UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
--------------------------------------------------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from to
-------------------------- ----------------------------
Commission file number 333-1173
----------------------------
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
- -------------------------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
- -------------------------------------------------------------------------------------------------
Colorado 84-0467907
- --------------------------------------------------------- -------------------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification
organization) Number)
8515 East Orchard Road, Greenwood Village, CO 80111
--------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
[303] 737-4128
--------------------------------------------------------------
(Registrant's telephone number, including area code)
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 12 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
-------------- --------------
As of September 30, 2002, 7,032,000 shares of the registrant's common stock were
outstanding, all of which were owned by the registrant's parent company.
NOTE: This Form 10-Q is filed by the registrant only as a consequence of
the sale by the registrant of a market value adjusted annuity
product.
13
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION Page
---------
Item 1 Financial Statements 3
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Consolidated Statement of Stockholder's Equity 8
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial Condition and
Results
of Operations 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk 20
Item 4 Controls and Procedures 20
Part II OTHER INFORMATION 21
Item 1 Legal Proceedings 21
Item 6 Exhibits and Reports on Form 8-K 21
Signature 21
Certification 22
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
[Dollars in Thousands]
==============================================================================================
[Unaudited]
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -- ----------------------------
REVENUES: 2002 2001 2002 2001
------------ ------------ ------------ ------------
Premium $ 292,155 $ 294,308 $ 841,164 $ 891,638
Fee income 216,968 250,335 676,976 733,185
Net investment income 231,367 227,363 693,867 709,392
Net realized gains on
Investments 18,077 13,111 25,985 22,043
------------ ------------ ------------ ------------
758,567 785,117 2,237,992 2,356,258
------------ ------------ ------------ ------------
BENEFITS AND EXPENSES:
Life and other policy benefits 264,790 234,350 715,974 766,266
Increase (decrease) in 38,540 47,484 63,767 76,799
reserves
Interest paid or credited to
contractholders 119,363 120,992 370,392 387,814
Provision for policyholders'
share of earnings
on participating business (loss) (710) 567 212 2,878
Dividends to policyholders 16,861 16,300 57,151 55,826
------------ ------------ ------------ ------------
438,844 419,693 1,207,496 1,289,583
------------ ------------ ------------ ------------
Commissions 40,979 52,792 139,518 147,022
Operating expenses 171,480 185,027 542,536 597,832
Premium taxes 7,878 13,452 23,225 27,038
Special charges 127,040
------------ ------------ ------------ ------------
659,181 670,964 1,912,775 2,188,515
------------ ------------ ------------ ------------
INCOME BEFORE INCOME
TAXES 99,386 114,153 325,217 167,743
PROVISION FOR INCOME
TAXES:
Current 68,129 (2,842) 112,298 54,883
Deferred (35,368) 42,743 (6,776) 832
------------ ------------ ------------ ------------
32,761 39,901 105,522 55,715
------------ ------------ ------------ ------------
NET INCOME $ 66,625 $ 74,252 $ 219,695 $ 112,028
============ ============ ============ ============
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
[Dollars in Thousands]
==============================================================================================
September 30, December 31,
ASSETS 2002 2001
- ------
----------------- ----------------
[unaudited]
INVESTMENTS:
Fixed maturities available-for-sale, at fair value
(amortized cost $9,977,138 and $9,904,453) $ 10,518,304 $ 10,116,175
Mortgage loans on real estate (net of allowances
of $57,654 and $57,654) 466,949 613,453
Common stock, at fair value (cost $74,586 and 66,247 73,344
$74,107)
Real estate 3,839 11,838
Policy loans 2,927,927 3,000,441
Short-term investments, available-for-sale
(cost $360,054 and $427,398) 360,266 424,730
----------------- ----------------
Total investments 14,343,532 14,239,981
OTHER ASSETS:
Cash 124,856 213,731
Reinsurance receivable 315,215 282,352
Deferred policy acquisition costs 257,152 275,570
Investment income due and accrued 124,938 130,775
Amounts receivable related to uninsured accident
and health plan claims (net of allowances of
$42,100 and $53,431) 104,867 89,533
Premiums in course of collection (net of allowances
of $11,955 and $22,217) 65,343 99,811
Deferred income taxes 100,689 149,140
Other assets 874,455 745,617
SEPARATE ACCOUNT ASSETS 10,933,287 12,584,661
----------------- ----------------
TOTAL ASSETS $ 27,244,334 $ 28,811,171
================= ================
(continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
[Dollars in Thousands]
==============================================================================================
September 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2002 2001
- ------------------------------------
----------------- -----------------
[unaudited]
POLICY BENEFIT LIABILITIES:
Policy reserves $ 12,272,288 $ 12,211,496
Policy and contract claims 382,154 401,389
Policyholders' funds 306,254 242,916
Provision for policyholders' dividends 75,931 74,740
Undistributed earnings on participating business 162,017 163,086
GENERAL LIABILITIES:
Due to GWL 37,520 41,874
Due to GWL&A Financial Inc. 255,405 251,059
Repurchase agreements 281,063 250,889
Commercial paper 96,592 97,046
Other liabilities 783,565 1,021,541
SEPARATE ACCOUNT LIABILITIES 10,933,287 12,584,661
----------------- -----------------
Total liabilities 25,586,076 27,340,697
----------------- -----------------
STOCKHOLDER'S EQUITY:
Preferred stock, $1 par value, 50,000,000 shares
authorized; 0 shares issued and outstanding
Common stock, $1 par value; 50,000,000 shares
authorized; 7,032,000 shares issued and 7,032 7,032
outstanding
Additional paid-in capital 717,537 712,801
Accumulated other comprehensive income 178,183 76,507
Retained earnings 755,506 674,134
----------------- -----------------
Total stockholder's equity 1,658,258 1,470,474
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 27,244,334 $ 28,811,171
================= =================
See notes to consolidated financial statements. (Concluded)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Dollars in Thousands]
==============================================================================================
[Unaudited]
Nine Months Ended
September 30,
-------------------------------------
OPERATING ACTIVITIES: 2002 2001
----------------- ----------------
Net income $ 219,695 $ 112,028
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain allocated to participating policyholders 212 2,878
Amortization of investments (55,937) (57,973)
Realized gains on disposal of investments
and write-downs of mortgage loans and real estate (25,985) (22,043)
Amortization 26,229 39,881
Deferred income taxes (6,776) 832
Write-off of Goodwill
Changes in assets and liabilities:
Policy benefit liabilities 530,745 236,026
Reinsurance receivable (32,863) 10,425
Accrued interest and other receivables 24,971 179,464
Corporate owned life insurance (7,110) (105,222)
Securities receivable/payable (200,369) 129,442
Other, net (184,388) (188,757)
----------------- ----------------
Net cash provided by operating activities 288,424 336,981
----------------- ----------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and redemptions
of investments:
Fixed maturities available-for-sale
Sales 4,301,335 3,940,889
Maturities and redemptions 1,038,940 906,159
Mortgage loans 157,956 142,209
Real estate 1,800
Common stock 7,960 19,600
Purchases of investments:
Fixed maturities held-to-maturity (5,281,140) (5,259,798)
Mortgage loans
Real estate (2,648) (2,280)
Common stock (828) (24,172)
----------------- ----------------
Net cash provided by (used in) investing 223,375 (277,393)
activities
----------------- ----------------
(continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Dollars in Thousands]
==============================================================================================
[Unaudited]
Nine Months Ended
September 30,
-------------------------------------
FINANCING ACTIVITIES: 2002 2001
----------------- ----------------
Contract withdrawals, net of deposits $ (492,063) $ (250,355)
Net GWL repayments (4,354) 3,484
Net GWL&A Financial (repayments) borrowings 4,346 (9,297)
Dividends paid (138,323) (141,050)
Commercial paper borrowings (repayments), net (454) (9,631)
Repurchase agreements borrowings, net 30,174 282,100
----------------- ----------------
Net cash used in financing activities (600,674) (124,749)
----------------- ----------------
NET DECREASE IN CASH (88,875) (65,161)
CASH, BEGINNING OF YEAR 213,731 153,977
----------------- ----------------
CASH, END OF PERIOD $ 124,856 $ 88,816
================= ================
See notes to consolidated financial statements. (Concluded)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 [Dollars in Thousands]
==============================================================================================
[Unaudited]
Accumulated
Additional Other
Preferred Stock Common Stock Paid-in Comprehensive Retained
-------------------- -----------------------
Shares Amount Shares Amount Capital Income (Loss) Earnings Total
-------- --------- ---------- ---------- ---------- -------------- ---------- ----------
BALANCE, JANUARY 1, 2002 0 $ 0 7,032,000 $ 7,032 $ 712,801 $ 76,507 $ 674,134 $ 1,470,474
Net income 219,695 219,695
Other comprehensive income 101,676 101,676
----------
Total comprehensive income 321,371
----------
Dividends (138,323) (138,323)
Income tax benefit on stock
Compensation 4,736 4,736
-------- --------- ---------- ---------- ---------- -------------- ---------- ----------
BALANCE, SEPTEMBER 30, 2002 0 $ 0 7,032,000 $ 7,032 $ 717,537 $ 178,183 $ 755,506 $ 1,658,258
======== ========= ========== ========== ========== ============== ========== ==========
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Amounts in Thousands]
================================================================================
[Unaudited]
1. BASIS OF PRESENTATION
The consolidated financial statements and related notes of Great-West
Life & Annuity Insurance Company (the Company) have been prepared in
accordance with accounting principles generally accepted in the United
States of America applicable to interim financial reporting and do not
include all of the information and footnotes required for complete
financial statements. However, in the opinion of management, these
statements include all normal recurring adjustments necessary for a fair
presentation of the results. These financial statements should be read
in conjunction with the audited consolidated financial statements and
the accompanying notes included in the Company's latest annual report on
Form 10-K for the year ended December 31, 2001.
Operating results for the nine months ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the full
year ending December 31, 2002.
2. NEW ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, Statement No. 142, "Goodwill and Other Intangible
Assets" (SFAS No. 142) was approved by the FASB. SFAS No. 142 changes
the accounting for goodwill and certain other intangibles from an
amortization method to an impairment-only approach. Amortization of
goodwill, including goodwill recorded in past business combinations,
will cease upon adoption of this statement. The Company implemented
SFAS No. 142 on January 1, 2002. Adoption of this statement did not
have a material impact on the Company's financial position or results
of operations.
In August 2001, the FASB issued Statement No.144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No.144). SFAS No.144
supercedes current accounting guidance relating to impairment of
long-lived assets and provides a single accounting methodology for
long-lived assets to be disposed of, and also supercedes existing
guidance with respect to reporting the effects of the disposal of a
business. SFAS No.144 was adopted January 1, 2002 without a material
impact on the Company's financial position or results of operations.
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (SFAS No. 145). FASB No. 4 required all gains or losses
from extinguishment of debt to be classified as extraordinary items net
of income taxes. SFAS No. 145 requires that gains and losses from
extinguishment of debt be evaluated under the provision of Accounting
Principles Board Opinion No. 30, and be classified as ordinary items
unless they are unusual or infrequent or meet the specific criteria for
treatment as an extraordinary item. This statement is effective January
1, 2003. The Company does not expect this statement to have a material
effect on the Company's financial position or results of operations.
In July 2002, the FASB issued Statement No. 146 " Accounting for Costs
Associated With Exit or Disposal Activities" (SFAS No. 146). This
statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in
a Restructuring)." This statement requires recognition of a liability
for a cost associated with an exit or disposal activity when the
liability is incurred, as opposed to when the entity commits to an exit
plan under EITF 94-3. SFAS No. 146 is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002. The
Company does not expect this statement to have a material impact on the
Company's financial position or results of operations.
3. OTHER
In the second quarter of 2001, the Company recorded a $127 million
special charge, ($80.9 million, net of tax) related to Alta Health &
Life Insurance Company (Alta). The principal components of the charge
include a $46 million premium deficiency reserve related to
under-pricing on the block of business, a $29 million reserve for
doubtful premium receivables, a $28 million reserve for doubtful
accident and health plan claim receivables, and $24 million decrease in
goodwill and other. Alta was acquired by the Company on July 8, 1998.
During 1999 and 2000 the Alta business continued to be run as a
free-standing unit but was converted to the Company's system and
accounting processes. This conversion program resulted in significant
issues related to pricing, underwriting, and administration of the
business. The Company has decided to transition Alta business to other
Company products. All Alta sales and administration staff have become
employees of the Company and the underwriting functions will be
conducted by the underwriting staff of the Company.
The Company is involved in various legal proceedings that arise in the
ordinary course of its business. In the opinion of management, after
consultation with counsel, the resolution of these proceedings should
not have a material adverse effect on its financial position or results
of operations.
Certain reclassifications have been made to the 2001 financial
statements to conform to the 2002 presentation.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended Nine Months Ended
Operating Summary September 30, September 30,
------------------------- ------------------------------
[Millions] 2002 2001 2002 2001
--------------------------- ----------- ---------- -------------- -------------
Premium income $ 292 $ 295 $ 841 $ 892
Fee income 217 250 677 733
Net investment income 232 227 694 709
Realized investment gains 18 13 26 22
----------- ---------- -------------- -------------
Total revenues 759 785 2,238 2,356
Total benefits and 659 671 1,913 2,061
expenses
Income tax expenses 33 40 105 102
----------- ---------- -------------- -------------
Net income before special
Charges 67 74 220 193
Special charges (net) 81
----------- ---------- -------------- -------------
Net income (loss) $ 67 74 220 112
=========== ========== ============== =============
Deposits for investment-
type
Contracts $ 201 207 513 581
Deposits to separate 521 917 1,909 2,559
accounts
Self-funded premium
Equivalents 1,305 1,370 3,947 4,346
Balance Sheet September 30, December 31,
[Millions] 2002 2001
--------------------------- -------------- -------------
Investment assets $ 14,344 $ 14,240
Separate account
Assets 10,933 12,585
Total assets 27,244 28,811
Total policy
benefit liabilities 13,037 12,931
Due to GWL 38 42
Due to GWL&A
financial 255 251
Total stockholder's
equity 1,658 1,470
GENERAL
This Form 10-Q contains forward-looking statements. Forward-looking
statements are statements not based on historical information and that
relate to future operations, strategies, financial results, or other
developments. In particular, statements using verbs such as "expect",
"anticipate", "believe", or words of similar import generally involve
forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements which represent the
Company's beliefs concerning future or projected levels of sales of the
Company's products, investment spreads or yields, or the earnings or
profitability of the Company's activities. Forward-looking statements
are necessarily based upon estimates and assumptions that are inherently
subject to significant business, economic, and competitive uncertainties
and contingencies, many of which are beyond the Company's control and
many of which, with respect to future business decisions, are subject to
change. These uncertainties and contingencies can affect actual results
and could cause actual results to differ materially from those expressed
in any forward-looking statements made by, or on behalf of, the Company.
Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable events
or developments, some of which may be national in scope, such as general
economic conditions and interest rates, some of which may be related to
the insurance industry generally, such as pricing competition,
regulatory developments, and industry consolidation, and others of which
may relate to the Company specifically, such as credit, volatility, and
other risks associated with the Company's investment portfolio, and
other factors. Readers are also directed to consider other risks and
uncertainties discussed in documents filed by the Company and certain of
its subsidiaries with the Securities and Exchange Commission.
The following discussion addresses the financial condition of the
Company as of September 30, 2002, compared with December 31, 2001, and
its results of operations for the quarter and nine months ended
September 30, 2002, compared with the same period last year. The
discussion should be read in conjunction with the Management's
Discussion and Analysis section included in the Company's report on Form
10-K for the year ended December 31, 2001 to which the reader is
directed for additional information.
CONSOLIDATED RESULTS
The Company's consolidated net income decreased $7 million or 9.5% for
the third quarter and increased $8 million or 4% for the first nine
months of 2002 when compared to the third quarter and first nine months
of 2001, before one-time charges of $80.9 million and operating losses
of $18.7 million, net of tax, related to the Alta Health & Life
Insurance Company (Alta) business. Alta was acquired by the Company on
July 8, 1998. During 2001 and 2000, the Alta business continued to be
run as a free-standing unit but was converted to the Company's systems
and accounting processes. This conversion program resulted in
significant issues related to pricing, underwriting, and administration
of the business. The Company has decided to transition Alta business to
other Company products. All Alta sales and administration staff have
become employees of the Company and the underwriting functions will be
conducted by the underwriting staff of the Company. The $7 million net
income decrease quarter over quarter reflects a $14 million decrease in
the Employee Benefits segment, offset by an $7 million increase in the
Financial Services segment. The $8 million net income increase year over
year reflects an increase of $10 million in the Financial Services
segment, offset by a decrease of $2 million in the Employee Benefits
segment, before one-time charges of $80.9 million and operating losses
of $18.7 million, net of tax, related to the Alta business.
Total revenues decreased $26 million or 3.3% and $118 million or 5.0%
for the third quarter and first nine months of 2002 when compared to the
third quarter and first nine months of 2001. The decrease in the third
quarter was primarily due to a $33 million decrease in fee income.
The decrease in total revenues for the first nine months of 2002 was due
to a $51 million decrease in premium income, a $56 million decrease in
fee income, and a $15 million decrease in net investment income, offset
by a $4 million increase in realized investment gains.
The decrease in premium income for the first nine months of 2002 is
primarily in the Employee Benefits segment reflecting lower case sales.
The decreases in fee income in the third quarter and first nine months
of 2002 were primarily in the Employee Benefits segment as a result of
the decline in membership.
The decrease in net investment income for the first nine months of 2002
was primarily the result of decreasing interest rates. The actual earned
rate at September 30, 2002 was 6.87% compared to 7.59% at September 30,
2001. The earned rate is expected to trend lower in the next few
quarters reflecting the interest rate environment.
Benefits and expenses decreased $12 million or 1.8% and $148 million or
7.2% for the third quarter and the first nine months of 2002 when
compared to the third quarter and the first nine months of 2001. The
decrease in benefits and expenses was a combination of lower group life
and health claims and effective cost management.
Income tax expense before special charges decreased $7 million or 17.5%
for the third quarter of 2002 when compared to the same period in 2001
reflecting the decrease in pretax income.
In evaluating its results of operations, the Company also considers net
changes in deposits received for investment-type contracts, deposits to
separate accounts and self-funded equivalents. Self-funded equivalents
represent paid claims under minimum premium and administrative services
only contracts, which amounts approximate the additional premiums that
would have been earned under such contracts if they had been written as
traditional indemnity or HMO programs.
Deposits for separate accounts decreased $650 million or 25.4% for the
first nine months of 2002 when compared to the first nine months of
2001. The decrease is due primarily to a combination of lower 401(k)
single premium deposits and lower BOLI deposits.
Self-funded premium equivalents decreased $399 million or 9.2% for the
first nine months of 2002 when compared to the first nine months of
2001. The decrease was due to the decrease in membership and improved
morbidity.
Historically, the 401(k) business unit had been included with the
Employee Benefits segment. In order to capitalize on administrative
system efficiencies and group pension expertise, 401(k) is now
administered by the Financial Services segment. As a result, prior
period segment results have been reclassified to conform with this
change.
SEGMENT RESULTS
Employee Benefits
The following is a summary of certain financial data of the Employee
Benefits segment:
Three Months Ended Nine Months Ended
Operating Summary September 30, September 30,
------------------------- -------------------------
[Millions] 2002 2001 2002 2001
----------------------------- ----------- ---------- ----------- ----------
Premium income $ 257 $ 258 $ 722 $ 766
Fee income 162 192 508 556
Net investment income 18 17 52 51
Realized investment gains 5 1 6 3
----------- ---------- ----------- ----------
Total revenues 442 468 1,288 1,376
Total benefits and expenses 402 404 1,131 1,239
Income tax expenses 14 24 52 49
----------- ---------- ----------- ----------
Net income before special
Charges 26 40 105 88
Special charges (net) 81
----------- ---------- ----------- ----------
Net income $ 26 $ 40 $ 105 $ 7
=========== ========== =========== ==========
Self-funded premium $ 1,305 $ 1,370 $ 3,947 $ 4,346
equivalents
The $14 million decrease in earnings for the third quarter of 2002
compared to the third quarter of 2001 is primarily due to a combination
of an expense loss from a decrease in membership and poor morbidity
experience as a result of accelerating claims payments associated with
the July 1, 2002 ERISA change. The ERISA change requires payments of
claims within 30 days rather than the previously allowed 45 days.
The $2 million decrease in earnings for the first nine months of 2002
compared to a year ago, before one-time charges of $80.9 million and
operating losses of $18.7 million, net of tax, related to the Alta
business, is primarily related to improved mortality and morbidity
results through June 30, 2002, offset by a decrease in the third quarter
of 2002 discussed above.
Premium and fee income decreased $31 million or 7% for the third quarter
of 2002 and decreased $92 million or 7.0% for the first nine months of
2002, when compared to the same periods of 2001. The decreases are
primarily due to lower membership levels associated with lower case
sales. There was a 4% decrease in total health care membership from
2,321,400 at June 30, 2002 to 2,239,300 at September 30, 2002. There was
a 16% decrease in total health care membership from 2,668,700 at
September 30, 2001 to 2,239,300 at September 30, 2002. Much of the
health care membership decline can be attributed to lower case sales.
The decline in membership was also, in part, due to difficulties with
the implementation of a systems enhancement, which was resolved by the
end of 2001; a decrease in the employee base for existing group health
care customers; and the general decline in the economy.
Total benefits and expenses decreased $108 million or 9% for the first
nine months of 2002 when compared to the first nine months of 2001. The
decreases are due primarily to a combination of lower group life and
health claims due to decreasing membership and a reduction in operating
expenses.
Self-funded premium equivalents decreased $65 million and $399 million
for the third quarter and first nine months of 2002 compared to the
third quarter and first nine months of 2001. The decrease was due to
improved morbidity as well as a decrease in membership.
The Company recorded $14.0 million ($9.1 million, net of tax) and $4.5
million ($2.9 million, net of tax) of restructuring costs in the first
quarter of 2002 and in the second quarter of 2002 related to the costs
associated with the consolidation of benefit payment offices and sales
offices throughout the United States. The charges relate to severance of
$2.8 million and $1.5 million, disposal of furniture and equipment of
$4.4 million and $0.5 million, and termination of leasing agreements of
$6.8 million and $2.5 million. During the first quarter of 2002, 304
employees were terminated, of which 250 employees were from the Employee
Benefits division. During the second quarter of 2002, 252 employees were
terminated, all of which were from the Employee Benefits division.
The Company established a premium deficiency reserve of $46 million
(included in one-time charges previously discussed) on the Alta block
of business in 2001. Releases of $18.7 million in 2001, $6.2 million
in the first quarter of 2002, and $2.1 million in the second quarter
of 2002 were made to offset the underwriting losses incurred on the
under-priced block of business. During the first quarter of 2002 the
reserve was reduced by $15.0 million ($9.8 million net of tax) and
during the second quarter of 2002 the reserve was reduced by $4.0
million ($2.6 million, net of tax) based on an analysis of emerging
experience which was more favorable than originally estimated. The
balance of the premium deficiency reserve at September 30, 2002 was
zero.
Financial Services
The following is a summary of certain financial data of the Financial
Services segment.
Three Months Ended Nine Months Ended
Operating Summary September 30, September 30,
------------------------- -------------------------
[Millions] 2002 2001 2002 2001
----------------------------- ----------- ---------- ----------- ----------
Premium income $ 35 $ 37 $ 119 $ 126
Fee income 55 58 169 177
Net investment income 214 210 642 658
Realized investment gains 13 12 20 19
----------- ---------- ----------- ----------
Total revenues 317 317 950 980
Total benefits and expenses 257 267 782 822
Income tax expenses 19 16 53 53
----------- ---------- ----------- ----------
Net income $ 41 $ 34 $ 115 $ 105
=========== ========== =========== ==========
Deposits for investment-type
Contracts $ 201 $ 207 $ 513 $ 581
Deposits to separate 521 917 1,909 2,559
accounts
Net income for Financial Services increased $7 million and $10 million
for the third quarter and first nine months ended September 30, 2002
when compared to the same periods last year. The increase reflects an
improvement in interest margins on guaranteed public/nonprofit business
and reductions in operating expenses.
Savings
Savings premiums and deposits and fees increased $163 million to $370
million or 79% for the third quarter of 2002 when compared to the same
period last year, and increased $95 million (from $1,089 million to
$1,184 million) or 9% for the first nine months of 2002 when compared to
the first nine months of 2001. The increases primarily reflect a
combination of an increase in deposits for investment-type contracts and
an increase in the deposits to separate accounts.
The Financial Services segment's core savings business is in the
public/non-profit pension market. The assets of the public/non-profit
pension business including separate accounts but excluding Guaranteed
Investment Contracts decreased $207 million or 2.5% from December 31,
2001 due to the influence of the volatility of the U.S. equity markets.
The Financial Services segment's savings business experienced growth
during the first nine months of 2002. The total lives under
administration increased 4.7% from 1,268,549 at December 31, 2001 to
1,329,388 at September 30, 2002.
Customer participation in guaranteed separate accounts increased during
2002, as many customers prefer the security of fixed income securities
in separate account assets. Assets under management for guaranteed
separate account funds were $1,658.6 million at September 30, 2002
compared to $1,214.4 million at December 31, 2001.
Life Insurance
Individual life insurance deposits and premiums and fees of $116 million
and $362 million for the third quarter and first nine months of 2002
represent a decrease of $458 million or 80% and a decrease of $466
million or 56% from the same periods last year. The decreases are
primarily due to slow sales in the BOLI markets due to low fixed
interest rates.
401(k)
401(k) premiums and deposits decreased 26% for the third quarter of 2002
when compared to the third quarter of 2001 (from $438 million to $324
million). 401(k) premiums and deposits decreased 24% for the nine months
of 2002 (from $1,526 million to $1,164 million) when compared to the
nine months of 2001. Assets under administration (including third-party
administration) in 401(k) decreased 18.0% during the first nine months
of 2002 due to the impact of lower U.S. equity markets and a decreasing
number of participants. The number of participants decreased from
564,025 at September 30, 2001 to 501,564 at September 30, 2002,
reflecting higher termination rates. 401(K) case terminations increased
45% to 702 for the first nine months of 2002 as compared to the first
nine months of 2001.
GENERAL ACCOUNT INVESTMENTS
The Company's primary investment objective is to acquire assets whose
duration and cash flow reflect the characteristics of the Company's
liabilities, while meeting industry, size, issuer, and geographic
diversification standards. Formal liquidity and credit quality
parameters have also been established.
The Company follows rigorous procedures to control interest rate risk
and observes strict asset and liability matching guidelines. These
guidelines are designed to ensure that even in changing market
conditions, the Company's assets will meet the cash flow and income
requirements of its liabilities. Using dynamic modeling to analyze the
effects of a wide range of possible market changes upon investments and
policyholder benefits, the Company ensures that its investment portfolio
is appropriately structured to fulfill financial obligations to its
policyholders.
Fixed Maturities
Fixed maturities investments include public and privately placed
corporate bonds, public and privately placed structured assets and
government bonds. This latter category contains both asset-backed and
mortgage-backed securities, including collateralized mortgage
obligations (CMOs). The Company's strategy related to structured assets
is to focus on those with lower volatility and minimal credit risk. The
Company does not invest in higher risk CMOs such as interest-only and
principal-only strips, and currently has no plans to invest in such
securities.
Private placement investments are generally less marketable than
publicly traded assets, yet they typically offer covenant protection
that allows the Company, if necessary, to take appropriate action to
protect its investment. The Company believes that the cost of the
additional monitoring and analysis required by private placements is
more than offset by their enhanced yield.
One of the Company's primary objectives is to ensure that its fixed
maturity portfolio is maintained at a high average quality, so as to
limit credit risk. If not externally rated, the securities are rated by
the Company on a basis intended to be similar to that of rating
agencies.
The distribution of the fixed maturity portfolio by credit rating is
summarized as follows:
June 30, December 31,
2002 2001
------------------ -------------------
AAA 59 % 58 %
AA 9 % 9 %
A 14 % 14 %
BBB 16 % 16 %
BB and Below (non-investment grade) 2 % 3 %
-------------- --- --------------- ---
TOTAL 100.0 % 100.0 %
============== === =============== ===
During the first nine months of 2002, net unrealized gains on fixed
maturities included in stockholder's equity, which is net of
policyholder-related amounts and deferred income taxes, increased
stockholder's equity by $101.7 million.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
the Company's management to make a variety of estimates and assumptions.
These estimates and assumptions affect, among other things, the reported
amounts of assets and liabilities, the disclosure of contingent
liabilities and the reported amounts of revenues and expenses. Actual
results can differ from the amounts previously estimated, which were
based on the information available at the time the estimates were made.
The critical accounting policies described below are those that the
Company believes are important to the portrayal of the Company's
financial condition and results, and which require management to make
difficult, subjective and/or complex judgments. Critical accounting
policies cover accounting matters that are inherently uncertain because
the future resolution of such matters is unknown. The Company believes
that critical accounting policies include policy reserves, allowances
for credit losses, deferred policy acquisition costs, and valuation of
privately placed fixed maturities.
Policy Reserves
Life Insurance and Annuity Reserves - Life insurance and annuity policy
reserves with life contingencies are computed on the basis of estimated
mortality, investment yield, withdrawals, future maintenance and
settlement expenses, and retrospective experience rating premium
refunds. Annuity contract reserves without life contingencies are
established at the contractholder's account value.
Reinsurance - Policy reserves ceded to other insurance companies are
carried as a reinsurance receivable on the balance sheet. The cost of
reinsurance related to long-duration contracts is accounted for over the
life of the underlying reinsured policies using assumptions consistent
with those used to account for the underlying policies. Reinsurance
contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk
arising from similar geographic regions, activities, or economic
characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. In the normal course of
business, the Company seeks to limit its exposure to loss on any single
insured and to recover a portion of benefits paid by ceding risks to
other insurance enterprises under excess coverage and co-insurance
contracts. The Company retains a maximum of $1.5 million of coverage per
individual life.
Policy and Contract Claims - Policy and contract claims include
provisions for reported life and health claims in process of settlement,
valued in accordance with the terms of the related policies and
contracts, as well as provisions for claims incurred and unreported
based primarily on prior experience of the Company.
Allowance For Credit Losses
The Company maintains an allowance for credit losses at a level that, in
management's opinion, is sufficient to absorb credit losses on its
amounts receivable related to uninsured accident and health plan claims
paid on behalf of policyholders and premiums in course of collection,
and to absorb credit losses on its impaired loans. Management's
judgement is based on past loss experience and current and projected
economic conditions, and extensive situational analysis of each
individual loan. The measurement of impaired loans is based on the fair
value of the collateral.
Deferred Policy Acquisition Costs
Policy acquisition costs, which primarily consist of sales commissions
and costs associated with the Company's group sales representatives
related to the production of new business, have been deferred to the
extent recoverable. These costs are variable in nature and are dependent
upon sales volume. Deferred costs associated with the annuity products
are being amortized over the life of the contracts in proportion to the
emergence of gross profits. Retrospective adjustments of these amounts
are made when the Company revises its estimates of current or future
gross profits. Deferred costs associated with traditional life insurance
are amortized over the premium paying period of the related policies in
proportion to premium revenues recognized.
Valuation Of Privately Placed Fixed Maturities
The estimated fair values of financial instruments have been determined
using available information and appropriate valuation methodologies.
However, considerable judgement is required to interpret market data to
develop estimates of fair value. Accordingly, the estimates presented
are not necessarily indicative of the amounts the Company could realize
in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
To determine fair value for fixed maturities not actively traded, the
Company utilizes discounted cash flows calculated at current market
rates on investments of similar quality and term.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have liquidity requirements that vary among the
principal product lines. Life insurance and pension plan reserves are
primarily long-term liabilities. Accident and health reserves, including
long-term disability, consist of both short-term and long-term
liabilities. Life insurance and pension plan reserve requirements are
usually stable and predictable, and are supported primarily by
long-term, fixed income investments. Accident and health claim demands
are stable and predictable but generally shorter term, requiring greater
liquidity.
Generally, the Company has met its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio. Liquidity
for the Company has remained strong, as evidenced by significant amounts
of short-term investments and cash that totaled $485.1 million and
$638.4 million as of September 30, 2002 and December 31, 2001,
respectively.
Funds provided from premiums and fees, investment income and maturities
of investment assets are reasonably predictable and normally exceed
liquidity requirements for payment of claims, benefits, and expenses.
However, since the timing of available funds cannot always be matched
precisely to commitments, imbalances may arise when demands for funds
exceed those on hand. Also, a demand for funds may arise as a result of
the Company taking advantage of current investment opportunities. The
Company's capital resources represent funds available for long-term
business commitments and primarily consist of retained earnings and
proceeds from the issuance of equity securities. Capital resources
provide protection for policyholders and the financial strength to
support the underwriting of insurance risks, and allow for continued
business growth. The amount of capital resources that may be needed is
determined by the Company's senior management and Board of Directors, as
well as by regulatory requirements. The allocation of resources to new
long-term business commitments is designed to achieve an attractive
return, tempered by considerations of risk and the need to support the
Company's existing business.
Additional liquidity is available through the Company's participation in
repurchase agreements with third party brokers and the issuance of
commercial paper. The Company had $281.1 million of repurchase
agreements at September 30, 2002, compared to $250.9 at December 31,
2001. The Company's participation in repurchase agreements depends on
current market conditions, and as a result, fluctuations may occur.
The Company's financial strength provides the capacity and flexibility
to enable it to raise funds in the capital markets through the issuance
of commercial paper. The Company continues to be well capitalized, with
sufficient borrowing capacity to meet the anticipated needs of its
business. The Company had $97.0 million of commercial paper outstanding
at September 30, 2002, and December 31, 2001. The commercial paper has
been given a rating of A-1 + by Standard & Poor's Corporation and a
rating of P-1 by Moody's Investors Service, each being the highest
rating available.
OBLIGATIONS RELATING TO DEBT AND LEASES FOR THE FULL YEAR ARE AS FOLLOWS:
2002 2003 2004 2005 2006 Thereafter
-------- -------- -------- -------- -------- -----------
Related party note $ $ $ $ $ 25.0 $ 175.0
Operating leases 7.9 28.9 23.3 20.7 17.9 38.0
-------- -------- -------- -------- -------- -----------
Total contractual
obligations $ 7.9 $ 28.9 $ 23.3 $ 20.7 $ 42.9 $ 213.0
======== ======== ======== ======== ======== ===========
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's assets are purchased to fund future benefit payments to
its policyholders and contractholders. The primary risk of these assets
is exposure to rising interest rates. The Company's exposure to foreign
currency exchange rate fluctuations is minimal as only nominal foreign
investments are held.
To manage interest rate risk, the Company invests in assets that are
suited to the products that it sells. For products with fixed and highly
predictable benefit payments such as certificate annuities and payout
annuities, the Company invests in fixed income assets with cash flows
that closely match the liability product cash flows. The Company is then
protected against interest rate changes, as any change in the fair value
of the assets will be offset by a similar change in the fair value of
the liabilities. For products with uncertain timing of benefit payments
such as portfolio annuities and life insurance, the Company invests in
fixed income assets with expected cash flows that are earlier than the
expected timing of the benefit payments. The Company can then react to
changing interest rates sooner as these assets mature for reinvestment.
The Company also manages risk with interest rate derivatives such as
interest rate caps that would pay the Company investment income if
interest rates rise above the level specified in the cap. The Company
also uses interest rate swaps to convert cash flow from variable-rate
investments to fixed amounts to match such cash flows to expected cash
flows on its liabilities to policyholders. These derivatives are only
used to reduce risk and are not used for speculative purposes.
To manage foreign currency exchange risk, the Company uses currency
swaps to convert foreign currency back to United States dollars. These
swaps are purchased each time a foreign currency denominated asset is
purchased.
There are no significant changes to the Company's market risk position
from December 31, 2001.
Item 4. CONTROLS AND PROCEDURES
Based on their evaluation as of October 25, 2002, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's
Disclosure Controls and Procedures are effective in ensuring that
information relating to the Company and its subsidiaries which is
required to be disclosed in reports filed under the Securities Exchange
Act of 1934 is (i) accumulated, processed and reported in a timely
manner; and (ii) communicated to the Company's senior management,
including the President and Chief Executive Officer and the Executive
Vice President and Chief Financial Officer, so that timely decisions may
be made regarding disclosure.
The Chief Executive Officer and Chief Financial Officer hereby confirm
that, since the date of their evaluation on October 25, 2002, there were
no significant changes in the Company's internal controls or in other
factors that could significantly affect these internal controls
including any corrective actions with regard to significant deficiencies
and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is a party or of which any of their property is
the subject.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
None
(b) Reports on Form 8-K
A report on Form 8-K, dated July 30, 2002, was filed disclosing
the Company's second quarter results as of June 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
BY: /s/ Glen R. Derback DATE: November 14, 2002
----------------------------------------- ----------------------
Glen R. Derback, Vice President and Controller
(Duly authorized officer and chief accounting officer)
CERTIFICATIONS
I, William T. McCallum, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Great-West Life &
Annuity Insurance Company (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusion about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ William T. McCallum
--------------------------------------
William T. McCallum
President and Chief Executive Officer
I, Mitchell T.G. Graye, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Great-West Life &
Annuity Insurance Company (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusion about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Mitchell T.G. Graye
---------------------------------
Mitchell T.G. Graye
Executive Vice President and
Chief Financial Officer