UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
--------------------------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from to
----------------- ----------------------
Commission file number 333-25269
----------------------------------
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
New York 93-1225432
- -------------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
125 Wolf Road, Albany, New York 12205
----------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
[518] 437-1816
----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----------------- -----------------
As of June 30, 2002, 2,500 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
Statements of Income 3
Balance Sheets 4
Statements of Cash Flows 6
Statement of Stockholder's Equity 7
Notes to Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 9
Item 3 Quantitative and Qualitative Disclosures About Market Risk 15
Part II OTHER INFORMATION 16
Item 1 Legal Proceedings 16
Item 6 Exhibits and Reports on Form 8-K 16
Signature 16
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF INCOME
[Dollars in Thousands]
======================================================================================================================
[Unaudited]
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
REVENUES:
Premium income $ 2,518 $ 4,449 $ 5,042 $ 9,016
Fee income 948 1,541 2,018 3,360
Net investment income 3,224 2,915 6,464 5,773
Realized gains (losses)
on investments 75 (46) 77 446
--------------- --------------- --------------- ---------------
6,765 8,859 13,601 18,595
--------------- --------------- --------------- ---------------
BENEFITS AND EXPENSES:
Life and other policy benefits 1,681 2,331 3,357 8,124
Change in reserves 97 (336) 180 (704)
Interest paid or credited
to contractholders 1,742 1,966 3,780 3,998
General and administrative
expenses 1,780 1,172 3,400 2,967
--------------- --------------- --------------- ---------------
5,300 5,133 10,717 14,385
--------------- --------------- --------------- ---------------
INCOME BEFORE
INCOME TAXES 1,465 3,726 2,884 4,210
PROVISION FOR
INCOME TAXES:
Current 954 1,526 1,619 1,716
Deferred (433) 15 (528) 30
--------------- --------------- --------------- ---------------
521 1,541 1,091 1,746
--------------- --------------- --------------- ---------------
NET INCOME $ 944 $ 2,185 $ 1,793 $ 2,464
=============== =============== =============== ===============
See notes to financial statements.
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
BALANCE SHEETS
[Dollars in Thousands Except for Share Information]
======================================================================================================================
June 30, December 31,
ASSETS 2002 2001
- ------
-------------------- ---------------------
[unaudited]
INVESTMENTS:
Fixed maturities available-for-sale, at fair value
(amortized cost $185,725 and $176,687) $ 191,303 $ 178,591
Short-term investments, available-for-sale
(cost approximates fair value) 4,167 3,854
-------------------- ---------------------
Total investments 195,470 182,445
Cash 7,732 7,860
Reinsurance receivable 2,478 2,346
Deferred policy acquisition costs 1,505 1,257
Investment income due and accrued 1,854 1,713
Uninsured claims receivable 399 1,884
Due from parent corporation 107
Other assets 2,246 3,371
Premiums in course of collection 504 792
Deferred income taxes 1,149 1,377
Separate account assets 41,690 45,576
-------------------- ---------------------
TOTAL ASSETS $ 255,027 $ 248,728
==================== =====================
(continued)
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
BALANCE SHEETS
[Dollars in Thousands]
======================================================================================================================
June 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2002 2001
- ------------------------------------
-------------------- ---------------------
[unaudited]
POLICY BENEFIT LIABILITIES:
Policy reserves $ 160,489 $ 152,874
Policy and contract claims 1,951 1,175
Policyholders' funds 2,868 2,801
GENERAL LIABILITIES:
Due to Parent Corporation 476
Bank overdrafts 1,808 3,104
Other liabilities 1,363 1,986
Separate account liabilities 41,690 45,576
-------------------- ---------------------
Total liabilities 210,645 207,516
-------------------- ---------------------
STOCKHOLDER'S EQUITY:
Common stock, $1,000 par value; 10,000 shares
authorized; 2,500 shares issued and outstanding 2,500 2,500
Additional paid-in capital 28,600 28,600
Accumulated other comprehensive income 2,104 727
Retained earnings 11,178 9,385
-------------------- ---------------------
Total stockholder's equity 44,382 41,212
-------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 255,027 $ 248,728
==================== =====================
See notes to financial statements. (Concluded)
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
[Dollars in Thousands]
======================================================================================================================
[Unaudited]
Six Months Ended
June 30,
---------------------------------------------
2002 2001
OPERATING ACTIVITIES:
Net income $ 1,793 $ 2,464
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of investments (652) (659)
Realized gains on disposal of investments 77 (446)
Depreciation and amortization (86) 154
Deferred income taxes (528) 30
Changes in assets and liabilities:
Policy benefit liabilities 7,546 3,931
Reinsurance recoverable (132) (509)
Accrued interest and other receivables 147 1,776
Other, net (1,150) (18,414)
-------------------- ---------------------
Net cash provided by (used in) operating activities 7,015 (11,673)
-------------------- ---------------------
INVESTING ACTIVITIES:
Proceeds from maturities and redemptions of investments:
Fixed maturities available-for-sale 12,423 34,711
Purchases of investments:
Fixed maturities available-for-sale (21,035) (28,134)
-------------------- ---------------------
Net cash (used in) provided by investing activities (8,612) 6,577
-------------------- ---------------------
FINANCING ACTIVITIES:
Contract deposits, net of withdrawals 886 7,200
Due to Parent Corporation 583 (1,419)
-------------------- ---------------------
Net cash provided by financing activities 1,469 5,781
NET (DECREASE) INCREASE IN CASH (128) 685
CASH, BEGINNING OF YEAR 7,860 8,462
-------------------- ---------------------
CASH, END OF PERIOD $ 7,732 $ 9,147
==================== =====================
See notes to financial statements.
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002
======================================================================================================================
[Dollars in Thousands]
[Unaudited]
Accumulated
Additional Other
Common Stock Paid-in Comprehensive Retained
-------------------------
Shares Amount Capital Income Earnings Total
----------- ---------- ----------- -------------- ---------------- ----------------
BALANCES, JANUARY 1, 2002 2,500 $ 2,500 $ 28,600 $ 727 $ 9,385 $ 41,212
Net income 1,793 1,793
Other comprehensive income 1,377 1,377
----------------
Comprehensive income 3,170
----------- ---------- ---------- -------------- ---------------- ----------------
BALANCES, JUNE 30, 2002 2,500 $ 2,500 $ 28,600 $ 2,104 $ 11,178 $ 44,382
=========== ========== ========== ============== ================ ================
See notes to financial statements.
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Amounts in Thousands]
================================================================================
[Unaudited]
1. BASIS OF PRESENTATION
First Great-West Life & Annuity Insurance Company (the Company) is a
wholly-owned subsidiary of Great-West Life & Annuity Insurance Company
(the Parent Corporation or GWL&A). The Company was incorporated as a
stock life insurance company in the State of New York and was
capitalized on April 4, 1997. The Company was licensed as an insurance
company in the State of New York on May 28, 1997.
The financial statements and related notes of 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 financial statements and the
accompanying notes included in the Company's latest annual report on
Form 10-K for the year ended December 31, 2001.
Operating results for the six months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the full
year ending December 31, 2002.
Certain reclassifications have been made to the 2001 financial
statements to conform to the 2002 presentation.
2. NEW ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, Statement No. 142, "Goodwill and Other Intangible
Assets" (SFAS No. 142) was approved by the FASB. SFAS No. 142 changes
the accounting for goodwill and certain other intangibles from an
amortization method to an impairment-only approach. Amortization of
goodwill, including goodwill recorded in past business combinations,
will cease upon adoption of this statement. The Company implemented
SFAS No.142 on January 1, 2002 without material impact on the Company's
financial position or results of operations.
In August 2001, the FASB issued Statement No.144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No.144). SFAS No.144
supercedes current accounting guidance relating to impairment of
long-lived assets and provides a single accounting methodology for
long-lived assets to be disposed of, and also supercedes existing
guidance with respect to reporting the effects of the disposal of a
business. SFAS No.144 was adopted January 1, 2002 without a material
impact on the Company's financial position or results of operations.
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (SFAS No. 145). FASB No. 4 required all gains or losses
from extinguishment of debt to be classified as extraordinary items net
of income taxes. SFAS No. 145 requires that gains and losses from
extinguishment of debt be evaluated under the provision of Accounting
Principles Board Opinion No. 30, and be classified as ordinary items
unless they are unusual or infrequent or meet the specific criteria for
treatment as an extraordinary item. This statement is effective January
1, 2003. The Company does not expect this statement to have a material
effect on the Company's financial position or results of operations.
In July 2002, the FASB issued Statement No. 146 " Accounting for Costs
Associated With Exit or Disposal Activities" (SFAS No. 146). This
statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." This statement requires recognition of a
liability for a cost associated with an exit or disposal activity when
the liability is incurred, as opposed to when the entity commits to an
exit plan under EITF 94-3. SFAS No. 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002. The
Company does not expect this statement to have a material impact on the
Company's financial position or results of operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended Six Months Ended
Operating Summary June 30, June 30,
------------------------------ ------------------------------
[Thousands] 2002 2001 2002 2001
------------------------------------ ------------- ------------- ------------- -------------
Premium income $ 2,518 $ 4,449 $ 5,042 $ 9,016
Fee income 948 1,541 2,018 3,360
Net investment income 3,224 2,915 6,464 5,773
Realized gains (losses) on
investments 75 (46) 77 446
------------- ------------- ------------- -------------
Total revenues 6,765 8,859 13,601 18,595
Total benefits and expenses 5,300 5,133 10,717 14,385
Income tax expenses 521 1,541 1,091 1,746
------------- ------------- ------------- -------------
Net income $ 944 $ 2,185 $ 1,793 $ 2,464
============= ============= ============= =============
Three Months Ended Six Months Ended
Operating Summary June 30, June 30,
------------------------------ ------------------------------
[Thousands] 2002 2001 2002 2001
--------------------------------- ------------- ------------ ------------- -------------
Deposits for investment
-type contracts $ 2,109 $ 2,427 $ 2,240 $ 7,629
Deposits to separate
accounts 2,627 2,504 3,964 5,379
Self funded premium
equivalents 6,001 13,403 12,397 19,803
Balance Sheet June 30, December 31,
[Thousands] 2002 2001
--------------------------------- ------------- ------------------
Investment assets $ 195,470 $ 182,445
Separate account assets 41,690 45,576
Total assets 255,027 248,728
Total policy benefit
liabilities 165,308 156,850
Total stockholder's equity 44,382 41,212
GENERAL
This Form 10-Q contains forward-looking statements. Forward-looking
statements are statements not based on historical information and which
relate to future operations, strategies, financial results or other
developments. In particular, statements using verbs such as "expect,"
"anticipate," "believe" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements which represent the
Company's beliefs concerning future or projected levels of sales of the
Company's products, investment spreads or yields, or the earnings or
profitability of the Company's activities. Forward-looking statements
are necessarily based upon estimates and assumptions that are
inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company's
control and many of which, with respect to future business decisions,
are subject to change. These uncertainties and contingencies can affect
actual results and could cause actual results to differ materially from
those expressed in any forward-looking statements made by, or on behalf
of, the Company. Whether or not actual results differ materially from
forward-looking statements may depend on numerous foreseeable and
unforeseeable events or developments, some of which may be national in
scope, such as general economic conditions and interest rates, some of
which may be related to the insurance industry generally, such as
pricing competition, regulatory developments and industry
consolidation, and others of which may relate to the Company
specifically, such as credit, volatility and other risks associated
with the Company's investment portfolio, and other factors. Readers are
also directed to consider other risks and uncertainties discussed in
documents filed by the Company and certain of its subsidiaries with the
Securities and Exchange Commission.
The following discussion addresses the financial condition of the
Company as of June 30, 2002, compared with December 31, 2001, and its
results of operations for the quarter and six months ended June 30,
2002, compared with the same periods last year. The discussion should
be read in conjunction with the Management's Discussion and Analysis
section included in the Company's report on Form 10-K for the
year-ended December 31, 2001 to which the reader is directed for
additional information.
RESULTS OF OPERATIONS
The Company's net income decreased $1.2 million and $0.7 million for
the second quarter and first six months of 2002 when compared to the
second quarter and first six months of 2001. The decreases are
primarily in the Employee Benefits segment.
Premium and fee income decreased $2.5 million and $5.3 million for the
second quarter and first six months of 2002 when compared to the second
quarter and first six months of 2001. The decreases are primarily due
to membership decline in the Employee Benefits segment.
Net investment income increased $309 thousand and $691 thousand for the
second quarter and first six months of 2002 when compared to the second
quarter and first six months of 2001. The increase is due to an
increase in investment assets associated with an increase in Business
Owned Life Insurance (BOLI) policy reserves.
The Company had a realized investment gain of $77 thousand for the
first six months of 2002. The $369 thousand decrease from the same
period last year is the result of investment yield enhancement activity
on the sale of available-for-sale securities in the first six months of
2001.
Benefits and expenses decreased $3.7 million for the first six months
of 2002 when compared to the same period last year due to a combination
of lower group life and health claims and an administrative expense
reduction related to reduced membership in the Employee Benefits
segment.
There were no significant changes in total assets and liabilities for
the six months of 2002 when compared to year ended December 31, 2001.
Historically, the 401(k) business unit had been included with the
Employee Benefits segment. In order to capitalize on administrative
system efficiencies and group pension expertise, the 401(k) business is
now administered by the Financial Services segment. As a result, prior
period segment results have been reclassified to conform with this
change.
SEGMENT RESULTS
Employee Benefits
The results below reflect the operations for the Employee Benefits
segment for the first quarter:
Operating Summary Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- ---------------------------------
[Thousands] 2002 2001 2002 2001
---------------------------------- -------------- -------------- -------------- --------------
Premium Income $ 2,536 $ 4,353 $ 5,062 $ 8,922
Fee Income 852 1,447 1,833 3,171
Net investment
Income 329 309 825 608
Realized gains (losses)
on investments 55 (38) 55 (38)
-------------- -------------- -------------- --------------
Total revenues 3,772 6,071 7,775 12,663
Total benefits and
Expenses 3,035 2,681 5,742 9,172
Income tax expenses 274 1,420 795 1,453
-------------- -------------- -------------- --------------
Net income $ 463 $ 1,970 $ 1,238 $ 2,038
============== ============== ============== ==============
Self funded premium equivalents
$ 6,001 $ 13,403 $ 12,397 $ 19,803
Employee Benefits net income decreased $1.5 million and $800 thousand
for the second quarter and first six months of 2002 when compared to
the second quarter and first six months of 2001. The decrease was
primarily due to an expense loss due to reduced membership.
Premium and fee income decreased $2.4 million and $5.2 million for the
second quarter and first six months of 2002 when compared to the second
quarter and first six months of 2001. The decrease is due primarily to
higher termination rates on the business acquired from Anthem of New
York.
Net investment income increased $20 thousand and $217 thousand for the
second quarter and first six months of 2002 when compared to the second
quarter and first six months of 2001. The increase was primarily the
result of the reallocation of surplus between segments.
Total benefits and expenses increased $354 thousand and decreased $3.4
million for the second quarter and first six months of 2002 when
compared to the second quarter and first six months of 2001. The
decrease for the first six months of 2002 when compared to the first
six months of 2001 was due to a combination of lower group life and
health claims and an administrative expense reduction related to
reduced membership.
Self funded premium equivalents decreased $7.4 million in the second
quarter and first six months of 2002 when compared to the same periods
in 2001 primarily due to membership decline.
Financial Services
The following is a summary of certain financial data of the Financial
Services segment:
Operating Summary Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- ---------------------------------
[Thousands] 2002 2001 2002 2001
---------------------------------- -------------- -------------- -------------- --------------
Premium Income $ (18) $ 96 $ (20) $ 94
Fee Income 96 94 185 189
Net investment
income 2,895 2,606 5,639 5,165
Realized gains (losses)
on investments 20 (8) 22 484
-------------- -------------- -------------- --------------
Total revenues 2,993 2,788 5,826 5,932
Total benefits and expenses 2,265 2,452 4,975 5,213
Income tax expenses 247 121 296 293
-------------- -------------- -------------- --------------
Net income (loss) $ 481 $ 215 $ 555 $ 426
============== ============== ============== ==============
Deposits for investment
-type contracts $ 2,109 $ 2,427 $ 2,240 $ 7,629
Deposits to separate accounts 2,627 2,504 3,964 5,379
Net Income for Financial Services increased $266 thousand and $129
thousand for the second quarter and first six months of 2002 when
compared to the second quarter and first six months of 2001. The
increase was primarily due to an increase in interest margins on the
BOLI block of business.
Premium income decreased $114 thousand for the second quarter and for
the first six months of 2002 when compared to the same periods in 2001
primarily due to reinsurance premium paid on the BOLI business in
force.
The Company had a realized investment gain of $22 thousand for the six
months of 2002. The $462 thousand decrease from the same period last
year is the result of investment yield enhancement activity on the sale
of available-for-sale securities during the first six months of 2001.
Benefits and expenses decreased $187 thousand and $238 thousand in
second quarter and first six months of 2002, when compared to the same
periods in 2001, due to lower death claims.
Deposits for investment-type contracts decreased $318 thousand and $5.3
million for the second quarter and first six months of 2002 when
compared to the second quarter and first six months of 2001. The
decrease was due to lower sales of BOLI products. BOLI sales generally
represent large single-deposit contracts, the timing of which can
significantly impact individual quarters.
Deposits to separate accounts decreased $1.4 million for the first six
months of 2002 when compared to the first six months of 2001 due to
volatility in U.S. equity markets.
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.
Fixed maturity investments include public and privately placed
corporate bonds, government bonds and mortgage-backed and asset-backed
securities. Private placement investments that are primarily in the
held-to-maturity category are generally less marketable than publicly
traded assets, yet they typically offer covenant protection that allows
the Company, if necessary, to take appropriate action to protect its
investment. The Company believes that the cost of the additional
monitoring and analysis, required by private placements, is more than
offset by their enhanced yield.
One of the Company's primary objectives is to ensure that its fixed
maturity portfolio is maintained at a high average quality, so as to
limit credit risk. If not externally rated, the securities are rated by
the Company on a basis intended to be similar to that of the rating
agencies.
The distribution of the fixed maturity portfolio by credit rating is
summarized as follows:
June 30, December 31,
2002 2001
---------------------- -----------------------
AAA 61.3 % 65.0 %
AA 12.3 % 6.8 %
A 10.8 % 11.9 %
BBB 13.6 % 13.9 %
BB and Lower 2.0 % 2.4 %
----------------- ---- ------------------ ----
TOTAL 100.0 % 100.0 %
================= ==== ================== ====
The Company follows rigorous procedures to control interest rate risk
and observes strict asset and liability matching guidelines. These
guidelines are designed to ensure that even under changing market
conditions, the Company's assets will always be able to meet the cash
flow and income requirements of its liabilities. Using dynamic modeling
to analyze the effects of a wide range of possible market changes upon
investments and policyholder benefits, the Company ensures that its
investment portfolio is appropriately structured to fulfill financial
obligations to its policyholders.
During the six months ended June 30, 2002, net unrealized gains on
fixed maturities included in stockholders' equity, which is net of
policyholder-related amounts and deferred income taxes, increased
surplus by $1.4 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 100% of the first $50 thousand of
coverage per individual life and has a maximum of $250 thousand of
coverage per individual life. Life insurance policies are first
reinsured to the Parent Corporation up to a maximum of $1.25 million of
coverage per individual life. Any excess amount is reinsured to a third
party.
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.
Management's judgement is based on past loss experience and current and
projected economic conditions.
Deferred Policy Acquisition Costs
Policy acquisition costs, which primarily consist of sales commissions
and costs associated with the Company's group sales representatives
related to the production of new business, have been deferred to the
extent recoverable. These costs are variable in nature and are
dependent upon sales volume. Deferred costs associated with the annuity
products are being amortized over the life of the contracts in
proportion to the emergence of gross profits. Retrospective adjustments
of these amounts are made when the Company revises its estimates of
current or future gross profits. Deferred costs associated with
traditional life insurance are amortized over the premium paying period
of the related policies in proportion to premium revenues recognized.
Valuation Of Privately Placed Fixed Maturities
The estimated fair values of financial instruments have been determined
using available information and appropriate valuation methodologies.
However, considerable judgement is required to interpret market data to
develop estimates of fair value. Accordingly, the estimates presented
are not necessarily indicative of the amounts the Company could realize
in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
To determine fair value for fixed maturities not actively traded, the
Company utilizes discounted cash flows calculated at current market
rates on investments of similar quality and term.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have liquidity requirements that are dependent
upon the principal product lines. Life insurance and pension plan
reserves are primarily 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.
Generally, the Company has met its operating requirements by
maintaining appropriate levels of liquidity in its investment
portfolio. Liquidity for the Company has remained strong, as evidenced
by significant amounts of short-term investments and cash that totaled
$11.9 million and $11.7 million as of June 30, 2002 and December 31,
2001, respectively.
Item 3. QUANTITATIVE AND QUALITATIVE 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.
To manage interest rate risk, the Company invests in assets that are
suited to the products that it sells. For products with uncertain
timing of benefit payments such as life insurance, the Company invests
in fixed income assets with expected cash flows that are earlier than
the expected timing of the benefit payments. The Company can then react
to changing interest rates as these assets mature for reinvestment.
There are no significant changes to the Company's risk from December
31, 2001.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is a party or of which any of their property is
the subject.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
None
(b) Reports on Form 8-K
None
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.
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
BY: /s/ Glen R. Derback DATE: August 14, 2002
---------------------------------- ---------------------------
Glen R. Derback,
Vice President and Treasurer
(Duly authorized officer and chief accounting officer)