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, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to ______________
Commission file number 33-62674
Great Northern Insured Annuity Corporation
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(Exact name of registrant as specified in its charter)
Washington 91-1127115
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
Two Union Square, Suite 5600
Seattle, Washington 98101
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (206) 625-1755
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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
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Part I - Financial Information
Item 1. Financial Statements.................................. 3
Item 2. Management's Discussion and Analysis
of Results of Operations............................ 8
Part II - Other Information
Item 1. Legal Proceedings..................................... 10
Item 2. Changes in Securities................................. 10
Item 3. Defaults Upon Senior Securities....................... 10
Item 4. Submission of Matters to a Vote of Security Holders... 10
Item 5. Other Information..................................... 10
Item 6. Exhibits and Reports on Form 8-K...................... 10
Signatures 11
<PAGE>
Item 1. Financial Statements
Great Northern Insured Annuity Corporation
Balance Sheets
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Sept. 30, 1998 Dec. 31, 1997
(Unaudited) (Unaudited)
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Assets
<S> <C>
Investments:
Fixed maturities available for sale, at fair value $ 4,961.2 $ 5,056.9
Mortgage loans, net of valuation allowance 1,077.5 1,203.8
Real estate owned, net 4.8 4.1
Policy loans 3.3 3.3
Short-term investments 4.8 98.8
Other invested assets 270.0 256.0
---------------------------
Total investments 6,321.6 6,622.9
Cash 2.5 2.8
Accrued investment income 108.7 110.7
Deferred acquisition costs 83.2 97.7
Intangible assets 65.1 98.5
Other assets 47.1 109.6
Separate account assets 36.9 39.9
---------------------------
Total assets $ 6,665.1 $ 7,082.1
===========================
Liabilities and Shareholder's Interest
Liabilities:
Future annuity and contract benefits $ 5,506.9 $ 6,003.6
Other policyholder liabilities 10.8 18.7
Accounts payable and accrued expenses 202.8 215.1
Deferred income tax liability 22.8 12.3
Separate account liabilities 36.9 39.9
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Total liabilities 5,780.2 6,289.6
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Accumulated non-owner changes in equity 77.2 38.3
Common stock 2.5 2.5
Additional paid-in capital 542.0 542.0
Retained earnings 263.2 209.7
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Total shareholder's interest 884.9 792.5
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Total liabilities and shareholder's interest $ 6,665.1 $ 7,082.1
===========================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Item 1. Financial Statements (Continued)
Great Northern Insured Annuity Corporation
Statements of Income and Retained Earnings
(Unaudited)
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
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<S> <C>
Revenues:
Net investment income $ 101.5 $ 117.8 $ 337.8 $ 356.8
Net realized investment gains (losses) 1.0 (.1) 1.6 6.5
Premiums 2.9 7.2 12.1 57.9
Policy fees and other income 2.4 1.7 6.9 6.4
------- -------- -------- --------
Total revenues 107.8 126.6 358.4 427.6
------- -------- -------- --------
Benefits and expenses:
Interest credited 62.4 73.3 196.5 220.8
Change in policy reserves 2.5 8.5 11.9 58.7
Annuity and surrender benefits 9.7 7.9 28.6 26.4
Commissions .9 2.5 3.7 13.3
General expenses 2.2 5.2 7.8 23.4
Amortization of intangibles, net 7.2 8.5 21.9 25.2
Change in deferred acquisition costs, net 3.4 (2.3) 8.1 (10.1)
------- -------- -------- --------
Total benefits and expenses 88.3 103.6 278.5 357.7
------- -------- -------- --------
Income before income taxes 19.5 23.0 79.9 69.9
Provision for income taxes 8.0 7.4 26.4 23.0
------- -------- -------- --------
Net income 11.5 15.6 53.5 46.9
Retained earnings at beginning of period 251.7 169.7 209.7 138.4
------- -------- -------- --------
Retained earnings at end of period $ 263.2 $ 185.3 $ 263.2 $ 185.3
======= ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Item 1. Financial Statements (Continued)
Great Northern Insured Annuity Corporation
Statements of Cash Flows
(Unaudited)
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1997
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<S> <C>
Cash flows from operating activities:
Net income $ 53.5 $ 46.9
------ -------
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiary (7.0) (6.2)
Increase in future policy benefits 208.3 279.5
Net realized investment gains (1.6) (6.5)
Amortization of investment premiums and discounts 3.8 10.3
Amortization of intangibles, net 21.9 25.2
Change in certain assets and liabilities:
Decrease (increase) in:
Accrued investment income 2.0 (1.9)
Deferred acquisition costs 8.1 (10.1)
Other assets 62.5 (247.9)
Increase (decrease) in:
Other policyholder liabilities (7.9) (31.0)
Accounts payable and accrued expenses (12.3) 230.9
Deferred income tax liability (7.1) (8.3)
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Total adjustments 270.7 234.0
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Net cash provided by operating activities 324.2 280.9
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Cash flows from investing activities:
Proceeds from investments in fixed maturities and other invested assets 879.8 849.9
Principal collected on mortgage and policy loans 206.3 122.3
Purchases of fixed maturities and other invested assets (718.1) (766.8)
Mortgage loan originations (81.2) (111.5)
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Net cash provided by investing activities 286.8 93.9
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Cash flows from financing activities:
Proceeds from issue of investment contracts 180.2 230.2
Redemption and benefit payments on investment contracts (885.5) (601.4)
------ -------
Net cash used in financing activities (705.3) (371.2)
------ -------
Net increase (decrease) in cash and cash equivalents (94.3) 3.7
Cash and cash equivalents at beginning of period 101.6 6.2
------ -------
Cash and cash equivalents at end of period $ 7.3 $ 9.9
====== =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Item 1. Financial Statement (Continued)
GREAT NORTHERN INSURED ANNUITY CORPORATION
Notes to Financial Statements
September 30, 1998
(Unaudited)
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(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 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 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.
The condensed 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 condensed financial statements should not be
regarded as necessarily indicative of results that may be expected for
the entire year.
(2) Commitment and Contingencies
As of September 30, 1998 and December 31, 1997, the Company was committed
to fund $24.0 million and $94.8 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
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, was adopted as of January 1, 1998. This Statement
requires reporting of changes in shareholder's equity that do not result
directly from transactions with the shareholder. An analysis of these
changes follows:
<PAGE>
Three Months Ended
(Dollars in millions) Sept 30, 1998 Sept 30, 1997
------------- -------------
Net Income $11.5 $15.6
Unrealized gains on Investment
securities-net 19.5 29.3
---- ----
Total $31.0 $44.9
===== =====
Nine Months Ended
(Dollars in millions) Sept 30, 1998 Sept 30, 1997
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Net Income $53.5 $46.9
Unrealized gains on Investment
securities-net 38.9 29.8
---- ----
Total $92.4 $76.7
===== =====
(4) In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities
(the "Statement"). The Statement requires that, upon adoption, all
derivative instruments (including certain derivative instruments embedded
in other contracts) be recognized in the balance sheet at fair value, and
that changes in such fair values be recognized in earning unless specific
hedging criteria are met. Changes in the values of derivatives that meet
these hedging criteria will ultimately offset related earnings effects of
the hedged items; effects of certain changes in fair value are recorded
in other comprehensive income pending recognition in earnings. The
Company will not adopt the Statement until required to do so on January
1, 2000.
<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, 1998 and
1997, 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 decreased $19.0 million to $337.8 million during the first
nine months of 1998 compared to 1997. The change is attributable to a reduction
in earning assets. Overall investment yields have also decreased due to a lower
interest rate environment.
Net realized investment gains were $1.6 million during the first nine months of
1998, compared to $6.5 million in gains during the same period in 1997. This
change is related to the Company's asset/liability risk management and varies
with market and economic conditions and include net investment gains from
securities being tendered.
Premiums decreased $45.8 million to $12.1 million during the first nine months
of 1998. This decrease is due to lower sales of life contingent structured
settlement products primarily related to a shift in marketing focus to products
of GE Capital Assurance, an affiliated company.
Interest credited on policyholder deposits decreased $24.3 million to $196.5
million for the first nine months of 1998 due to lower future annuity and
contract benefit liabilities and a lower interest rate environment.
Change in policy reserves decreased $46.8 million to $11.9 million during the
first nine months of 1998. This decrease is largely due to the higher level of
annuity benefits.
Annuity and surrender benefits increased $2.2 million to $28.6 million primarily
due to normal growth in the number of policyholders receiving benefit payments.
Commissions decreased $9.6 million to $3.7 million. This decrease is due to
continued shift in marketing focus to GE Capital Assurance products.
General expenses decreased $15.6 million to $7.8 million for the first nine
months of 1998. Decrease is due to the Company's continuing cost reduction
strategy and shift in marketing focus to products issued by GE Capital
Assurance.
Amortization of intangibles (net) decreased $3.3 million to $21.9 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, 1998.
Change in deferred acquisition costs increased $18.2 million primarily as a
result of amortization of prior capitalized cost and lower current period
capitalization resulting from lower sales.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations
(continued)
Year 2000. The inability of business processes to continue to function correctly
after the beginning of the Year 2000 could have serious adverse effects on
companies and entities throughout the world. The Company has undertaken efforts
to identify and mitigate Year 2000 issues in its information systems, products
and services, facilities and suppliers as well as to assess the extent to which
Year 2000 issues will impact its customers. The Company has a Year 2000 leader
who oversees a multi-functional remediation project team responsible for
applying the Six Sigma quality program in four phases: (1)
define/measure-identify and inventory possible sources of Year 2000 issues; (2)
analyze - determine the nature and extent of Year 2000 issues and develop
project plans to address those issues; (3) improve - execute project plans and
perform a majority of the testing; and (4) control - complete testing, continue
monitoring readiness and complete necessary contingency plans. The progress of
this program is monitored continuously at each business and company-wide reviews
with senior management are conducted quarterly. Management plans to have
completed the first three phases of the program for a majority of
mission-critical systems by the end of 1998 and to have nearly all significant
information systems, products and services, facilities and suppliers in the
control phase of the program by mid-1999.
The scope of the Company's Year 2000 effort encompasses many applications and
computer programs; products and services; facilities and facilities-related
equipment; and suppliers; and, customers. Business operations of the Company
are also dependent on the Year 2000 readiness of infrastructure suppliers in
areas such as utility, communications, transportation and other services.
In this environment, there will likely be instances of failure that could cause
disruptions in business processes or that could affect customers' ability to
repay amounts owed to the Company. The likelihood and effects of failures
in infrastructure systems and in the supply chain cannot be estimated. However,
with respect to operations under its direct control, management does not expect,
in view of its Year 2000 program efforts and the diversity of the Company's
business, suppliers and customers, that occurrences of Year 2000 failures will
have a material adverse effect on the financial position, results of
operations or liquidity of the Company.
Total Year 2000 remediation expenditures are expected to be approximately $45
million for GE Financial Assurance, parent for the Company, of which two-thirds
is expected to be spent by the end of 1998. Most of these cost are not likely to
be incremental cost, but rather will represent the redeployment of existing
resources.
The activities involved in the Year 2000 effort necessarily involve estimates
and projections of activities and resources that will be required in the future.
These estimates and projections could change as work progresses.
<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.
<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 11, 1998 By /s/ Thomas W. Casey
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Date Thomas W. Casey, Senior Vice President, Chief
Financial Officer (Principal Financial Officer)
November 11, 1998 By /s/ Stephen N. DeVos
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Date Stephen N. DeVos, Vice President and Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GREAT
NORTHERN INSURED ANNUITY CORPORATION FORM 10-K AND ITS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 SEP-30-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<DEBT-HELD-FOR-SALE> 5,056 4,961
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 0 0
<MORTGAGE> 1,204 1,078
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 6,623 6,322
<CASH> 0 0
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 98 83
<TOTAL-ASSETS> 7,082 6,665
<POLICY-LOSSES> 6,004 5,507
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 19 11
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 0 0
0 0
0 0
<COMMON> 3 3
<OTHER-SE> 790 882
<TOTAL-LIABILITY-AND-EQUITY> 7,082 6,665
61 12
<INVESTMENT-INCOME> 475 338
<INVESTMENT-GAINS> 20 2
<OTHER-INCOME> 8 7
<BENEFITS> 36 29
<UNDERWRITING-AMORTIZATION> (8) 8
<UNDERWRITING-OTHER> 42 12
<INCOME-PRETAX> 107 80
<INCOME-TAX> 36 26
<INCOME-CONTINUING> 71 54
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 71 54
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</TABLE>
