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 March 31, 2003
----------------------------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from to
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Commission file number 333-1173
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
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Colorado 84-0467907
- ---------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation ororganization) Number)
8515 East Orchard Road, Greenwood Village, CO 80111
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(Address of principal executive offices)
(Zip Code)
[303] 737-4128
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(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
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Indicate by check mark whether the registrant is an accelerated filer as defined
in ss.240.12(b)-2 of this chapter.
Yes No X
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The public may read and copy any of the registrant's reports filed with the SEC
at the SEC's Public Reference Room, 450 Fifth Street NW, Washington DC 20549,
telephone 1-800-SEC-0330 or online at (http://www.sec.gov).
As of May 1, 2003, 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.
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 Statements 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 18
Item 4 Controls and Procedures 19
Part II OTHER INFORMATION 20
Item 1 Legal Proceedings 20
Item 6 Exhibits and Reports on Form 8-K 20
Signature 20
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
March 31
-------------------------------
REVENUES: 2003 2002
-------------- --------------
Premium $ 273,903 $ 289,521
Fee income 215,874 226,744
Net investment income 214,631 229,729
Net realized gains on investments 26,315 6,241
-------------- --------------
730,723 752,235
BENEFITS AND EXPENSES:
Life and other policy benefits (net of reinsurance
recoveries totaling $5,737 and 13,767) 187,407 210,328
Increase in reserves 53,012 39,594
Interest paid or credited to contractholders 114,677 125,900
Provision for policyholders' share of earnings
on participating business 2,361 929
Dividends to policyholders 24,803 24,202
-------------- --------------
382,260 400,953
Commissions 39,900 39,437
Operating expenses 171,289 197,784
Premium taxes 6,661 5,800
-------------- --------------
600,110 643,974
INCOME BEFORE INCOME TAXES 130,613 108,261
PROVISION FOR INCOME TAXES:
Current 27,073 6,862
Deferred 17,601 28,512
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44,674 35,374
-------------- --------------
NET INCOME $ 85,939 $ 72,887
============== ==============
See notes to consolidated financial statements.
3
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
[Dollars in Thousands]
=================================================================================================
March 31 December 31,
ASSETS 2003 2002
- ------
----------------- ----------------
[unaudited]
INVESTMENTS:
Fixed maturities available-for-sale, at fair value
(amortized cost $10,179,266 and $9,910,662) $ 10,627,847 $ 10,371,152
Mortgage loans on real estate (net of allowances
of $53,654 and $55,654) 381,317 417,412
Common stock, at fair value (cost $100,970, and
$102,862) 96,813 90,188
Real estate 1,734 3,735
Policy loans 2,963,359 2,964,030
Short-term investments, available-for-sale
(cost $530,711 and $709,592) 530,711 709,804
----------------- ----------------
Total investments 14,601,781 14,556,321
OTHER ASSETS:
Cash 237,831 154,600
Reinsurance receivable 226,093 241,153
Deferred policy acquisition costs 273,085 267,846
Investment income due and accrued 132,099 133,166
Amounts receivable related to uninsured accident
and health plan claims (net of allowances of
$48,091 and $42,144) 113,698 86,228
Premiums in course of collection (net of allowances
of $11,134 and $12,011) 52,313 54,494
Deferred income taxes 55,885 69,016
Other assets 987,306 754,869
SEPARATE ACCOUNT ASSETS 11,174,963 11,338,376
----------------- ----------------
TOTAL ASSETS $ 27,855,054 $ 27,656,069
================= ================
(continued)
4
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
[Dollars in Thousands]
=================================================================================================
[unaudited]
March 31, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2003 2002
- ------------------------------------
----------------- -----------------
[unaudited]
POLICY BENEFIT LIABILITIES:
Policy reserves $ 12,297,628 $ 12,251,214
Policy and contract claims 361,596 378,995
Policyholders' funds 285,753 299,730
Provision for policyholders' dividends 77,836 76,983
Undistributed earnings on participating business 174,454 170,456
GENERAL LIABILITIES:
Due to GWL 26,235 33,841
Due to GWL&A Financial Inc. 183,890 171,416
Repurchase agreements 149,814 323,200
Commercial paper 94,318 96,645
Other liabilities 1,331,369 850,757
SEPARATE ACCOUNT LIABILITIES 11,174,963 11,338,376
----------------- -----------------
Total liabilities 26,157,856 25,991,613
----------------- -----------------
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 outstanding 7,032 7,032
Additional paid-in capital 720,226 719,709
Accumulated other comprehensive income 142,593 150,616
Retained earnings 827,347 787,099
----------------- -----------------
Total stockholder's equity 1,697,198 1,664,456
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 27,855,054 $ 27,656,069
================= =================
See notes to consolidated financial statements. (Concluded)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Dollars in Thousands]
=================================================================================================
[Unaudited]
- ----------------------------------------------------------- -------------------------------------
Three Months Ended
March 31,
-------------------------------------
----------------- -- ----------------
OPERATING ACTIVITIES: 2003 2002
- ------------------------------------------------------- ----------------- ----------------
Net income $ 85,939 $ 72,887
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain allocated to participating policyholders 2,361 929
Amortization of investments (17,909) (18,667)
Realized gains on disposal of investments
and write-downs of mortgage loans and real estate (26,315) (6,241)
Amortization 7,732 16,007
Deferred income taxes 17,601 28,512
Changes in assets and liabilities:
Policy benefit liabilities 125,002 104,315
Reinsurance receivable 15,060 (351)
Accrued interest and other receivables (24,222) 6,159
Other, net (20,993) (280,197)
----------------- ----------------
Net cash provided by (used in) operating activities 164,256 (76,647)
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and redemptions
of investments:
Fixed maturities available-for-sale:
Sales 1,741,273 1,796,138
Maturities and redemptions 561,312 388,547
Mortgage loans 38,270 41,069
Real estate 3,000 1,800
Common stock 5,901 7,227
Purchases of investments:
Fixed maturities available-for-sale (2,092,206) (2,035,914)
Real estate (233) (908)
Common stock (4,663)
----------------- ----------------
Net cash provided by investing activities 252,654 197,959
6
(continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
- -------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Dollars in Thousands]
=================================================================================================
[Unaudited]
Three Months Ended
March 31,
-------------------------------------
FINANCING ACTIVITIES: 2003 2002
----------------- ----------------
Contract withdrawals, net of deposits $ (117,143) $ (150,908)
Net GWL repayments (7,606) (2,205)
Net GWL&A Financial borrowings (repayments) 12,474 (18,774)
Dividends paid (45,691) (45,412)
Commercial paper (repayments) borrowings (2,327) 1,684
Repurchase agreements (repayments) borrowings (173,386) 21,591
----------------- ----------------
Net cash used in financing activities (333,679) (194,024)
----------------- ----------------
NET INCREASE (DECREASE) IN CASH 83,231 (72,712)
CASH, BEGINNING OF YEAR 154,600 213,731
----------------- ----------------
CASH, END OF PERIOD $ 237,831 $ 141,019
================= ================
See notes to consolidated financial statements. (Concluded)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003 [Dollars in Thousands]
=================================================================================================
[Unaudited]
Accumulated Other
Comprehensive Income
(Loss)
-------------------------
Unrealized Minimum
Additional Gains Pension
Preferred Stock Common Stock Paid-in (Losses) Liability Retained
on
Shares Amount Shares Amount Capital Securities Adjustment Earnings Total
------- ------- --------- -------- --------- ----------- ----------- ---------- ----------
BALANCE, JANUARY 1, 2003 0 $ 0 7,032 $ 7,032 $ 719,709 $ 163,500 $ (12,884) $ 787,099 $ 1,664,456
Net income 85,939 85,939
Other comprehensive (8,023) (8,023)
income
----------
Total comprehensive 77,916
income
----------
Dividends (45,691) (45,691)
Income tax benefit
on stock compensation 517 517
------- ------- --------- -------- --------- ----------- ----------- ---------- ----------
BALANCE, MARCH 31, 2003 0 $ 0 7,032 $ 7,032 $ 720,226 $ 155,477 $ (12,884) $ 827,347 $ 1,697,198
======= ======= ========= ======== ========= =========== =========== ========== ==========
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, 2002.
Operating results for the three months ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the full
year ending December 31, 2003.
At March 31, 2003, the Company has a stock option plan that provides for
the granting of options on common shares of Great-West Lifeco Inc.
(Lifeco), of which the Company is an indirect wholly-owned subsidiary,
to certain officers and employees of Lifeco and its subsidiaries,
including the Company. The Company accounts for the plan under
recognition and measurement principles of APB Opinion No. 25 "Accounting
for Stock Issued to Employees," and related interpretations. No
stock-based employee compensation cost is reflected in net income, as
all options granted under this plan had an exercise price equal to the
market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation" to stock-based employee
compensation.
Proforma disclosures For the three months
[Thousands] ended March 31,
------------------------
2003 2002
------------------------------------------------------- ---------- ----------
Net income as reported $ 85,939 $ 72,887
Less compensation for fair value of stock options,
net of 659 566
related tax effects
---------- ----------
---------- ----------
Proforma net income $ 85,280 $ 72,321
========== ==========
2. NEW ACCOUNTING PRONOUNCEMENTS
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. SFAS No. 145 was adopted
January 1, 2003 without a material impact 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
adoption of this statement did not have a material impact on the
Company's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" to clarify
accounting and disclosure requirements relating to a guarantor's
issuance of certain types of guarantees. FIN 45 requires entities to
disclose additional information about certain guarantees, or groups of
similar guarantees, even if the likelihood of the guarantor's having to
make any payments under the guarantee is remote. The disclosure
provisions are effective for financial statements for fiscal years ended
after December 15, 2002. For certain guarantees, the interpretation also
requires that guarantors recognize a liability equal to the fair value
of the guarantee upon its issuance. This initial recognition and
measurement provision is to be applied only on a prospective basis to
guarantees issued or modified after December 31, 2002. In the normal
course, the Company may enter into agreements which may contain features
which meet the FIN 45 definition of a guarantee, and while the maximum
guarantee cannot always be determined, given the nature of the future
events which may or may not occur, any such arrangements that were
material have been previously disclosed by the Company.
In January 2003, FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities", an interpretation of
Accounting Research Bulletin (ARB) No. 51. This Interpretation addresses
consolidation by business enterprises of variable interest entities
(VIE), which have one or both of the following characteristics: a)
insufficient equity investment at risk, or b) insufficient control by
equity investors. This guidance is effective for VIEs created after
January 31, 2003, and for existing VIEs as of July 1, 2003. An entity
with variable interests in VIEs created before February 1, 2003, shall
apply the guidance no later than the beginning of the first interim or
annual reporting period beginning after June 15, 2003. In conjunction
with the issuance of this guidance, the Company conducted a review of
its involvement with VIEs and does not believe it has any significant
investments or ownership in VIEs.
3. OTHER
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.
On February 17, 2003, Great-West Lifeco announced a definitive agreement
to acquire Canada Life Financial Corporation for $7.3 billion
(Canadian). Canada Life is a Canadian based insurance company with
business principally in Canada, the United Kingdom, the United States
and Ireland. In the United States, Canada Life sells individual and
group insurance and annuity products. Subject to required shareholder
and regulatory approvals, the transaction is expected to close on July
10, 2003.
Canada Life's U.S. operations represented approximately $1.6 billion in
annual revenue in 2002 and $7.4 billion in assets as of December 31,
2002. If the transaction proceeds, Canada Life's U.S. operations will be
integrated with the Company's operations. The details of the integration
are still to be determined.
Certain reclassifications have been made to the 2002 financial
statements to conform to the 2003 presentation. These changes in
classification had no effect on previously reported stockholder's equity
or net income.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Summary Three Months Ended March 31,
-----------------------------
[Millions] 2003 2002
------------------------------------------------ ------------ -------------
Premium income $ 274 $ 289
Fee income 216 227
Net investment income 215 230
Realized investment gains 26 6
------------ -------------
Total revenues 731 752
Total benefits and expenses 600 644
Income tax expenses 45 35
------------ -------------
Net income $ 86 $ 73
============ =============
Deposits for investment- type contracts $ 147 $ 150
Deposits to separate accounts 570 799
Self-funded premium equivalents 1,197 1,348
Balance Sheet March 31, December 31,
[Millions] 2003 2002
------------------------------------------------ ------------ -------------
Investment assets $ 14,602 $ 14,556
Separate account
assets 11,175 11,338
Total assets 27,855 27,656
Total policy
benefit liabilities 13,197 13,177
Due to GWL 26 34
Due to GWL&A
Financial 184 171
Total stockholder's
equity 1,697 1,664
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 March 31, 2003, compared with December 31, 2002, and its
results of operations for the quarter ended March 31, 2003, 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, 2002 to which the reader is directed for additional
information.
CONSOLIDATED RESULTS
The Company's consolidated net income increased $13 million or 17.8 %
for the first quarter of 2003 when compared to the first quarter of
2002. The net income increase reflects improved morbidity, effective
expense management, and an increase in realized investment gains on
fixed maturities.
Total revenues decreased $21 million or 2.8% for the first quarter of
2003 when compared to 2002. The decrease in the first quarter was
primarily due to a $15 million decrease in premium income and an $11
million decrease in fee income.
The decrease in premium and fee income for the first quarter is
primarily in the Employee Benefits segment reflecting lower membership
levels mainly associated with contract terminations resulting from
pricing actions taken during 2002.
The decrease in net investment income for the first quarter of 2003 was
primarily the result of decreasing interest rates. The actual earned
rate at March 31, 2003 was 6.67% compared to 6.99% at March 31, 2002.
The earned rate is expected to trend lower in the next few quarters
reflecting the interest rate environment.
Benefits and expenses decreased $44 million or 6.8% for the first
quarter of 2003 when compared to the first quarter of 2002. The decrease
in benefits and expenses is primarily in the Employee Benefits division
due to higher deficit recoveries resulting from pricing actions taken in
2002 and lower operating expenses resulting from a reduction in staff
and improved expense management.
Income tax expense increased $10 million or 28.6% for the first quarter
of 2003 when compared to the same period in 2002 reflecting the increase
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. These amounts approximate the additional premiums which
would have been earned under such contracts if they had been written as
traditional indemnity or HMO programs.
Deposits for separate accounts decreased $229 million or 28.7% for the
first quarter of 2003 when compared to the first quarter of 2002. The
decrease is due primarily to a decrease in group annuity single premium
deposits.
Self-funded premium equivalents decreased $151 million or 11.2% for the
first quarter of 2003 when compared to the first quarter of 2002. The
decrease was due to the decrease in membership and improved morbidity.
SEGMENT RESULTS
Employee Benefits
The following is a summary of certain financial data of the Employee
Benefits segment:
Operating Summary Three Months Ended March
31,
---------------------------
[Millions] 2003 2002
----------------------------------------- ------------ -----------
Premium income $ 236 $ 243
Fee income 159 171
Net investment income 16 17
Realized investment gains 5
------------ -----------
Total revenues 416 431
Total benefits and expenses 344 376
Income tax expenses 25 18
------------ -----------
Net income $ 47 $ 37
============ ===========
Self-funded premium equivalents $ 1,197 $ 1,348
The $10 million increase in earnings for the first quarter of 2003
compared to the first quarter of 2002 is primarily due to improved
aggregate and specific stop loss morbidity.
Premium and fee income decreased $19 million or 4.6% for the first
quarter of 2003 when compared to the same period of 2002. The decrease
is primarily due to lower membership levels. There was a 10.0% decrease
in total health care membership from 2,174,000 at December 31, 2002 to
1,956,100 at March 31, 2003. There was an 18.0% decrease in total health
care membership from 2,386,200 at March 31, 2002 to 1,956,100 at March
31, 2003. Much of the health care membership decline can be attributed
to contract terminations resulting from pricing actions taken during
2002. 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 $32 million or 8.5% for the first
quarter of 2003 when compared to the first quarter of 2002. The decrease
is due primarily to higher deficit recoveries resulting from the pricing
actions taken and lower operating expenses resulting from a reduction in
staff and improved expense management.
Self-funded premium equivalents decreased $151 million for the first
quarter of 2003 compared to the first quarter of 2002. The decrease was
due to improved morbidity, as well as the decrease in membership.
The Company recorded $14.0 million ($9.1 million, net of tax) of
restructuring costs in the first 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, disposal of furniture and equipment of $4.4 million, and
termination of leasing agreements of $6.8 million.
During the first quarter of 2002, the premium deficiency reserve was
reduced by $15.0 million ($9.8 million, net of tax) based on an analysis
of emerging experience. The Company had released premium deficiency
reserves of $18.7 million in 2001 and $6.2 million in the first quarter
of 2002 to offset the underwriting losses incurred on the under priced
block of business. The premium deficiency reserve at March 31, 2002 was
$6.1 million and $0 at March 31, 2003.
Financial Services
The following is a summary of certain financial data of the Financial
Services segment.
Operating Summary Three Months Ended March 31,
-----------------------------
[Millions] 2003 2002
------------------------------------------------ ------------ -------------
Premium income $ 38 $ 46
Fee income 57 56
Net investment income 199 211
Realized investment gains 21 6
------------ -------------
Total revenues 315 319
Total benefits and expenses 256 266
Income tax expenses 20 17
------------ -------------
Net income $ 39 $ 36
============ =============
Deposits for investment-type contracts $ 147 $ 150
Deposits to separate accounts $ 570 $ 799
Net income for Financial Services increased $3 million for the first
quarter of 2003 when compared to the same period last year. The increase
reflects an increase in realized investment gains on fixed maturities
and reductions in operating expenses.
Savings
Savings premiums and deposits and fees decreased $174 million to $336
million or 34% for the first quarter of 2003 when compared to the same
period last year. Deposits to separate accounts decreased $161 million
from the first quarter of 2002. In the prior year, the Company received
single premium deposits of $139 million. In 2003, single premium
deposits were only $26 million due to lower sales.
The Financial Services segment's core savings business is in the
public/non-profit pension market. Policyholder liabilities decreased $40
million or 1% from December 31, 2002 due to one large case termination.
In the first quarter of 2003, the Financial Services segment's savings
business experienced a decrease in the total lives under
administrations. The decrease was the result of the loss of a single
case. Total lives under administration at March 31, 2003 were 1,225,720
compared to 1,331,061 at December 31, 2002.
Assets in variable separate accounts were $2,459 million at March 31,
2003, compared to $2,553 million at December 31, 2002. The decrease
reflects lower deposits and the impact of the volatility of the U.S.
equities market.
Customer participation in guaranteed separate accounts increased during
2003, as many customers prefer the security of fixed income securities
in separate account assets. Assets under management for guaranteed
separate account funds were $1,709 million at March 31, 2003 compared to
$1,650 million at December 31, 2002.
In addition to providing administrative services to customers of the
Company's annuity products, a subsidiary of the Company also provides
comprehensive third-party administrative and record keeping services for
other financial institutions and employer-sponsored retirement plans.
Including the savings business lives under administration referenced
above, the Company currently provides these services to a total of
1,629,315 lives at March 31, 2003, compared to 1,708,533 at December 31,
2002.
Life Insurance
Individual life insurance deposits and premiums and fees of $80 million
for the first quarter of 2003 represent a decrease of $24 million or 23%
from the same period last year. The decrease is primarily due to slow
sales in the BOLI markets due to low fixed interest rates.
401(k)
401(k) premiums and deposits decreased 10% for the first quarter of 2003
when compared to the first quarter of 2002 (from $437 million to $395
million) as a result of a decline in membership. Variable assets in
separate accounts decreased during the first quarter of 2003 from $5.4
billion at December 31, 2002, to $5.3 billion at March 31, 2003 due to
the impact of lower U.S. equity markets and negative case growth
resulting in lower deposits.
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 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 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, government bonds, and mortgage-backed and asset-backed
securities. The Company's strategy related to structured assets is to
focus on those investments with lower volatility and minimal credit
risk. The Company does not invest in higher risk mortgage obligations
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:
March 31, December 31,
2003 2002
------------------ -------------------
AAA 60.6 % 58.9 %
AA 8.7 % 8.9 %
A 14.4 % 15.2 %
BBB 13.8 % 14.4 %
BB and below (non-investment grade) 2.5 % 2.6 %
-------------- --- --------------- ---
TOTAL 100.0 % 100.0 %
============== === =============== ===
During the first three months of 2003, 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 $8 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 $768.5 million and
$864.4 million as of March 31, 2003 and December 31, 2002, 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 $149.8 million of repurchase
agreements at March 31, 2003, compared to $323.2 million at December 31,
2002. 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 $94.3 million of commercial paper outstanding
at March 31, 2003, and $96.6 million at December 31, 2002. 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 AT MARCH 31, 2003 ARE AS FOLLOWS:
2003 2004 2005 2006 2007 Thereafter
-------- -------- -------- -------- -------- -----------
Related party
notes $ -- $ -- $ -- $ 25.0 $ -- $ 175.0
Operating leases 20.1 23.0 21.6 19.8 17.8 39.3
-------- -------- -------- -------- -------- -----------
Total contractual
obligations $ 20.1 $ 23.0 $ 21.6 $ 44.8 $ 17.8 $ 214.3
======== ======== ======== ======== ======== ===========
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 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, 2002.
Item 4. CONTROLS AND PROCEDURES
Based on their evaluation as of April 24, 2003, 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 April 24, 2003, 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
Exhibit Number Title Page
31 Rule 13a-14(a)/15d-14(a) Certifications
99 Additional Exhibits
(b) REPORTS ON FORM 8-K
A report on Form 8-K, dated May 1, 2003, was filed disclosing the
Company's first quarter results as of March 31, 2003.
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: May 14, 2003
------------------------------------------- --------------------
Glen R. Derback, Vice President and Controller
(Duly authorized officer and chief accounting officer)