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 September 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
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Commission file number 333-25269
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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 incorporation or organization) (I.R.S. Employer Identification Number)
125 Wolf Road, Albany, New York 12205
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(Address of principal executive offices)
(Zip Code)
[518] 437-1816
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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
----------------- -----------------
As of September 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.
18
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 9
of Financial Condition and Results of
Operations
Item 3 Quantitative and Qualitative 15
Disclosures About Market Risk
Item 4 Controls and Procedures 15
Part II OTHER INFORMATION 16
Item 1 Legal Proceedings 16
Item 6 Exhibits and Reports on Form 8-K 16
Signature 16
Certification 17
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 Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------------
2002 2001 2002 2001
-------------- -------------- --------------- ---------------
REVENUES:
Premium income $ 2,325 $ 3,955 $ 7,367 $12,971
Fee income 1,167 1,193 3,185 4,553
Net investment income 3,064 3,130 9,528 8,903
Realized gains
on investments 77 446
-------------- -------------- --------------- ---------------
6,556 8,278 20,157 26,873
-------------- -------------- --------------- ---------------
BENEFITS AND EXPENSES:
Life and other policy 1,452 911 4,809 9,035
benefits
Change in reserves 312 (191) 492 (895)
Interest paid or credited
to contractholders 2,496 1,627 6,276 5,625
General and administrative
expenses 1,401 1,978 4,801 4,945
-------------- -------------- --------------- ---------------
5,661 4,325 16,378 18,710
-------------- -------------- --------------- ---------------
INCOME BEFORE
INCOME TAXES 895 3,953 3,779 8,163
PROVISION FOR
INCOME TAXES:
Current (1,166) 1,645 453 3,361
Deferred 1,601 10 1,073 40
-------------- -------------- --------------- ---------------
435 1,655 1,526 3,401
-------------- -------------- --------------- ---------------
NET INCOME $ 460 $ 2,298 $ 2,253 $ 4,762
============== ============== =============== ===============
See notes to financial statements.
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
BALANCE SHEETS
[Dollars in Thousands Except for Share Information]
===================================================================================================================================
September 30, December 31,
ASSETS 2002 2001
- ------
-------------------- ---------------------
[unaudited]
INVESTMENTS:
Fixed maturities available-for-sale, at fair value
(amortized cost $188,471 and $176,687) $ 199,987 $ 178,591
Short-term investments, available-for-sale
(cost approximates fair value) 6,747 3,854
-------------------- ---------------------
Total investments 206,734 182,445
Cash 8,861 7,860
Reinsurance receivable 2,485 2,346
Deferred policy acquisition costs 356 1,257
Investment income due and accrued 1,885 1,713
Uninsured claims receivable 1,424 2,377
Other assets 2,166 3,371
Premiums in course of collection 335 792
Deferred income taxes 1,377
Separate account assets 36,572 45,576
-------------------- ---------------------
TOTAL ASSETS $ 260,818 $ 249,114
==================== =====================
(continued)
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
BALANCE SHEETS
[Dollars in Thousands]
==================================================================================================================================
September 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2002 2001
- ------------------------------------
-------------------- ---------------------
[unaudited]
POLICY BENEFIT LIABILITIES:
Policy reserves $ 166,020 $ 152,874
Policy and contract claims 1,920 1,175
Policyholders' funds 3,392 2,801
GENERAL LIABILITIES:
Due to Parent Corporation 1,722 386
Bank overdrafts 1,309 3,104
Deferred taxes 1,702
Other liabilities 1,080 1,986
Separate account liabilities 36,572 45,576
-------------------- ---------------------
Total liabilities 213,717 207,902
-------------------- ---------------------
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 4,363 727
Retained earnings 11,638 9,385
-------------------- ---------------------
Total stockholder's equity 47,101 41,212
-------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 260,818 $ 249,114
==================== =====================
See notes to financial statements. (Concluded)
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
[Dollars in Thousands]
===================================================================================================================================
[Unaudited]
Nine Months Ended
September 30,
---------------------------------------------
2002 2001
-------------------- ---------------------
OPERATING ACTIVITIES:
Net income $ 2,253 $ 4,762
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of investments (731) (1,001)
Realized gains on disposal of investments (77) (446)
Depreciation and amortization 200 189
Deferred income taxes 1,073 40
Changes in assets and liabilities:
Policy benefit liabilities 13,898 4,653
Reinsurance recoverable (139) (564)
Accrued interest and other receivables 285 1,778
Other, net (3,729) (24,031)
-------------------- ---------------------
Net cash provided by (used in) operating activities 13,033 (14,620)
-------------------- ---------------------
INVESTING ACTIVITIES:
Proceeds from maturities and redemptions of investments:
Fixed maturities available-for-sale 12,757 35,033
Purchases of investments:
Fixed maturities available-for-sale (26,617) (41,675)
-------------------- ---------------------
Net cash used in investing activities (13,860) (6,642)
-------------------- ---------------------
FINANCING ACTIVITIES:
Contract deposits, net of withdrawals 492 9,236
Due to Parent Corporation 1,336 6,689
-------------------- ---------------------
Net cash provided by financing activities 1,828 15,925
NET INCREASE (DECREASE) IN CASH 1,001 (5,337)
CASH, BEGINNING OF YEAR 7,860 8,462
-------------------- ---------------------
CASH, END OF PERIOD $ 8,861 $ 3,125
==================== =====================
See notes to financial statements.
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 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 2,253 2,253
Other comprehensive income 3,636 3,636
---------
Comprehensive income 5,889
-------- ------- --------- --------- ---------- ---------
BALANCES, SEPTEMBER 30, 2002 2,500 $2,500 $ 28,600 $4,363 $ 11,638 $ 47,101
======== ======== ========= ========= ========== =========
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 nine months ended September 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 Nine Months Ended
Operating Summary September 30, September 30,
------------------------------ ------------------------------
[Thousands] 2002 2001 2002 2001
------------------------------------ ------------- ------------- ------------- -------------
Premium income $ 2,325 $ 3,955 $ 7,367 $ 12,971
Fee income 1,167 1,193 3,185 4,553
Net investment income 3,064 3,130 9,528 8,903
Realized gains on
investments 77 446
------------- ------------- ------------- -------------
Total revenues 6,556 8,278 20,157 26,873
Total benefits and expenses 5,661 4,325 16,378 18,710
Income tax expenses 435 1,655 1,526 3,401
------------- ------------- ------------- -------------
Net income $ 460 $ 2,298 $ 2,253 $ 4,762
============= ============= ============= =============
Three Months Ended Nine Months Ended
Operating Summary September 30, September 30,
------------------------------- -----------------------------------
[Thousands] 2002 2001 2002 2001
--------------------------------- ------------- ----------- ------------------ ------------------
Deposits for investment
-type contracts $ 1,038 $ 2,257 $ 3,278 $ 9,886
Deposits to separate
accounts 3,061 1,040 7,025 6,419
Self funded premium
equivalents 4,112 11,988 16,509 31,791
Balance Sheet September 30, December 31,
[Thousands] 2002 2001
--------------------------------- ------------------ ------------------
Investment assets $ 206,734 $ 182,445
Separate account assets 36,572 45,576
Total assets 260,818 249,114
Total policy benefit
liabilities 171,332 156,850
Total stockholder's equity 47,101 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 September 30, 2002, compared with December 31, 2001, and
its results of operations for the quarter and nine months ended
September 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 $1.8 million and $2.5 million for
the third quarter and first nine months of 2002 when compared to the
third quarter and first nine months of 2001. The decreases are
primarily in the Employee Benefits segment.
Premium and fee income decreased $1.7 million and $7.0 million for the
third quarter and first nine months of 2002 when compared to the third
quarter and first nine months of 2001. The decreases are primarily due
to membership decline in the Employee Benefits segment.
Net investment income decreased $66 thousand for the third quarter and
increased $625 thousand for the first nine months of 2002 when
compared to the third quarter and first nine months of 2001. The
increase for the first nine months 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 nine 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
nine months of 2001.
Benefits and expenses increased $1.3 million for the third quarter of
2002 when compared to the third quarter of 2001. The increase is
primarily in the Financial Services segment.
Benefits and expenses decreased $2.3 million for the first nine 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.
General account assets are up $20.8 million at September 30, 2002 when
compared to year ended December 31, 2001 primarily due to growth in
BOLI policy reserves.
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
Following is a summary of certain financial data of the Employee
Benefits segment:
Three Months Ended Nine Months Ended
Operating Summary September 30, September 30,
-------------------------------- ---------------------------------
[Thousands] 2002 2001 2002 2001
---------------------------------- -------------- -------------- -------------- --------------
Premium Income $ 1,765 $ 4,056 $ 6,827 $ 12,978
Fee Income 957 1,099 2,790 4,270
Net investment
Income 408 543 1,233 1,151
Realized gains (losses)
on investments 4 (1) 59 (39)
-------------- -------------- -------------- --------------
Total revenues 3,134 5,697 10,909 18,360
Total benefits and
expenses 2,358 2,155 8,100 11,327
Income tax expenses 346 1,471 1,141 2,924
-------------- -------------- -------------- --------------
Net income $ 430 $ 2,071 $ 1,668 $ 4,109
============== ============== ============== ==============
Self funded premium
equivalents $ 4,112 $ 11,988 $ 16,509 $ 31,791
-------------- -------------- -------------- --------------
Employee Benefits net income decreased $1.6 million and $2.4 million
for the third quarter and first nine months of 2002 when compared to
the third quarter and first nine months of 2001. The decrease was
primarily due to an expense loss due to lower recoveries from reduced
membership and poor morbidity in both aggregate and specific stop
loss.
Premium and fee income decreased $2.4 million and $7.6 million for the
third quarter and first nine months of 2002 when compared to the third
quarter and first nine months of 2001. The decrease is due primarily
to higher termination rates on the block of business.
Net investment income decreased $135 thousand for the third quarter
and increased $82 thousand for the first nine months of 2002 when
compared to the third quarter and first nine months of 2001. These
changes were primarily the result of allocating Corporate to the
segments.
Total benefits and expenses decreased $3.2 million for the first nine
months of 2002 when compared to the first nine months of 2001. The
decrease for the first nine months of 2002 when compared to the first
nine 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 $7.9 million and $15.3
million in the third quarter and first nine months of 2002 when
compared to the same periods in 2001 primarily due to membership
decline associated with higher terminations.
Financial Services
The following is a summary of certain financial data of the Financial
Services segment:
Operating Summary Three Months Ended September Nine Months Ended
30, September 30,
-------------------------------- ---------------------------------
[Thousands] 2002 2001 2002 2001
---------------------------------- -------------- -------------- -------------- --------------
Premium Income $ 560 $ (101) $ 540 $ (7)
Fee Income 210 94 395 283
Net investment
Income 2,656 2,587 8,295 7,752
Realized gains (losses)
on investments (4) 1 18 485
-------------- -------------- -------------- --------------
Total revenues 3,422 2,581 9,248 8,513
Total benefits and expenses 3,303 2,170 8,278 7,383
Income tax expenses 89 184 385 477
-------------- -------------- -------------- --------------
Net income (loss) $ 30 $ 227 $ 585 $ 653
============== ============== ============== ==============
Deposits for investment
-type contracts $ 1,038 $ 2,257 $ 3,278 $ 9,886
-------------- -------------- -------------- --------------
Deposits to separate accounts 3,061 1,040 7,025 6,419
-------------- -------------- -------------- --------------
Net Income for Financial Services decreased $197 thousand and $68
thousand for the third quarter and first nine months of 2002 when
compared to the third quarter and first nine months of 2001. The
decrease in quarter is the result of expense losses in public/
nonprofit and 401(K) lines of business. The decrease in earnings for
the nine months ended is related to the reduction of capital gains
from 2001.
Premium income increased $661 thousand and $547 thousand for the third
quarter and for the first nine months of 2002 when compared to the
same periods in 2001 primarily due to the new insurance premiums on
the individual life policies sold in the quarter.
Fee income increased $116 thousand and $112 thousand for the third
quarter and for the first nine months of 2002 when compared to the
same periods in 2001 primarily due to fees received on the 5,153 new
group annuity participants.
The Company had a realized investment gain of $18 thousand for the
nine months of 2002. The $467 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 nine months
of 2001.
Benefits and expenses increased $1.1 million and $895 thousand in
third quarter and first nine months of 2002, when compared to the same
periods in 2001, due to increased administrative costs and commission
costs on the new business sold in 2002.
Deposits for investment-type contracts decreased $1.2 million and $6.6
million for the third quarter and first nine months of 2002 when
compared to the third quarter and first nine 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 increased $2.0 million and $606 thousand
for the third quarter and the first nine months of 2002 when compared
to the third quarter and the first nine 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:
September 30, December 31,
2002 2001
---------------------- -----------------------
AAA 61.5 % 65.0 %
AA 11.8 % 6.8 %
A 10.6 % 11.9 %
BBB 9.9 % 13.9 %
BB and Lower 6.2 % 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 nine months ended September 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 $3.6 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.
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
$15.6 million and $11.7 million as of September 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.
Item 4. CONTROLS AND PROCEDURES
Based on their evaluation as of October 25, 2002, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's
Disclosure Controls and Procedures are effective in ensuring that
information relating to the Company and its subsidiaries which is
required to be disclosed in reports filed under the Securities
Exchange Act of 1934 is (i) accumulated, processed and reported in a
timely manner; and (ii) communicated to the Company's senior
management, including the President and Chief Executive Officer and
the Executive Vice President and Chief Financial Officer, so that
timely decisions may be made regarding disclosure.
The Chief Executive Officer and Chief Financial Officer hereby confirm
that, since the date of their evaluation on October 25, 2002, there
were no significant changes in the Company's internal controls or in
other factors that could significantly affect these internal controls
including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
or any of its subsidiaries is a party or of which any of their
property is the subject.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
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:November 14, 2002
----------------------------------------------------- -----------------
Glen R. Derback, Vice President and Treasurer
(Duly authorized officer and chief accounting officer)
CERTIFICATIONS
I, William T. McCallum, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Great-West
Life & Annuity Insurance Company (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusion about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ William T. McCallum
--------------------------------------
William T. McCallum
Chairman, President and Chief Executive Officer
I, Mitchell T.G. Graye, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Great-West
Life & Annuity Insurance Company (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusion about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Mitchell T.G. Graye
---------------------------------
Mitchell T.G. Graye
Executive Vice President and Chief Financial Officer