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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For The Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition 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 incorporation or organization) (I.R.S. Employer Identification No.)
125 Wolf Road, Albany, New York 12205
(Address of principal executive offices) (Zip Code)
(518) 437-1816
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of March 1, 1999, the aggregate market value of the registrant's voting stock
held by non-affiliates of the registrant was $0.
As of March 1, 1999, 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-K is filed by the registrant only as a consequence of the
sale by the registrant of a market value adjusted annuity product.
ii
TABLE OF CONTENTS
Page
PART I
Item 1. Business........................................................................1
A. Organization and Corporate Structure...................................1
B. Business of the Company ...............................................1
C. Description of Business ...............................................2
D. Investments............................................................3
E. Regulation.............................................................4
F. Ratings................................................................5
G. Miscellaneous..........................................................5
Item 2. Properties......................................................................6
Item 3. Legal Proceedings...............................................................6
Item 4. Submission of Matters to a Vote of Security Holders.............................6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................................6
A. Equity Security Holders and Market Information.........................6
B. Dividends..............................................................6
Item 6. Selected Financial Data.........................................................6
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................................7
A. Results of Operations..................................................8
B. Investments............................................................8
C. Liquidity and Capital Resources........................................9
D. Accounting Pronouncements..............................................10
E. Year 2000 Issue........................................................10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................11
Item 8. Financial Statements and Supplementary Data.....................................12
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................................26
PART III
Item 10. Directors and Executive Officers of the Registrant..............................26
A. Identification of Directors............................................26
B. Identification of Executive Officers...................................28
Item 11. Executive Compensation..........................................................29
A. Compensation of Executive Officers.....................................29
B. Compensation of Directors..............................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management..................29
A. Security Ownership of Certain Beneficial Owners........................29
B. Security Ownership of Management.......................................31
Item 13. Certain Relationships and Related Transactions..................................32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................32
A. Index to Financial Statements..........................................32
B. Index to Exhibits......................................................33
C. Reports on Form 8-K....................................................34
Signatures................................................................................35
16
PART I
ITEM 1. BUSINESS
A. ORGANIZATION AND CORPORATE STRUCTURE
First Great-West Life & Annuity Insurance Company (the "Company") is a stock
life insurance company organized under the laws of the State of New York in
1996.
The Company is a wholly-owned subsidiary of Great-West Life & Annuity Insurance
Company ("GWL&A"), a life insurance company domiciled in Colorado. GWL&A is a
wholly-owned subsidiary of GWL&A Financial Inc. ("GWL&A Financial"), a Delaware
holding company. GWL&A Financial is an indirect wholly-owned subsidiary of The
Great-West Life Assurance Company ("Great-West Life"), a Canadian life insurance
company. Great-West Life is a subsidiary of Great-West Lifeco Inc. ("Great-West
Lifeco"), a Canadian holding company. Great-West Lifeco is a subsidiary of Power
Financial Corporation ("Power Financial"), a Canadian holding company with
substantial interests in the financial services industry. Power Financial
Corporation is a subsidiary of Power Corporation of Canada ("Power
Corporation"), a Canadian holding and management company. Mr. Paul Desmarais,
through a group of private holding companies, which he controls, has voting
control of Power Corporation.
Common and preferred shares of Great-West Life, Great-West Lifeco, Power
Financial and Power Corporation are traded publicly in Canada.
B. BUSINESS OF THE COMPANY
The Company is authorized to engage in the sale of life insurance, annuities,
and accident and health insurance. The Company became licensed to do business in
New York and Iowa in 1997. The Company's business is currently limited to the
sale of individual life and annuity products.
The Company was capitalized on April 4, 1997. The table that follows summarizes
premiums and deposits received during the year ended December 31, 1998 and
during the period April 4, 1997 through December 31, 1997. For further
information concerning the Company, see Item 6 (Selected Financial Data), and
Item 8 (Financial Statements and Supplementary Data). For commentary on the
information in the following table, see Item 7 (Management's Discussion and
Analysis of Financial Condition and Results of Operations).
(Dollars in Thousands)
Period from
Year-ended Apr. 4, 1997
to
Dec. 31, 1998 Dec. 31, 1997
--------------- ---------------
Premiums and fee income 78 21
Deposits for investment-type contracts 62,528 84
Deposits to separate accounts 12,776 9,121
C. DESCRIPTION OF BUSINESS
1. Principal Products
The Company currently administers and sells individual life and annuity
insurance products. The Company intends to begin offering group health and life
insurance and 401(k) products in 1999.
The Company's fixed annuity product is a Guarantee Period Fund which was
established as a non-unitized Separate account in which the owner does not
participate in the performance of the assets. The assets accrue solely to the
benefit of the Company and any gain or loss in the Guarantee Period Fund is
borne entirely by the Company. Guarantee period durations of one to ten years
are currently being offered by the Company. Distributions from the amounts
allocated to a Guarantee Period Fund more than six months prior to the maturity
date results in a market value adjustment ("MVA"). The MVA reflects the
relationship as of the time of its calculation between the current U.S. Treasury
Strip ask side yield and the U.S. Treasury Strip ask side yield at the inception
of the contract.
The Company's variable annuity product offers 24 investment options. This
product provides the opportunity for contractholders to assume the risks of, and
receive all the benefits from, the investment of retirement assets. The variable
product assets are invested, as designated by the participant, in a separate
account which in turn invests in shares of underlying funds managed by selected
external fund managers.
The fixed annuity product generates earnings from the investment spreads on
guaranteed investment returns. The variable annuity product generates earnings
from the fees collected for mortality and expense risks associated with the
variable options.
The amount of annuities in force is measured by account balances. At December
31, 1998, annuity account balances were $91.5 thousand for fixed annuities and
$23.8 million for variable annuities. At December 31, 1997, annuity account
balances were $84.3 thousand for fixed annuities and $9.0 million for variable
annuities.
During 1998, the Company began selling life insurance products in the Bank-Owned
Life Insurance ("BOLI") market. This interest-sensitive whole life product funds
post-retirement benefits for bank employees. BOLI deposits of $62.5 million were
received in 1998, representing $251.8 million of life insurance in force.
2. Method of Distribution
The Company distributes its annuity products through Charles Schwab & Co., Inc.
pursuant to a distribution agreement. The Company's BOLI product is currently
marketed through one broker, Clark/Bardes, Inc.
3. Competition
The individual life and annuity insurance marketplace is highly competitive. The
Company's competitors include mutual fund companies, insurance companies, banks,
investment advisors and certain service and professional organizations. No one
competitor or small number of competitors is dominant. Competition focuses on
service, technology, cost, variety of investment options, investment
performance, product features, price and financial strength as indicated by
ratings issued by nationally recognized agencies. For more information on the
Company's ratings see Item 1(F) - Ratings.
4. Reserves
Reserves for interest-sensitive whole life products are equal to cumulative
deposits less withdrawals and charges plus credited interest. For all life
insurance contracts, reserves are established for claims that have been incurred
but not reported based on factors derived from past experience.
Reserves for investment contracts (deferred annuities and immediate annuities
without life contingent payouts) are equal to cumulative deposits plus credited
interest less withdrawals and other charges.
The above-mentioned reserves are computed amounts that, with additions from
premiums and deposits to be received, and with interest on such reserves, are
expected to be sufficient to meet the Company's policy obligations at their
maturities, and pay expected death or retirement benefits or surrender requests.
D. INVESTMENTS
GWL&A manages the Company's general and separate accounts in support of cash and
liquidity requirements of the Company's insurance and investment products.
Invested assets under management at year-end 1998 totaled $104.2 million,
comprised of $80.4 million of general account assets and $23.8 million of
separate account assets. Invested assets under management at year-end 1997
totaled $14.4 million, comprised of $5.4 million of general account assets and
$9.0 million of separate account assets.
The invested assets of the Company include a broad range of asset classes, such
as public and privately placed corporate bonds, public and privately placed
structured assets and government bonds. The assets of the Company are managed to
reflect the underlying characteristics of related insurance products.
The assets of the Company are routinely monitored and evaluated in light of
current economic conditions, trends in capital markets and other factors. These
other factors include investment size, quality, concentration by industry and
other diversification considerations for fixed maturity investments.
E. REGULATION
1. Insurance Regulation
The Company must comply with the insurance laws of New York and Iowa. These laws
govern the admittance of assets, premium rating methodology, policy forms,
establishing reserve requirements and solvency standards, maximum interest rates
on life insurance policy loans and minimum rates for accumulation of surrender
values and the type, amounts and valuation of investments permitted.
The Company's operations and accounts are subject to examination by the New York
Insurance Department at specified intervals.
New York has substantially adopted into law the National Association of
Insurance Commissioners' risk-based capital rules and other financial ratios for
life insurance companies. Based on the Company's December 31, 1998 statutory
financial reports, the Company has risk-based capital well in excess of that
required; however, the Company did fall outside the usual range of some of the
ratios due to the start-up nature of its operations.
2. Insurance Holding Company Regulations
The Company is subject to and complies with insurance holding company
regulations in New York. These regulations contain certain restrictions and
reporting requirements for transactions between an insurer and its affiliates,
including the payments of dividends. They also regulate changes in control of an
insurance company.
3. Securities Law
The Company is subject to various levels of regulation under federal securities
laws. The Company's separate accounts and annuity products are registered under
the Investment Company Act of 1940 and the Securities Act of 1933.
4. Potential Legislation
United States legislation and administrative developments in various areas,
including pension regulation, financial services regulation, health care
legislation and the insurance industry could significantly and adversely affect
the Company in the future. For example, Congress is currently considering
legislation relating to health care reform and managed care issues (including
patients' rights, privacy of medical records and managed care plan or enterprise
liability), and legislation relating to the taxation of policyholder surplus
accounts and the capitalization of deferred acquisition costs. Congress has from
time to time also considered the deferral of taxation on the accretion of value
within certain annuities and life insurance products, financial services reform
legislation establishing frameworks for banks engaging in the insurance
business, changes in regulation for the Employee Retirement Income Security Act
of 1974 and the availability of Section 401(k) for individual retirement
accounts.
It is not possible to predict whether future legislation or regulation adversely
affecting the business of the Company will be enacted and, if enacted, the
extent to which such legislation or regulation will have an effect on the
Company and its competitors.
F. RATINGS
The Company is rated by a number of nationally recognized rating agencies. The
ratings represent the opinion of the rating agencies on the financial strength
of the Company and its ability to meet the obligations of its insurance
policies. The ratings take into account an agreement whereby GWL&A has
undertaken to provide the Company with certain financial support related to
maintaining required statutory surplus and liquidity.
Rating Agency Measurement Rating
----------------------------------- ----------------------------- --------------
A.M. Best Company Financial Condition and AA+ *
Operating Performance
Duff & Phelps Corporation Claims Paying Ability AAA *
Standard & Poor's Corporation Claims Paying Ability AA **
Moody's Investors Service Insurance Financial Strength Aa3 ***
* Highest ratings available.
** Third highest rating out of 19 rating categories.
*** Fourth highest rating out of 19 rating categories.
G. MISCELLANEOUS
Significant BOLI deposits were received during 1998. Although the Company's BOLI
business is comprised of two major customers, which account for the majority of
the total deposits, the BOLI contracts allow for no more than 20% surrenders in
any given year.
The Company distributes its annuity products through Charles Schwab & Co., Inc.
pursuant to a marketing agreement. The Company's BOLI product is currently
marketed through one broker, Clark/Bardes, Inc. Loss of business from either of
these agents would have a material effect on the Company's distribution process.
The Company and GWL&A have an administration service agreement whereby GWL&A
administers, distributes, and underwrites business for the Company and
administers the Company's investment portfolio.
ITEM 2. PROPERTIES
The Company leases its home office in Albany, New York.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1998 to a vote of security
holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
A. EQUITY SECURITY HOLDERS AND MARKET INFORMATION
There is no established public trading market for the Company's common equity.
B. DIVIDENDS
The Company has not paid dividends on its common shares.
Under New York law, the Company cannot distribute any dividend unless a notice
of its intention to declare such dividend and the amount thereof has been filed
with the New York Superintendent of Insurance not less than thirty days in
advance of such proposed declaration. The Superintendent may disapprove of such
distribution by giving written notice to the Company within thirty days after
such filing that he finds that the financial condition of the Company does not
warrant such distribution.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of certain financial data of the Company. This
summary has been derived in part from, and should be read in conjunction with,
the consolidated financial statements of the Company included in Item 8
(Financial Statements and Supplementary Data).
(Dollars in Thousands)
For the Period From
April 4, 1997
(Inception) through
December 31, 1998 December 31, 1997
-------------------- --------------------------
INCOME STATEMENT DATA
Premium and fee income $ 78 $ 21
Net investment income 3,367 243
Realized investment gains 74
-------------------- --------------------------
-------------------- --------------------------
Total Revenues 3,519 264
-------------------- --------------------------
-------------------- --------------------------
Total benefits and expenses 2,124 213
Income tax expense 603 18
==================== ==========================
Net Income $ 792 $ 33
==================== ==========================
BALANCE SHEET DATA
Investment assets $ 80,353 $ 5,381
Separate account assets 23,836 9,045
Total assets 107,095 16,154
Total policyholder 64,445 84
liabilities
Total stockholder's equity 16,642 6,538
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-K 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.
Management's discussion and analysis of financial condition and results of
operations of the Company for the year ended December 31, 1998 and the period
April 4, 1997 through December 31, 1997 follows.
A. RESULTS OF OPERATIONS
Annuity contract charges and premiums were $78 thousand in 1998 versus $21
thousand in 1997 (sales of the annuity product began in the second half of
1997). Interest for BOLI account balances is credited directly to the balance
sheet and accordingly, only the cost of insurance and contract administration
fees related to the policies are included in premiums on the income statement.
During 1998 the Company received approval from the New York Department of
Insurance to market its BOLI product. The Company is authorized to sell up to
$100 million of BOLI. BOLI deposits in 1998 totaled $62.5 million.
The Company's operations during the period April 4, 1997 (inception) to December
31, 1997 were focused on obtaining a New York insurance license (which occurred
May 28, 1997), and preliminary marketing activities.
Net investment income grew from $243 thousand in 1997 to $3.4 million in 1998,
primarily due to BOLI sales as well as a capital infusion from GWL&A of $8.6
million in December 1998.
Net income grew from $33 thousand in 1997 to $792 thousand in 1998. The increase
in 1998 was primarily due to higher investment income. The Company's effective
tax rate was 43.2% in 1998 compared to 35% in 1997, due to the effect of state
income taxes on the higher level of income.
It is expected that the sale of individual annuities and BOLI will continue and
increase during 1999. The Company intends to begin marketing group life and
health and 401(k) products in 1999.
B. INVESTMENTS
The Company's primary investment objective is to acquire assets whose durations
and cash flows reflect the characteristics of the Company's liabilities, while
meeting industry, size, issuer and geographic diversification standards. Formal
liquidity and credit quality parameters have also been established.
The Company follows rigorous procedures to control interest rate risk and
observes strict asset and liability matching guidelines. These guidelines are
designed to ensure that even in changing interest rate environments, the
Company's assets will always be able to meet the cash flow and income
requirements of its liabilities. Through dynamic modeling, using
state-of-the-art software 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.
A summary of the Company's general account invested assets follows:
(Dollars in Thousands)
1998 1997
--------------- ----------------
Fixed maturities, available for sale, at fair $ 65,154 $ 4,995
value
Fixed maturities, held-to-maturity, at amortized 14,500
cost
Short-term investments 699 386
=============== ================
Total invested assets $ 80,353 $ 5,381
=============== ================
Fixed maturity investments include public and privately placed corporate bonds,
public and privately placed structured assets and government bonds. Private
placement investments, which are primarily in the held-to-maturity category, are
generally less marketable than publicly traded assets, yet they typically offer
covenant protection which 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 (both available-for-sale and
held-to-maturity) by credit rating is summarized as:
Credit Rating 1998 1997
-------------
-------------- --------------
AAA 62.7% 100.0%
AA 6.5
A 13.1
BBB 17.7
BB and Below (non-investment grade)
============== ==============
TOTAL 100.0% 100.0%
============== ==============
C. LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have liquidity requirements that are dependent upon the
principal product lines currently offered. 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 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 is strong, as evidenced by significant amounts of short-term investments
and cash, which totaled $1.4 million and $2.0 million as of December 31, 1998
and December 31, 1997, respectively.
As discussed above, the Company and GWL&A have an agreement whereby GWL&A has
undertaken to provide the Company with certain financial support related to
maintaining required statutory surplus and liquidity.
D. ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and for Hedging Activities". This Statement provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. This Statement is effective for the Company beginning
January 1, 2000, and earlier adoption is encouraged. The Company has not adopted
this Statement as of December 31, 1998. Management has not determined the impact
of the Statement on the Company's financial position or results of operations.
E. YEAR 2000 ISSUE
The Year 2000 ("Y2K") problem arises when a computer performing date-based
computations or operations produces erroneous results due to the historical
practice of using two digit years within computer hardware and software. This
causes errors or misinterpretations of the century in date calculations.
Virtually all businesses, including the Company, are required to determine the
extent of their Y2K problems. Systems that have a Y2K problem must then be
converted or replaced by systems that will operate correctly with respect to the
year 2000 and beyond.
As mentioned previously, GWL&A provides all administrative services to the
Company.
GWL&A has a written plan that encompasses all computer hardware, software,
networks, facilities (embedded systems) and telephone systems. The plan also
includes provisions for identifying and verifying that major vendors and
business partners are Y2K compliant. GWL&A is developing contingency plans to
address the possibility of both internal and external failures as well. The plan
calls for full Y2K compliance for core systems by June 30, 1999 and full Y2K
compliance for all Company systems by October 31, 1999.
GWL&A's plan establishes five phases for becoming Y2K compliant. Phase 1 is
"impact analysis" which includes initial inventory and preliminary assessment of
Y2K impact. Phase 2 is "solution planning" which includes system by system
planning to outline the approach and timing for reaching compliance. Phase 3 is
"conversion/renovation" which means the actual process of replacing or repairing
non-compliant systems. Phase 4 is "testing" to ensure that the systems function
correctly under a variety of different date scenarios including current dates,
year 2000 and leap year dates. Phase 5 is "implementation" which means putting
Y2K compliant systems back into production.
As of December 31, 1998, GWL&A had completed impact analysis (phase 1) and
solution planning (phase 2) for all of its core systems and was more than 95%
complete for phases 1 and 2 with respect to its systems as a whole. In addition,
GWL&A was approximately 87% complete with respect to conversion and renovation
(phase 3), 79% complete with respect to testing (phase 4), and 78% complete with
respect to implementation (phase 5).
In addition to ensuring that GWL&A's own systems are Y2K compliant, GWL&A has
identified third parties with which GWL&A has significant business relationships
in order to assess the potential impact on GWL&A of the third parties' Y2K
issues and plans. GWL&A expects to complete this process during the first
quarter of 1999 and will conduct system testing with third parties throughout
1999. GWL&A does not have control over these third parties and cannot make any
representations as to what extent GWL&A's and the Company's future operating
results may be adversely affected by the failure of any third party to address
successfully its own Y2K issues.
On the basis of currently available information, the expense incurred by GWL&A,
including anticipated future expenses, related to the Y2K issue has not and is
not expected to be material to GWL&A's financial condition or results of
operations. GWL&A has spent approximately $9.7 million on its Y2K project
through the end of December 1998 and expects to spend up to approximately $15.3
million on its Y2K project. All of these funds will come from GWL&A's cash flow
from operations. GWL&A has continued other scheduled non-Y2K information systems
changes and upgrades. Although work on Y2K issues may have resulted in minor
delays on the other projects, the delays are not expected to have a material
adverse effect on the Company's financial condition or results of operations.
The most reasonably likely worst case Y2K scenario is that GWL&A and/or the
Company will experience isolated internal or third party computer failures and
will be temporarily unable to process insurance and annuity benefit
transactions. All of GWL&A's Y2K efforts have been designed to prevent such an
occurrence. However, if GWL&A identifies internal or third party Y2K issues
which cannot be timely corrected, there can be no assurance that GWL&A and/or
the Company can avoid Y2K problems or that the cost of curing the problem will
not be material.
In an effort to mitigate risks associated with Y2K failures, GWL&A is in the
process of developing contingency plans to address core functions, including
relations with third parties. It is GWL&A's expectation that contingency plans
will address possible failures generated internally, by vendors or business
partners, and by customers. Possible general approaches include manual
processing, payments on an estimated basis and use of disaster recovery
facilities.
ITEM 7A........QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
.......RISK
The primary risk facing the Company 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.
The Company has estimated the possible effects of interest rate changes at
December 31, 1998. If interest rates increased by 100 basis points (1%), the
fair value of the fixed income assets would decrease by approximately $5
million. This calculation used projected asset cash flows, discounted back to
December 31, 1998. The cash flow projections used the Company's estimate of
prepayments on residential mortgages and other assets where the timing of the
borrower's repayment or prepayment might be affected by a change in interest
rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following are the Company's Financial Statements for the year ended December
31, 1998 and for the period April 4, 1997 (inception) to December 31, 1997 and
the Independent Auditors' Report thereon.
First Great-West Life & Annuity Insurance Company
(A wholly-owned subsidiary of
Great-West Life & Annuity Insurance Company)
Financial Statements for the Year Ended December 31, 1998
and the Period from April 4, 1997 (Inception) to December
31, 1997 and Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of First Great-West Life & Annuity
Insurance Company:
We have audited the accompanying balance sheets of First Great-West Life &
Annuity Insurance Company (a wholly-owned subsidiary of Great-West Life &
Annuity Insurance Company) as of December 31, 1998 and 1997, and the related
statements of income, stockholder's equity, and cash flows for the year ended
December 31, 1998 and the period from April 4, 1997 [inception] to December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of First Great-West Life & Annuity Insurance
Company as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for the year ended December 31, 1998 and the period from April 4,
1997 [inception] to December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
January 25, 1999
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
[Dollars in thousands except for share information]
ASSETS 1998 1997
- - ------
----------------- ----------------
INVESTMENTS:
Fixed maturities:
Held-to-maturity, at amortized cost
(fair value $15,044) $ 14,500 $
Available-for-sale, at fair value
(amortized cost $63,321 and $4,987) 65,154 4,995
Short-term investments, available-for-sale (cost
approximates fair value) 699 386
----------------- ----------------
Total Investments 80,353 5,381
Cash 705 1,648
Reinsurance receivable 123
Deferred acquisition costs 381
Investment income due and accrued 695 24
Other assets 19 6
Deferred income taxes 983 50
Separate account assets 23,836 9,045
----------------- ----------------
TOTAL ASSETS $ 107,095 $ 16,154
================= ================
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves $ 64,320 $ 84
Policy and contract claims 125
GENERAL LIABILTIES:
Due to Parent Corporation 2,077 155
Other liabilities 95 332
Separate account liabilities 23,836 9,045
----------------- ----------------
Total Liabilities 90,453 9,616
----------------- ----------------
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 12,600 4,000
Accumulated other comprehensive income 717 5
Retained earnings 825 33
----------------- ----------------
Total Stockholder's Equity 16,642 6,538
----------------- ----------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 107,095 $ 16,154
================= ================
See notes to financial statements.
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
AND THE PERIOD FROM APRIL 4, 1997 [INCEPTION] TO DECEMBER 31, 1997
[Dollars in thousands]
1998 1997
------------------ -----------------
REVENUES:
Premiums and fee income $ 78 $ 21
Net investment income 3,367 243
Net realized gains on investments 74
------------------ -----------------
3,519 264
------------------ -----------------
BENEFITS AND EXPENSES:
Life and other policy benefits 50
Interest paid or credited to contractholders 1,687
General and administrative expenses 387 213
------------------ -----------------
2,124 213
------------------ -----------------
INCOME BEFORE INCOME TAXES 1,395 51
PROVISION FOR INCOME TAXES:
Current 1,920 71
Deferred (1,317) (53)
------------------ -----------------
603 18
------------------ -----------------
NET INCOME $ 792 $ 33
================== =================
See notes to financial statements.
17
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
AND THE PERIOD FROM APRIL 4, 1997 [INCEPTION] TO DECEMBER 31, 1997 [Dollars in
thousands except for share information]
Accumulated
Additional Other
Paid-in Comprehensive Retained
Shares Amount Capital Income Earnings Total
------------- ------------- ------------- ---------------- ------------- -------------
Capital contribution 2,500 $ 2,500 $ 4,000 $ 6,500
Net income $ 33 33
Other comprehensive income $ 5 5
-------------
Comprehensive income 38
------------- ------------- ------------- ---------------- ------------- -------------
BALANCE, DECEMBER 31, 1997 2,500 2,500 4,000 5 33 6,538
Net income 792 792
Other comprehensive income 712 712
-------------
Comprehensive income 1,504
-------------
Capital contribution 8,600 8,600
------------- ------------- ------------- ---------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 2,500 $ 2,500 $ 12,600 $ 717 $ 825 $ 16,642
============= ============= ============= ================ ============= =============
See notes to financial statements.
38
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
AND THE PERIOD FROM APRIL 4, 1997 [INCEPTION] TO DECEMBER 31, 1997
[Dollars in thousands]
1998 1997
------------------ -----------------
OPERATING ACTIVITIES:
Net income $ 792 $ 33
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization of investments 12 (19)
Realized gains on sale of investments (74)
Deferred income taxes (1,317) (53)
Changes in assets and liabilities:
Investment income due and accrued (671) (24)
Policy benefit liabilities 1,859
Reinsurance receivable (123)
Other, net (1,361) 326
------------------ -----------------
Net cash (used in) provided by operating activities (883) 263
------------------ -----------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and redemptions of investments:
Fixed maturities:
Available-for-sale 73,340
Purchases of investments:
Fixed maturities:
Held-to-maturity (14,500)
Available-for-sale (131,924) (5,354)
------------------ -----------------
Net cash used in investing activities (73,084) (5,354)
------------------ -----------------
FINANCING ACTIVITIES:
Contract deposits, net of withdrawals 62,502 84
Due to Parent Corporation 1,922 155
Capital contributions 8,600 6,500
------------------ -----------------
Net cash provided by financing activities 73,024 6,739
------------------ -----------------
NET (DECREASE) INCREASE IN CASH (943) 1,648
CASH, BEGINNING OF PERIOD 1,648 0
------------------ -----------------
CASH, END OF PERIOD $ 705 $ 1,648
================== =================
See notes to financial statements.
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
AND THE PERIOD FROM APRIL 4, 1997 [INCEPTION] TO DECEMBER 31, 1997 [Dollars in
thousands except for share information]
1. ORGANIZATION
Organization - First Great-West Life & Annuity Insurance Company (the
Company) is a wholly-owned subsidiary of Great-West Life & Annuity
Insurance Company (the Parent Corporation). The Company was incorporated
as a stock life insurance company in the State of New York and was
capitalized on April 4, 1997, through a $6,000 cash investment from the
Parent Corporation for 2,000 shares of common stock. On December 29,
1997, the Company issued an additional 500 shares of common stock to the
Parent Corporation for $500. The Company was licensed as an insurance
company in the State of New York on May 28, 1997. The Company operates
in one business segment.
Basis of Presentation - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash - Cash includes only amounts in demand deposit accounts.
Investments - Management determines the classification of fixed
maturities at the time of purchase. Fixed maturities are classified as
held-to-maturity when the Company has the positive intent and ability to
hold the securities to maturity. Held-to-maturity securities are stated
at amortized cost unless fair value is less than cost and the decline is
deemed to be other than temporary, in which case they are written down
to fair value and a new cost basis is established.
Fixed maturities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are carried at fair
value, with the net unrealized gains and losses reported as accumulated
other comprehensive income in stockholder's equity.
The amortized cost of fixed maturities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and
accretion of discounts using the effective interest method over the
estimated life of the related bonds. Such amortization is included in
net investment income. Realized gains and losses, and declines in value
judged to be other-than-temporary are included in net realized gains
(losses) on investments.
Short-term investments include securities purchased with initial
maturities of one year or less and are carried at amortized cost. The
Company considers short-term investments to be available-for-sale and
amortized cost approximates fair value.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting
for Derivative Instruments and for Hedging Activities". This Statement
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. This Statement is
effective for the Company beginning January 1, 2000, and earlier
adoption is encouraged. The Company has not adopted this Statement as of
December 31, 1998. Management has not determined the impact of the
Statement on the financial statements.
Deferred Policy Acquisition Costs - Policy acquisition costs, which
consist of sales commissions related to the production of new and
renewal business, have been deferred to the extent recoverable. 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. Amortization of deferred policy acquisition costs
was immaterial to the financial statements in 1998.
Separate Accounts - Separate account assets and related liabilities are
carried at fair value. The Company's separate accounts invest in shares
of various external mutual funds. Investment income and realized capital
gains and losses of the separate accounts accrue directly to the
contractholders and, therefore, are not included in the Company's
statements of income. Revenues to the Company from the separate accounts
consist of contract maintenance fees, administration fees, and mortality
and expense risk charges.
Due to Parent Corporation - Due to Parent Corporation includes amounts
due on demand.
Policy Reserves - Life insurance reserves of $64,228 at December 31,
1998 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 of $92 and $84 are carried at
contractholders' account value at December 31, 1998 and 1997,
respectively. The carrying value of policy reserves is a reasonable
estimate of fair 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.
Policy and Contract Claims - Policy and contract claims include
provisions for reported 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.
Recognition of Premium Income and Expenses - Life insurance premiums are
recognized when due. Revenues for annuity and other contracts without
significant life contingencies are recognized as received. They consist
of contract charges for the cost of insurance, contract administration,
and surrender fees that have been assessed against the contract account
balance during the period. Fee income is derived primarily from assets
under management, consisting of contract maintenance fees,
administration fees and mortality and expense risk charges, and is
recognized when due. Benefits and expenses on policies with life
contingencies impact premium income by means of the provision for future
policy benefit reserves, resulting in recognition of profits over the
life of the contracts.
During 1998, the Company sold life insurance policies to two customers
and collected deposits of $50,000 and $12,500, respectively, which are
included as a component of policy reserves on the balance sheet. These
two customers accounted for 49% and 12%, respectively, of the Company's
net income during 1998.
Regulatory Requirements - In accordance with the requirements of the
State of New York, the Company must demonstrate adequate capital. At
December 31, 1998, the Company was in compliance with the requirement.
The Company is also required to maintain an investment deposit in the
amount of $5,000 in cash or investment certificates with the New York
Insurance Commissioner for the protection of policyholders in the event
the Company is unable to satisfactorily meet its contractual
obligations. A United States Treasury obligation, whose cost
approximates market value, was designated to meet this requirement at
December 31, 1998.
3. RELATED-PARTY TRANSACTIONS
The Company and the Parent Corporation have service agreements whereby
the Parent Corporation administers, distributes, and underwrites
business for the Company and administers the Company's investment
portfolio and the Company provides services for the Parent Corporation.
The amounts recorded are based upon management's best estimate of actual
costs incurred and resources expended based upon number of policies
and/or certificates in force. These transactions are summarized as
follows:
Years Ended
December 31,
------------------------
1998 1997
----------- -----------
Investment management expense
(included in net investment income) 47 4
Administrative and underwriting revenue
(included in operating expenses) (48) (15)
The Company and the Parent Corporation have an agreement whereby the
Parent Corporation provides certain financial support related to
maintaining adequate regulatory surplus and liquidity.
4. REINSURANCE
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 of coverage per individual life and has a maximum
retention of $250 per individual life. Life insurance policies are first
reinsured to the Parent Corporation up to a maximum of $1,250 of
coverage per individual life.
Any excess amount is reinsured to a third party.
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; consequently, allowances are
established for amounts deemed uncollectible. 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. At December 31, 1998 and
1997, the reinsurance receivable had a carrying value of $123 and $0,
respectively.
Total reinsurance premiums ceded to the Parent Corporation in 1998 and
1997 were $61 and $0, respectively.
5. SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 1998 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
---------- ----------- ------------ ---------- ----------
Held-to-Maturity:
Corporate bonds $ 14,500 $ 544 $ $ 15,044 $ 14,500
---------- ----------- ------------ ---------- ----------
$ 14,500 $ 544 $ $ 15,044 $ 14,500
========== =========== ============ ========== ==========
Available-for-Sale:
U.S. Treasury
Securities and
obligations of U.S.
Government Agencies:
Collateralized
mortgage
obligations $ 17,963 $ 1,063 $ $ 19,026 $ 19,026
Other 4,999 59 5,058 5,058
Collateralized
mortgage
obligations 19,956 331 20,287 20,287
Corporate bonds 20,403 380 20,783 20,783
---------- ----------- ------------ ---------- ----------
$ 63,321 $ 1,833 $ $ 65,154 $ 65,154
========== =========== ============ ========== ==========
Fixed maturities owned at December 31, 1997 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ----------- ------------ ----------- -----------
Available-for-Sale:
U.S. Treasury
Securities and
obligations of U.S.
Government Agencies $ 4,987 $ 8 $ $ 4,995 $ 4,995
----------- ----------- ------------ ----------- -----------
$ 4,987 $ 8 $ $ 4,995 $ 4,995
=========== =========== ============ =========== ===========
The collateralized mortgage obligations consist primarily of sequential
and planned amortization classes with final stated maturities of two to
thirty years and average lives of less than one to fifteen years.
Prepayments on all mortgage-backed securities are monitored monthly and
amortization of the premium and/or the accretion of the discount
associated with the purchase of such securities is adjusted by such
prepayments.
See Note 6 for additional information on policies regarding estimated
fair value of fixed maturities.
The amortized cost and estimated fair value of fixed maturity
investments at December 31, 1998, by projected maturity, are shown
below. Actual maturities will likely differ from these projections
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Held-to-Maturity Available-for-Sale
------------------------ ------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
----------- ----------- ----------- -----------
Due in one year or less $ 217 $ 226 $ $
Due after one year through five 1,510 1,573 4,999 5,058
years
Due after five years through ten 8,509 8,805 10,007 10,264
years
Due after ten years 4,264 4,440
Mortgage-backed securities 37,919 39,314
Asset-backed securities 10,396 10,518
=========== =========== =========== ===========
$ 14,500 $ 15,044 $ 63,321 $ 65,154
=========== =========== =========== ===========
Proceeds from sales of securities available-for-sale were $73,340 and $0
during 1998, and 1997, respectively. The realized gains on such sales
totaled $201 and $0 for 1998 and 1997, respectively. The realized losses
totaled $127 and $0 for 1998 and 1997, respectively. During 1998, no
held-to-maturity securities were sold.
6. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
December 31,
-------------------------------------------------
1998 1997
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
ASSETS:
Fixed maturities and short-term
investments $ 80,353 $ 80,897 $ 5,381 $ 5,381
LIABILITIES:
Annuity contract reserves without
life contingencies 92 92 84 84
Due to Parent Corporation 2,077 2,077 155 155
The estimated fair value of financial instruments have been determined
using available information and appropriate valuation methodologies.
However, considerable judgement is necessarily 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.
The estimated fair value of fixed maturities that are publicly traded
are obtained from an independent pricing service. To determine fair
value for fixed maturities not actively traded, the Company utilized
discounted cash flows calculated at current market rates on investments
of similar quality and term.
The fair value of annuity contract reserves without life contingencies
are estimated by discounting the cash flows to maturity of the
contracts, utilizing current credited rates for similar products.
The estimated fair value of due to Parent Corporation is based on
discounted cash flows at current market spread rates on high quality
investments.
7. FEDERAL INCOME TAXES
Income taxes are recorded using and asset and liability approach, which
requires, among other provisions, the recognition of deferred tax assets
and liabilities for expected future tax consequences of events that have
been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, all expected future events (other
than the enactments or changes in the tax laws or rules) are considered.
The following is a reconciliation between the federal income tax rate
and the Company's effective rate:
1998 1997
---------------- --------------
Federal tax rate 35.0 % 35.0 %
Change in tax rate resulting from:
State taxes 6.8 %
Prior year tax adjustment 1.4 %
================ ==============
Total 43.2 % 35.0 %
================ ==============
Temporary differences, which give rise to the deferred tax assets and
liabilities as of December 31, 1998 and 1997, are as follows:
1998 1997
---------------------------- ----------------------------
Deferred Deferred
Deferred Tax Deferred Tax
Tax Asset Liability Tax Asset Liability
------------- ------------- ------------- -------------
Policy reserves $ $ 175 $ $
Deferred policy
acquisition costs 134
Deferred acquisition
cost proxy tax 1,720 53
Investment assets 642 3
State taxes 214
------------- ------------- ------------- -------------
Total deferred taxes $ 1,934 $ 951 $ 53 $ 3
============= ============= ============= =============
Amounts related to investment assets above include $642 and $3 related
to the unrealized gains on the Company's fixed maturities
available-for-sale at December 31, 1998 and 1997, respectively. Although
realization is not assured, management believes that it is more likely
than not that all of the deferred tax asset will be realized.
The Company and the Parent Corporation have entered into an income tax
allocation agreement whereby the Parent Corporation could file a
consolidated federal income tax return. Under the agreement the Company
is responsible for and will receive the benefits of any income tax
liability or benefit computed on a separate basis. In 1998, the Company
will not file on a consolidated basis with the Parent Corporation.
8. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income".
This Statement establishes new rules for reporting and display of
comprehensive income and its components; however, the adoption of this
Statement had no impact on the Company's net income or stockholder's
equity. This Statement requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were
reported separately in stockholder's equity, to be included in other
comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of Statement 130.
Other comprehensive income at December 31, 1998 is summarized as
follows:
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
-------------- --------------- --------------
Unrealized gains on securities:
Unrealized holding gains
arising during the period $ 1,826 $ (639) $ 1,187
-------------- --------------- --------------
Net unrealized gains 1,826 (639) 1,187
Reserve and DAC adjustment (730) 255 (475)
-------------- --------------- --------------
Other comprehensive income $ 1,096 $ (384) $ 712
============== =============== ==============
Other comprehensive income at December 31, 1997 is summarized as
follows:
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
-------------- --------------- --------------
Unrealized gains on securities:
Unrealized holding gains
arising during the period $ 8 $ (3) $ 5
-------------- --------------- --------------
Net unrealized gains 8 (3) 5
-------------- --------------- --------------
Other comprehensive income $ 8 $ (3) $ 5
============== =============== ==============
9. DIVIDEND RESTRICTIONS
The Company's net income and capital and surplus, as determined in
accordance with statutory accounting principles and practices for
December 31 are as follows (unaudited):
Unaudited
1998 1997
------------ ------------
Net loss $ (2,182) $ (19)
Capital and surplus 12,808 6,469
As an insurance company domiciled in the State of New York, the Company
is required to maintain a minimum of $6,000 of capital and surplus. In addition,
the maximum amount of dividends, which can be paid to stockholders, is subject
to restrictions relating to statutory surplus and statutory adjusted net
investment income. The Company should be able to pay dividends of $1,281 in
1999. The Company paid no dividends in 1998 and 1997. Dividends are paid as
determined by the Board of Directors.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in the Company's independent accountants or resulting
disagreements on accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. IDENTIFICATION OF DIRECTORS
Director Age Served as Principal Occupation(s) For
Director From Last Five Years
Marcia D. Alazraki 57 1996 Partner, Kalkines, Arky, Zall &
Bernstein LLP (a law firm) since
January, 1998; previously Counsel,
Simpson Thacher & Bartlett (a law
firm)
James Balog (1) 70 1997 Company Director
James W. Burns, O.C. 69 1997 Chairman of the Boards of Great-West
Lifeco, Great-West Life, London
Insurance Group Inc. and London Life
Insurance Company; Deputy Chairman,
Power Corporation
Paul Desmarais, Jr. 44 1997 Chairman and Co-Chief Executive
Officer, Power Corporation;
Chairman, Power Financial
Robert Gratton 55 1997 Chairman of the Board of GWL&A;
President and Chief Executive
Officer, Power Financial
N. Berne Hart (1) 69 1997 Company Director
Stuart Z. Katz 56 1997 Partner, Fried, Frank, Harris,
Shriver & Jacobson (a law firm)
William T. McCallum 56 1997 Chairman, President and Chief
Executive Officer of the Company;
President and Chief Executive
Officer, GWL&A; President and Chief
Executive Officer, United States
Operations, Great-West Life
Brian E. Walsh (1) 45 1997 Co-Founder and Managing Partner,
Veritas Capital Management, LLC (a
merchant banking company) since
September 1997; previously Partner,
Trinity L.P. (an investment company)
from January 1996; previously
Managing Director and Co-Head,
Global Investment Bank, Bankers
Trust Company (an
investment/commercial bank)
(1) Member of the Audit Committee
Unless otherwise indicated, all of the directors have been engaged for not less
than five years in their present principal occupations or in another executive
capacity with the companies or firms identified.
Directors are elected annually to serve until the following annual meeting of
shareholders.
The following lists directorships held by the directors of the Company, on
companies whose securities are traded publicly in the United States or that are
investment companies registered under the Investment Company Act of 1940.
J. Balog .......Elan plc
........ .......Euclid Mutual Fund
........ .......Transatlantic Holdings
........ .......Zweig-Glaser Mutual Fund
P. Desmarais, Jr......Petrofina S.A.
B.......IDENTIFICATION OF EXECUTIVE OFFICERS
Executive Officer Age Served as Executive Principal Occupation(s) For
Officer From Last Five Years
William T. McCallum 56 1997 Chairman, President and Chief
Chairman, President and Executive Officer of the Company;
Chief Executive Officer President and Chief Executive
Officer, GWL&A; President and Chief
Executive Officer, United States
Operations, Great-West Life
Mitchell T.G. Graye 43 1997 Executive Vice President and Chief
Executive Vice President and Financial Officer of the Company and
Chief Financial Officer GWL&A; Executive Vice President and
Chief Financial Officer, United
States, Great-West Life
James D. Motz 49 1997 Executive Vice President, Employee
Executive Vice President, Benefits of the Company, GWL&A and
Employee Benefits Great-West Life
Douglas L. Wooden 42 1997 Executive Vice President, Financial
Executive Vice President, Services of the Company, GWL&A and
Financial Services Great-West Life
John T. Hughes 62 1997 Senior Vice President, Chief
Senior Vice President, Investment Officer of the Company
Chief Investment Officer and GWL&A; Senior Vice President,
Chief Investment Officer, United
States, Great-West Life
D. Craig Lennox 51 1997 Senior Vice President, General
Senior Vice President, Counsel and Secretary of the Company
General Counsel and Secretary and GWL&A; Senior Vice President and
Chief U.S. Legal Officer, Great-West
Life
Martin Rosenbaum 46 1997 Senior Vice President, Employee
Senior Vice President, Benefits Operations of the Company,
Employee Benefits Operations GWL&A and Great-West Life
Gregory E. Seller 45 1997 Senior Vice President, Major
Senior Vice President, Major Accounts of the Company, GWL&A and
Accounts Great-West Life
Robert K. Shaw 43 1997 Senior Vice President, Individual
Senior Vice President, Markets of the Company, GWL&A and
Individual Markets Great-West Life
Unless otherwise indicated, all of the executive officers have been engaged for
not less than five years in their present principal occupations or in another
executive capacity with the companies or firms identified.
The appointments of executive officers are confirmed annually.
ITEM 11. EXECUTIVE COMPENSATION
A. COMPENSATION OF EXECUTIVE OFFICERS
The executive officers of the Company are not compensated for their services to
the Company. They are compensated as executive officers of GWL&A.
B. COMPENSATION OF DIRECTORS
For each director of the Company who is not also a director of GWL&A, Great-West
Life or Great-West Lifeco, the Company pays an annual fee of $10,000. For each
director of the Company who is also a director of GWL&A, Great-West Life or
Great-West Lifeco, the Company pays an annual fee of $5,000. The Company pays
each director a meeting fee of $1,000 for each meeting of the Board of Directors
or a committee thereof attended. In addition, all directors are reimbursed for
incidental expenses. The above amounts are paid in the currency of the country
of residence of the director.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below is certain information, as of February 1, 1999, concerning
beneficial ownership of the voting securities of the Company by entities and
persons who beneficially own more than 5% of the voting securities of the
Company. The determinations of "beneficial ownership" of voting securities are
based upon Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). This rule provides that securities will be deemed to be
"beneficially owned" where a person has, either solely or in conjunction with
others, (1) the power to vote or to direct the voting of securities and/or the
power to dispose or to direct the disposition of, the securities or (2) the
right to acquire any such power within 60 days after the date such "beneficial
ownership" is determined.
(1) 100% of the Company's 2,500 outstanding common shares are owned by
Great-West Life & Annuity Insurance Company, 8515 East Orchard Road,
Englewood, Colorado 80111.
(2) 100% of the outstanding common shares of Great-West Life & Annuity
Insurance Company's are owned by GWL&A Financial Inc., 8515 East Orchard
Road, Englewood, Colorado 80111.
(3) 100% of the outstanding common shares of GWL&A Financial Inc. are owned
by GWL&A Financial (Nova Scotia) Co., Suite 800, 1959 Upper Water
Street, Halifax, Nova Scotia, Canada B3J 2X2.
(4) 100% of the outstanding common shares of GWL&A Financial (Nova Scotia)
Co. are owned by The Great-West Life Assurance Company, 100 Osborne
Street North, Winnipeg, Manitoba, Canada R3C 3A5.
(5) 99.6% of the outstanding common shares of The Great-West Life Assurance
Company are owned by Great-West Lifeco Inc., 100 Osborne Street North,
Winnipeg, Manitoba, Canada R3C 3A5.
(6) 81.1% of the outstanding common shares of Great-West Lifeco Inc. are
controlled by Power Financial Corporation, 751 Victoria Square,
Montreal, Quebec, Canada H2Y 2J3.
(7) 67.5% of the outstanding common shares of Power Financial Corporation
are owned by 171263 Canada Inc., 751 Victoria Square, Montreal,
Quebec, Canada H2Y 2J3.
(8) 100% of the outstanding common shares of 171263 Canada Inc. are
owned by 2795957 Canada Inc., 751 Victoria Square, Montreal, Quebec,
Canada H2Y 2J3.
(9) 100% of the outstanding common shares of 2795957 Canada Inc. are owned
by Power Corporation of Canada, 751 Victoria Square, Montreal, Quebec,
Canada H2Y 2J3.
(10) Mr. Paul Desmarais, 751 Victoria Square, Montreal, Quebec, Canada H2Y
2J3, through a group of private holding companies, which he controls,
has voting control of Power Corporation of Canada.
As a result of the chain of ownership described in paragraphs (1) through (10)
above, each of the entities and persons listed in paragraphs (1) through (10)
would be considered under Rule 13d-3 of the Exchange Act to be a "beneficial
owner" of 100% of the outstanding voting securities of the Company.
B. SECURITY OWNERSHIP OF MANAGEMENT
The following table sets out the number of equity securities, and exercisable
options (including options which will become exercisable within 60 days) for
equity securities, of the Company or any of its parents or subsidiaries,
beneficially owned, as of February 1, 1999, by (i) the directors of the Company;
and (ii) the directors and executive officers of the Company as a group.
- - ----------------------- --------------------------------------------------------------------------
Company
--------------------------------------------------------------------------
------------- ---------------- -------------------- ----------------------
The Great-West Power Financial Power Corporation of
Great-West Lifeco Inc. Corporation Canada
Life
Assurance
Company
(1) (2) (3) (4)
------------- ---------------- -------------------- ----------------------
Directors
- - --------------------------------------------------------------------------------------------------
- - ----------------------- ------------- ---------------- -------------------- ----------------------
M.D. Alazraki - - - -
- - ----------------------- ------------- ---------------- -------------------- ----------------------
- - ----------------------- ------------- ---------------- -------------------- ----------------------
J. Balog - - - -
- - ----------------------- ------------- ---------------- -------------------- ----------------------
- - ----------------------- ------------- ---------------- -------------------- ----------------------
J. W. Burns 50 112,000 8,000 400,640
200,000 options
- - ----------------------- ------------- ---------------- -------------------- ----------------------
- - ----------------------- ------------- ---------------- -------------------- ----------------------
P. Desmarais, Jr. 50 32,000 - 890,500 options
- - ----------------------- ------------- ---------------- -------------------- ----------------------
- - ----------------------- ------------- ---------------- -------------------- ----------------------
R. Gratton - 330,000 310,000 5,000
5,280,000 options 300,000 options
- - ----------------------- ------------- ---------------- -------------------- ----------------------
- - ----------------------- ------------- ---------------- -------------------- ----------------------
N.B. Hart - - - -
- - ----------------------- ------------- ---------------- -------------------- ----------------------
- - ----------------------- ------------- ---------------- -------------------- ----------------------
S.Z. Katz - - - -
- - ----------------------- ------------- ---------------- -------------------- ----------------------
- - ----------------------- ------------- ---------------- -------------------- ----------------------
W.T. McCallum 17 71,362 80,000 -
240,000 options
- - ----------------------- ------------- ---------------- -------------------- ----------------------
- - ----------------------- ------------- ---------------- -------------------- ----------------------
B.E. Walsh - - - -
- - ----------------------- ------------- ---------------- -------------------- ----------------------
- - --------------------------------------------------------------------------------------------------
Directors and Executive
Officers as a Group
- - --------------------------------------------------------------------------------------------------
- - ----------------------- ------------- ---------------- -------------------- ----------------------
117 596,167 398,000 406,440
678,000 options 5,635,054 options 1,390,500 options
- - ----------------------- ------------- ---------------- -------------------- ----------------------
(1) All holdings are common shares of The Great-West Life Assurance Company.
(2) All holdings are common shares, or where indicated, exercisable options
for common shares, of Great-West Lifeco Inc.
(3) All holdings are common shares, or where indicated, exercisable options
for common shares, of Power Financial Corporation.
(4) All holdings are subordinate voting shares, or where indicated,
exercisable options for subordinate voting shares, of Power Corporation
of Canada.
The number of common shares and exercisable options for common shares of Power
Financial Corporation held by R. Gratton represents 1.6% of the total number of
common shares and exercisable options for common shares of Power Financial
Corporation outstanding. The number of common shares and exercisable options for
common shares of Power Financial Corporation held by the directors and executive
officers as a group represents 1.7% of the total number of common shares and
exercisable options for common shares of Power Financial Corporation
outstanding. None of the remaining holdings set out above exceed 1% of the total
number of shares and exercisable options for shares of the class outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
M.D. Alazraki, a director of the Company, is an attorney with a law firm which
provided legal services to the Company. From January 1, 1998 through March 17,
1999, the amount of such services was approximately $72,300.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The documents identified below are filed as a part of this report:
Page
A. INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report On Financial Statements 14
for the year ended December 31, 1998 and the period
April 4, 1997 (inception) to December 31, 1997.
Balance Sheets as of December 31, 1998 and 1997. 15
Statement of Income for the year ended December 31, 1998 and the 16
period April 4, 1997 (inception) to December 31, 1997.
Statement of Stockholder's Equity for the year ended December 31, 17
1998 and the period April 4, 1997 (inception) to December 31, 1997.
Statement of Cash Flows for the year ended December 31, 1998 18 and the
period April 4, 1997 (inception) to December 31, 1997.
Notes to Financial Statements for the year ended December 31, 1998 19
and the period April 4, 1997 (inception) to December 31, 1997.
All schedules and separate financial statements of the Registrant are omitted
because they are not applicable, or not required, or because the required
information is included in the financial statements or notes thereto.
B. INDEX TO EXHIBITS
Exhibit Number Title Page
3(i) Restated Charter of First Great-West Life &
Annuity Insurance Company
Filed as Exhibit 3(i) to Registrant's Form 10-K for
the year ended December 31, 1997 and incorporated
herein by reference.
3(ii) Bylaws of First Great-West Life & Annuity
Insurance Company
Filed as Exhibit 3(ii) to Registrant's Form 10-K
for the year ended December 31, 1997 and
incorporated herein by reference.
Material Contracts
10.1 - Distribution Agreement between First
Great-West Life & Annuity Insurance Company
and Charles Schwab & Co., Inc.
Filed as Exhibit 10.1 to Registrant's Form 10-K for
the year ended December 31, 1997 and incorporated
herein by reference.
10.2 - Administration Services Agreement between
First Great-West Life & Annuity Insurance
Company and Great-West Life & Annuity
Insurance Company
Filed as Exhibit 10.2 to Registrant's Form 10-K for
the year ended December 31, 1997 and incorporated
herein by reference.
10.3 - Financial Support Agreement between First
Great-West Life & Annuity Insurance Company
and Great-West Life & Annuity Insurance
Company
Filed as Exhibit 10.3 to Registrant's Form 10-K for
the year ended December 31, 1997 and incorporated
herein by reference.
24 Directors' Powers of Attorney
Filed as Exhibit 24 to Registrant's Form 10-K for
the year ended December 31, 1997 and incorporated
herein by reference.
27 Financial Data Schedule 37
C. REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
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/ W.T. McCallum
William T. McCallum
Chairman, President and Chief Executive Officer
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature and Title Date
/s/ William T. McCallum March 31, 1999
William T. McCallum
Chairman, President and Chief Executive Officer
and a Director
/s/ Mitchell T.G. Graye March 31, 1999
Mitchell T.G. Graye
Executive Vice President and Chief Financial Officer
/s/ Glen R. Derback March 31, 1999
Glen R. Derback
Vice President and Treasurer
Signature and Title Date
/s/ Marcia D. Alazraki * March 31, 1999
- - ------------------------
Marcia D. Alazraki, Director
/s/ James Balog * March 31, 1999
James Balog, Director
/s/ James W. Burns * March 31, 1999
- - --------------------
James W. Burns, Director
/s/ Paul Desmarais, Jr. * March 31, 1999
- - -------------------------
Paul Desmarais, Jr., Director
/s/ Robert Gratton * March 31, 1999
Robert Gratton, Director
/s/ N. Berne Hart * March 31, 1999
- - -------------------
N. Berne Hart, Director
/s/ Stuart Z. Katz * March 31, 1999
- - --------------------
Stuart Z. Katz, Director
/s/ Brian E. Walsh * March 31, 1999
- - --------------------
Brian E. Walsh, Director
* By: /s/ D. Craig Lennox March 31, 1999
---------------------
D. Craig Lennox
Attorney-in-fact pursuant to filed Powers of Attorney.