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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, 2004
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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 333-1173
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
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 May 1, 2004, 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 19
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: 2004 2003
---------------- -----------------
Premium (net of premiums ceded totaling $328,413 and
$8,551) $ 42,250 $ 273,903
Fee income 210,556 215,874
Net investment income 281,238 214,631
Net realized gains on investments 40,776 26,315
---------------- -----------------
574,820 730,723
BENEFITS AND EXPENSES:
Life and other policy benefits (net of reinsurance
recoveries totaling $88,415 and $10,404) 212,165 187,407
(Decrease) increase in reserves (201,596) 53,012
Interest paid or credited to contractholders 116,588 114,677
Provision for policyholders' share of earnings
on participating business 4,589 2,361
Dividends to policyholders 37,006 24,803
---------------- -----------------
168,752 382,260
Commissions 51,309 39,900
Operating expenses 195,770 171,289
Premium taxes 7,267 6,661
---------------- -----------------
423,098 600,110
INCOME BEFORE INCOME TAXES 151,722 130,613
PROVISION FOR INCOME TAXES:
Current 63,231 27,073
Deferred (11,566) 17,601
---------------- -----------------
51,665 44,674
---------------- -----------------
NET INCOME $ 100,057 $ 85,939
================ =================
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
[Dollars in Thousands]
====================================================================================================================================
March 31 December 31,
ASSETS 2004 2003
- ------
-------------------- ---------------------
[unaudited]
INVESTMENTS:
Fixed maturities available-for-sale, at fair value
(amortized cost $12,458,590 and $12,757,614) $ 12,969,754 $ 13,136,564
Mortgage loans on real estate (net of allowances
of $29,889 and $31,889) 1,822,886 1,885,812
Equity investments, at fair value (cost $504,310, and
$407,797) 546,582 427,810
Real estate 7,849 7,912
Policy loans 3,435,413 3,389,534
Short-term investments, available-for-sale
(cost approximates fair value) 1,030,365 852,198
-------------------- ---------------------
Total investments 19,812,849 19,699,830
OTHER ASSETS:
Cash 112,260 188,329
Reinsurance receivable
Related party 1,199,310 1,312,139
Other 215,245 262,685
Deferred policy acquisition costs 300,793 284,866
Deferred ceding commission 244,350 285,165
Investment income due and accrued 157,048 165,417
Amounts receivable related to uninsured accident
and health plan claims (net of allowances of
$31,015 and $32,329) 130,809 129,031
Premiums in course of collection (net of allowances
of $8,412 and $9,768) 55,718 75,809
Deferred income taxes 56,237 119,971
Other assets 815,471 754,160
SEPARATE ACCOUNT ASSETS 13,439,845 13,175,480
-------------------- ---------------------
TOTAL ASSETS $ 36,539,935 $ 36,452,882
==================== =====================
(continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
[Dollars in Thousands]
====================================================================================================================================
[unaudited]
March 31, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2004 2003
- ------------------------------------
-------------------- ---------------------
[unaudited]
POLICY BENEFIT LIABILITIES:
Policy reserves $ 18,386,595 $ 18,650,078
Policy and contract claims 320,968 418,930
Policyholders' funds 337,071 368,076
Provision for policyholders' dividends 90,222 89,121
Undistributed earnings on participating business 185,127 177,175
GENERAL LIABILITIES:
Due to GWL 30,286 30,950
Due to GWL&A Financial Inc. 201,401 175,691
Repurchase agreements 561,686 389,715
Commercial paper 92,160 96,432
Other liabilities 826,682 994,608
SEPARATE ACCOUNT LIABILITIES 13,439,845 13,175,480
-------------------- ---------------------
Total liabilities 34,472,043 34,566,256
-------------------- ---------------------
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 723,667 722,365
Accumulated other comprehensive income 207,727 127,820
Retained earnings 1,129,466 1,029,409
-------------------- ---------------------
Total stockholder's equity 2,067,892 1,886,626
-------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 36,539,935 $ 36,452,882
==================== =====================
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: 2004 2003
-------------------- -------------------
Net income $ 100,057 $ 85,939
Adjustments to reconcile net income to net cash
provided by operating activities:
Earnings allocated to participating policyholders 4,589 2,361
Amortization of investments (5,766) (17,909)
Net realized gains on investments (40,776) (26,315)
Depreciation and amortization 35,486 7,732
Deferred income taxes (11,566) 17,601
Changes in assets and liabilities:
Policy benefit liabilities (195,404) 125,002
Reinsurance receivable 40,394 15,060
Accrued interest and other receivables 20,120 (24,222)
Other, net (74,952) (20,993)
-------------------- ---------------------
Net cash (used in) provided by operating activities (127,818) 164,256
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and redemptions of investments: Fixed
maturities available-for-sale:
Sales 2,431,616 1,741,273
Maturities and redemptions 804,709 561,312
Mortgage loans 61,613 38,270
Real estate 3,000
Equity investments 10,219 5,901
Purchases of investments:
Fixed maturities available-for-sale (3,068,637) (2,092,206)
Mortgage loans (1,250)
Real estate (2) (233)
Equity investments (104,883) (4,663)
Other, net (133,439)
-------------------- ---------------------
Net cash (used in) provided by investing activities (54) 252,654
(continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Dollars in Thousands]
====================================================================================================================================
[Unaudited]
Three Months Ended
March 31,
---------------------------------------------
FINANCING ACTIVITIES: 2004 2003
-------------------- ---------------------
Contract withdrawals, net of deposits $ (140,941) $ (117,143)
Net GWL repayments (664) (7,606)
Net GWL&A Financial borrowings 25,710 12,474
Dividends paid (45,691)
Commercial paper repayments (4,272) (2,327)
Repurchase agreements (repayments) borrowings 171,971 (173,386)
-------------------- ---------------------
Net cash provided by (used in) financing activities 51,804 (333,679)
-------------------- ---------------------
NET (DECREASE) INCREASE IN CASH (76,069) 83,231
CASH, BEGINNING OF YEAR 188,329 154,600
-------------------- ---------------------
CASH, END OF PERIOD $ 112,260 $ 237,831
==================== =====================
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, 2004 [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, 2004 0 $ 0 7,032 $ 7,032 $ 722,365 $ 137,131 $ (9,311) 1,029,409 $ 1,886,626
Net income 100,057 100,057
Other comprehensive income 79,907 79,907
---------
Total comprehensive income 179,964
---------
Income tax benefit on stock
compensation 1,302 1,302
-------- -------- --------- --------- ---------- ---------- ---------------------- ----------
BALANCE, MARCH 31, 2004 0 $ 0 7,032 $ 7,032 $ 723,667 $ 217,038 $ (9,311) 1,129,466 $ 2,067,892
======== ======== ========= ========= ========== ============ =========== ========== =========
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Amounts in Thousands]
================================================================================
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, 2003.
Operating results for the three months ended March 31, 2004 are not
necessarily indicative of the results that may be expected for the full
year ending December 31, 2004.
The Company has two reportable segments: Great-West Healthcare and
Financial Services. The Great-West Healthcare segment markets group
life and health insurance to small and mid-sized corporate employers.
The Financial Services segment markets and administers savings products
to public and not-for-profit employers, corporations, and individuals
and offers life insurance products to individuals and businesses. The
Company's reportable segments are strategic business units that offer
different products and services. They are managed separately as each
segment has unique distribution channels.
At March 31, 2004, 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
March 31
------------------------------
2004 2003
Proforma Disclosures [Thousands]
------------------------------------ ------------------------------
Net income as reported $ 100,057 $ 85,939
Less compensation for fair value
of stock options, net of related
tax effects 1,020 659
------------- -------------
Proforma net income $ 99,037 $ 85,280
============= =============
2. NEW ACCOUNTING PRONOUNCEMENTS
In January 2004, FASB reissued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities" as FIN 46R. 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, as
reissued, is effective for VIEs created after January 31, 2003, and for
pre-existing VIEs as of March 31, 2004. 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 July 2003, the Accounting Standards Executive Committee (AcSEC) of
the American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP) 03-01, "Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts." AcSEC developed the SOP to
address the evolution of product designs since the issuance of SFAS No.
60, "Accounting and Reporting by Insurance Enterprises," and SFAS No.
97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale
of Investments." SOP 03-1 provides guidance related to the reporting
and disclosure of certain insurance contracts and separate accounts,
including guidance for computing reserves for products with guaranteed
benefits, such as guaranteed minimum death benefits, and for products
with annuitization benefits such as guaranteed minimum income benefits.
In addition, SOP 03-1 addresses certain issues related to the
presentation and reporting of separate accounts, as well as rules
concerning the capitalization and amortization of sales inducements.
SOP 03-1 was effective January 1, 2004. The adoption of SOP 03-1 did
not have a material effect on the Company's consolidated financial
statements.
3. RELATED-PARTY TRANSACTIONS
On August 31, 2003, the Company and The Canada Life Assurance Company
(CLAC), a wholly owned subsidiary of Canada Life, entered into an
Indemnity Reinsurance Agreement pursuant to which the Company reinsured
80% (45% coinsurance and 35% coinsurance with funds withheld) of
certain United States life, health and annuity business of CLAC's U.S.
branch.
On February 29, 2004, CLAC recaptured the group life and health
business from the Company associated with the original Indemnity
Reinsurance Agreement dated August 31, 2003. The Company recorded $256
million of negative premium income and decrease in reserves associated
with these policies. The Company recorded, at fair value, the following
at February 29, 2004 as a result of this transaction:
Assets (millions) Liabilities and Stockholder's Equity (millions)
-------------------------------------------------------- ------------------------------------------------
Cash $ (126) Policy reserves $ (280)
Reinsurance receivable (148) Policy and contract claims (33)
Deferred ceding commission (24)
Premiums in course of collection (15)
------------------- -----------------
$ (313) $ (313)
=================== =================
4. REINSURANCE
In addition to the Indemnity Reinsurance Agreement entered into with
CLAC (see 3 above), the Great-West Healthcare division of the Company
entered into a reinsurance agreement during 2003 with Allianz Risk
Transfer (Bermuda) Limited (Allianz) to cede 90% in 2003 and 75% in
2004 of direct written group health stop-loss and excess loss activity.
5. COMPONENTS OF NET PERIODIC BENEFIT COST
Post-Retirement
Pension Benefits Medical Plan
--------------------- ---------------------
2004 2003 2004 2003
[Thousands]
---------------------------------------------
Service cost $ 2,144 $ 2,067 $ 722 $ 511
Interest cost 3,329 3,069 684 568
Expected return on plan assets (3,733) (3,239)
Amortization of transition obligation (379) (379)
Amortization of unrecognized prior
service cost 158 158 (178) (178)
Amortization of gain from earlier
periods 688 873 166 65
-------- --------- --------- ---------
Net periodic cost $ 2,207 $ 2,549 $ 1,394 $ 966
======== ========= ========= =========
The Company previously disclosed in its financial statements for the
year ended December 31, 2003, that it expected to contribute $4.8
million to fund its pension plan in 2004. As of March 31, 2004, no
contributions have been made. The Company anticipates contributing $4.8
million to fund its pension plan in 2004.
6. 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 consolidated financial
position or results of operations.
Certain reclassifications have been made to the 2003 financial
statements to conform to the 2004 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
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, 2004, compared with December 31, 2003, and its
results of operations for the quarter ended March 31, 2004, 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, 2003 to which the reader is directed for additional
information.
Three Months Ended March 31,
2004 2003
--------------- ----------------
Operating Summary [Millions]
----------------------------------------------------------- -----------------------------------
Premium income $ 42 $ 274
Fee income 211 216
Net investment income 281 215
Realized investment gains 41 26
--------------- ----------------
Total revenues 575 731
Total benefits and expenses 423 600
Income tax expenses 52 45
--------------- ----------------
Net income $ 100 $ 86
=============== ================
Deposits for investment- type contracts $ 170 $ 147
Deposits to separate accounts 536 570
Self-funded premium equivalents 1,167 1,197
March 31, December 31,
2004 2003
--------------- ----------------
Balance Sheet [Millions]
----------------------------------------------------------- -----------------------------------
Investment assets $ 19,813 $ 19,700
Separate account
assets 13,440 13,175
Total assets 36,540 36,453
Total policy
benefit liabilities 19,320 19,703
Due to GWL 30 31
Due to GWL&A
Financial 201 176
Total stockholder's
equity 2,068 1,887
CONSOLIDATED RESULTS
The Company's consolidated net income increased $14 million or 16% for
the first quarter of 2004 when compared to the first quarter of 2003.
The net income increase reflects $27 million as a result of the July
2003 purchase of Canada Life Insurance Company of America (CLICA)and
Canada Life Insurance Company of New York (CLNY) and the August 2003
Indemnity Reinsurance Agreement with CLAC (collectively referred to as
Canada Life activity), a $8 million decrease in the Great-West
Healthcare segment excluding the Canada Life activity and a $5 million
decrease in the Financial Services segment excluding the impact of the
Canada Life activity.
Total revenues decreased $156 million or 21% for the first quarter of
2004 when compared to 2003. The decrease in total revenue in the first
quarter was primarily due to a $232 million decrease in premium income.
A $296 million decrease in premium income in the Great-West Healthcare
segment primarily resulting from the negative premiums associated with
the recapture of group life and health premiums by CLAC was offset by a
$64 million increase in premium income in the Financial Services
segment.
Benefits and expenses decreased $177 million or 30% for the first
quarter of 2004 when compared to the first quarter of 2003. The
decrease in benefits and expenses results from a $305 million decrease
in the Great-West Healthcare segment primarily resulting from the
recapture of benefit expense by CLAC, offset by a $129 million increase
in the Financial Services segment.
Income tax expense increased $7 million or 16% for the first quarter of
2004 when compared to the same period in 2003 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 investment-type contracts increased $23 million or 16% for
the first quarter of 2004 when compared to the first quarter of 2003.
This increase resulted from increases in the 401(k) line of business
and the Canada Life activity.
Deposits for separate accounts decreased $34 million or 6% for the
first quarter of 2004 when compared to the first quarter of 2003. The
decrease is due primarily to lower sales in Individual Markets.
Self-funded premium equivalents decreased $30 million or 3% for the
first quarter of 2004 when compared to the first quarter of 2003. The
decrease is due to lower membership.
SEGMENT RESULTS
Great-West Healthcare
The following is a summary of certain financial data of the Great-West
Healthcare segment:
Three Months Ended March 31,
2004 2003
--------------- ----------------
Operating Summary [Millions]
-------------------------------------------------- -----------------------------------
Premium income $ (60) $ 236
Fee income 144 159
Net investment income 16 16
Realized investment gains 7 5
--------------- ----------------
Total revenues 107 416
Total benefits and expenses 39 344
Income tax expenses 23 25
--------------- ----------------
Net income $ 45 $ 47
=============== ================
Self-funded premium equivalents $ 1,167 $ 1,197
The decrease in earnings for the first quarter of 2004 compared to the
same period of 2003 is primarily due to the decline in fee income
contributing to lower expense gains as expense levels were not
declining proportionately.
Excluding premium and fee income of negative $209 million associated
with Canada Life activity and excluding negative $73 million associated
with the Allianz reinsurance cession, premium and fee income decreased
$29 million or 7% for the first quarter of 2004 when compared to the
same period of 2003. The decrease is primarily due to a decline in
membership from March 31, 2003 to March 31, 2004, partially offset by
pricing increases. Including 37,000 Canada Life stop loss members which
renewed in the first quarter of 2004, the Great-West Healthcare segment
experienced a 1.3% increase in total health care membership from
1,856.1 thousand at December 31, 2003 to 1,880.0 thousand at March 31,
2004. There was a 3.9% decrease in total health care membership from
1,956.1 thousand at March 31, 2003 to 1,880.0 thousand at March 31,
2004. The decline in membership is due to terminations resulting from
pricing action related to target margins but reflects a stabilization
in the first quarter of 2004. Canada Life premiums of negative $209
million are primarily the result of $256 million of premiums related to
a recapture of life and health premiums by CLAC associated with the
original Indemnity Reinsurance Agreement dated August 31, 2003, offset
by $47 million of normal business activity recorded before the February
29, 2004 recapture.
Excluding total benefits and expenses of negative $212 million
associated with Canada Life activity and excluding negative $73 million
associated with the Allianz reinsurance cession, total benefits and
expenses decreased $21 million or 6% for the first quarter when
compared to the same period of 2003. The decrease is due primarily to
decreased benefits associated with lower membership. Canada Life total
benefits and expenses of negative $212 million are primarily the result
of $256 million of change in reserves as a result of the recapture
discussed above offset by $44 million of normal business activity
before the February 29, 2004 recapture.
Self-funded premium equivalents decreased $30 million or 3% for the
first quarter when compared to the same period of 2003. The decrease is
due to lower membership.
Financial Services
The following is a summary of certain financial data of the Financial
Services segment.
Three Months Ended March 31,
2004 2003
--------------- ----------------
Operating Summary [Millions]
----------------------------------------------------------- -----------------------------------
Premium income $ 102 $ 38
Fee income 67 57
Net investment income 265 199
Realized investment gains 34 21
--------------- ----------------
Total revenues 468 315
Total benefits and expenses 385 256
Income tax expenses 28 20
--------------- ----------------
Net income $ 55 $ 39
=============== ================
Deposits for investment-type contracts $ 170 $ 147
Deposits to separate accounts $ 536 $ 570
Net income for Financial Services increased $16 million or 41% in the
first quarter 2004 when compared to first quarter 2003. Effective July
10, 2003 the Company acquired CLICA and CLNY. The results of operations
for the life insurance and annuity business areas for these
subsidiaries have been included in the Income Statement Data above for
the first quarter of 2004.
In addition, the Company has entered into an Indemnity Reinsurance
Agreement with CLAC, a wholly owned subsidiary of Canada Life, pursuant
to which the Company reinsured 80% (45% coinsurance and 35% coinsurance
with funds withheld) of certain United States life, health and annuity
business of CLAC's U.S. branch as of August 31, 2003. The life
insurance and annuity reinsurance transactions related to this
agreement have also been included in the Income Statement Data above
for the first quarter of 2004.
The impact of both of these transactions (Canada Life activity) on the
Financial Services Division results for the first quarter of 2004 is as
follows:
Premiums $59
Fee income 2
Net investment income 85
Net realized gains on inv 17
----
Total revenues 163
Policyholder benefits 111
Operating expenses 19
----
Total benefits and expenses 130
---
Income from operations 33
Income taxes 12
----
Net income 21
Net income for the Financial Services division (excluding the Canada
Life activity discussed above) has decreased $5 million or 13% from
2003. The decrease is primarily related to a deterioration in mortality
in Individual Insurance.
Excluding Canada Life activity, total premiums including deposits to
investment-type contracts and deposits to separate accounts decreased
$17 million or 2.3%. Premiums and deposits have decreased $23 million
in the Individual Markets area where sales have been below budget for
the first quarter of 2004. This decrease is offset by an increase in
premiums and deposits in the Retirement Services area.
Retirement participant accounts including third-party administration
and institutional accounts increased 3.3% in 2004 from 2,265,713 at
December 31, 2003 to 2,339,924 at March 31, 2004.
Fee income has increased $8 million or 14%, excluding fee income
associated with Canada Life, for the first quarter of 2004 when
compared to the same period of 2003. 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.
Excluding investment income of $85 million associated with Canada Life,
investment income decreased $19 million or 10% for the first quarter of
2004 when compared to the same period of 2003 due to lower investment
earned rates.
Excluding total benefits and expenses of $130 million associated with
Canada Life, total benefits and expenses have remained flat for the
first quarter of 2004 when compared to the same period of 2003.
GENERAL ACCOUNT INVESTMENTS
The Company's primary investment objective is to acquire assets with
duration and cash flow characteristics reflective 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 under 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 works to ensure that its investment portfolio is
appropriately structured to fulfill financial obligations to its
policyholders.
Fixed Maturities
Fixed maturity investments include public and privately placed
corporate bonds, government bonds, and mortgage-backed and asset-backed
securities. The Company's strategy related to mortgage-backed and
asset-backed securities is to focus on those investments with low
prepayment risk and minimal credit risk. The Company does not invest in
higher-risk collateralized 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 enhanced 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 the rating
agencies.
The distribution of the fixed maturity portfolio by Standard & Poor's
credit rating is summarized as follows:
March 31, December 31,
2004 2003
---------------------- -----------------------
AAA 54.0 % 54.3 %
AA 8.2 % 8.7 %
A 16.3 % 16.0 %
BBB 19.1 % 18.4 %
BB and below (non-investment grade) 2.4 % 2.6 %
----------------- ---- ------------------ ----
TOTAL 100.0 % 100.0 %
================= ==== ================== ====
During the first three months of 2004, 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 $80 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 on direct business written and up to $2.8 million
on business reinsured from CLAC.
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
judgment 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 sales representatives related
to the production of new business, have been deferred to the extent
deemed 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 judgment 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
its 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
and utilizing positive cash flows from operations. Liquidity for the
Company has remained strong, as evidenced by significant amounts of
short-term investments and cash that totaled $1.1 billion and $1.0
billion as of March 31, 2004 and December 31, 2003, respectively. In
addition, the bond portfolio carried an investment grade rating of 98%
and 97% as of March 31, 2004 and December 31, 2003, respectively,
thereby providing significant liquidity to the Company's overall
investment portfolio.
Funds provided by 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
sources of the funds that may be required in such situations include
the issuance of commercial paper and equity securities.
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 $92.2 million and $96.4 million of commercial
paper outstanding at March 31, 2004 and December 31, 2003,
respectively. The commercial paper has been given a rating of A-1+ by
Standard & Poor's and a rating of P-1 by Moody's Investors Services,
each being the highest rating available. In addition, the Company
issued a surplus note to GWL&A Financial in 1999. The surplus note
bears interest at 7.25% and is due June 20, 2048.
Capital resources provide protection for policyholders and 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.
OBLIGATIONS RELATING TO DEBT AND LEASES AT MARCH 31, 2004 ARE AS FOLLOWS:
2004 2005 2006 2007 2008 Thereafter
-------- -------- -------- ------- ------- ------------
[Millions]
----------------------------------------------------------------------------
Related party notes $ $ $ 25.0 $ $ $ 175.0
Operating leases 18.3 22.6 19.6 17.6 16.8 22.5
Contractual commitments 191.8 11.3
-------- -------- -------- ------- ------- ------------
Total contractual
obligations $ 210.1 $ 33.9 $ 44.6 $ 17.6 $ 16.8 $ 197.5
======== ======== ======== ======= ======= ============
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 also manages risk with interest rate derivatives such as
interest rate caps that would pay the Company investment income if
interest rates rise above the level specified in the cap. 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.
Item 4. CONTROLS AND PROCEDURES
Based on their evaluation as of March 31, 2004, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are effective at the reasonable
assurance level 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 is (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
31.1 Rule 13a-14(a)/15d-14(a) Certification 21
31.2 Rule 13a-14(a)/15d-14(a) Certification 22
32 18 U.S.C. 1350 Certification 23
(b) Reports on Form 8-K
A report on Form 8-K, dated January 30, 2004, was filed
disclosing the Company's results as of December 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 13, 2004
--------------------------------------------------------------------- ---------------------------
Glen R. Derback, Senior Vice President and Controller
(Duly authorized officer and chief accounting officer)