million of fixed maturity gains in 1998.
Increases (decreases) in the provision for asset losses of $(4.0) million and
$.7 million were recognized for the first six months of 1999 and 1998,
respectively.
Benefits and expenses increased $147 million or 30% and $272 million or 29% for
the second quarter and first six months of 1999 when compared to the second
quarter and first six months of 1998. The growth in benefits and expenses was
primarily in the Employee Benefits segment, which increased $146 million and
$299 million during the second quarter and first six months of 1999, of which
$125 million and $259 million related to benefits and expenses generated by
AH&L. The Financial Services segment was essentially flat with a decrease in
benefits and expenses of $10 million and $27 million for the second quarter and
first six months of 1999 when compared to the same periods last year.
Income tax expense increased $5 million or 11% for the first six months of 1999
when compared to the first six months of 1998. The increase reflects higher
pre-tax earnings for the first six 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 $95 million or 36% and $180
million or 40% for the second quarter and first six months of 1999 when compared
to the second quarter and first six months of 1998. This decrease is primarily
attributable to the Financial Services segment, where decreases in deposits of
Corporate Owned Life Insurance ("COLI") totaled $0 and $56 million for the
second quarter and first six months of 1999 when compared to the same periods
last year. Additionally, Bank Owned Life Insurance ("BOLI") deposits decreased,
from $165 million and $230 million for the second quarter and first six months
of 1998 to $40 million and $90 million for the second quarter and first six
months of 1999.
Deposits for separate accounts increased $120 million or 21% and $256 million or
23% for the second quarter and first six months of 1999 when compared to the
second quarter and first six months of 1998 in both segments 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.
Self-funded premium equivalents increased $197 million or 33% and $380 million
or 34% for the second quarter and first six months of 1999 when compared to the
second quarter and first six months of 1998. The increase was due to the
acquisition of AH&L ($129 million and $211 million for second quarter and first
six months of 1999), with the remainder coming from the growth in business in
the remainder of the Employee Benefits segment.
Total assets increased $385 million or 2% 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:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
Operating Summary (Millions) 1999 1998 1999 1998
---------- ----------- ---------- ----------
Premiums $ 247 $ 110 $ 512 $ 242
Fee income 127 110 261 212
Net investment income 20 21 39 43
Realized investment gains
(losses) 1 (2) 2
---------- ----------- ---------- ----------
Total revenues 395 241 810 499
Total benefits and expenses 353 206 729 430
Income tax expense 13 12 27 22
========== =========== ========== ==========
Net income $ 29 $ 23 $ 54 $ 47
========== =========== ========== ==========
Deposits for investment-type
contracts $ 18 $ 10 $ 18 $ 15
Deposits to separate accounts 431 398 925 789
Self-funded premium
equivalents 788 591 1,506 1,126
</TABLE>
Net income for Employee Benefits increased $6 million or 26% and $7 million or
15% for the second quarter and first six months of 1999 when compared to the
second quarter and the first six months of 1998. The increase was primarily due
to improved morbidity experience.
401(k) premiums and deposits increased 10% (from $428 million to $472 million)
and 17% (from $842 million to $988 million) for the second quarter and first six
months of 1999, as a result of higher recurring deposits from existing
customers. Assets under administration (including third-party administration) in
401(k) increased 10% over the first six months of 1998, primarily due to strong
equity markets. The number of contributing participants increased from 477,000
at December 31, 1998 to 497,000 at June 30, 1999.
Equivalent premium revenue and fee income for group life and health increased
44% (from $791 million to $1,140 million) and 45% (from $1,542 million to $2,234
million) from the second quarter and first six 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:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
Operating Summary (Millions) 1999 1998 1999 1998
---------- ----------- ---------- -----------
Premiums $ 47 $ 53 $ 100 $ 109
Fee income 23 17 43 33
Net investment income 196 203 393 404
Realized investment gains
(losses) 1 5 (2) 17
---------- ----------- ---------- -----------
Total revenues 267 278 534 563
Total benefits and expenses 235 245 470 497
Income tax expense 11 12 23 23
========== =========== ========== ===========
Net income $ 21 $ 21 $ 41 $ 43
========== =========== ========== ===========
Deposits for investment-type
Contracts $ 151 $ 254 $ 257 $ 440
Deposits to separate accounts 264 177 440 320
</TABLE>
Net income for Financial Services decreased $2 million or 5% for the first six
months of 1999 when compared to the first six months of 1999.
Savings
Savings equivalent premiums and deposits increased 2% (from $252 million to $257
million) and 6% (from $476 million to $503 million) for the second quarter and
first six months of 1999, which 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, decreased 1% from December 31, 1998.
Customer demand for investment diversification continued to grow during 1999.
New contributions to variable business represented 59% of the total deposits
received in the first six months of 1999 compared to 58% for the first six
months of 1998.
Customer participation in guaranteed separate accounts increased and assets
under management for guaranteed separate account funds were $613 million at June
30, 1999 compared to $562 million at December 31, 1998.
Life Insurance
Individual life insurance revenue premiums and deposits of $227 million and $337
million for the second quarter and first six months of 1999 represented a
decrease of $22 million or 9% and $90 million or 21% from the second quarter and
first six months of 1998, which is primarily due to a decrease in deposits for
COLI of $56 million for the first six months of 1999 and a decrease in deposits
for BOLI of $25 million and $40 million for the second quarter and first six
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:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
June 30, December 31,
1999 1998
------------------ ------------------
AAA 48.8% 45.6%
AA 8.8% 9.4%
A 20.7% 23.8%
BBB 21.2% 20.7%
BB and Below (non-investment grade) .5% 0.5%
------------------ ------------------
TOTAL 100.0% 100.0%
</TABLE>
During the first six 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 $89
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 $354 million and $596 million as of June 30, 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 $30
million and $40 million of commercial paper outstanding at June 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 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 June 30, 1999, the Company is essentially Y2K ready (99% complete for all
phases). Only five minor systems require additional work, and that work will be
completed by October 1, 1999.
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 June 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 $12.5 million on its
Y2K project through the end of June 30, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
Exhibit Number Title Page
---------------- ------------------------- -------------
27 Financial Data Schedule 20
(b) Reports on Form 8-K
The Company filed a Form 8-K on April 27, 1999, disclosing second quarter
results of the Company.
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: August 12, 1999 BY: /s/ Glen R. Derback
Glen R. Derback, Vice President and Controller
(Duly authorized officer and chief accounting officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27 Financial Data Schedule
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<LEGEND>
Great-West Life & Annuity Insurance Company as of and for the period ended June
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</LEGEND>
<CIK> 0000744455
<NAME> Great-West Life & Annuity Insurance Company
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