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 June 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 (I.R.S. Employer
jurisdiction of 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.
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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 ............................................... 9
Item 2. Changes in Securities ........................................... 9
Item 3. Defaults Upon Senior Securities ................................. 9
Item 4. Submission of Matters to a Vote of Security Holders ............. 9
Item 5. Other Information ............................................... 9
Item 6. Exhibits and Reports on Form 8-K ................................ 9
SIGNATURES 10
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GREAT NORTHERN INSURED ANNUITY CORPORATION
BALANCE SHEETS
(Unaudited)
(Dollar amounts in millions)
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June 30, December 31,
1998 1997
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Assets
Investments:
Fixed maturities available for sale, at
fair value $ 4,943.2 $ 5,056.9
Mortgage loans, net of valuation allowance 1,149.7 1,203.8
Real estate owned, net 5.1 4.1
Policy loans 3.4 3.3
Short-term investments 1.6 98.8
Other invested assets 278.2 256.0
------------------------
Total investments 6,381.2 6,622.9
Cash 1.1 2.8
Accrued investment income 106.1 110.7
Deferred acquisition costs 102.3 97.7
Intangible assets 90.1 98.5
Other assets 56.8 109.6
Separate account assets 40.7 39.9
------------------------
Total assets $ 6,778.3 $ 7,082.1
========================
Liabilities and
Shareholder's Interest
Liabilities:
Future annuity and contract benefits $ 5,694.4 $ 6,003.6
Other policyholder liabilities 11.9 18.7
Accounts payable and accrued expenses 152.7 215.1
Deferred income tax liability 24.7 12.3
Separate account liabilities 40.7 39.9
------------------------
Total liabilities 5,924.4 6,289.6
------------------------
Accumulated non-owner changes in equity 57.7 38.3
Common stock 2.5 2.5
Additional paid-in capital 542.0 542.0
Retained earnings 251.7 209.7
------------------------
Total shareholder's interest 853.9 792.5
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Total liabilities and
shareholder's interest $ 6,778.3 $ 7,082.1
================================================================================
See accompanying notes to financial statements.
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GREAT NORTHERN INSURED ANNUITY CORPORATION
STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
(Dollar amounts in millions)
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Three months
ended Six months ended
June 30 June 30
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1998 1997 1998 1997
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Revenues:
Net investment income $ 119.6 $ 119.1 $ 236.3 $ 239.0
Net realized investment gains
(losses) 1.4 (1.8) 0.7 6.6
Premiums 5.2 22.3 9.1 50.7
Policy fees and other income 2.7 2.2 4.4 4.6
--------- -------- -----------------
Total revenues 128.9 141.8 250.5 300.9
--------- -------- -----------------
Benefits and expenses:
Interest credited 65.1 73.0 134.1 147.5
Change in policy reserves 2.5 21.1 9.4 50.2
Annuity and surrender benefits 12.6 9.8 18.8 18.6
Commissions 1.2 6.0 2.8 10.9
General expenses 3.3 8.2 5.6 17.9
Amortization of intangibles, net 6.9 7.6 14.7 16.7
Change in deferred acquisition
costs, net 2.7 (4.3) 4.7 (7.8)
--------- -------- -----------------
Total benefits and
expenses 94.3 121.4 190.1 254.0
--------- -------- -----------------
Income before income taxes 34.6 20.4 60.4 46.9
Provision for income taxes 9.8 6.7 18.4 15.6
--------- -------- -----------------
Net income 24.8 13.7 42.0 31.3
Retained earnings at beginning of
period 226.9 156.0 209.7 138.4
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Retained earnings at end of period $ 251.7 $ 169.7 $ 251.7 $ 169.7
================================================================================
See accompanying notes to financial statements.
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<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollar amounts in millions)
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Six months ended
June 30,
----------------------
1998 1997
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Cash flows from operating activities:
Net income $ 42.0 $ 31.3
--------------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of
subsidiary (9.5) (3.9)
Increase in future policy benefits 143.5 197.7
Net realized investment (gains) losses (0.7) (6.6)
Amortization of investment premiums and
discounts (1.5) 8.0
Amortization of intangibles, net 14.7 16.7
Change in certain assets and liabilities:
Decrease (increase) in:
Accrued investment income 4.6 (1.1)
Deferred acquisition costs 4.6 (7.8)
Other assets 52.8 (26.4)
Increase (decrease) in:
Other policyholder liabilities (6.8) (23.2)
Accounts payable and accrued expenses (62.4) 34.7
Deferred income tax liability 4.0 (5.3)
---------------------
Total adjustments 143.3 182.8
---------------------
Net cash provided by operating activities 185.3 214.1
---------------------
Cash flows from investing activities:
Proceeds from investments in fixed maturities and
other invested assets 656.5 559.2
Principal collected on mortgage and policy loans 125.2 81.5
Purchases of fixed maturities and other invested
assets (541.5) (549.6)
Mortgage loan originations (71.7) (53.3)
---------------------
Net cash provided by investing activities 168.5 37.8
---------------------
Cash flows from financing activities:
Proceeds from issue of investment contracts 48.7 179.6
Redemption and benefit payments on investment
contracts (501.4) (419.2)
---------------------
Net cash used in financing activities (452.7) (239.6)
---------------------
Net increase (decrease) in cash and cash
equivalents (90.7) 12.3
Cash and cash equivalents at beginning of period 101.6 6.2
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Cash and cash equivalents at end of period $ 2.7 $ 18.5
================================================================================
See accompanying notes to financial statements.
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GREAT NORTHERN INSURED ANNUITY CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 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 June 30, 1998 and December 31, 1997, the Company was committed to
fund $17.2 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 share owners' equity that do not result
directly from transactions with share owners. An analysis of these changes
follows:
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<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Dollars in Millions) June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
<S> <C>
Net Earnings $24.8 $13.7 $42.0 $31.3
Unrealized gains
on Investment
securities -net 13.5 24.9 19.4 0.5
---- ---- ---- ---
Total $38.3 $38.6 $61.4 $31.8
===== ===== ===== =====
</TABLE>
(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 earnings 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 Corporation
will not adopt the Statement until required to do so on January 1, 2000.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GNA's results of operations for the six months ended June 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 $2.7 million to $236.3 million during the first
six 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/LOSSES - Net realized investment gains were $0.7
million during the first six months of 1998, compared to $6.6 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.
PREMIUMS decreased $41.6 million to $9.1 million during the first six months of
1998. This decrease is due to lower sales of life contingent structured
settlement product primarily related to a shift in marketing focus to products
of GE Capital Assurance, an affiliated company.
INTEREST CREDITED on policyholder deposits decreased $13.4 million to $134.1
million for the first six months of 1998 due to lower future annuity and
contract benefit liabilities and a lower interest rate environment.
CHANGE IN POLICY RESERVES decreased $40.8 million to $9.4 million during the
first six months of 1998. This decrease is largely due to the higher level of
annuity benefits as well as a reduction in sales related to the shift in
marketing to focus on products of GE Capital Assurance, an affiliated company.
ANNUITY AND SURRENDER BENEFITS increased $0.2 million to $18.8 million primarily
due to normal growth in the number of policyholders receiving benefit payments.
COMMISSIONS decreased $8.1 million to $2.8 million. This decrease is due to
continued shift in marketing focus to GE Capital Assurance products.
GENERAL EXPENSES decreased $12.3 million to $5.6 million for the first six
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 $2.0 million to $14.7 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 June 30, 1998.
CHANGE IN DEFERRED ACQUISITION COSTS increased $12.5 million primarily as a
result of amortization of prior capitalized cost and lower current period
capitalization resulting from lower sales.
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<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any material pending legal
proceedings.
Item 2. Changes in Securities
Omitted.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Omitted.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GREAT NORTHERN INSURED ANNUITY CORPORATION
------------------------------------------
(Registrant)
, 1998 By /s/Thomas W. Casey
________________________________________________
________________________ Thomas W. Casey, Senior Vice President, Chief
Date Financial Officer (Principal Financial Officer)
, 1998 By /s/Stephen N. DeVos
________________________ _________________________________________________
Date Stephen N. DeVos, Vice President and Controller
(Principal Accounting Officer)
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<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 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 JUN-30-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<DEBT-HELD-FOR-SALE> 5,056 4,943
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 0 0
<MORTGAGE> 1,204 1,150
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 6,623 6,381
<CASH> 0 0
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 98 102
<TOTAL-ASSETS> 7,082 6,778
<POLICY-LOSSES> 6,004 5,694
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 19 12
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 0 0
0 0
0 0
<COMMON> 3 3
<OTHER-SE> 790 851
<TOTAL-LIABILITY-AND-EQUITY> 7,082 6,778
61 9
<INVESTMENT-INCOME> 475 236
<INVESTMENT-GAINS> 20 1
<OTHER-INCOME> 8 4
<BENEFITS> 36 19
<UNDERWRITING-AMORTIZATION> (8) 5
<UNDERWRITING-OTHER> 42 8
<INCOME-PRETAX> 107 60
<INCOME-TAX> 36 18
<INCOME-CONTINUING> 71 42
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 71 42
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
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</TABLE>
