FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [Not Applicable]
<PAGE>
The registrant meets the conditions set forth in general instructions J(1) (a)
and (b) of Form 10-K and is therefore filing this form with the permitted
abbreviated narrative disclosure.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Consolidated Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
PART I
Item 1. Business
OWNERSHIP
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.
Effective July 14, 1993, GE Capital acquired 100% of the 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). GE Capital Assurance, a Delaware life
insurer, is licensed in the District of Columbia, and all states except Maine
and New York.
On February 1, 1990, GNA acquired 100% of the outstanding stock of
First GNA Life Insurance Company of New York (First GNA). Subsequent to the
acquisition of United Pacific Life, GNA merged First GNA with United Pacific
Reliance Life Insurance Company of New York, a wholly-owned subsidiary of United
Pacific Life. The merged company is 48% owned by GNA and 52% by GE Capital
Assurance. Effective February 1, 1996, First GNA's name was changed to GE
Capital Life Assurance Company of New York (GE Capital Life of New York). GE
Capital Life of New York issues deferred and immediate annuities, life insurance
and long-term care insurance in the state of New York.
Effective October 1, 1995, GNA was party to a reorganization involving
GNA Corporation and certain of its life insurance company subsidiaries (herein
referred to as the Reorganization). 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.
MARKETING
GNA is licensed in the District of Columbia and all states except New
Hampshire and New York. GNA markets fixed-rate deferred annuities, immediate
annuities and structured settlement immediate annuities primarily through banks,
thrifts and other financial institutions.
Deferred Fixed Rate Annuities. The predominant form of deferred
annuities require either single premium or flexible premium payments and have a
minimum annual guaranteed crediting rate. After the initial guarantee period,
the crediting rate may be changed periodically. The policy owner is permitted to
<PAGE>
withdraw all or part of the premium paid plus interest credited, less a
surrender charge for withdrawals during the initial penalty period of one to
eight years. The surrender charge is initially 5% to 8% of the contract value
and decreases over the penalty period. Some deferred annuities provide for
penalty-free partial withdrawals of the accumulated interest credited or up to
10% annually of the accumulation value. In 1997, the Company issued $233 million
in deferred annuities. At December 31, 1997, deferred annuities comprised $5,064
million of total liabilities for future annuity and contract benefits.
Immediate Annuities. The Company's immediate annuities are designed to
provide a series of periodic payments for a fixed length of time or for life,
according to the annuitant's choice at the time of issue. Once the payments have
begun, the amount, frequency and length of time for which they are payable are
fixed. A primary form of immediate annuities, the structured settlement annuity,
is usually sold as part of a settlement resulting from a personal injury or
wrongful death claim to provide scheduled payments to an injured person or their
dependents. Structured settlement annuities are generally long-term and cannot
be surrendered. In 1997, the Company issued $72.2 million in immediate
annuities. At December 31, 1997, immediate annuities comprised $760.1 million of
total liabilities for future annuity and contract benefits.
COMPETITION
The Company is engaged in a business that is highly competitive because
of the large number of stock and mutual life insurance companies and other
entities marketing insurance products. There are numerous stock, mutual and
other types of insurers in the life insurance business in the United States, a
significant number of which are substantially larger than GNA. As of December
31, 1997, the Company has 279 employees. In addition, the Company has 42 retail
sales agents selling the Company's products through an affiliated company, GNA
Insurance Services, Inc. The number of retail sales agents decreased
significantly during 1997 as a result of several banks internalizing sales
forces.
A.M. Best assigned to GNA an A + (Superior) rating. Duff & Phelps
reaffirmed the Company's AA (Very High) rating, and Standard & Poor's reaffirmed
an AA (Excellent) rating based on the Company's high claims paying ability and
excellent asset quality.
GOVERNMENT REGULATION
GNA is subject to the laws of the State of Washington governing
insurance companies and to the regulations of the Washington Insurance
Department. In addition, GNA is subject to regulation under the insurance laws
of other jurisdictions in which the Company operates. Regulation by other
supervisory agencies includes licensing to transact business, overseeing trade
practices, licensing agents, approving policy forms, establishing reserve
requirements, fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. The Company's books and accounts are subject to review by
each Insurance Department and other supervisory agencies at all times, and GNA
files annual statements with these agencies. A full examination of the Company's
operations is conducted periodically by various Insurance Departments and may
include the participation of the insurance departments of other states in which
GNA conducts business. Recent examinations have not resulted in significant
findings.
<PAGE>
In addition, many states regulate affiliated groups of insurers
(including GNA) under insurance holding company legislation. Under such laws,
intercompany transactions, including transfers of assets and dividend payments
from insurance subsidiaries, may be subject to prior notice or approval,
depending on the size of the transfers and payments in relation to the financial
positions of the companies involved. Due to the Company's volume of California
business, GNA is considered a California commercially domiciled insurer under
California insurance holding company law.
The National Association of Insurance Commissioners (NAIC) has adopted
Risk-Based Capital (RBC) requirements to evaluate the adequacy of statutory
capital and surplus in relation to risks associated with: (i) asset quality,
(ii) insurance risk, (iii) interest rate risk, and (iv) other business factors.
The RBC formula is designed as an early warning tool for the states to identify
possible under-capitalized companies for the purpose of initiating regulatory
action. In the course of its operations, the Company monitors the level of its
RBC and it exceeds the minimum required levels.
Under insurance guaranty fund laws in most states, insurers doing
business therein can be assessed (up to prescribed limits) for policyholder
losses incurred by insolvent companies. GNA has estimated assessments related to
known insolvencies, and has recorded a liability of $28.9 million at December
31, 1997 related to this estimated liability. The amount of any future
assessments related to future insolvencies under these laws, however, cannot be
reasonably estimated. Most of these laws do provide that an assessment may be
excused or deferred if it would threaten an insurer's own financial strength.
Although the federal government generally does not directly regulate
the business of insurance, federal initiatives often have an impact on the
business in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies and the tax
treatment of insurance and investment products sold by the Company and the
taxation impact on the relative desirability of various investment vehicles.
Item 2. Properties
The Company leases office space in Seattle, Washington. The Company is
reimbursed by its affiliates for rent based on direct and indirect allocation
methods.
Item 3. Legal Proceedings
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 GNA of which
the Company has any knowledge.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The common stock of the Company is owned entirely by GE Capital
Assurance and, therefore, there is no trading market in such stock.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction
with the consolidated financial statements and notes thereto included in this
Form 10-K.
Selected Financial Data
(Dollars in millions)
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1997 1996 1995 1995 1994 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
Pro forma Pro forma
(unaudited) (unaudited)
(1) (1)
<S> <C>
Net investment income $ 475.3 $ 462.5 $ 444.5 $ 784.7 $ 391.6 $ 837.8 $ 579.8
Income before income taxes
and minority interest 106.8 76.0 39.1 62.0 70.6 107.7 57.0
Net income 71.3 51.1 26.7 26.3 44.0 47.5 34.1
Total assets 7,082.1 7,120.0 6,926.5 6,926.5 6,578.0 13,100.2 13,160.1
Shareholder's interest,
excluding net unrealized
investment gain/(loss) 754.2 682.9 631.7 631.7 607.3 794.2 754.0
Net unrealized investment
gain/(loss) 38.3 7.0 29.9 29.9 (166.7) (528.8) (16.3)
Total shareholder's interest 792.5 689.9 661.6 661.6 440.6 265.4 737.7
</TABLE>
(1) Unaudited pro forma results reflect the Reorganization as if it had
occurred at the beginning of the period.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
GNA derives substantially all its income from earnings on investments
offset by interest credited to policyholders of predominantly deferred and
immediate annuities, operating expenses, acquisition costs and taxes. Funds
received for the purchase of immediate annuities with life contingencies,
including options elected under annuity contracts, are reported as premium
income. Other income is primarily surrender fees on deferred annuity policies.
GNA's results of operations for the years ended December 31, 1997 and
1996 include the accounts of GNA, as well as the Company's investment in GE
Capital Life of New York, accounted for under the equity method.
1997 Compared to 1996
Net investment income increased $12.8 million to $475.3 million. 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 $19.7 million during 1997, compared to a $3.1 million in 1996. This change
is related to the Company's asset/liability risk management and varies with
market and economic conditions.
Premiums decreased $138.9 million to $61.1 million. 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 $1.8 million to
$293.9 million primarily due to lower future annuity and contract benefit
liabilities during 1997.
Benefits and other changes in policy reserves decreased $133.2 million
to $97.7 million. Change in policy reserves decreased largely due to a reduction
in sales of life contingent structured settlement products and reserved
reduction associated with the payout of benefits.
Commissions decreased $12.7 million to $14.7 million. This decrease is
due to continued shift in marketing focus to GE Capital Assurance products.
General expenses decreased $9.6 million to $26.9 million due to the
Company's continued shift in marketing focus to GE Capital Assurance products.
Amortization of intangibles decreased $1.3 million to $32.6 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 December 31, 1997.
<PAGE>
Change in deferred acquisition costs decreased $18.5 million to $8.2
million primarily as a result of lower commissions.
1996 Compared to 1995
Net investment income decreased $322.2 million to $462.5 million, of
which $343.8 million relates to GE Capital Assurance and subsidiaries that were
divested and are no longer included in the earnings of the Company as of October
1, 1995. The offsetting $21.6 million increase is primarily attributable to
higher invested assets, the equity income of the Company's subsidiary, and the
impact of higher interest rates resulting in higher reinvestment rates.
Net realized investment gains (losses) - Net realized investment gains
were $3.1 million during 1996, compared to a $14.4 million loss in 1995. This
change is related to the Company's asset/liability risk management and varies
with market and economic conditions.
Premiums increased $22.9 million to $200.0 million. This increase
primarily relates to greater recognition of premiums on GNA's life contingent
structured settlement product, offset by the effects of the Reorganization of
$9.4 million.
Interest credited on policyholder deposits decreased $166.5 million to
$295.7 million. The decrease was primarily related to the Reorganization.
Interest crediting rates remained relatively consistent with 1995.
Benefits and Other Changes in policy reserves increased $26.5 million
to $201.0 million. Policy reserves related to life contingent products increased
primarily from greater life contingent structured settlement premiums, offset by
the effects of the Reorganization of $8.0 million.
Annuity and surrender benefits decreased $106.8 million to $29.9
million. Offsetting the effects of the Reorganization, which decreased benefits
by $116.3 million, annuity and surrender benefits increased by $9.5 million,
primarily due to payments on life contingent structured settlements benefits.
Commissions decreased $15.5 million to $27.4 million. The
Reorganization accounted for $10.7 million of the decrease with the remaining
decrease attributable to a lower sales of single premium deferred annuities.
General expenses decreased $34.7 million to $36.5 million. This
decrease is primarily related to an accrual for guaranty association assessments
of $20.4 million recorded in the fourth quarter of 1995. There was no
significant additional accrual necessary during 1996. In addition, the effects
of the Reorganization resulted in a $14.5 million decrease in general expenses.
Amortization of intangibles decreased $23.6 million to $33.9 million.
The decrease is primarily related to the fact that as result of the
Reorganization, the amortization of the goodwill and PVFP balances of GE Capital
Assurance are no longer included in the Company's earnings effective October 1,
1995.
<PAGE>
Change in deferred acquisition costs decreased $16.2 million to $26.7
million primarily as a result of lower commissions of $4.8 million and the
effect of the Reorganization of $10.8 million.
Provision for income taxes. The effective tax rate for 1996 decreased
from 39.5% to 32.8% primarily due to equity income of the Company's subsidiary
and lower state taxes as a result of the Reorganization.
Minority interest decreased $11.2 million to zero due to the fact that
subsequent to the third quarter of 1995, after the effects of the
Reorganization, there was no longer minority interest recorded in GNA's
financial statements. The minority interest previously recorded represented GNA
Corporation's proportional ownership of GE Capital Assurance.
INVESTMENTS
The Company manages its investment portfolio to meet the
diversification, credit quality, yield and liquidity requirements of its policy
liabilities by investing primarily in fixed maturity instruments, including
government and corporate bonds, mortgage backed bonds, and mortgage loans on
real estate. At December 31, 1997, the Company held $6.3 billion, or 94.5% of
its investment portfolio, in fixed maturity instruments and mortgage loans. The
Company's investment philosophy focuses on purchasing assets the durations of
which approximate policyholder obligations. To match some of its longer term
policy liabilities, the Company has followed a strategy of buying bonds with
adequate call protection. The Company also invests in policy loans, short-term
securities and other investments, which comprised the remaining 5.5% of its
investment portfolio at December 31, 1997.
The Company primarily purchases investment-grade (BBB-/Baa3 or above)
bonds. At December 31, 1997, $4,601.5 million, or 91.1%, of the fixed maturity
securities held by the Company were bonds rated by a rating agency (S&P or
Moody's), or were government/agency bonds. Fixed maturity securities of $455.4
million, or 8.9%, were comprised primarily of private placement bonds not rated
by either rating agency. At December 31, 1997, the Company held $40.0 million of
bonds rated below investment grade (excluding split-rated bonds). In addition,
the Company held $22.5 million of "not-rated" bonds which the Company believes
are below investment grade. Below investment grade bonds include those bonds
originally purchased as investment grade but subsequently downgraded in rating,
as well as bonds purchased as below investment grade. The Company holds this
small percentage of below investment grade bonds in order to enhance the yield
on its investment portfolio.
Investments in mortgage-backed bonds include $1,417.2 million in
collateralized mortgage obligations (CMOs) and asset-backed securities and
$396.5 million of pass-through securities. These bonds are secured primarily by
pools of residential mortgages and generally carry high credit ratings.
Approximately 62% of the mortgage-backed bonds are backed by securities issued
by Government National Mortgage Association, Federal Home Loan Mortgage
Corporation, or Federal National Mortgage Association. In the aggregate, the
mortgage-backed bonds had an average rating of AAA/Aaa at December 31, 1997.
Most CMO and pass-through securities are subject to prepayment and extension
risk (i.e. principal can be received earlier or later than anticipated, based on
the rate of mortgage prepayments in the underlying residential mortgage pools).
<PAGE>
The Company has classified all of its fixed maturity investments
available-for-sale. Such securities are carried on the consolidated balance
sheet at current fair values and marked to market quarterly. Changes in market
value, net of the effect on present value of future profits, deferred policy
acquisition costs and deferred income taxes, are recorded as unrealized
appreciation or depreciation directly in shareholder's interest and,
accordingly, have no effect on net income. At December 31, 1997, the amortized
cost basis of the Company's fixed maturity securities was $4,903.2 million,
representing net unrealized gains of $153.7 million.
The Company's mortgage loan portfolio consisted of 989 loans at
December 31, 1997. The loans, which are originated through a network of mortgage
bankers, are made only on completed, leased properties and have a maximum
loan-to-value ratio of 75% at the date of origination. Commercial loans comprise
the majority of the portfolio, with $656.5 million (53.1%), $298.9 million
(24.1%) and $185.1 million (14.9%) attributable to the retail, industrial and
office sectors, respectively. The remainder of the loans, $99.4 million (8.0%),
are attributable to the residential and other miscellaneous sectors. The
mortgage loans are secured by property throughout the U.S., with concentrations
in the Pacific region (44.0%) and the South Atlantic region (21.4%).
Other invested assets of $256.0 million at December 31, 1997 were
comprised of several types of assets. The Company has made investments in mutual
funds offered by the Company's mutual fund and variable annuity distribution
channels of $47.8 million in order to provide seedmoney for these funds.
Pursuant to a periodic review of its asset allocation strategy, the Company has
also made investments in limited partnerships ($81.9 million) and an investment
in affiliate ($126.3 million).
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements are met by funds from operations
and investment activity. Premiums and policyholder deposits are invested in
assets that generally have durations similar to the Company's liabilities. Funds
from investment activity included principal and interest payments from the bond
and mortgage portfolio as well as sales, calls and maturities of certain
securities. As of December 31, 1997, investments subject to certain call
provisions totaled $136.5 million; and mortgage-backed securities subject to
prepayment risk totaled $1,853.7 million.
The Company is restricted by Washington State as to the amount of
dividends it may pay within a given calendar year to its parent without
regulatory consent. That restriction is the greater of statutory net gain from
operations for the previous year or 10% of the statutory surplus at the end of
the year, subject to a maximum equal to statutory earned surplus. As of December
31, 1997, approximately $73.7 million was available for dividend payments in
1998.
YEAR 2000
Year 2000 compliance programs and information systems modifications
have been initiated in an attempt to ensure that these systems and key processes
will remain functional. This objective is expected to be achieved either by
<PAGE>
modifying present systems using existing internal and external programming
resources or by installing new systems, including enterprise systems, and by
monitoring supplier and other third-party interfaces. While there can be no
assurance that all such modifications will be successful, management does not
expect that either costs of modifications or consequences of any unsuccessful
modifications should have material adverse effect on the Corporation's financial
position, results of operations or liquidity.
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. Its distinguishes transfers of 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 consolidated
financial statements and management of the Company does not expect 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 of
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 reporting 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.
In December 1997, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 97-3, Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments. This SOP provides guidance
on accounting by insurance and other enterprises for guaranty-fund and certain
other insurance related assessments. The SOP requires 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
<PAGE>
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 effective for financial
statements for fiscal years beginning after December 15, 1998 and will be
reported in a manner similar 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.
<PAGE>
[KPMG PEAR MARWICK LETTERHEAD]
Independent Auditors' Report
The Board of Directors
Great Northern Insured Annuity Corporation:
We have audited the accompanying consolidated balance sheets of Great Northern
Insured Annuity Corporation and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, shareholder's interest, and
cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Great Northern
Insured Annuity Corporation and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK
Richmond, Virginia
January 23, 1998
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(Dollar amounts in millions, except per share amounts)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Assets 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C>
Investments:
Fixed maturities available-for-sale, at fair value
(amortized cost of $4,903.2 in 1997
and $5,254.4 in 1996) $ 5,056.9 5,270.1
Mortgage loans, net of valuation allowance of $36.7 and $35.6
at December 31, 1997 and 1996, respectively 1,203.8 1,159.7
Real estate owned, net 4.1 -
Policy loans 3.3 3.3
Short-term investments 98.8 3.9
Other invested assets 256.0 161.7
- -------------------------------------------------------------------------------------------------------
Total investments 6,622.9 6,598.7
Cash 2.8 2.3
Accrued investment income 110.7 112.2
Deferred acquisition costs 97.7 129.6
Intangible assets 98.5 181.0
Deferred income taxes - 19.1
Other assets 109.6 44.4
Separate account assets 39.9 32.7
- --------------------------------------------------------------------------------------------------------
Total assets $ 7,082.1 7,120.0
========================================================================================================
Liabilities and Shareholder's Interest
- -------------------------------------------------------------------------------------------------------
Liabilities:
Future annuity and contract benefits $ 6,003.6 6,171.9
Other policyholder liabilities 18.7 48.1
Accounts payable and accrued expenses 215.1 177.4
Separate account liabilities 39.9 32.7
Deferred income tax liability 12.3 -
- -------------------------------------------------------------------------------------------------------
Total liabilities 6,289.6 6,430.1
- -------------------------------------------------------------------------------------------------------
Shareholder's interest:
Common stock, ($100 par value; 25,000 authorized, issued and
outstanding) 2.5 2.5
Additional paid-in capital 542.0 542.0
Net unrealized investment gains 38.3 7.0
Retained earnings 209.7 138.4
- -------------------------------------------------------------------------------------------------------
Total shareholder's interest 792.5 689.9
- -------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's interest $ 7,082.1 7,120.0
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1997 and 1996
(Dollar amounts in millions)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Revenues:
Net investment income $ 475.3 462.5 784.7
Net realized investment gains (losses) 19.7 3.1 (14.4)
Premiums 61.1 200.0 177.1
Policy fees and other income 8.3 8.1 16.7
- -------------------------------------------------------------------------------------------------------------------------------
Total revenues 564.4 673.7 964.1
- -------------------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Interest credited 293.9 295.7 462.2
Benefits and other changes in policy reserves 97.7 230.9 311.2
Commissions 14.7 27.4 42.9
General expenses 26.9 36.5 71.2
Amortization of intangibles, net 32.6 33.9 57.5
Change in deferred acquisition costs, net (8.2) (26.7) (42.9)
- -------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 457.6 597.7 902.1
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 106.8 76.0 62.0
Provision for income taxes 35.5 24.9 24.5
- -------------------------------------------------------------------------------------------------------------------------------
Income before minority interest 71.3 51.1 37.5
Minority interest - - 11.2
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 71.3 51.1 26.3
===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholder's Interest
Years ended December 31, 1997, 1996 and 1995
(Dollar amounts in millions, except share amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized
Additional Investment Total
Paid-in Gains Retained Shareholder's
Shares Amount Capital (Losses) Earnings Interest
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Balances at December 31, 1994 25,000 $ 2.5 719.4 (528.8) 72.3 265.4
Net income - - - - 26.3 26.3
Dividend of GE Capital Assurance - - (175.2) - (11.3) (186.5)
Purchase price adjustments - - (2.3) - - (2.3)
Net unrealized investment gains - - - 558.7 - 558.7
- ----------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 25,000 2.5 541.9 29.9 87.3 661.6
Net income - - - - 51.1 51.1
Purchase price adjustments - - 0.1 - - 0.1
Net unrealized investment losses - - - (22.9) - (22.9)
- ----------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 25,000 2.5 542.0 7.0 138.4 689.9
Net income - - - - 71.3 71.3
Net unrealized investment gains - - - 31.3 - 31.3
- ----------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 25,000 $ 2.5 542.0 38.3 209.7 792.5
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
(Dollar amounts in millions)
- --------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Net income $ 71.3 51.1 26.3
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest - - 11.2
Increase in future policy benefits 355.3 496.7 636.7
Equity in earnings of GE Capital Life of New York (8.4) (7.6) (1.3)
Net realized investment gains (19.7) (3.1) 14.4
Amortization of investment premiums and discounts 9.9 27.7 61.4
Amortization of intangibles 32.6 33.9 57.5
Deferred income tax expense (benefit) 17.0 (10.4) 4.0
Change in certain assets and liabilities:
Decrease (increase) in:
Accrued investment income 1.5 (26.6) (6.5)
Deferred acquisition costs (8.2) (26.7) (42.9)
Other assets, net (66.1) (12.4) 12.6
Increase (decrease) in:
Other policy related balances (29.4) (25.5) (25.7)
Accounts payable and accrued expenses 37.7 73.3 24.1
- --------------------------------------------------------------------------------------------------------------
Total adjustments 322.2 519.3 745.5
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 393.5 570.4 771.8
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from investments in fixed maturities
and real estate 1,229.3 868.2 1,735.6
Principal collected on mortgage and policy loans 152.1 163.9 124.4
Purchases of fixed maturities (965.2) (1,199.5) (1,846.5)
Mortgage and policy loan originations (198.0) (42.3) (159.9)
Dividends received 7.2 7.5 7.1
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 225.4 (202.2) (139.3)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issue of investment contracts 263.9 415.6 810.3
Redemption and benefit payments on investment contracts (787.4) (807.6) (1,469.2)
Cash distributed in conjunction with dividend - - (31.5)
- --------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (523.5) (392.0) (690.4)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 95.4 (23.8) (57.9)
===============================================================================================================
Cash and cash equivalents at beginning of year 6.2 30.0 87.9
===============================================================================================================
Cash and cash equivalents at end of year $ 101.6 6.2 30.0
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar amounts in millions)
==============================================================================
(1) Basis of Presentation, Principles of Consolidation and Summary of
Significant Accounting Policies
Basis of Presentation
These consolidated financial statements have been prepared on the basis
of generally accepted accounting principles (GAAP) for stock life
insurance companies, which vary in several respects from accounting
practices prescribed or permitted by the Insurance Commissioner of the
State of Washington, where Great Northern Insured Annuity Corporation
(GNA or the Company) is domiciled. The preparation of financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts and related
disclosures. Actual results could differ from those estimates.
Principles of Consolidation
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 GNA's parent company,
GNA Corporation. 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
(collectively, the Acquisitions). During 1994 United Pacific Life
Insurance Company was renamed General Electric Capital Assurance
Company (GE Capital Assurance).
Effective October 1, 1995, the Company was party to a reorganization
(the Reorganization) involving GNA Corporation and certain of its life
insurance company subsidiaries. The Reorganization allows all life
insurance company subsidiaries of GNA Corporation to file a
consolidated federal tax return.
Prior to the Reorganization, GE Capital Assurance's voting common stock
was owned by GNA and its preferred and nonvoting common stock was owned
by GNA Corporation, thus resulting in minority interest. As part of the
Reorganization, GNA became a wholly-owned subsidiary of GE Capital
Assurance and GE Capital Assurance became a wholly-
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(1) Continued
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 share
of GE Capital Assurance. On October 1, 1995, 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 and a decrease in shareholder's interest of $186.5.
The accompanying consolidated financial statements include the accounts
of GNA and its subsidiaries prior to the Reorganization, GE Capital
Assurance and First GNA Life Insurance Company of New York (First GNA),
owned 48% by GNA and 52% by GE Capital Assurance. The results
subsequent to the Reorganization include GNA, as well as its
proportionate share of First GNA, accounted for under the equity
method. Effective February 1, 1996, First GNA was renamed GE Capital
Life Assurance Company of New York (GE Capital Life of New York).
Products
The Company's operations are in one business segment, Wealth
Accumulation and Transfer. Wealth Accumulation and Transfer products
are investment vehicles and insurance contracts intended to increase
the policyholder's wealth, transfer wealth to beneficiaries or provide
a means for replacing the income of the insured in the event of
premature death. The Company's principal product lines under the Wealth
Accumulation and Transfer segment are deferred annuities (fixed and
variable) and immediate annuities.
The Company primarily sells its products through banks, thrifts and
other financial institutions.
Revenues
Investment income is recorded when earned. Investment gains and losses
are calculated on the basis of specific identification. Premiums on
short duration insurance contracts are reported as revenue over the
terms of the related insurance policies. In general, earned premiums
are calculated on a pro-rata basis or are recognized in proportion to
expected claims. Premiums on long-duration insurance products are
recognized as earned when
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(1) Continued
due or, in the case of life contingent immediate annuities, when the
contracts are issued. Premiums received under annuity contracts without
significant mortality risk and premiums received on universal life
products are not reported as revenues but as future annuity and
contract benefits. Other income consists primarily of surrender charges
on certain policies. Surrender charges are recognized as income when
the policy is surrendered.
Statements of Cash Flows
Certificates and other time deposits are classified as short-term
investments on the consolidated balance sheets and considered cash
equivalents in the consolidated statements of cash flows.
Investments
The Company has designated its fixed maturities (bonds, notes, and
redeemable preferred stock) as available-for-sale. The fair value for
fixed maturities is based on quoted market prices, where available. For
fixed maturities not actively traded, fair values are estimated using
values obtained from independent pricing services or, in the case of
private placements, are estimated by discounting expected future cash
flows using a current market rate applicable to the credit quality,
call features and maturity of the investments, as applicable.
Changes in the market values of investments available-for-sale, net of
the effect on deferred policy acquisition costs, present value of
future profits and deferred federal income taxes, are reflected as
unrealized investment gains or losses in a separate component of
shareholder's interest and, accordingly, have no effect on net income.
Unrealized losses that are considered other than temporary are
recognized in earnings through an adjustment to the amortized cost
basis of the underlying securities.
Investment income on mortgage-backed securities is initially based upon
yield, cash flow and prepayment assumptions at the date of purchase.
Subsequent revisions in those assumptions are recorded using the
retrospective method, whereby the amortized cost of the securities is
adjusted to the amount that would have existed had the revised
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(1) Continued
assumptions been in place at the date of purchase. The adjustments to
amortized cost are recorded as a charge or credit to investment income.
The Company does not engage in derivatives trading, market-making or
other speculative activities. The Company requires all options to be
designated and accounted for as hedges of specific assets, liabilities
or committed transactions; resulting payments and receipts are
recognized contemporaneously with effects of hedged transactions. Any
instrument designated but ineffective as a hedge is marked to market
and recognized in operations immediately. A payment or receipt arising
from early termination of an effective hedge is accounted for as an
adjustment to the basis of the hedged transaction.
Mortgage and policy loans are stated at the unpaid principal balance of
such loans, net of allowances for estimated uncollectable amounts.
Deferred Acquisition Costs
Acquisition costs include costs and expenses which vary with and are
primarily related to the acquisition of insurance and investment
contracts, such as commissions, direct advertising and printing and
certain support costs such as underwriting and policy issue expenses.
Acquisition costs capitalized are determined by actual costs and
expenses incurred by product in the year of issue.
For investment contracts, deferred acquisition costs are amortized
based on the present value of the anticipated gross profits from
investments, interest credited, surrender charges, mortality and
maintenance expenses. As actual gross profits vary from projected, the
impact on amortization is included in net income. For insurance
contracts, the acquisition costs are amortized in relation to the
benefit payments or the present value of expected future premiums.
Recoverability of deferred acquisition costs is evaluated periodically
by comparing the current estimate of expected future gross profits to
the unamortized asset balances. If such comparison indicates that the
expected gross profits will not be sufficient to recover the asset, the
difference is charged to expense.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(1) Continued
Intangible Assets
Present Value of Future Profits - In conjunction with the acquisitions
of life insurance subsidiaries, a portion of the purchase price is
assigned to the right to receive future gross profits arising from
existing insurance and investment contracts. This intangible asset,
called the present value of future profits (PVFP), represents the
actuarially determined present value of the projected future cash flows
from the acquired policies.
Goodwill - Goodwill is amortized over its estimated period of benefit
on the straight-line method. No amortization period exceeds 25 years.
Goodwill in excess of associated expected operating cash flows is
considered to be impaired and is written down to fair value.
Federal Income Taxes
The Company is included with GE Capital Assurance in a life insurance
consolidated federal income tax return. Deferred taxes are allocated by
applying the asset and liability method of accounting for deferred
income taxes to members of the group as if each member was a separate
taxpayer. Intercompany balances are settled annually.
Future Annuity and Contract Benefits
Future annuity and contract benefits consists of the liability for life
insurance policies and immediate and deferred annuity contracts.
Depending on the type of contract, these are calculated based upon
actuarial assumptions as to mortality, morbidity, interest, expense and
withdrawals, with experience adjustments for adverse deviation where
appropriate.
Separate Accounts
The separate account assets and liabilities represent funds held for
the exclusive benefit of the variable annuity contract owners. The
Company receives mortality risk fees and administration charges from
the variable mutual fund portfolios. The separate account assets are
carried at fair value and are equivalent to the liabilities that
represent the policyholders' equity in those assets.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(1) Continued
Reclassifications
Certain reclassifications may have been made to the prior year's
financial statements to conform to the current year's presentation.
These reclassifications have no effect on reported net income of
financial position.
(2) Investments
General
For the years ended December 31, the sources of investment income of
the Company were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Fixed maturities $ 369.6 353.0 662.9
Mortgage loans 97.8 102.8 122.3
GE Capital Life of New York equity method income 8.4 7.6 1.3
Other 3.4 2.4 4.9
- -------------------------------------------------------------------------------------------------------------
Gross investment income 479.2 465.8 791.4
Investment expenses (3.9) (3.3) (6.7)
- -------------------------------------------------------------------------------------------------------------
Net investment income $ 475.3 462.5 784.7
=============================================================================================================
</TABLE>
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
(2) Continued
For the years ended December 31, sales proceeds and gross realized
investment gains and losses resulting from the sales of investment
securities available-for-sale were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Sales proceeds $ 349.4 192.8 998.9
Gross realized investment:
Gains 24.1 8.1 16.6
Losses (4.4) (5.0) (31.0)
- ------------------------------------------------------------------------------------------------------------
Net realized investment gains (losses) $ 19.7 3.1 (14.4)
============================================================================================================
</TABLE>
The additional proceeds from investments presented in the statements of
cash flows result from principal collected on mortgage-backed
securities, maturities, calls and sinking payments.
Net unrealized gains and losses on investment securities classified as
available-for-sale are reduced by deferred income taxes and adjustments
to the present value of future profits and deferred acquisition costs
that would have resulted had such gains and losses been realized. Net
unrealized gains and losses on available-for-sale investment securities
reflected as a separate component of shareholder's interest are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Net unrealized gains on available-for-sale investment securities before
adjustments:
Fixed maturities $ 153.7 15.7
Other invested assets 3.5 5.4
- -----------------------------------------------------------------------------------------------------------
Sub-total 157.2 21.1
Adjustments to the present value of future profits and deferred
acquisition costs (100.1) (10.0)
Deferred income taxes (18.8) (4.1)
- -----------------------------------------------------------------------------------------------------------
Net unrealized gains on available-for-sale investment securities $ 38.3 7.0
===========================================================================================================
</TABLE>
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(2) Continued
At December 31, the amortized cost, gross unrealized gains and losses,
and fair values of the Company's fixed maturities available-for-sale
were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
1997 cost gains losses value
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Fixed maturities:
U.S. government and agency $ 78.5 10.8 - 89.3
Non-U.S. corporate 184.1 12.1 (0.9) 195.3
U.S. corporate 2,826.9 97.6 (5.9) 2,918.6
Mortgage-backed 1,813.7 48.7 (8.7) 1,853.7
- -------------------------------------------------------------------------------------------------------------
Total fixed maturities $ 4,903.2 169.2 (15.5) 5,056.9
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
1996 cost gains losses value
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Fixed maturities:
U.S. government and agency $ 144.5 9.9 (1.4) 153.0
Non-U.S. corporate 200.9 6.7 (1.5) 206.1
U.S. corporate 3,065.0 10.1 (28.0) 3,047.1
Mortgage-backed 1,844.0 36.5 (16.6) 1,863.9
- -------------------------------------------------------------------------------------------------------------
Total fixed maturities $ 5,254.4 63.2 (47.5) 5,270.1
==============================================================================================================
</TABLE>
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(2) Continued
The scheduled maturity distribution of the fixed maturities portfolio
at December 31 follows. Expected maturities may differ from scheduled
contractual maturities because issuers of securities may have the right
to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
1997
--------------------------
Amortized Fair
cost value
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Due in one year or less $ 396.4 398.5
Due one year through five years 1,475.0 1,501.7
Due five years through ten years 569.2 592.3
Due after ten years 648.9 710.7
- ----------------------------------------------------------------------------------------------------------
Subtotals 3,089.5 3,203.2
Mortgage-backed securities 1,813.7 1,853.7
- ----------------------------------------------------------------------------------------------------------
Totals $ 4,903.2 5,056.9
==========================================================================================================
</TABLE>
As required by law, the Company has investments on deposit with
governmental authorities and banks for the protection of policyholders
of $3.5 and $3.0 to December 31, 1997 and 1996, respectively.
At December 31, 1997, approximately 23.5% and 15.3% of the Company's
investment portfolio is comprised of securities issued by the
manufacturing and financial industries, respectively, the vast majority
of which are rated investment grade, and which are senior secured
bonds. No other industry group comprises more than 10% of the Company's
investment portfolio. This portfolio is widely diversified among
various geographic regions in the United States, and is not dependent
on the economic stability of one particular region.
At December 31, 1997, the Company did not hold any fixed maturity
securities, other than securities issued or guaranteed by the U.S.
government, which exceeded 10% of shareholder's interest.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(2) Continued
The credit quality of the fixed maturity portfolio at December 31
follows. The categories are based on the higher of the ratings
published by Standard & Poors or Moody's.
<TABLE>
<CAPTION>
1997 1996
------------------------ ---------------------
Fair Fair
value Percent value Percent
- --------------------------------------------------------------------------------------------------------
<S> <C>
Agencies and treasuries $ 1,207.0 23.9% $ 1,400.5 26.6%
AAA/Aaa 612.3 12.1 476.7 9.0
AA/Aa 317.1 6.3 284.6 5.4
A/A 1,162.4 23.0 1,412.7 26.8
BBB/Baa 1,262.7 25.0 1,275.1 24.2
BB/Ba 36.9 0.7 40.7 0.8
B/B 3.1 0.1 - -
Not rated 455.4 8.9 379.8 7.2
- --------------------------------------------------------------------------------------------------------
Totals $ 5,056.9 100.0% $ 5,270.1 100.0%
- --------------------------------------------------------------------------------------------------------
</TABLE>
Bonds with ratings ranging from AAA/Aaa to BBB-/Baa3 are generally
regarded as investment grade securities. Some agencies and treasuries
(that is, those securities issued by the United States government or an
agency thereof) are not rated, but all are considered to be investment
grade securities. Finally, some securities, such as private placements,
have not been assigned a rating by any rating service and are therefore
categorized as "not rated." This has neither positive nor negative
implications regarding the value of the security.
At December 31, 1997, there were no fixed maturities in default as to
principal and interest.
Mortgage Loans
At December 31, 1997 and 1996, the Company's mortgage loan portfolio
consisted of 989 and 1,044, respectively, first mortgage loans on
commercial real estate properties. The loans, which are originated by
the Company through a network of mortgage bankers, are made only on
completed, leased properties and have a maximum loan-to-value ratio of
75% at the date of origination.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
(2) Continued
At December 31, 1997 and 1996, respectively, the Company held $451.1
and $449.0 in mortgages secured by real estate in California,
comprising 36% and 38% of the respective total mortgage portfolio. For
the years ended December 31, 1997, 1996 and 1995, respectively, the
Company originated $79.7, $12.5 and $18.5 of mortgages secured by real
estate in California, which represent 40%, 29% and 13% of the
respective total origination's for those years.
"Impaired" loans are defined under generally accepted accounting
principles as loans for which it is probable that the lender will be
unable to collect all amounts due according to 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 the Company's commercial loans.
Under these principles, the Company has two types of "impaired" loans
as of December 31, 1997 and 1996: loans requiring allowances for losses
($0 and $1.7, respectively) and loans expected to be fully recoverable
because the carrying amount has been reduced previously through
charge-offs or deferral of income recognition ($6.1 and $12.6,
respectively). Allowance for losses on these loans as of December 31,
1997 and 1996 were $0 and $.8, respectively. Average investment in
impaired loans during 1997, 1996 and 1995 was $8.9, $15.6 and $11.3
respectively and interest income earned on these loans while they were
considered impaired was $.7, $.7 and $1.3, respectively.
The following table shows the activity in the allowance for losses
during the years ended December 31:
1997 1996 1995
- ------------------------------------------------------------------------
Balance at January 1 $ 35.6 35.3 32.0
Dividend of GE Capital Assurance - - (0.3)
Provision charged to operations 2.3 2.5 2.8
Amounts written off, net of recoveries (1.2) (2.2) 0.8
- ------------------------------------------------------------------------
Balance at December 31 $ 36.7 35.6 35.3
========================================================================
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(2) Continued
The write-offs represented .09%, 0.18% and 0.15% of average
mortgage loans outstanding during 1997, 1996 and 1995, respectively.
The allowance for losses on mortgage loans at December 31, 1997 and
1996 represented 3.0% and 3.1% of gross mortgage loans, respectively.
Investment in GE Capital Life of New York
A portion of other invested assets at December 31, 1997 and 1996
included $126.3 and $121.0, respectively, for the Company's 48%
investment in GE Capital Life of New York, accounted for under the
equity method. Investment income for 1997 and 1996 includes $8.4 and
$7.6 for equity in earnings of GE Capital Life of New York
respectively. For 1995, investment income includes $1.3 for equity in
earnings of GE Capital Life of New York subsequent to the
Reorganization on October 1, 1995. Prior to the Reorganization, GE
Capital Life of New York was consolidated. Following is the summarized
financial information for GE Capital Life of New York as of and for the
years ended December 31:
1997 1996 1995
- --------------------------------------------------------------------------
Total revenue $ 164.4 163.3 102.0
Total expenses 135.4 137.6 84.1
- --------------------------------------------------------------------------
Income before income taxes 29.0 25.7 17.9
Provision for income taxes 11.5 9.8 8.4
- --------------------------------------------------------------------------
Net income $ 17.5 15.9 9.5
==========================================================================
Total investments $ 1,667.6 1,554.1 1,491.6
Other assets 139.9 154.9 100.1
- --------------------------------------------------------------------------
Total assets $ 1,807.5 1,709.0 1,591.7
==========================================================================
Total liabilities $ 1,547.2 1,459.8 1,334.9
Shareholder's interest 260.3 249.2 256.8
- --------------------------------------------------------------------------
Total liabilities and
shareholder's interest $ 1,807.5 1,709.0 1,591.7
- --------------------------------------------------------------------------
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(3) Deferred Acquisition Costs
Activity impacting deferred acquisition costs for the years ended
December 31, was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Unamortized balance at January 1 $ 133.2 106.5 90.2
Dividend of GE Capital Assurance - - (26.6)
Costs deferred 18.4 36.0 53.0
Amortization, net (10.2) (9.3) (10.1)
- -----------------------------------------------------------------------------------------------------------
Unamortized balance at December 31 141.4 133.2 106.5
Cumulative effect of net unrealized investment gains (43.7) (3.6) (17.7)
- -----------------------------------------------------------------------------------------------------------
Recorded balance $ 97.7 129.6 88.8
============================================================================================================
</TABLE>
(4) Intangible Assets
Present Value of Future Profits (PVFP)
The method used by the Company to value PVFP in connection with
acquisitions of life insurance entities is summarized as follows: (1)
identify the future gross profits attributable to certain lines of
business, (2) identify the risks inherent in realizing those gross
profits, and (3) discount these gross profits at the rate of return
that the Company must earn in order to accept the inherent risks.
After PVFP is determined, the amount is amortized, net of accreted
interest in a manner similar to the amortization of deferred
acquisition cost. Interest accretes at rates credited to policyholders
on underlying contracts. As actual results vary from projected amounts,
the impact on amortization is included in net income.
Recoverability of PVFP is evaluated periodically by comparing the
current estimate of expected future gross profits to the unamortized
asset balance. If such comparison indicates that the expected gross
profits will not be sufficient to recover PVFP, the difference is
charged to expense.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(4) Continued
The following table presents the activity in PVFP for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Unamortized balance at January 1 $ 155.1 187.5 313.9
Dividend of GE Capital Assurance - - (74.0)
Interest accrued at 5.2% in 1997, 5.4% in 1996 and 4.8% in 1995 7.1 10.0 15.4
Amortization (38.1) (42.4) (67.8)
- ----------------------------------------------------------------------------------------------------------
Unamortized balance at December 31 124.1 155.1 187.5
Cumulative effect of net unrealized investment gains (56.4) (6.4) (65.1)
- ----------------------------------------------------------------------------------------------------------
Recorded balance $ 67.7 148.7 122.4
===========================================================================================================
</TABLE>
The estimated percentage of the December 31, 1997 balance, before the
effect of unrealized investment gains or losses, to be amortized over
each of the next five years is as follows:
1998 20%
1999 16
2000 13
2001 11
2002 9
Goodwill
At December 31, 1997 and 1996, total unamortized goodwill was $29.7 and
$31.2, respectively, which is shown net of accumulated amortization of
$6.9 and $5.5, respectively. Goodwill amortization was $1.5, $1.5 and
$4.8 for the years ended December 31, 1997, 1996 and 1995,
respectively.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(5) Future Annuity and Contract Benefits
Investment and Universal Life Type Contracts
Investment contracts are broadly defined to include contracts without
significant mortality or morbidity risk. Payments received from sales
of investment and universal life contracts are recognized by providing
a liability equal to the current account value of the policyholder's
contracts. Interest rates credited to investment contracts are
guaranteed for the initial policy term with renewal rates determined as
necessary by management. At December 31, 1997 and 1996, investment and
universal life contracts comprised $5,435.8 and $5,660.9, respectively.
Insurance Contracts
Insurance contracts are broadly defined to include contracts with
significant mortality and/or morbidity risk. The liability for future
benefits of insurance contracts is the present value of such benefits
based on mortality, morbidity, and other assumptions which were
appropriate at the time the policies were issued or acquired. These
assumptions are periodically evaluated for potential premium
deficiencies. At December 31, 1997 and 1996, insurance contracts
comprised $567.8 and $511.0, respectively.
Interest rate assumptions used in calculating the present value of
future annuity and contract benefits range from 5.8% to 9.9%.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(6) Income Taxes
The total provision for income taxes for the years ended December 31
consisted of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Current federal income tax provision $ 17.2 34.3 19.5
Deferred federal income tax provision (benefit) 17.3 (10.1) 3.9
- ------------------------------------------------------------------------------------------------------------
Subtotal federal provision 34.5 24.2 23.4
Current state income tax provision 1.3 1.0 1.0
Deferred state income tax provision (benefit) (0.3) (0.3) 0.1
- ------------------------------------------------------------------------------------------------------------
Subtotal state provision 1.0 0.7 1.1
- ------------------------------------------------------------------------------------------------------------
Total income tax provision $ 35.5 24.9 24.5
=============================================================================================================
</TABLE>
The reconciliation of the federal statutory tax rate to the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
Equity in earnings of GE Capital Life of New York (2.8) (3.5) (0.7)
State income tax 0.6 0.6 1.2
Goodwill amortization 0.5 0.7 2.7
Other, net (0.1) - 1.3
- ----------------------------------------------------------------------------------------------------------
Effective rate 33.2% 32.8% 39.5%
===========================================================================================================
</TABLE>
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(6) Continued
The components of the net deferred income tax benefit at December 31
are as follows:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Future annuity and contract benefits $ 68.7 68.2
Guaranty association assessments 11.7 14.1
Mortgage loans and real estate owned - 6.2
Other 1.0 0.7
- -----------------------------------------------------------------------------------------------------------
Total deferred tax assets 81.4 89.2
- -----------------------------------------------------------------------------------------------------------
Liabilities:
Net unrealized gains on investment securities (18.8) (4.1)
Investments (3.1) (2.0)
Present value of future profits (35.7) (45.2)
Deferred acquisition costs (22.5) (16.4)
Other (13.6) (2.4)
- -----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (93.7) (70.1)
- -----------------------------------------------------------------------------------------------------------
Net deferred income tax benefit (liability) $ (12.3) 19.1
============================================================================================================
</TABLE>
Based on an analysis of the Company's tax position, management believes
it is more likely than not that the results of future operations and
implementation of tax planning strategies will generate sufficient
taxable income enabling the Company to realize remaining deferred tax
assets. Accordingly, no valuation allowance for deferred tax assets was
deemed necessary.
The Company paid $25.4, $50.4 and $1.7, for federal and state income
taxes during the years 1997, 1996 and 1995, respectively.
(7) Related Party Transactions
During the years ended December 31, 1997, 1996 and 1995, the Company
recognized $3.4, $3.4 and $1.6, respectively, from its affiliates,
Capital Brokerage Corporation (formerly known as GNA Securities, Inc.)
and GNA Distributors, Inc. for reimbursement of marketing,
administrative and general office expenses.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(7) Continued
During the years ended December 31, 1997, 1996 and 1995, the Company
received a dividend from GE Capital Life of New York of $7.2, $7.5 and
$7.1, respectively.
(8) Commitments and Contingencies
Mortgage Loan Commitments
As of December 31, 1997 and 1996, the Company was committed to fund
$94.8 and $27.7, respectively, in mortgage loans.
Guaranty Association Assessments
The Company's insurance subsidiaries are required by law to participate
in the guaranty associations of the various states in which they do
business. The state guaranty associations ensure payment of guaranteed
benefits, with certain restrictions, to policyholders of impaired or
insolvent insurance companies by assessing all other companies involved
in similar lines of business.
There are currently several unrelated insurance companies which had
substantial amounts of annuity business in the process of liquidation
or rehabilitation. The Company's insurance subsidiaries paid
assessments of $5.4, $3.9 and $6.6 to various state guaranty
associations during the years 1997, 1996 and 1995, respectively. At
December 31, 1997 and 1996, accounts payable and accrued expenses
include $28.9 and $34.4, respectively, related to estimated future
assessments.
Litigation
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.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
(9) Fair Value of Financial Instruments
On December 31, 1995, the Company adopted SFAS No. 119, Disclosures
About Derivative Financial Instruments and Fair Value of Financial
Instruments. This statement requires disclosures about the amounts,
nature and terms of derivative financial instruments and modifies
existing disclosure requirements for other financial instruments.
The Company has no derivative financial instruments as defined by SFAS
No. 119 at December 31, 1997, other than mortgage loan commitments of
$94.8.
The fair values of financial instruments presented in the applicable
notes to the Company's consolidated financial statements are estimates
of the fair values at a specific point in time using available market
information and valuation methodologies considered appropriate by
management. These estimates are subjective in nature and involve
uncertainties and significant judgment in the interpretation of current
market data. Therefore, the fair values presented are not necessarily
indicative of amounts the Company could realize or settle currently.
The Company does not necessarily intend to dispose of or liquidate such
instruments prior to maturity.
Financial instruments that, as a matter of accounting policy,
are reflected in the accompanying consolidated financial statements
at fair value are not included in the following disclosures. Such
items include fixed maturities, accrued investment income and certain
other invested assets. The carrying value of policy loans and
short-term investments approximates fair value at December 31, 1997 and
1996, respectively.
At December 31, the carrying amounts and fair values of the Company's
remaining financial instruments were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Financial Instruments amount value amount value
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Mortgage loans $ 1,203.8 1,268.6 1,159.7 1,171.2
Investment contracts $ 5,315.3 5,194.3 5,504.0 5,364.5
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
===============================================================================
(9) Continued
The fair value of mortgage loans is estimated by discounting the
estimated future cash flows using interest rates applicable to current
loan origination, adjusted for credit risks.
The estimated fair value of investment contracts is the amount payable
on demand (cash surrender value) for deferred annuities and the net
present value based on interest rates currently offered on similar
contracts for non-life contingent immediate annuities. Fair value
disclosures are not required for insurance contracts.
(10) Restrictions on Dividends
Insurance companies are restricted by states as to the aggregate amount
of dividends they may pay to their parent in any consecutive twelve
month period without regulatory approval. Generally, dividends may be
paid out of earned surplus without approval with thirty days prior
written notice within certain limits. The limits are generally based on
10% of the prior year surplus (net of adjustments in some cases) and
prior year statutory income (net gain from operations, net income
adjusted for realized capital gains, or net investment income).
Dividends in excess of the prescribed limits or the company's earned
surplus are deemed extraordinary and require formal state insurance
commission approval. Based on statutory results as of December 31,
1997, the Company is able to pay $73.7 in dividends in 1998 without
obtaining regulatory approval.
(11) Supplementary Financial Data
The Company's insurance subsidiaries file financial statements with
state insurance regulatory authorities and the National Association of
Insurance Commissioners (NAIC) that are prepared on an accounting basis
prescribed by such authorities (statutory basis). Statutory accounting
practices differ from generally accepted accounting principles (GAAP)
in several respects, causing differences in reported net income and
shareholder's interest. Permitted statutory accounting practices
encompass all accounting practices not so prescribed but that have been
specifically allowed by state insurance authorities. The Company's
insurance subsidiaries have no significant permitted accounting
practices.
Combined statutory net income for the Company's insurance
subsidiaries for the years ended December 31, 1997, 1996 and 1995 was
$73.0, $65.4 and $76.7 , respectively. The
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
================================================================================
(11) Continued
combined statutory capital and surplus as of December 31, 1997
and 1996 was $496.5 and $411.2, respectively.
The NAIC has adopted Risk-Based Capital (RBC) requirements to evaluate
the adequacy of statutory capital and surplus in relation to risks
associated with: (i) asset quality, (ii) insurance risk, (iii) interest
rate risk, and (iv) other business factors. The RBC formula is
designated as an early warning tool for the states to identify possible
under- capitalized companies for the purpose of initiating regulatory
action. In the course of operations, the Company periodically monitors
the RBC level of each of its insurance subsidiaries. At December 31,
1997 and 1996, each of the Company's insurance subsidiaries exceeded
the minimum required RBC levels.
===============================================================================
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
GREAT NORTHERN INSURED ANNUITY CORPORATION FORM 10-K AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 5,056
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 1,204
<REAL-ESTATE> 0
<TOTAL-INVEST> 6,623
<CASH> 0
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 98
<TOTAL-ASSETS> 7,082
<POLICY-LOSSES> 6,004
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 19
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 3
<OTHER-SE> 790
<TOTAL-LIABILITY-AND-EQUITY> 7,082
61
<INVESTMENT-INCOME> 475
<INVESTMENT-GAINS> 20
<OTHER-INCOME> 8
<BENEFITS> 36
<UNDERWRITING-AMORTIZATION> (8)
<UNDERWRITING-OTHER> 42
<INCOME-PRETAX> 107
<INCOME-TAX> 36
<INCOME-CONTINUING> 71
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
