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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 33-62674
GREAT NORTHERN INSURED ANNUITY CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1127115
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
TWO UNION SQUARE, SUITE 5600, SEATTLE, WASHINGTON 98101
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (206) 625-1755
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 twelve 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 [_]
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)
(A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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<PAGE>
TABLE OF CONTENTS
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PAGE
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PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.............................................. 3
Item 2. Management's Discussion and Analysis of Results of Operations..... 8
PART II--OTHER INFORMATION
Item 1. Legal Proceedings................................................. 10
Item 2. Changes in Securities............................................. 10
Item 3. Defaults Upon Senior Securities................................... 10
Item 4. Submission of Matters to a Vote of Security Holders............... 10
Item 5. Other Information................................................. 10
Item 6. Exhibits and Reports on Form 8 K.................................. 10
SIGNATURES................................................................. 11
</TABLE>
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
AND SUBSIDIARIES
BALANCE SHEETS
(DOLLAR AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities..................................... $4,969.5 $5,064.6
Mortgage loans, net.................................. 1,255.8 1,282.4
Short-term investments............................... 9.4 28.1
Other invested assets................................ 168.1 169.0
-------- --------
Total investments.................................. 6,402.8 6,544.1
Cash................................................... 1.2 1.9
Accrued investment income.............................. 95.3 85.6
Deferred acquisition costs............................. 110.6 88.8
Intangible assets...................................... 213.2 156.3
Deferred income tax benefit............................ 15.3 --
Other assets........................................... 33.0 32.2
Separate account assets................................ 24.2 17.6
-------- --------
Total assets....................................... $6,895.6 $6,926.5
======== ========
LIABILITIES AND SHAREHOLDER'S INTEREST
Liabilities:
Future annuity and contract benefits................. $6,038.5 $6,067.4
Other policyholder liabilities....................... 90.0 73.6
Deferred income tax liability........................ -- 2.2
Accounts payable and accrued expenses................ 103.2 104.1
Separate account liabilities......................... 24.2 17.6
-------- --------
Total liabilities.................................. 6,255.9 6,264.9
-------- --------
Shareholder's interest:
Common stock......................................... 2.5 2.5
Additional paid-in capital........................... 541.9 541.9
Net unrealized investment gains (losses)............. (.8) 29.9
Retained earnings.................................... 96.1 87.3
-------- --------
Total shareholder's interest....................... 639.7 661.6
-------- --------
Total liabilities and shareholder's interest....... $6,895.6 $6,926.5
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(UNAUDITED)
(DOLLAR AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
1996 1995
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<S> <C> <C>
Revenues:
Net investment income................................... $ 113.4 $ 220.6
Net realized investment gains (losses).................. 1.5 (.9)
Premiums................................................ 40.8 57.1
Surrender fee and other income.......................... 1.9 4.2
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Total revenues........................................ 157.6 281.0
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Benefits and expenses:
Interest credited....................................... 73.4 126.7
Change in policy reserves............................... 41.8 55.8
Annuity and surrender benefits.......................... 6.0 41.9
Commissions............................................. 4.6 16.4
General expenses........................................ 10.4 12.5
Amortization of intangibles, net........................ 11.4 16.2
Increase in deferred acquisition costs, net............. (3.0) (15.2)
--------- ---------
Total benefits and expenses........................... 144.6 254.3
--------- ---------
Income before income taxes and minority interest...... 13 26.7
Provision for income taxes................................ 4.2 10.7
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Income before minority interest....................... 8.8 16.0
Minority interest......................................... -- 4.4
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Net income............................................ 8.8 11.6
Retained earnings at beginning of period.................. 87.3 72.3
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Retained earnings at end of period........................ $ 96.1 $ 83.9
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLAR AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 8.8 $ 11.6
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Adjustments to reconcile net income to net cash pro-
vided by operating activities:
Equity in undistributed earnings of subsidiary....... (1.8) --
Minority interest.................................... -- 4.4
Increase in future policy benefits................... 115.2 182.5
Net realized investment (gains) losses............... (1.5) .9
Amortization of investment premiums and discounts.... 8.7 18.2
Amortization of intangibles, net..................... 11.4 16.2
Change in certain assets and liabilities:
Decrease (increase) in:
Accrued investment income........................ (9.7) (3.2)
Deferred acquisition costs....................... (3.0) (15.2)
Other assets..................................... (.8) 7.1
Increase (decrease) in:
Other policyholder liabilities................... 19.4 (24.3)
Accounts payable and accrued expenses............ (.9) (4.1)
Deferred income tax benefit...................... (2.9) 1.8
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Total adjustments................................ 134.1 184.3
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Net cash provided by operating activities........ 142.9 195.9
--------- ---------
Cash flows from investing activities:
Proceeds from investments in fixed maturities and real
estate................................................ 162.5 296.3
Principal collected on mortgage and policy loans....... 31.3 26.1
Purchases of fixed maturities.......................... (204.3) (246.0)
Mortgage loan originations............................. (4.9) (62.0)
--------- ---------
Net cash provided by (used in) investing activi-
ties............................................ (15.4) 14.4
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Cash flows from financing activities:
Proceeds from issue of investment contracts............ 58.8 301.1
Redemption and benefit payments on investment con-
tracts................................................ (205.7) (495.4)
--------- ---------
Net cash used in financing activities............ (146.9) (194.3)
--------- ---------
Net increase (decrease) in cash and cash equiva-
lents........................................... (19.4) 16.0
Cash and cash equivalents at beginning of period......... 30.0 87.8
--------- ---------
Cash and cash equivalents at end of period............... $ 10.6 $ 103.8
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
(1) BASIS OF PRESENTATION
Effective April 1, 1993, General Electric Capital Corporation (GE Capital),
all of whose common stock is indirectly owned by General Electric Company,
completed the acquisition of 100% of GNA Corporation's capital stock from
Weyerhaeuser Company and Weyerhaeuser Financial Services Inc. for a purchase
price of $577.4 million. Effective July 14, 1993, GE Capital acquired 100% of
the issued and outstanding capital stock of United Pacific Life Insurance
Company and four of its seven wholly-owned subsidiaries from Reliance
Insurance Company and its parent company, Reliance Group Holdings, Inc., for a
purchase price of $514.6 million in cash. During 1994, United Pacific Life
Insurance Company was renamed General Electric Capital Assurance Company (GE
Capital Assurance).
Effective October 1, 1995, Great Northern Insured Annuity Corporation (GNA
or the Company) was party to a reorganization (the Reorganization) involving
GNA Corporation and certain of its life insurance company subsidiaries. The
Reorganization allows the life insurance company subsidiaries of GNA
Corporation to file a consolidated federal tax return.
Prior to the Reorganization, the voting common stock of GE Capital Assurance
was owned by GNA and its preferred and nonvoting common stock was owned by GNA
Corporation. As part of the Reorganization, GNA became a wholly-owned
subsidiary of GE Capital Assurance and GE Capital Assurance became a wholly-
owned subsidiary of GNA Corporation. In order for GE Capital Assurance to
become the direct parent of GNA, GNA Corporation contributed all of the stock
of GNA to GE Capital Assurance in exchange for voting shares of GE Capital
Assurance. GNA distributed its holdings of GE Capital Assurance common stock
to GE Capital Assurance with the result that GE Capital Assurance is now
wholly-owned by GNA Corporation.
The accompanying financial statements include the accounts of GNA, as well
as its investment in First GNA Life Insurance Company of New York (First GNA),
accounted for under the equity method. Effective February 1, 1996, First GNA's
name was changed to GE Capital Life Assurance Company of New York (GE Capital
Life). Prior to the Reorganization, the results of GNA included the accounts
of GNA and its subsidiaries, GE Capital Assurance and GE Capital Life,
accounted for on a consolidated basis.
The financial statements represent all significant transactions during the
periods presented. In the opinion of management, all adjustments of a normal
recurring nature necessary to present a fair statement of financial position
as of March 31, 1996, statements of income and retained earnings and cash
flows for the three-month interim periods ended March 31, 1996 and March 31,
1995 have been included. The financial statements have been prepared in
accordance with the instructions for Form 10-Q and therefore do not include
some information and footnotes necessary to constitute a complete and detailed
presentation in conformity with annual reporting requirements.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect reported amounts and
related disclosures. Actual results could differ from those estimates.
The results of operations for the three months ended March 31, 1996 should
not be regarded as an indication of the results that may be expected for the
entire year.
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(2) COMMITMENT AND CONTINGENCIES
As of March 31, 1996 and December 31, 1995, the Company was committed to
fund $17.2 million and $20.2 million, respectively, in mortgage loans.
(3) NEW ACCOUNTING STANDARDS
Two newly issued accounting standards were adopted in the first quarter of
1996 with no significant effect on the financial position or results of
operations of the Company.
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, requires that certain long-lived assets be reviewed for impairment when
events or circumstances indicate that the carrying amounts of the assets may
not be recoverable. If such review indicates that the carrying amount of an
asset exceeds the sum of its expected future cash flows, the asset's carrying
value is written down to fair value. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less cost to sell.
SFAS No. 122, Accounting for Mortgage Servicing Rights, requires that
capitalized rights to service mortgage loans be assessed for impairment by
individual risk stratum by comparing each stratum's carrying amount with its
fair value. Strata are based on the predominant risk characteristics of the
underlying loans, which include loan type and note rate. Fair values are
estimated based on discounted anticipated future net cash flows considering
market consensus for loan prepayment predictions and other economic factors.
To the extent that the carrying value of mortgage servicing rights exceeds
fair value by individual stratum, the resulting impairment is recognized in
earnings through a valuation allowance.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GNA's results of operations for the three months ended March 31, 1996
include the accounts of GNA, as well as its investment in GE Capital Life,
accounted for under the equity method. For the three months ended March 31,
1995, GNA's results of operations include the accounts of GNA and its
subsidiaries, GE Capital Assurance and GE Capital Life, accounted for on a
consolidated basis.
Net investment income decreased $107.2 million to $113.4 million during the
first three months of 1996 compared to 1995. As a result of the
Reorganization, net investment income excluded GE Capital Assurance and GE
Capital Life's net investment income, which was $113.4 million for the quarter
ended March 31, 1995. The remaining $6.2 million increase is primarily
attributable to an increase in invested assets, reinvestment of net investment
proceeds in higher yielding securities, and the equity income of its
subsidiary.
Net realized investment gains/losses--Net realized investment gains were
$1.5 million during the first three months of 1996, compared to a $0.9 million
loss during the same period in 1995. This increase is related to the Company's
asset/liability risk management.
Premiums decreased $16.3 million to $40.8 million during the first three
months of 1996. This decrease primarily relates to decreased sales of GNA's
structured settlement product of $15.0 million, as well as the effects of the
Reorganization of $3.6 million.
Interest credited on policyholder deposits decreased $53.3 million to $73.4
million for the first three months of 1996. This decrease is almost
exclusively related to the Reorganization as interest crediting rates remained
relatively consistent with the same period in 1995.
Change in policy reserves decreased $14.0 million to $41.8 million during
the first three months of 1996. Policy reserves related to life contingent
products decreased largely due to a reduction in structured settlement sales.
Annuity and surrender benefits decreased $35.9 million to $6.0 million,
primarily due to a $38.0 million decrease caused by the Reorganization.
Commissions decreased $11.8 million to $4.6 million. This decrease is
primarily related to decreased product sales of $147.8 million as well as a
$4.5 million decrease due to the Reorganization.
General expenses decreased $2.1 million to $10.4 million for the first three
months of 1996. Offsetting the effects of the Reorganization, which decreased
expenses by $4.3 million, general expenses increased by $2.2 million primarily
due to increased salaries and marketing expenditures.
Amortization of intangibles (net)--The Company established goodwill and
present value of future profits assets in connection with the GNA and GE
Capital Assurance acquisitions. Most of the decrease in amortization can be
attributed to the effects of the Reorganization, resulting in a $3.5 million
decrease.
Increase in deferred acquisition costs (net) decreased $12.2 million
primarily as a result of an $11.8 million decrease in commissions.
INVESTMENTS
Fixed Maturities. The Company's fixed maturities must be invested in
accordance with requirements of applicable state laws and regulations
regarding the nature and quality of investments that may be made by life
insurance companies and the percentage of assets that may be held in certain
types of investments. At March 31,
-8-
<PAGE>
1996, approximately 66.4% of fixed maturity investments were in corporate
issues and US Treasury notes and another 33.6% in securities backed by
residential mortgages. Approximately 84.5% of the fixed maturities portfolio
(excluding mortgage backed securities) is expected to mature within 10 years.
Approximately 23.7%, 18.6%, and 8.3% of the portfolio were concentrated in the
manufacturing, financial and utility industries, respectively. As of March 31,
1996, 1.5% of the Company's diversified portfolio was rated below investment
grade and no bonds were in default as to interest and principal.
All of the Company's fixed maturities were designated as available-for-sale
at March 31, 1996 and December 31, 1995. Unrealized gains and losses, net of
the effects of present value of future profits, deferred acquisition costs,
and deferred taxes have been included in shareholder's interest as of March
31, 1996. Shareholder's interest included net unrealized losses of $0.8
million and net unrealized gains of $29.9 million at March 31, 1996 and
December 31, 1995, respectively, a difference primarily due to a decrease in
the fair value of fixed maturities, principally resulting from higher interest
rates.
Mortgage Loans. At March 31, 1996, the mortgage loan portfolio consisted of
1,138 mortgage loans on commercial real estate properties, 47% of which are
located in California. The loans, which were originated through a network of
mortgage bankers, were made only on completed leased properties and have loan-
to-value-ratios of 75% or less at the date of origination. GNA does not engage
in construction lending or land loans.
At March 31, 1996, impaired loans amounted to $17.3 million. All of these
loans are fully recoverable and do not require an allowance for losses. GNA's
average investment in impaired loans is $12.5 million at March 31, 1996, with
revenue of $0.3 million recognized, principally on the cash basis
Real Estate Owned. All real estate holdings are a result of mortgage loan
foreclosure. Properties are currently reported at the lower of cost or fair
value less estimated cost to sell. At March 31, 1996, the Company holds 2
properties, valued at $1.1 million, for which management intends to market in
an orderly fashion to maximize their value.
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<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any material pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES
Omitted.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
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<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Great Northern Insured Annuity Corporation
------------------------------------------
(Registrant)
By /s/ Geoffrey S. Stiff
- -------------------------------- -----------------------------------
Date Geoffrey S. Stiff, Senior Vice
President, Finance
(Principal Financial Officer)
By /s/ Thomas W. Casey
- -------------------------------- -----------------------------------
Date Thomas W. Casey, Vice President and
Controller
(Principal Accounting Officer)
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GREAT
NORTHERN INSURED ANNUITY CORPORATION FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<DEBT-HELD-FOR-SALE> 4,970 5,065
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 0 0
<MORTGAGE> 1,256 1,282
<REAL-ESTATE> 1 1
<TOTAL-INVEST> 6,403 6,544
<CASH> 11 30
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 111 89
<TOTAL-ASSETS> 6,896 6,927
<POLICY-LOSSES> 6,039 6,067
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 90 74
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 0 0
0 0
0 0
<COMMON> 3 3
<OTHER-SE> 637 659
<TOTAL-LIABILITY-AND-EQUITY> 6,896 6,927
41 57
<INVESTMENT-INCOME> 113 221
<INVESTMENT-GAINS> 2 (1)
<OTHER-INCOME> 2 4
<BENEFITS> 6 42
<UNDERWRITING-AMORTIZATION> (3) (15)
<UNDERWRITING-OTHER> 16 29
<INCOME-PRETAX> 13 27
<INCOME-TAX> 4 11
<INCOME-CONTINUING> 9 12
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 9 12
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
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<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
