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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, 2005
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 333-1173
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
- ----------------------------------------------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0467907
- --------------------------------------------------------------------- ---------------------------------------------
(State or other jurisdiction of incorporation or 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] 737-3000
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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
----------------- -----------------
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
----------------- -----------------
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, 2005, 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 13
Item 3 Quantitative and Qualitative Disclosures About Market Risk 21
Item 4 Controls and Procedures 21
Part II OTHER INFORMATION 22
Item 1 Legal Proceedings 22
Item 6 Exhibits 22
Signature 22
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
(Unaudited)
Three Months Ended
March 31,
-------------------------------------
2005 2004
----------------- -----------------
REVENUES:
Premium (net of premiums ceded totaling $56,317
and $328,413) $ 321,971 $ 76,885
Fee income 238,459 210,556
Net investment income 256,998 281,238
Net realized (losses) gains on investments (8,654) 40,776
----------------- -----------------
Total revenues 808,774 609,455
----------------- -----------------
BENEFITS AND EXPENSES:
Life and other policy benefits (net of reinsurance recoveries
totaling $54,498 and $88,415) 267,283 236,028
Increase (decrease) in reserves 31,815 (201,596)
Interest paid or credited to contractholders 119,009 127,360
Provision for policyholders' share of earnings on participating
business 339 4,589
Dividends to policyholders 36,126 37,006
----------------- -----------------
Total benefits 454,572 203,387
----------------- -----------------
Commissions 45,170 51,309
Operating expenses 184,400 195,770
Premium taxes 9,526 7,267
----------------- -----------------
Total benefits and expenses 693,668 457,733
----------------- -----------------
INCOME BEFORE INCOME TAXES 115,106 151,722
PROVISION FOR INCOME TAXES:
Current 7,403 63,231
Deferred 26,933 (11,566)
----------------- -----------------
Total income taxes 34,336 51,665
----------------- -----------------
NET INCOME $ 80,770 $ 100,057
================= =================
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
(Unaudited)
March 31, December 31,
2005 2004
-------------------- ---------------------
ASSETS
INVESTMENTS:
Fixed maturities available-for-sale, at fair value
(amortized cost $13,150,995 and $12,909,455) $ 13,226,838 $ 13,215,042
Mortgage loans on real estate (net of allowances
of $16,255 and $30,339) 1,520,289 1,543,507
Equity investments, at fair value (cost $596,736 and
$591,474) 648,284 637,434
Policy loans 3,588,586 3,548,225
Short-term investments, available-for-sale
(cost approximates fair value) 851,718 708,801
-------------------- ---------------------
Total Investments 19,835,715 19,653,009
OTHER ASSETS:
Cash 94,788 110,518
Reinsurance receivable:
Related party 1,030,401 1,072,940
Other 246,745 260,409
Deferred policy acquisition costs 325,234 301,603
Deferred ceding commission 90,023 82,648
Investment income due and accrued 147,934 159,398
Amounts receivable related to uninsured accident
and health plan claims (net of allowances of
$23,565 and $22,938) 134,630 144,312
Premiums in course of collection (net of allowances
of $7,240 and $7,751) 120,269 95,627
Deferred income taxes 163,699 138,845
Securities pledged to creditors 172,952 340,755
Due from GWL&A Financial Inc. 33,778 55,915
Other assets 544,192 494,515
SEPARATE ACCOUNT ASSETS 13,707,968 14,155,397
-------------------- ---------------------
TOTAL ASSETS $ 36,648,328 $ 37,065,891
==================== =====================
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
(Unaudited)
March 31, December 31,
2005 2004
-------------------- ---------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves $ 18,254,041 $ 17,942,319
Policy and contract claims 385,078 360,862
Policyholders' funds 310,340 327,409
Provision for policyholders' dividends 116,067 118,096
Undistributed earnings on participating business 184,494 192,878
GENERAL LIABILITIES:
Due to The Great-West Life Assurance Company 31,362 26,659
Due to GWL&A Financial Inc. 199,120 194,164
Repurchase agreements 654,441 563,247
Commercial paper 94,040 95,044
Payables under securities lending agreements 179,487 349,913
Other liabilities 585,100 695,542
SEPARATE ACCOUNT LIABILITIES 13,707,968 14,155,397
-------------------- ---------------------
Total Liabilities 34,701,538 35,021,530
-------------------- ---------------------
COMMITMENTS AND CONTINGENCIES
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 726,554 725,935
Accumulated other comprehensive income 35,870 118,795
Retained earnings 1,177,334 1,192,599
-------------------- ---------------------
Total Stockholder's Equity 1,946,790 2,044,361
-------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 36,648,328 $ 37,065,891
==================== =====================
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
March 31,
---------------------------------------------
2005 2004
-------------------- ---------------------
OPERATING ACTIVITIES:
Net income $ 80,770 $ 100,057
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Earnings allocated to participating policyholders 339 4,589
Amortization of investments (20,985) (5,766)
Net realized losses (gains) on investments 8,654 (40,776)
Depreciation and amortization 15,005 35,486
Deferral of acquisition costs (11,506) (13,077)
Deferred income taxes 26,933 (11,566)
Changes in assets and liabilities:
Policy benefit liabilities 36,516 (195,404)
Reinsurance receivable 56,203 40,394
Accrued interest and other receivables (3,496) 20,120
Other, net (176,137) (45,183)
-------------------- ---------------------
Net cash provided by (used in) operating activities 12,296 (111,126)
-------------------- ---------------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and redemptions of investments: Fixed
maturities available-for-sale:
Sales 636,910 2,431,616
Maturities and redemptions 3,429,427 804,709
Mortgage loans on real estate 73,026 61,613
Equity investments 8,041 10,219
Purchases of investments:
Fixed maturities available-for-sale (4,278,186) (2,890,470)
Mortgage loans on real estate (40,780) (1,252)
Equity investments (13,298) (104,883)
Net change in short-term investments (142,917) (178,167)
Other, net (29,587) (133,439)
-------------------- ---------------------
Net cash used in investing activities $ (357,364) $ (54)
-------------------- ---------------------
(Continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
Ended March 31,
---------------------------------------------
FINANCING ACTIVITIES: 2005 2004
-------------------- ---------------------
Contract withdrawals, net of deposits $ 298,365 $ (140,941)
Change in due to The Great-West Life Assurance
Company 4,703 (664)
Change in due to/from GWL&A Financial Inc. 27,093 25,710
Dividends paid (96,035) -
Change in bank overdrafts 5,022 (16,693)
Net commercial paper repayments (1,004) (4,272)
Net repurchase agreements borrowings 91,194 171,971
-------------------- ---------------------
Net cash provided by financing activities 329,338 35,111
-------------------- ---------------------
NET DECREASE IN CASH (15,730) (76,069)
CASH, BEGINNING OF PERIOD 110,518 188,329
-------------------- ---------------------
CASH, END OF PERIOD $ 94,788 $ 112,260
==================== =====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ (7,064) $ 14,701
Interest 645 3,732
See notes to consolidated financial statements. (Concluded)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(In Thousands, Except Share Unit Amount)
(Unaudited)
Accumulated Other
Comprehensive Income (Loss)
-------------------------------
Unrealized Minimum
Preferred Stock Common Stock Additional Gains Pension
--------------------- ---------------- Paid-in (Losses) on Liability Retained
Shares Amount Shares Amount Capital Securities Adjustment Earnings Total
-------- ------- -------- ------- ---------- ------------ ----------- ---------- ----------
BALANCES, JANUARY 1, 2005 0 $ 0 7,032 $ 7,032 $ 725,935 $ 133,546 $ (14,751) $ 1,192,599 $ 2,044,361
Net income 80,770 80,770
Other comprehensive income (82,766) (159) (82,925)
----------
Total comprehensive income (2,155)
----------
Dividends (96,035) (96,035)
Income tax benefit on stock
compensation 619 619
-------- ------- -------- ------- ---------- ------------ ----------- ---------- ----------
BALANCES, MARCH 31, 2005 0 $ 0 7,032 $ 7,032 $ 726,554 $ 50,780 $ (14,910) $ 1,177,334 $ 1,946,790
======== ======= ======== ======= ========== ============ =========== ========== ==========
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 notes 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 financial position and the results of
operations at and for the periods indicated. 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, 2004.
Operating results for the three months ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the full
year ending December 31, 2005.
Great-West Lifeco Inc. ("Lifeco"), of which the Company is an indirect
wholly-owned subsidiary, has a stock option plan (the "Plan") that
provides for the granting of options on its common shares to certain of
its officers and employees and those of its subsidiaries, including the
Company. The Company accounts for options granted under the plan in
accordance with the recognition and measurement principles of
Accounting Principles Board Opinion 25 "Accounting for Stock Issued to
Employees," ("APB No. 25") and related interpretations. Refer to Note 2
- New Accounting Pronouncements regarding changes to the accounting for
options. No stock-based employee compensation cost is reflected in net
income, as all options granted under the 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 Financial
Accounting Standards Board ("FASB") Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") as revised by Statement of
Financial Accounting Standards No. 123R "Share-Based Payment" ("SFAS
No. 123R"), to stock-based employee compensation.
Three Months Ended March 31,
-------------------------------------------
Proforma Disclosure 2005 2004
--------------------------------------------- ------------------ ---------------------
Net income as reported $ 80,770 $ 100,057
Less compensation for fair value of
stock options net of related tax
effects 841 1,020
------------------ ---------------------
Proforma net income $ 79,929 $ 99,037
================== =====================
Certain reclassifications have been made to the 2004 consolidated
financial statements to conform to the 2005 presentation. These changes
in classification had no effect on previously reported stockholder's
equity or net income.
2. NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, SFAS No. 123R was issued by the FASB. SFAS No.
123R is a revision of SFAS No. 123 and supersedes APB No. 25. SFAS No.
123R requires that compensation cost relating to share-based
payment transactions be recognized in financial statements based
on the fair value of the equity instruments issued. The Company
will be required to adopt SFAS No. 123R on January 1, 2006.
Previously, the Company elected to only disclose the impact of
recording the fair value of stock options in the notes to its
consolidated financial statements. The adoption of SFAS No. 123R
is not expected to have a material effect on the Company's consolidated
financial position or results of its operations.
In January 2004, the FASB issued Emerging Issues Task Force ("EITF")
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" ("EITF 03-1"). EITF 03-1 provides
guidance on the disclosure requirements, which were effective as of
December 31, 2003, for other-than-temporary impairments of debt and
marketable equity investments that are accounted for under SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"). EITF 03-1 also included guidance on the measurement and
recognition of other-than-temporary impairments of certain investments,
which was originally going to be effective during the quarter ended
September 30, 2004. However, in response to various concerns raised by
financial statement preparers and others, the measurement and
recognition provisions of EITF 03-1 were delayed. The staff of the FASB
is currently evaluating the guidance of EITF 03-1 in the context of
developing implementation guidance for its measurement and recognition
provisions. The Company is continuing to evaluate potential
other-than-temporary impairments under SFAS 115 and Securities and
Exchange Commission Staff Accounting Bulletin Topic 5-M, "Other Than
Temporary Impairment Of Certain Investments In Debt and Equity
Securities." Due to the current uncertainty as to the implementation
guidance for EITF 03-1 by the FASB staff, the Company is unable to
evaluate the impact EITF 03-1 will ultimately have on its financial
position or results of its operations.
3. RELATED-PARTY TRANSACTIONS
On August 31, 2003, the Company and The Canada Life Assurance Company
("CLAC"), an affiliate, 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 United States 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 an
income statement impact of $256,000 of negative premium income and
change 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 Liabilities and Stockholder's Equity
------------------------------------------------------- --------------------------------------------------
Cash $ (126,105) Policy reserves $ (286,149)
Reinsurance receivable (152,077) Policy and contract claims (32,755)
Deferred ceding commission (29,831) Policyholders' funds (3,982)
Premiums in course of
collection (14,873)
------------------ -----------------
$ (322,886) $ (322,886)
================== =================
On November 15, 2004, the Company issued a surplus note to its parent
company, GWL&A Financial Inc. ("GWL&A Financial") with a face amount of
$195,000 and a carrying amount of $194,167 and $194,164 at March 31,
2005 and December 31, 2004, respectively. The surplus note bears
interest at the rate of 6.675% per annum, payable in arrears on each
May 14 and November 14, and matures on November 14, 2034. On December
16, 2004, the Company used the proceeds from the sale of the surplus
note to redeem its $175,000 subordinated note payable to GWL&A
Financial and for general corporate purposes.
The Company's separate accounts offer Maxim Profile I and II, which are
portfolios offered by Maxim Series Fund, Inc., a subsidiary of the
Company. Beginning in February 2005, these Maxim Series Fund, Inc.
portfolios purchased guaranteed interest annuity contracts issued by
the Company in the amount of $312 million. As the general account
investment contracts owned by Maxim Series Fund, Inc. are also included
in the separate account balances, the Company has reduced the separate
account assets and liabilities to avoid the overstatement of asset and
liabilities in its consolidated balance sheet.
4. REINSURANCE
In addition to the Indemnity Reinsurance Agreement with CLAC (see Note
3 above), the Great-West Healthcare division of the Company and Allianz
Risk Transfer (Bermuda) Limited ("Allianz") have a reinsurance
agreement to cede 75% in 2004 and 40% in 2005 of direct written group
health stop-loss and excess loss activity.
5. IMPAIRMENT OF FIXED MATURITIES AND EQUITY INVESTMENTS
The Company classifies all of its fixed maturities and equity
investments as available-for-sale and marks them to market through
other comprehensive income. All securities with gross unrealized losses
at the consolidated balance sheet date are subjected to the Company's
process for identifying other-than-temporary impairments.
The Company writes down to fair value securities that it deems to be
other-than-temporarily impaired in the period the securities are deemed
to be so impaired. The Company records writedowns as investment losses
and adjusts the cost basis of the securities accordingly. The Company
does not change the revised cost basis for subsequent recoveries in
value.
During the three months ended March 31, 2005 and 2004, the Company
recorded other-than-temporary impairments in the fair value of its
fixed maturity investments of $4.2 million and $3.0 million,
respectively. No impairments were recorded on equity securities for
either of the periods ended March 31, 2005 or 2004.
6. COMPONENTS OF NET PERIODIC BENEFIT COST
The cost of employee benefit plans included in operating expenses is as
follows:
Three Months Ended March 31,
-------------------------------------------------------
2005 2004 2005 2004
------------ ----------- ----------- -----------
Post-Retirement
Pension Benefits Medical Plan
-------------------------- -------------------------
Service cost $ 2,150 $ 2,144 $ 808 $ 722
Interest cost 3,695 3,329 742 684
Expected return on plan assets (3,902) (3,733) - -
Amortization of transition obligation (379) (379) - -
Amortization of unrecognized prior
service cost 158 158 (178) (178)
Amortization of gain from earlier
periods 1,114 688 164 166
------------ ----------- ----------- -----------
Net periodic cost $ 2,836 $ 2,207 $ 1,536 $ 1,394
============ =========== =========== ===========
The Company does not expect to make contributions to its pension plan
in 2005.
7. SEGMENT INFORMATION
The Company has two reportable business segments: Great-West Healthcare
and Financial Services. The Great-West Healthcare segment markets group
life and health insurance to 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.
The following table summarizes the financial results of the Company's
Great-West Healthcare segment for the three months ended March 31, 2005
and 2004:
Three Months Ended March 31,
-------------------------------------
2005 2004
---------------- -----------------
Premiums $ 186,488 $ (60,371)
Fee income 165,607 144,102
Net investment income 13,455 16,388
Net realized gains on investments 731 6,660
---------------- -----------------
Total revenues 366,281 106,779
---------------- -----------------
Benefits and expenses 307,094 38,483
Income tax expense 18,299 23,026
---------------- -----------------
Net income $ 40,888 $ 45,270
================ =================
The following table summarizes the financial results of the Company's
Financial Services segment for the three months ended March 31, 2005
and 2004:
Three Months Ended March 31,
------------------------------------
2005 2004
---------------- ----------------
Premiums $ 135,483 $ 137,256
Fee income 72,852 66,454
Net investment income 243,543 264,850
Net realized gains (losses) on investments (9,385) 34,116
---------------- ----------------
Total revenues 442,493 502,676
Benefits and expenses 386,574 419,250
Income tax expense 16,037 28,639
---------------- ----------------
Net income $ 39,882 $ 54,787
================ ================
8. 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.
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 its
products, investment spreads or yields, or the earnings or
profitability of its 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 its 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, 2005, compared with December 31, 2004, and its
results of operations for the three months ended March 31, 2005,
compared with the same period in 2004. The discussion should be read in
conjunction with the Management's Discussion and Analysis of Financial
Condition and Results of Operations section included in the Company's
report on Form 10-K for the year ended December 31, 2004, to which the
reader is directed for additional information.
Three Months Ended
March 31,
Operating Summary -----------------------------------
(In millions) 2005 2004
--------------------------------------------------------- --------------- ----------------
Premiums $ 322 $ 77
Fee income 239 211
Net investment income 257 281
Net realized gains (losses) on investments (9) 41
--------------- ----------------
Total revenues 809 610
Benefits and expenses 694 458
Income tax expense 34 52
--------------- ----------------
Net income $ 81 $ 100
=============== ================
Deposits for investment-type contracts (1) $ 701 $ 135
Deposits to separate accounts 561 536
Self-funded premium equivalents 1,151 1,165
(1) Includes $312 million and $0 at March 31, 2005 and 2004,
respectively, of the Company's guaranteed interest annuity
contracts purchased by Maxim Series Fund, Inc. portfolios as
discussed in Note 3 to the accompanying consolidated financial
statements.
Balance Sheet March 31, December 31,
(In millions) 2005 2004
-------------------------------------------------------- ------------------- ------------------
Investment assets $ 19,836 $ 19,653
Separate account assets (2) 13,708 14,155
Total assets 36,648 37,066
Total policy benefit liabilities 19,250 18,942
Due to Great-West Life Assurance Company 31 27
Due to GWL&A Financial Inc., net 165 138
Total stockholder's equity 1,947 2,044
(2) Excludes $312 million and $0 at March 31, 2005 and 2004,
respectively, of the Company's guaranteed interest annuity
contracts purchased by Maxim Series Fund, Inc. portfolios as
discussed in Note 3 to the accompanying consolidated financial
statements.
CONSOLIDATED RESULTS
Three months ended March 31, 2005 compared with the three months ended
March 31, 2004
The Company's consolidated net income decreased by $19 million or 19%
for the three months ended March 31, 2005 when compared to the
corresponding period of the preceding year. The decrease in net income
is primarily the result of realized investment losses and a decrease in
investment income offset by increased fee revenue. The net income
decrease reflects a $4 million decrease in the Great-West Healthcare
segment and a $15 million decrease in the Financial Services segment.
Premium income increased $245 million for the first quarter of 2005
when compared to the same period of the preceding year. This increase
is primarily a result of the February 29, 2004, Canada Life Assurance
Company ("CLAC") recapture of certain group life and health insurance
business previously ceded to the Company (see Note 3 to the
accompanying consolidated financial statements). The Company recorded
an income statement impact of $256 million in negative premium revenues
and a corresponding change in reserves related to the recaptured
policies.
Fee income increased $28 million or 13% for the first quarter of 2005
when compared to the same period of the preceding year. This increase
is primarily the result of increases in Healthcare membership and
Great-West Retirement Services participant accounts, which increased by
2% and 5%, respectively, when compared to the first quarter of 2004.
Net investment income decreased $24 million or 9% for the first quarter
of 2005 when compared to the same period of the preceding year. This
decrease is a result of losses in the embedded derivative associated
with a reinsurance receivable from CLAC (see Item 3). Excluding the
effects of the embedded derivative, net investment income would have
increased 3% primarily due to increases in total investment assets.
During the first quarter of 2005, the Company incurred a net realized
loss of $9 million on investments, a decrease of $50 million when
compared to a net realized gain of $41 million for the same period of
the preceding year.
Benefits and expenses increased by $236 million the first quarter of
2005 when compared to the first quarter of 2004. The increase in
benefits and expenses is primarily the result of the aforementioned
$256 million change in reserves in 2004 resulting from the CLAC
reinsurance recapture offset by a 2005 decrease in reserves in the
Financial Services segment.
Income tax expense decreased by $18 million or 35% for the first
quarter of 2005 when compared to the same period in 2004 primarily due
to the decrease in pretax income. In evaluating its results of
operations, the Company 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 to investment-type contracts increased by $566 million during
the first quarter of 2005 when compared to the same period of 2004.
This increase is primarily attributable to the purchase of $312 million
of the Company's guaranteed interest annuity contracts by the Maxim
Series Fund, Inc. portfolios as discussed in Note 3 to the accompanying
consolidated financial statements.
Deposits for separate accounts increased $25 million or 5% for the
first quarter of 2005 when compared to the first quarter of 2004. The
increase is due primarily to an increase in sales in the Great-West
Retirement Services block of business.
The segment information below discusses the reasons for these changes.
SEGMENT RESULTS
Great-West Healthcare
Three months ended March 31, 2005 compared with the three months ended
March 31, 2004
The following is a summary of certain financial data of the Great-West
Healthcare segment:
Three Months Ended
March 31,
Operating Summary ----------------------------------
(In millions) 2005 2004
------------------------------------------------------ -------------- ---------------
Premiums $ 186 $ (60)
Fee income 166 144
Net investment income 13 16
Net realized gains on investments 1 7
-------------- ---------------
Total revenues 366 107
Total benefits and expenses 307 39
Income tax expenses 18 23
-------------- ---------------
Net income $ 41 $ 45
============== ===============
Self-funded premium equivalents $ 1,151 $ 1,165
Earnings for the first quarter of 2005 were $41 million, which is a
decline of 9% compared to the same period of the preceding year due
primarily to lower net realized gains on investments. Enhanced product
design, increased persistency, and decreased strain from first year
business improved loss ratios, which enhanced morbidity results.
Excluding premium and fee income of negative $209 million associated
with the 2004 Canada Life activity and the Allianz reinsurance cession,
premium and fee income increased $34 million or 9% for the three months
ended March 31, 2005 when compared to the same period of the preceding
year. The increase is primarily due to an increase in membership from
March 31, 2004 to March 31, 2005 combined with the results of the new
pharmacy benefits management ("PBM") contract, which has increased PBM
participation. Membership at March 31, 2005 of 1.914 million increased
2% from 1.880 million members at March 31, 2004. The operating results
for the three months ended March 31, 2005 reflect a 5% decline from the
December 31, 2004 membership of 2.021 million resulting from
terminations during the period.
Canada Life premiums of negative $209 million during the three months
ended March 31, 2004 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 prior to the February 29, 2004 recapture.
Excluding benefits and expenses associated with the 2004 Canada Life
activity and the Allianz reinsurance cession, Healthcare segment
benefits and expenses increased $31 million or 10% for the three months
ended March 31 2005 when compared to the same period in the preceding
year. The increase is due primarily to higher membership combined with
customers electing enhanced insurance coverage.
Financial Services
Three months ended March 31, 2005 compared with the three months ended
March 31, 2004
The following is a summary of certain financial data of the Financial
Services segment.
Three Months Ended
March 31,
Operating Summary ----------------------------------
(In millions) 2005 2004
------------------------------------------------------ --------------- ---------------
Premiums $ 135 $ 137
Fee income 73 67
Net investment income 244 265
Net realized gains (losses) on investments (10) 34
--------------- ---------------
Total revenues 442 503
Total benefits and expenses 386 420
Income tax expenses 16 28
--------------- ---------------
Net income $ 40 $ 55
=============== ===============
Deposits for investment-type contracts $ 701 $ 135
Deposits to separate accounts 561 536
Net income for the Financial Services segment decreased by $15 million
or 27% during the first quarter of 2005 when compared to the same
period of the preceding year. The decrease is primarily due to net
realized investment losses in 2005 as compared to realized gains in
2004 and a decrease in net investment income.
Total premiums including deposits to investment-type contracts and
deposits to separate accounts increased $589 million or 73% during the
three months ended March 31, 2005 when compared to the same period in
the preceding year. The increase is primarily within the Retirement
Services area. The Company's segregated funds offer Maxim Profile I and
II portfolios, which are portfolios offered by Maxim Series Fund, Inc.,
a subsidiary of the Company. Beginning in February 2005, these Maxim
Series Fund, Inc. Portfolios purchased guaranteed interest annuity
contracts issued by the Company in the amount of $312 million, which is
included in deposits for investment-type contracts.
Fee income has increased by $6 million or 9% during the first quarter
of 2005 when compared to the same period of 2004. 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
United States equities market.
Investment income decreased by $21 million or 8% during the first
quarter of 2005 when compared to the same period of 2004 primarily as a
result of losses in the embedded derivative associated with a
reinsurance receivable from CLAC (see Item 3).
Total benefits and expenses have decreased by $34 million or 8% during
the first quarter of 2005 when compared to the same period of 2004 due
to a decrease in the change in reserves in the individual insurance
business and a decrease in the interest paid or credited to
contractholders due to a decrease in the average crediting rate.
Retirement participant accounts, including third party administration
and institutional accounts, increased by 5% during the three months
ended March 31, 2005 from 2.498 million at December 31, 2004 to 2.622
million at March 31, 2005. The Company acquired Metavante 401(k)
Services, Inc. on January 1, 2005 and renamed it EMJAY Retirement Plan
Services, Inc. ("EMJAY RPS"). The acquisition has added approximately
60,000 retirement participant accounts from 4,000 plan sponsors in the
small and mid-market area to the Great-West Retirement Services block
of business. During the first quarter of 2005, the Company began the
process of integrating the operations of EMJAY RPS with its
recordkeeping business with completion scheduled for December 2005.
GENERAL ACCOUNT INVESTMENTS
The Company's primary investment objective is to acquire assets with
duration and cash flow characteristics reflective of its 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.
The rating distribution of the Company's fixed maturity portfolio is
summarized as follows:
March 31, December 31,
2005 2004
---------------------- -----------------------
AAA 57.5 % 56.9 %
AA 7.6 % 8.2 %
A 15.6 % 15.6 %
BBB 16.5 % 16.7 %
BB and below (non-investment grade) 2.8 % 2.6 %
----------------- ------------------
TOTAL 100.0 % 100.0 %
================= ==================
During the three months ended March 31, 2005, net unrealized losses on
fixed maturities and equity investments included in stockholder's
equity, which is net of policyholder-related amounts and deferred
income taxes, decreased stockholder's equity by $83 million.
Impairment Of Fixed Maturities And Equity Investments
The Company classifies all of its fixed maturities and equity
investments as available-for-sale and marks them to market through
other comprehensive income. All securities with gross unrealized losses
at the consolidated balance sheet date are subjected to the Company's
process for identifying other-than-temporary impairments.
The Company writes down to fair value securities that it deems to be
other-than-temporarily impaired in the period the securities are deemed
to be so impaired. The Company records writedowns as investment losses
and adjusts the cost basis of the securities accordingly. The Company
does not change the revised cost basis for subsequent recoveries in
value.
During the three months ended March 31, 2005 and 2004, the Company
recorded other-than-temporary impairments in the fair value of its
fixed maturity investments of $4.2 million and $3.0 million,
respectively. No impairments were recorded on equity securities for
either of the periods ended March 31, 2005 or 2004.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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 its 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 -The Company's liability for policy
reserves is the largest liability included in its consolidated balance
sheets. This liability represented 53.7% and 52.2% of total liabilities
at March 31, 2005 and December 31, 2004, respectively. 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. If actual experience is different than estimated,
adjustments to such reserves may be required. Annuity contract reserves
without life contingencies are established at the contractholder's
account value.
Reinsurance - The Company enters into reinsurance transactions as both
a provider and a purchaser of reinsurance. Policy reserves ceded to
other insurance companies are carried as reinsurance receivable on the
Company's consolidated balance sheets. 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. Ceded reinsurance
contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations under
these contracts 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 defaults. 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 $3.5 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 the Company's prior experience.
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
amounts receivable related to uninsured accident and health plan claims
paid on behalf of policyholders, premiums in course of collection and
to absorb credit losses on its impaired mortgage loans. Management's
judgment is based on past loss experience and current and projected
economic conditions and, as relates to mortgages, extensive situational
analysis of each individual loan. The measurement of impaired loans is
based on the fair value of the collateral. Because receivables from
policyholders are not subject to concentration in individual companies,
general economic trends and the Company's operating practices can
impact the adequacy of allowances for such receivables. Individual
mortgage and related collateral characteristics have a more pronounced
impact on the ultimate adequacy of the allowance for mortgage loans.
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 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
A large portion of the Company's invested assets is stated at fair
value in its consolidated balance sheets based on quoted market prices.
However, when such information is not available, fair value is
estimated. The estimated fair values of financial instruments have been
determined using available information and established 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. At March 31, 2005,
assets representing approximately 39% of the fair value of fixed
maturity investments are valued using these types of estimates.
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.
New Accounting Pronouncements
See Note 2 to the accompanying consolidated financial statements for a
discussion of new accounting pronouncements that the Company has
recently adopted or will be adopting in the future.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to a company's ability to generate sufficient cash
flows to meet the needs of its operations. The Company manages its
operations to ensure stable, reliable and cost-effective sources of
cash flows to meet all of its obligations.
The principal sources of the Company's liquidity are premium and
annuity considerations, investment and fee income and investment
maturities and sales. The principal uses of the Company's liquidity
relate to benefit payments, claim payments, payments to policy and
contract holders in connection with surrenders and withdrawals,
purchase of investments, commissions and general and administrative
expenses.
The Company's operations have liquidity requirements that vary amongst
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 cash flows from operations. Liquidity for the Company has
remained strong, as evidenced by significant amounts of short-term
investments and cash that totaled $946.5 million and $819.3 million as
of March 31, 2005 and December 31, 2004, respectively. In addition, as
of March 31, 2005 and December 31, 2004, 97% of the bond portfolio
carried an investment grade rating, 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. Management
believes that the liquidity profile of its assets is sufficient to
satisfy the liquidity requirements of reasonably foreseeable scenarios.
The Company's financial strength provides the capacity and flexibility
to enable it to raise funds in the capital markets through the issuance
of commercial paper. The Company continues to be well capitalized, with
sufficient borrowing capacity to meet the anticipated needs of its
business. The Company had $94.0 million and $95.0 million of commercial
paper outstanding at March 31, 2005 and December 31, 2004,
respectively. The commercial paper has been given a rating of A-1+ by
Standard & Poor's Rating Services and a rating of P-1 by Moody's
Investors Services, each being the highest rating available.
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.
Item 3. QUANTITATIVE AND QUALITIVE 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 these products' liability 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 may also manage risk from time to time with interest rate
derivatives such as interest rate caps that would produce investment
income if interest rates rise above the level specified in the cap.
These derivatives are only used to reduce interest rate 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.
As a result of the coinsurance with funds withheld element of the
Company's reinsurance of business of CLAC's United States branch, it
has recorded a derivative financial instrument to account for the
different credit risks and other characteristics of the reinsurance
receivable and the investment assets of CLAC that underlie that
receivable. This derivative is carried at fair value and changes in
fair value are included in net investment income as a non-cash charge
or credit. Therefore, the Company's operating results are exposed to
volatility, reflecting changes in the fair value of the underlying
investment portfolio, which is exposed to interest rate, market and
credit risk. A loss in the amount of $7.2 million and a gain in the
amount of $2.7 million, net of offsetting changes in deferred ceding
commissions and income taxes, were included in net income for the three
months ended March 31, 2005 and 2004, respectively, as a result of this
embedded derivative.
Item 4. CONTROLS AND PROCEDURES
Based on their evaluation as of March 31, 2005, the Chief Executive
Officer and the 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 have materially affected, or are
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 are a party or of which any of their property
is the subject.
Item 6. EXHIBITS
Index to Exhibits
Exhibit Number Title Page
------------------------ -------------------------------------------------- -----------
31.1 Rule 13a-14(a)/15d-14(a) Certification 23
31.2 Rule 13a-14(a)/15d-14(a) Certification 24
32 18 U.S.C. 1350 Certification 25
SIGNATURE
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, 2005
--------------------------------------------------------------------- ---------------------------
Glen R. Derback, Senior Vice President and Controller
(Duly authorized officer and chief accounting officer)