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, 1997
[ ] 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 of (I.R.S. Employer Identification No.)
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.
<PAGE>
TABLE OF CONTENTS
Page
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
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Balance Sheets
(Dollar amounts in millions)
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------
September 30, December 31,
1997 1996
- -------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Investments:
Fixed maturities available-for-sale, at fair value $ 5,267.6 $ 5,270.1
Mortgage loans, net of valuation allowance of $36.5
and $36.0 at September 30, 1997 and December 31, 1,147.6 1,159.7
1996, respectively
Short-term investments 8.1 3.9
Other invested assets 183.5 165.0
----------------------------------
Total investments 6,606.8 6,598.7
Cash 1.8 2.3
Accrued investment income 114.1 112.2
Deferred acquisition costs 116.5 129.6
Intangible assets 127.7 181.0
Deferred income tax benefit 13.1 19.1
Other assets 63.8 44.4
Separate account assets 39.2 32.7
----------------------------------
Total assets $ 7,083.0 $ 7,120.0
----------------------------------
Liabilities and Shareholder's
Interest
Liabilities:
Future annuity and contract benefits $ 6,080.3 $ 6,171.9
Other policyholder liabilities 17.1 48.1
Accounts payable and accrued expenses 179.8 177.4
Separate account liabilities 39.2 32.7
----------------------------------
Total liabilities 6,316.4 6,430.1
----------------------------------
Shareholder's interest:
Common stock 2.5 2.5
Additional paid-in capital 542.0 542.0
Net unrealized investment gains 36.8 7.0
Retained earnings 185.3 138.4
----------------------------------
Total shareholder's interest 766.6 689.9
- ----------------------------------------------------------------------------------------------------
Total liabilities and shareholder's interest $ 7,083.0 $ 7,120.0
- ----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
- 3 -
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Statements of Income and Retained Earnings
(Unaudited)
(Dollar amounts in millions)
<TABLE>
<CAPTION>
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------
For the three months For the nine
ended months ended
September 30 September 30
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Revenues:
Net investment income $ 117.8 $ 118.0 $ 356.8 $ 344.5
Net realized investment gains (losses) (.1) .3 6.5 2.4
Premiums 7.2 67.3 57.9 151.2
Policy fees and other income 1.7 1.8 6.4 5.9
------------------------------------------------------
Total revenues 126.6 187.4 427.6 504.0
------------------------------------------------------
Benefits and expenses:
Interest credited 73.3 75.2 220.8 221.2
Benefits and other changes in policy reserves 16.4 77.4 85.1 175.7
Commissions 2.5 9.0 13.3 20.4
General expenses 5.2 7.1 23.4 27.4
Amortization of intangibles, net 8.5 4.6 25.2 25.9
Change in deferred acquisition costs, net (2.3) (10.4) (10.1) (20.6)
------------------------------------------------------
Total benefits and expenses 103.6 162.9 357.7 450.0
------------------------------------------------------
Income before income taxes and minority
interest 23.0 24.5 69.9 54.0
Provision for income taxes 7.4 8.1 23.0 17.8
------------------------------------------------------
Net income 15.6 16.4 46.9 36.2
Retained earnings at beginning of period 169.7 107.1 138.4 87.3
- ----------------------------------------------------------------------------------------------------------------------
Retained earnings at end of period $ 185.3 $ 123.5 $ 185.3 $ 123.5
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Statements of Cash Flows
(Unaudited)
(Dollar amounts in millions)
<TABLE>
<CAPTION>
<S> <C>
- --------------------------------------------------------------------------------- --- --------------------------------
Nine months ended
September 30
------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 46.9 $ 36.2
------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiary (6.2) (5.4)
Increase in future policy benefits 279.5 376.2
Net realized investment gains (6.5) (2.4)
Amortization of investment premiums and discounts 10.3 22.3
Amortization of intangibles, net 25.2 25.9
Deferred income tax benefit (8.3) (6.7)
Change in certain assets and liabilities:
Decrease (increase) in:
Accrued investment income (1.9) (27.2)
Deferred acquisition costs (10.1) (20.6)
Other assets (247.9) (11.1)
Increase (decrease) in:
Other policy-related balances (31.0) 12.7
Accounts payable and accrued expenses 230.9 14.0
------------------------------
Total adjustments 234.0 377.7
------------------------------
Net cash provided by operating activities 280.9 413.9
------------------------------
Cash flows from investing activities:
Proceeds from investments in fixed maturities and real estate 849.9 650.1
Principal collected on mortgage and policy loans 122.3 122.4
Purchases of fixed maturities (766.8) (855.0)
Mortgage loan originations (111.5) (23.0)
------------------------------
Net cash used in investing activities 93.9 (105.5)
------------------------------
Cash flows from financing activities:
Proceeds from issue of investment contracts 230.2 307.4
Redemption and benefit payments on investment contracts (601.4) (594.4)
------------------------------
Net cash used in financing activities (371.2) (287.0)
------------------------------
Net increase in cash and cash equivalents 3.7 21.4
Cash and cash equivalents at beginning of period 6.2 30.0
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 9.9 $ 51.4
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
- 5 -
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Financial Statements
September 30, 1997
(Unaudited)
- -=------------------------------------------------------------------------------
(1) Basis of Presentation
Great Northern Insured Annuity Corporation (GNA or the Company) was
incorporated as a stock life insurance company organized under the laws
of the state of Washington on June 4, 1980 and began writing business
pursuant to licensing on October 15, 1980. On June 30, 1983, The
Weyerhaeuser Company (Weyerhaeuser) acquired a controlling interest in
GNA.
Pursuant to a Stock Purchase Agreement dated January 5, 1993, by and
between Weyerhaeuser and General Electric Capital Corporation (GE
Capital), 100% of the outstanding capital stock of GNA Corporation was
sold to GE Capital effective April 1, 1993. The Company was a 100% owned
subsidiary of GNA Corporation at the date of acquisition.
Effective July 14, 1993, GE Capital acquired 100% of the issued and
outstanding capital stock of United Pacific Life Insurance Company
(United Pacific Life). GE Capital transferred controlling ownership of
United Pacific Life to GNA. Subsequently, United Pacific Life's name was
changed to General Electric Capital Assurance Company (GE Capital
Assurance).
Effective October 1, 1995, GNA was party to a reorganization involving
GNA Corporation and certain of its life insurance company subsidiaries.
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. Previously, all of GE Capital Assurance's
voting common stock was owned by GNA. The reorganization allows all life
insurance company subsidiaries of GNA Corporation to file a consolidated
federal tax return.
The accompanying financial statements include the accounts of GNA, as
well as its 48% investment in GE Capital Life Assurance Company of New
York (GE Capital Life of New York), accounted for under the equity
method.
The quarterly financial statements are unaudited. These statements
include all adjustments (consisting of normal recurring accruals)
considered necessary by management to present a fair statement of the
results of operations, financial position and cash flows. The results
reported in these financial statements should not be regarded as
necessarily indicative of results that may be expected for the entire
year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual
results could differ from those estimates.
-6-
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Financial Statements
September 30, 1997
(Unaudited)
- -=------------------------------------------------------------------------------
(2) Commitment and Contingencies
As of September 30, 1997 and December 31, 1996, the Company was
committed to fund $143.7 million and $27.7 million, respectively,
in mortgage loans.
There is no material pending litigation to which the Company is a party
or of which any of the Company's property is the subject, and there are
no legal proceedings contemplated by any governmental authorities against
the Company of which management has any knowledge.
(3) New Accounting Standards
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities. This Statement provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments
of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers to financial assets that are sales from transfers that are
secured borrowings. SFAS No. 125 is required to be adopted by the
Company in 1997, except for certain sections which were deferred in
accordance with SFAS 127. The adoption of the applicable provisions of
SFAS No. 125 in 1997 did not have a material impact on the Company's
financial statements and management of the Company does not except that
adoption of the remaining provisions of SFAS No. 125 will have a material
impact on the Company's 1998 financial position, results of operations,
or liquidity.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This Statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income includes all changes in
equity from nonowner sources; investments by and distributions to
owners are excluded. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The Company will include this new
reporting information in its 1998 consolidated financial statements as
required.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 is effective
for disclosures about segments of an enterprise and related information
for periods beginning after December 15, 1997. This Statement
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. Management has not yet
determined the impact, if any, of this Statement on the Company's future
disclosures.
The American Institute of Certified Public Accountants has released
an exposure draft of a new Statement of Position (SOP), Accounting
by Insurance and Other Enterprises for Guaranty-Fund and Certain
Other Insurance-Related Assessments. This SOP provides guidance on
accounting by insurance and other enterprises to recognize a liability for
assessments when (a) an assessment has been asserted or information
available prior to issuance of the financial statements indicates it
is probable that an assessment will be asserted, (b) the underlying
cause of the asserted or probable assessment has occurred on or before
the date of the financial statements, and (c) the amount of the loss can
be reasonably estimated. This SOP is expected to be effective for
financial statements for fiscal years beginning after December 15,
1997 and will be reported in a manner similiar to a cumulative effect of a
change in accounting principle in the initial year of adoption.
Management of the Company does not expect that this SOP will have a
material impact on the Company's financial position, results of
operations, or liquidity.
- 7 -
<PAGE>
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, 1997 and
1996 include the accounts of GNA, as well as its investment in GE Capital Life
of New York, accounted for under the equity method.
Net investment income increased $12.3 million to $356.8 million during the first
nine months of 1997 compared to 1996. This increase is primarily attributable to
purchase of higher yield securities, dividends from other invested assets and an
increase in average investments during the period.
Net realized investment gains/losses - Net realized investment gains were $6.5
million during the first nine months of 1997, compared to a $2.4 million gain
during the same period in 1996. This increase is related to the Company's
asset/liability risk management and varies with market and economic conditions.
Premiums decreased $93.3 million to $57.9 million during the first nine months
of 1997. This decrease is due to lower sales of life contingent structured
settlement product primarily related to a shift in marketing focus to GE Capital
Assurance products.
Interest credited on policyholder deposits decreased $0.4 million to $220.8
million for the first nine months of 1997 due to lower future annuity and
contract benefit liabilities during 1997.
Change in policy reserves decreased $96.3 million to $58.7 million during the
first nine months of 1997. Change in policy reserves decreased largely due to a
reduction in sales of life contingent structured settlement product and reserve
reduction associated with the payout of benefits.
Annuity and surrender benefits increased $5.7 million to $26.4 million primarily
due to benefit payments on life contingent structured settlement product.
Commissions decreased $7.1 million to $13.3 million. This decrease is due to
continued shift in marketing focus to GE Capital Assurance products.
General expenses decreased $4.0 million to $23.4 million for the first nine
months of 1997. Decrease is due to the Company's continuing cost reduction
strategy and continued shift in marketing focus to GE Capital Assurance
products.
Amortization of intangibles (net) decreased $.7 million to $25.2 million. The
Company established goodwill and present value of future profits (PVFP)
assets in connection with GNA's acquisition. The decrease is primarily related
to lower PVFP amortization for the period ended September 30, 1997.
Increase in deferred acquisition costs decreased $10.5 million primarily as a
result of lower commissions.
- 8 -
<PAGE>
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, 1997, approximately 60.0% of fixed maturity investments were in
corporate issues and US Treasury notes and another 36.4% in securities backed by
residential mortgages. Approximately 78.0% of the fixed maturities portfolio
(excluding mortgage backed securities) is expected to mature within 10 years.
Approximately 38.9%, 24.7%, and 16.2% of the portfolio were concentrated in the
government, manufacturing, and financial industries, respectively. As of
September 30, 1997, .7% of the Company's diversified portfolio was rated below
investment grade and no bonds were in default as to interest or principal.
All of the Company's fixed maturities were designated as available-for-sale at
September 30, 1997 and December 31, 1996. Unrealized gains and losses, net of
the effects on present value of future profits, deferred acquisition costs,
deferred taxes and investment in GE Capital Life of New York have been included
in shareholder's interest as of September 30, 1997. Shareholder's interest
included net unrealized gains of $36.8 and $7.0 million at September 30, 1997
and December 31, 1996, respectively, a difference primarily due to an increase
in the fair value of fixed maturities, principally resulting from lower market
interest rates.
Mortgage Loans. At September 30, 1997, the mortgage loan portfolio consisted of
981 first mortgage loans on commercial real estate properties. The loans, which
were originated through a network of mortgage bankers, were made only on
completed leased properties and have a maximum loan-to-value-ratio of 75% at the
date of origination. The Company does not engage in construction lending or land
loans.
The Company originated $44.2 of mortgages secured by real estate in California,
which represents 39.7% of total originations for the period ended September 30,
1997. At September 30, 1997, the Company held $432.8 in mortgages secured by
real estate in California; this is 36% of the total mortgage portfolio as of
September 30, 1997.
"Impaired loans" are defined by generally accepted accounting principles as
loans for which it is probable that the lender will be unable to collect all
amounts due according to terms of the original contractual terms of the loan
agreement. That definition excludes, among other things, leases, or large groups
of smaller-balance homogeneous loans, and therefore applies principally to GNA's
mortgage loans.
At September 30, 1997, impaired loans amounted to $7.5. The carrying amount has
been reduced previously through charge-offs or deferral of income recognition
and does not require an allowance for losses. Average investment during 1997 is
$10.8 and interest income earned on these loans while they were considered
impaired was $.7.
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 September 30, 1997, the Company holds six
properties, valued at $4.1 million, for which management intends to market in an
orderly fashion to maximize their value.
- 9 -
<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.
- 10 -
<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)
November 12, 1997 By /s/ Thomas W. Casey
_____________________________________
- ------------------------
Date Thomas W. Casey, Vice President, Chief
Financial Officer (Principal Financial
Officer)
November 12, 1997 By /s/ Stephen N. DeVos
_____________________________________
- ------------------------
Date Stephen N. DeVos, Vice President and
Controller (Principal Accounting
Officer)
- 11 -
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Great
Northern Insured Annuity Corporation 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-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<DEBT-HELD-FOR-SALE> 5268 5104
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 0 0
<MORTGAGE> 1148 1182
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 6607 6502
<CASH> 10 51
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 117 132
<TOTAL-ASSETS> 7083 7054
<POLICY-LOSSES> 6080 6157
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 17 86
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 0 0
0 0
0 0
<COMMON> 3 3
<OTHER-SE> 764 660
<TOTAL-LIABILITY-AND-EQUITY> 7083 7054
58 151
<INVESTMENT-INCOME> 357 345
<INVESTMENT-GAINS> 7 2
<OTHER-INCOME> 6 6
<BENEFITS> 26 21
<UNDERWRITING-AMORTIZATION> (10) (21)
<UNDERWRITING-OTHER> 37 48
<INCOME-PRETAX> 70 54
<INCOME-TAX> 23 18
<INCOME-CONTINUING> 47 36
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 47 36
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
