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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1996
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[ ] 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
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(Exact name of registrant as specified in its charter)
Washington 91-1127115
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation
Two Union Square, Suite 5600
Seattle, Washington 98101
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(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
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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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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
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2
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GREAT NORTHERN INSURED ANNUITY CORPORATION
AND SUBSIDIARIES
BALANCE SHEETS
(DOLLAR AMOUNTS IN MILLIONS)
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SEPTEMBER 30, December 31,
1996 1995
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(UNAUDITED)
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Assets
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Investments:
Fixed maturities $5,103.7 $5,064.6
Mortgage loans, net 1,182.4 1,282.4
Short-term investments 48.7 28.1
Other invested assets 167.2 169.0
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Total investments 6,502.0 6,544.1
Cash 2.7 1.9
Accrued investment income 112.8 85.6
Deferred acquisition costs 131.7 88.8
Intangible assets 208.4 156.3
Deferred income tax benefit 22.1 -
Other assets 43.2 32.2
Separate account assets 31.0 17.6
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Total assets $7,053.9 $6,926.5
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Liabilities and Shareholder's Interest
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Liabilities:
Future annuity and contract benefits $6,156.5 $6,067.4
Other policyholder liabilities 86.3 73.6
Deferred income tax liability - 2.2
Accounts payable and accrued expenses 118.1 104.1
Separate account liabilities 31.0 17.6
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Total liabilities 6,391.9 6,264.9
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Shareholder's interest:
Common stock 2.5 2.5
Additional paid-in capital 543.4 541.9
Net unrealized investment gains (losses) (7.4) 29.9
Retained earnings 123.5 87.3
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Total shareholder's interest 662.0 661.6
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Total liabilities and
shareholder's interest $7,053.9 $6,926.5
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See accompanying notes to consolidated financial statements.
3
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GREAT NORTHERN INSURED ANNUITY CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(UNAUDITED)
(DOLLAR AMOUNTS IN MILLIONS)
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For the three For the nine
months ended months ended
September 30 September 30
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1996 1995 1996 1995
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Revenues:
Net investment income $118.0 $225.2 $344.5 $670.9
Net realized investment gains (losses) .3 (11.1) 2.4 (16.0)
Premiums 67.3 33.5 151.2 138.9
Surrender fee and other income 1.8 2.6 5.9 10.6
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Total revenues 187.4 250.2 504.0 804.4
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Benefits and expenses:
Interest credited 75.2 129.6 221.2 385.6
Increase in policy reserves 69.5 33.4 155.0 137.2
Annuity and surrender benefits 7.9 45.0 20.7 129.9
Commissions 9.0 6.9 20.4 37.5
General expenses 7.1 12.5 27.4 39.5
Amortization of intangibles, net 4.6 15.0 25.9 47.8
Increase in deferred acquisition costs, net (10.4) (5.7) (20.6) (35.1)
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Total benefits and expenses 162.9 236.7 450.0 742.4
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Income before income taxes
and minority interest 24.5 13.5 54.0 62.0
Provision for income taxes 8.1 5.9 17.8 25.3
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Income before minority interest 16.4 7.6 36.2 36.7
Minority interest - (2.5) - (10.9)
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Net income 16.4 5.1 36.2 25.8
Retained earnings at beginning of period 107.1 93.0 87.3 72.3
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Retained earnings at end of period $123.5 $ 98.1 $123.5 $ 98.1
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See accompanying notes to consolidated financial statements.
4
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GREAT NORTHERN INSURED ANNUITY CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLAR AMOUNTS IN MILLIONS)
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Nine months ended
September 30
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1996 1995
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Cash flows from operating activities:
Net income $ 36.2 $ 25.8
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Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest - 10.9
Equity in undistributed earnings of subsidiary (5.4) -
Increase in future policy benefits 376.2 522.7
Net realized investment (gains) losses (2.4) 16.0
Amortization of investment premiums and discounts 22.3 52.2
Amortization of intangibles, net 25.9 47.8
Change in certain assets and liabilities:
Decrease (increase) in:
Accrued investment income (27.2) (13.0)
Deferred acquisition costs (20.6) (35.1)
Other assets (11.1) 7.7
Increase (decrease) in:
Other policyholder liabilities 12.7 (16.6)
Accounts payable and accrued expenses 14.0 22.5
Deferred income tax benefit (6.7) 9.8
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Total adjustments 377.7 624.9
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Net cash provided by operating activities 413.9 650.7
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Cash flows from investing activities:
Proceeds from investments in fixed maturities and real estate 650.1 1,455.0
Principal collected on mortgage and policy loans 122.4 72.1
Purchases of fixed maturities (855.0) (1,410.6)
Mortgage loan originations (23.0) (158.8)
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Net cash used in investing activities (105.5) (42.3)
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Cash flows from financing activities:
Proceeds from issue of investment contracts 307.4 676.4
Redemption and benefit payments on investment contracts (594.4) (1,284.6)
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Net cash used in financing activities (287.0) (608.2)
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Net increase in cash and cash equivalents 21.4 .2
Cash and cash equivalents at beginning of period 30.0 87.8
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Cash and cash equivalents at end of period $ 51.4 $ 88.0
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See accompanying notes to consolidated financial statements.
5
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GREAT NORTHERN INSURED ANNUITY CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 September 30, 1996, statements of income and retained earnings for the
three-month and nine-month interim periods ended September 30, 1996 and
September 30, 1995, and statement of cash flows for the nine-month interim
periods ended September 30, 1996 and September 30, 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.
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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 nine months ended September 30, 1996 should
not be regarded as an indication of the results that may be expected for the
entire year.
(2) COMMITMENT AND CONTINGENCIES
As of September 30, 1996 and December 31, 1995, the Company was committed to
fund $35.3 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 and did not have a material 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. 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.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GNA's results of operations for the nine months ended September 30, 1996 include
the accounts of GNA, as well as its investment in GE Capital Life, accounted for
under the equity method. For the nine months ended September 30, 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 $326.4 million to $344.5 million during the
first nine 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 $343.8 million for the nine months ended September
30, 1995. The remaining $17.4 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 $2.4
million during the first nine months of 1996, compared to a $16.0 million loss
during the same period in 1995. This change is related to the Company's
asset/liability risk management and varies with market and economic conditions.
Premiums increased $12.3 million to $151.2 million during the first nine months
of 1996. This increase primarily relates to a significant increase in sales of
GNA's structured settlement product, offset by the effects of the Reorganization
of $9.4 million.
Interest credited on policyholder deposits decreased $164.4 million to $221.2
million for the first nine months of 1996. This decrease is primarily related
to the effects of the Reorganization as interest crediting rates remained
relatively consistent with the same period in 1995.
Change in policy reserves increased $17.8 million to $155.0 million during the
first nine months of 1996. Policy reserves related to life contingent products
increased largely due to greater structured settlement sales, offset by an $8.0
million decrease related to the Reorganization.
Annuity and surrender benefits decreased $109.2 million to $20.7 million,
primarily due to a $116.3 million effect of the Reorganization. The offsetting
increase primarily relates to higher benefit payments on structured settlement
annuities.
Commissions decreased $17.1 million to $20.4 million. The Reorganization
accounted for $10.7 million of the decrease with the remaining decrease
resulting from lower sales of single premium deferred annuities.
General expenses decreased $12.1 million to $27.4 million for the first nine
months of 1996. This decrease is primarily related to the effects of the
Reorganization of $14.5 million.
Amortization of intangibles, net - The Company established goodwill and present
value of future profits (PVFP) assets in connection with the GNA and GE Capital
Assurance acquisitions. The decrease of $21.9 million is primarily due to the
effects of the Reorganization of $10 million and a $10.3 million decrease of
PVFP amortization.
Increase in deferred acquisition costs decreased $14.5 million primarily as a
result of a $17.1 million decrease in commissions reflecting the Reorganization
and reduced sales of fixed annuities.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
(CONTINUED)
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
September 30, 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 81.2% of the fixed maturities portfolio
(excluding mortgage backed securities) is expected to mature within 10 years.
Approximately 23.0%, 19.8% and 6.3% of the portfolio were concentrated in the
manufacturing, financial and utility industries, respectively. As of September
30, 1996, .6% 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
September 30, 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 September 30,
1996. Shareholder's interest included net unrealized losses of $7.4 million and
net unrealized gains of $29.9 million at September 30, 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 September 30, 1996, the mortgage loan portfolio consisted of
1,068 mortgage loans on commercial real estate properties, 42% 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 September 30, 1996, the Company held $469.8 in mortgages secured by real
estate in California; this is 38% of the total mortgage portfolio.
At September 30, 1996, impaired loans amounted to $15.2 million. For $2.1
million of such loans, the required allowance for losses was $.8 million. The
remaining $13.1 million of loans represent the recorded investments in loans
that are fully recoverable. GNA's average investment in impaired loans is $15.7
million for the nine-month period ended September 30, 1996, with revenue of $.6
million recognized, principally on the cash basis.
Real Estate Owned. All real estate holdings are a result of mortgage loan
foreclosure. Properties are reported at the lower of cost or fair value less
estimated cost to sell. At September 30, 1996, the Company has no foreclosed or
other real estate holdings.
9
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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.
10
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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
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(Registrant)
November 13, 1996 By /s/ Thomas W. Casey
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Date Thomas W. Casey, Vice President, Chief Financial
Officer (Principal Financial Officer)
November 13, 1996 By /s/ Stephen N. Devos
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Date Stephen N. Devos, Vice President and Controller
(Principal Accounting Officer)
11
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<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> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> SEP-30-1996 SEP-30-1995
<DEBT-HELD-FOR-SALE> 5,104 5,065
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 0 0
<MORTGAGE> 1,182 1,282
<REAL-ESTATE> 0 1
<TOTAL-INVEST> 6,502 6,544
<CASH> 51 30
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 132 89
<TOTAL-ASSETS> 7,054 6,937
<POLICY-LOSSES> 6,157 6,067
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 86 74
<POLICY-HOLDER-FUNDS> 0 0
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0 0
0 0
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<OTHER-SE> 660 659
<TOTAL-LIABILITY-AND-EQUITY> 7,054 6,927
151 139
<INVESTMENT-INCOME> 345 671
<INVESTMENT-GAINS> 2 (16)
<OTHER-INCOME> 6 11
<BENEFITS> 21 130
<UNDERWRITING-AMORTIZATION> (21) (35)
<UNDERWRITING-OTHER> 48 77
<INCOME-PRETAX> 54 62
<INCOME-TAX> 18 25
<INCOME-CONTINUING> 36 26
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
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<NET-INCOME> 36 26
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