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 June 30, 2003
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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 333-01173
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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
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification
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 August 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 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 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk 20
Item 4 Controls and Procedures 21
Part II OTHER INFORMATION
Item 1 Legal Proceedings 22
Item 6 Exhibits and Reports on Form 8-K 22
Signature 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 Six Months Ended
June 30, June 30,
------------------------------------------------------------------------
REVENUES: 2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Premium (net of premiums
ceded totaling $35,689, $33,516,
$44,240, and $41,895) $ 233,693 $ 259,488 $ 507,596 $ 549,009
Fee income 206,601 233,264 422,475 460,008
Net investment income 206,114 234,582 420,745 462,500
Net realized gains on
Investments 24,535 1,667 50,850 7,908
--------------- --------------- --------------- ---------------
670,943 729,001 1,401,666 1,479,425
--------------- --------------- --------------- ---------------
BENEFITS AND EXPENSES:
Life and other policy benefits
(net of reinsurance recoveries
totaling $12,006, $12,744,
$22,410, and $25,487) 189,274 240,856 376,681 451,184
Increase (decrease) in reserves 1,157 (14,367) 54,169 25,227
Interest paid or credited to
contractholders 129,914 125,129 244,591 251,029
Provision for policyholders'
share of earnings (loss)
on participating business 3,285 (7) 5,646 922
Dividends to policyholders 15,726 16,088 40,529 40,290
--------------- --------------- --------------- ---------------
339,356 367,699 721,616 768,652
--------------- --------------- --------------- ---------------
Commissions 40,207 59,102 80,107 98,539
Operating expenses 164,016 175,083 335,305 371,056
Premium taxes 8,552 9,547 15,213 15,347
--------------- --------------- --------------- ---------------
552,131 611,431 1,152,241 1,253,594
--------------- --------------- --------------- ---------------
INCOME BEFORE INCOME
TAXES 118,812 117,570 249,425 225,831
PROVISION FOR INCOME
TAXES:
Current 34,281 37,307 61,354 44,169
Deferred 5,180 80 22,781 28,592
--------------- --------------- --------------- ---------------
39,461 37,387 84,135 72,761
--------------- --------------- --------------- ---------------
NET INCOME $ 79,351 $ 80,183 $ 165,290 $ 153,070
=============== =============== =============== ===============
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
[Dollars in Thousands]
====================================================================================================================================
June 30, December 31,
ASSETS 2003 2002
- ------
-------------------- ---------------------
[unaudited]
INVESTMENTS:
Fixed maturities available-for-sale, at fair value
(amortized cost $10,228,529 and $9,910,662) $ 10,789,279 $ 10,371,152
Mortgage loans on real estate (net of allowances
of $49,462 and $55,654) 347,246 417,412
Common stock, at fair value (cost $103,969 and $102,862) 109,085 90,188
Real estate 1,721 3,735
Policy loans 2,986,381 2,964,030
Short-term investments, available-for-sale
(cost $675,795 and $709,592) 675,795 709,804
-------------------- ---------------------
Total investments 14,909,507 14,556,321
OTHER ASSETS:
Cash 273,989 154,600
Reinsurance receivable 229,083 241,153
Deferred policy acquisition costs 266,302 267,846
Investment income due and accrued 108,592 133,166
Amounts receivable related to uninsured accident
and health plan claims (net of allowances of
$47,454 and $42,144) 97,900 86,228
Premiums in course of collection (net of allowances
of $10,275 and $12,011) 45,235 54,494
Deferred income taxes 25,050 69,016
Other assets 993,946 754,869
SEPARATE ACCOUNT ASSETS 12,300,781 11,338,376
-------------------- ---------------------
TOTAL ASSETS $ 29,250,385 $ 27,656,069
==================== =====================
(continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
[Dollars in Thousands]
====================================================================================================================================
June 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2003 2002
- ------------------------------------
-------------------- ---------------------
[unaudited]
POLICY BENEFIT LIABILITIES:
Policy reserves $ 12,312,551 $ 12,251,214
Policy and contract claims 362,723 378,995
Policyholders' funds 315,815 299,730
Provision for policyholders' dividends 78,264 76,983
Undistributed earnings on participating business 179,112 170,456
GENERAL LIABILITIES:
Due to GWL 25,966 33,841
Due to GWL&A Financial Inc. 184,394 171,416
Repurchase agreements 187,921 323,200
Commercial paper 102,032 96,645
Other liabilities 1,379,004 850,757
SEPARATE ACCOUNT LIABILITIES 12,300,781 11,338,376
-------------------- ---------------------
Total liabilities 27,428,563 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 720,484 719,709
Accumulated other comprehensive income 187,610 150,616
Retained earnings 906,696 787,099
-------------------- ---------------------
Total stockholder's equity 1,821,822 1,664,456
-------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 29,250,385 $ 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]
Six Months Ended
June 30,
---------------------------------------------
OPERATING ACTIVITIES: 2003 2002
-------------------- ---------------------
Net income $ 165,290 $ 153,070
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain allocated to participating policyholders 5,646 922
Amortization of investments (33,728) (37,991)
Realized gains on disposal of investments
and write-downs of mortgage loans and real estate (50,850) (7,908)
Amortization 17,907 19,834
Deferred income taxes 22,781 28,592
Changes in assets and liabilities:
Policy benefit liabilities 256,797 197,437
Reinsurance receivable 12,070 (30,149)
Accrued interest and other receivables 22,161 52,893
Other, net (48,548) (3,935)
-------------------- ---------------------
Net cash provided by operating activities 369,526 372,765
-------------------- ---------------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and redemptions of investments:
Fixed maturities available-for-sale
Sales 1,887,963 3,013,838
Maturities and redemptions 4,154,422 699,609
Mortgage loans 77,751 102,047
Real estate 3,000 1,800
Common stock 7,638 7,347
Purchases of investments:
Fixed maturities held-to-maturity (6,248,797) (3,699,276)
Mortgage loans
Real estate (496) (2,243)
Common stock (7,948) (15,372)
Other, net 311,847 (63,390)
-------------------- ---------------------
Net cash provided by investing activities 185,380 44,360
-------------------- ---------------------
(continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Dollars in Thousands]
====================================================================================================================================
[Unaudited]
Six Months Ended
June 30,
---------------------------------------------
FINANCING ACTIVITIES: 2003 2002
-------------------- ---------------------
Contract withdrawals, net of deposits $ (265,035) $ (249,040)
Net GWL repayments (7,875) (1,773)
Net GWL&A Financial borrowings 12,978 5,341
Dividends paid (45,693) (90,358)
Commercial paper borrowings, net 5,387 1,475
Repurchase agreements (repayments) borrowings, net (135,279) 64,809
-------------------- ---------------------
Net cash used in financing activities (435,517) (269,546)
-------------------- ---------------------
NET INCREASE IN CASH 119,389 147,579
CASH, BEGINNING OF YEAR 154,600 213,731
-------------------- ---------------------
CASH, END OF PERIOD $ 273,989 $ 361,310
==================== =====================
See notes to consolidated financial statements. (Concluded)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003 [Dollars in Thousands]
====================================================================================================================================
[Unaudited]
Accumulated Other
Comprehensive Income
(Loss)
-----------------------
Unrealized Minimum
Additional Gains Pension
Preferred Stock Common Stock Paid-in (Losses) on Liability Retained
---------------- -------------------
Shares Amount Shares Amount Capital Securities Adjustment Earnings Total
------- -------- --------- -------- --------- ---------- ----------- ---------- -----------
BALANCE, JANUARY 1, 2003 0 $ 0 7,032,000 $ 7,032 $ 719,709 $ 163,500 $ (12,884) $ 787,099 $ 1,664,456
Net income 165,290 165,290
Other comprehensive income 36,994 36,994
-------
Total comprehensive income 202,284
-------
Dividends (45,693) (45,693)
Income tax benefit on stock
compensation 775 775
------- -------- --------- ------- --------- ----------- ----------- ---------- -----------
BALANCE, JUNE 30, 2003 0 $ 0 7,032,000 $ 7,032 $ 720,484 $ 200,494 $ (12,884) $ 906,696 $ 1,821,822
======= ======== ========= ======= ========= =========== =========== ========== ===========
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 six months ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the full
year ending December 31, 2003.
At June 30, 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.
For the three months ended For the six months ended
Proforma Disclosures June 30, June 30,
------------------------------ ------------------------------
[Thousands] 2003 2002 2003 2002
------------------------------------ ------------- ------------- ------------- -------------
Net income as reported $ 79,351 $ 80,183 $ 165,290 $ 153,070
Less compensation for fair value
of stock options, net of related
tax effects 742 582 1,401 1,148
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Proforma net income $ 78,609 $ 79,601 $ 163,889 $ 151,922
============= ============= ============= =============
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
have any investments or ownership in VIEs.
In April 2003, the FASB issued Statement No. 149 "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" (SFAS
No. 149). SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Except for certain
implementation guidance that is incorporated in SFAS No. 149 and
already effective, SFAS No. 149 is effective for contracts entered into
or modified after June 30, 2003. The Company does not expect SFAS No.
149 to have a significant impact on the Company's financial position or
results of operation.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with characteristics of both Liabilities and
Equity" (SFAS 150). SFAS 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances), many of which were
previously classified as equity. The provisions of SFAS 150 are
effective for financial instruments entered into or modified after May
31, 2003 and with one exception, is effective at the beginning of the
first interim period beginning after June 15, 2003. The adoption of
SFAS 150 will not have a material effect on the Company's financial
statements.
3. OTHER
On July 10, 2003, Lifeco completed its acquisition of Canada Life
Financial Corporation. 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.
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. Canada Life's U.S. operations are being integrated with the
Company's operations. As of July 10, 2003, the Company will provide,
with respect to Canada Life's U.S. operations, certain corporate
services, and operational administrative services with respect to
Canada Life's individual life and annuity business.
On July 21, 2003 the Company announced a new name for the Employee
Benefit divisions of the Company and its subsidiaries: Alta Health &
Life Insurance Company, First Great-West Life & Annuity Insurance
Company, and the One Health Plan HMO companies. Great-West Healthcare
is the new name designed to unify all the employee benefit products and
services under one brand name. The name change is intended to eliminate
potential market confusion over different carriers and networks.
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 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
Three Months Ended Six Months Ended
Operating Summary June 30, June 30,
------------------------------- ----------------------------------
[Millions] 2003 2002 2003 2002
---------------------------------- ------------- ------------- ------------- ----------------
Premium income $ 234 $ 260 $ 507 $ 549
Fee income 207 233 422 460
Net investment income 206 234 421 462
Realized investment gains 24 2 51 8
------------- ------------- ------------- ----------------
Total revenues 671 729 1,401 1,479
Total benefits and expenses 552 611 1,152 1,253
Income tax expenses 40 38 84 73
------------- ------------- ------------- ----------------
Net income $ 79 $ 80 $ 165 $ 153
============= ============= ============= ================
Deposits for investment- type
contracts $ 122 $ 162 $ 269 $ 312
Deposits to separate accounts 480 589 1,050 1,388
Self-funded premium
equivalents 1,205 1,294 2,402 2,642
Balance Sheet June 30, December 31,
[Millions] 2003 2002
---------------------------------- ------------- ----------------
Investment assets $ 14,910 $ 14,556
Separate account
assets 12,301 11,338
Total assets 29,250 27,656
Total policy
benefit liabilities 13,248 13,177
Due to GWL 26 34
Due to GWL&A
Financial 184 171
Total stockholder's
equity 1,822 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 June 30, 2003, compared with December 31, 2002, and its
results of operations for the quarter and six months ended June 30,
2003, compared with the same periods in 2002. 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 decreased $1 million or 1% for
the second quarter of 2003 when compared to the same period of 2002.
The net income decrease reflects a $3 million decrease in the Financial
Services segment offset by a $2 million increase in the Employee
Benefits segment. The net income decrease of $1 million reflects lower
investment income offset by improved aggregate and specific stop loss
morbidity and an increase in realized gains on the sale of fixed
maturities.
The Company's consolidated net income increased $12 million or 8% for
the first six months of 2003 when compared to the same period of 2002.
The net income increase reflects a $12 million increase in the Employee
Benefits segment as a result of improved morbidity and increases in
realized investment gains on the sale of fixed maturities offset by
reduced revenues primarily resulting from the decline in membership.
Total revenues decreased $58 million or 8% and $78 million or 5% for
the second quarter and first six months of 2003 when compared to the
same periods of 2002. The decreases were primarily due to a $52 million
or 11% decrease and a $80 million or 8% decrease in premium and fee
income in the second quarter and first six months of 2003 when compared
to the second quarter and first six months of 2002. The decreases are
primarily in the Employee Benefits segment reflecting lower membership
levels mainly associated with contract terminations resulting from
pricing actions taken during 2002.
The decreases in net investment income for the second quarter and the
first six months of 2003 when compared to the same periods in 2002 were
primarily the result of decreasing interest rates. The actual earned
rate at June 30, 2003 was 6.35% compared to 6.67% at March 31, 2003;
6.99% at March 31, 2002 and 6.87% at June 30, 2002.
Realized investment gains increased $22 million and $43 million for the
second quarter and the first six months of 2003 when compared to the
same periods in 2002 primarily due to an increase in the gains on the
sale of fixed maturities as a result of the declining interest rate
environment.
Benefits and expenses decreased $59 million or 10% and $101 million or
8% for the second quarter and the first six months of 2003 when
compared to the same periods of 2002. The decrease in benefits and
expenses was primarily in the Employee Benefits segment and was a
combination of higher deficit recoveries resulting from the pricing
actions taken in 2002 and lower operating expenses resulting from a
reduction in staff.
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 received for investment-type contracts decreased $40 million
or 25% and $43 million or 14% for the second quarter and the first six
months of 2003 when compared to the same periods of 2002. The decreases
were due to the net decrease in participant accounts in the retirement
products area in 2003.
Deposits for separate accounts decreased $109 million or 19% and $338
million or 24% for the second quarter and the first six months of 2003
when compared to the same periods of 2002. The second quarter decrease
was due to lower 401k premium deposits associated with a decrease in
participant accounts and fewer individual insurance Business Owned Life
Insurance (BOLI) sales. The decrease for the first six months of 2003
when compared to the same period last year was due primarily to a
decrease in group annuity single premium deposits.
Self-funded premium equivalents decreased $89 million or 7% and $240
million or 9% for the second quarter and the first six months of 2003
when compared to the same periods of 2002. The decreases were due to
improved morbidity as well as the decrease in membership.
SEGMENT RESULTS
Employee Benefits
The following is a summary of certain financial data of the Employee Benefits
segment:
Three Months Ended Six Months Ended
Operating Summary June 30, June 30,
------------------------------- -------------------------------
[Millions] 2003 2002 2003 2002
------------------------------------ ------------- -------------- ------------- -------------
Premium income $ 191 $ 222 $ 426 $ 465
Fee income 151 175 310 346
Net investment income 15 17 31 34
Realized investment gains 5 1 10 1
------------- -------------- ------------- -------------
Total revenues 362 415 777 846
Total benefits and expenses 296 352 640 728
Income tax expenses 22 21 46 39
------------- -------------- ------------- -------------
Net income $ 44 $ 42 $ 91 $ 79
============= ============== ============= =============
Self-funded premium equivalents $ 1,205 $ 1,294 $ 2,402 $ 2,642
The increase in earnings for the second quarter and the first six
months of 2003 compared to the same periods of 2002 is primarily due to
improved aggregate and specific stop loss morbidity.
Premium and fee income decreased $55 million or 14% for the second
quarter of 2003 and decreased $75 million or 9% for the first six
months of 2003, when compared to the same periods of 2002. The
decreases are primarily due to lower membership levels. There was an
11% decrease in total health care membership from 2,174,000 at December
31, 2002 to 1,926,900 at June 30, 2003. There was a 17% decrease in
total health care membership from 2,321,400 at June 30, 2002 to
1,926,900 at June 30, 2003. Much of the health care decline can be
attributed to contract terminations resulting from pricing actions
taken during 2002. The decline in membership is also due to a decrease
in the employee base for existing group health care customers and the
general decline in the economy.
Total benefits and expenses decreased $56 million or 16% and $88
million or 12% for the second quarter and first six months of 2003 when
compared to the same periods of 2002. The decreases are due primarily
to higher deficit recoveries resulting from the pricing actions taken
and lower operating expenses resulting from a reduction in staff.
Self-funded premium equivalents decreased $89 million and $240 million
for the second quarter and first six months of 2003 compared to the
same periods 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) 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.
The Company established a premium deficiency reserve on the Alta block
of business in 2001. The Company had released premium deficiency
reserves of $6.2 million in the first quarter of 2002 and $2.1 million
in the second quarter of 2002 to offset underwriting losses incurred on
the under priced block of business. In addition, the premium deficiency
reserve was reduced by $15.0 million ($9.8 million net of tax) during
the first quarter of 2002 and was reduced by $4.0 million ($2.6
million, net of tax) during the second quarter of 2002 based on an
analysis of emerging experience which was more favorable than
originally estimated. The premium deficiency reserve was $0 at June 30,
2002.
Financial Services
The following is a summary of certain financial data of the Financial Services
segment.
Three Months Ended Six Months Ended
Operating Summary June 30, June 30,
------------------------------- -------------------------------
[Millions] 2003 2002 2003 2002
------------------------------------ ------------- -------------- ------------- -------------
Premium income $ 43 $ 38 $ 81 $ 84
Fee income 56 58 112 114
Net investment income 191 217 390 428
Realized investment gains 19 1 41 7
------------- -------------- ------------- -------------
Total revenues 309 314 624 633
Total benefits and expenses 256 259 512 525
Income tax expenses 18 17 38 34
------------- -------------- ------------- -------------
Net income $ 35 $ 38 $ 74 $ 74
============= ============== ============= =============
Deposits for investment-type
contracts $ 122 $ 162 $ 269 $ 312
Deposits to separate accounts 480 589 1,050 1,388
The decrease in Financial Services earnings for the second quarter of
2003 compared to the same period in 2002 is primarily due to lower
interest margins, which were partially offset by realized investment
gains. Earnings for the first six months of 2003 have remained
relatively unchanged compared to the same period in 2002, as lower
interest margins were largely offset by realized investment gains.
Premium income and deposits to investment-type contracts and separate
accounts have decreased $146 million or 17% for the second quarter of
2003 and decreased $386 million or 20% for the first six months of 2003
when compared to the same periods in 2002. Some of the decrease is
associated with the net decrease in participant accounts in the
retirement products area in 2003. The remaining decrease from 2002
relates to individual insurance sales of the BOLI product that have
been negligible in 2003.
Retirement participant accounts including third-party administration
and institutional accounts decreased 3% in 2003 from 2,160,000 at
December 31, 2002 to 2,091,000 at June 30, 2003. There was a 4%
decrease in participant accounts from 2,186,000 at June 30, 2002 to
2,091,000 at June 30, 2003. A large part of the decrease is related to
one large case termination of 117,000 participant accounts.
Fee income has decreased $2 million or 3% for the second quarter of
2003 and decreased $2 million or 2% for the first six months of 2003
when compared to the same periods of 2002. Retirement products variable
asset-based fees fluctuate with fluctuations in the participant account
values. Account values change due to cash flow and unrealized market
gains and losses associated with fluctuations in the U.S. equities
market.
Investment income decreased $26 million or 12% for the second quarter
of 2003 and decreased $38 million or 9% for the first six months of
2003 when compared to the same periods of 2002. The decrease in
investment income is offset by positive realized investment gains in
the first six months of 2003.
Total benefits and expenses have decreased $3 million or 1% for the
second quarter of 2003 and decreased $13 million or 2% for the first
six months of 2003 when compared to the same periods of 2002. A
reduction in expenses and positive mortality experience on the
individual insurance lines have contributed to these reductions.
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:
June 30, December 31,
2003 2002
---------------------- -----------------------
AAA 60.8 % 58.9 %
AA 8.7 % 8.9 %
A 14.3 % 15.2 %
BBB 13.7 % 14.4 %
BB and Below (non-investment grade) 2.5 % 2.6 %
---------------------- -----------------------
TOTAL 100.0 % 100.0 %
====================== =======================
During the first six 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 $37 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
$949.8 million and $864.4 million as of June 30, 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 $187.9 million of repurchase
agreements at June 30, 2003, compared to $323.2 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 $102.0 million and $96.6 million of
commercial paper outstanding at June 30, 2003, and December 31, 2002,
respectively. 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 JUNE 30, 2003, ARE AS FOLLOWS:
2003 2004 2005 2006 2007 Thereafter
---------- --------- ---------- ---------- --------- -------------
Related party notes $ - $ - $ - $ 25.0 $ - $ 175.0
Operating leases 19.3 23.3 22.0 20.1 18.1 39.4
---------- --------- ---------- ---------- --------- -------------
Total contractual
obligations $ 19.3 $ 23.3 $ 22.0 $ 45.1 $ 18.1 $ 214.4
========== ========= ========== ========== ========= =============
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 risk from December
31, 2002.
Item 4. CONTROLS AND PROCEDURES
Based on their evaluation as of June 30, 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) recorded, processed, summarized and reported in a
timely manner; and (ii) accumulated and 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 there were no significant changes in the Company's internal
control over financial reporting that occurred during the Company's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
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 and 15d-14 Certifications 23
32 Rule 13a-14 and 15d-14 Certifications 25
(b) REPORTS ON FORM 8-K
A report on Form 8-K, dated July 31, 2003, was filed disclosing the
Company's second quarter results as of June 30, 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: August 13, 2003
----------------------------------------------------- ----------------
Glen R. Derback, Senior Vice President and Controller
(Duly authorized officer and chief accounting officer)