Attached files
| file | filename |
|---|---|
| EX-32 - EXHIBIT 32 - GREAT WEST LIFE & ANNUITY INSURANCE CO | q22018gwla-exx32.htm |
| EX-31.2 - EXHIBIT 31.2 - GREAT WEST LIFE & ANNUITY INSURANCE CO | q22018gwla-exx312.htm |
| EX-31.1 - EXHIBIT 31.1 - GREAT WEST LIFE & ANNUITY INSURANCE CO | q22018gwla-ex311.htm |
| EX-3.II - EXHIBIT 3.II - GREAT WEST LIFE & ANNUITY INSURANCE CO | q22018gwla-exhibit3ii.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2018
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 333-1173
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
COLORADO | 84-0467907 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
8515 EAST ORCHARD ROAD, GREENWOOD VILLAGE, CO 80111
(Address of principal executive offices)
(303) 737-3000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined in Rule 12b-2 of the Act.
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer x | Smaller reporting company ¨ | Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Act.
Yes ¨ No x
As of August 14, 2018, 7,320,176 shares of the registrant’s common stock were outstanding, all of which were owned by the registrant’s parent company.
Table of Contents
Page | |||
Number | |||
Part I | |||
Item 1 | |||
Item 2 | |||
Item 3 | |||
Item 4 | |||
Part II | |||
Item 1 | |||
Item 1A | |||
Item 6 | |||
2
Part I Financial Information
Item1. Interim Financial Statements
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Balance Sheets
June 30, 2018 (Unaudited) and December 31, 2017
(In Thousands, Except Share Amounts)
June 30, 2018 | December 31, 2017 | |||||||
Assets | ||||||||
Investments: | ||||||||
Fixed maturities, available-for-sale, at fair value (amortized cost $22,757,572 and $22,762,962) | $ | 22,762,737 | $ | 23,593,139 | ||||
Fixed maturities, held-for-trading, at fair value (amortized cost $19,825 and $20,512) | 19,519 | 21,059 | ||||||
Mortgage loans on real estate (net of allowances of $773 and $773) | 4,316,198 | 4,005,187 | ||||||
Policy loans | 4,121,136 | 4,104,094 | ||||||
Short-term investments (amortized cost $294,314 and $350,266) | 294,314 | 350,266 | ||||||
Limited partnership interests | 63,586 | 45,540 | ||||||
Other investments | 53,298 | 17,997 | ||||||
Total investments | 31,630,788 | 32,137,282 | ||||||
Other assets: | ||||||||
Cash and cash equivalents | 88,106 | 17,211 | ||||||
Reinsurance recoverable | 591,657 | 589,080 | ||||||
Deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”) | 681,959 | 518,510 | ||||||
Investment income due and accrued | 285,953 | 299,362 | ||||||
Collateral under securities lending agreements | 80,013 | — | ||||||
Due from parent and affiliates | 101,671 | 114,133 | ||||||
Goodwill | 137,683 | 137,683 | ||||||
Other intangible assets | 15,741 | 17,085 | ||||||
Other assets | 1,039,558 | 954,250 | ||||||
Assets of discontinued operations | 14,662 | 16,095 | ||||||
Separate account assets | 26,676,615 | 27,660,571 | ||||||
Total assets | $ | 61,344,406 | $ | 62,461,262 | ||||
See notes to condensed consolidated financial statements. | (Continued) | |
3
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Balance Sheets
June 30, 2018 (Unaudited) and December 31, 2017
(In Thousands, Except Share Amounts)
June 30, 2018 | December 31, 2017 | |||||||
Liabilities and stockholder’s equity | ||||||||
Policy benefit liabilities: | ||||||||
Future policy benefits | $ | 30,293,590 | $ | 30,048,927 | ||||
Policy and contract claims | 388,222 | 389,029 | ||||||
Policyholders’ funds | 273,319 | 280,578 | ||||||
Provision for policyholders’ dividends | 40,325 | 41,972 | ||||||
Undistributed earnings on participating business | 10,903 | 14,636 | ||||||
Total policy benefit liabilities | 31,006,359 | 30,775,142 | ||||||
General liabilities: | ||||||||
Due to parent and affiliates | 563,852 | 553,901 | ||||||
Commercial paper | 99,381 | 99,886 | ||||||
Payable under securities lending agreements | 80,013 | — | ||||||
Deferred income tax liabilities, net | 5,643 | 93,203 | ||||||
Other liabilities | 857,885 | 812,875 | ||||||
Liabilities of discontinued operations | 14,662 | 16,095 | ||||||
Separate account liabilities | 26,676,615 | 27,660,571 | ||||||
Total liabilities | 59,304,410 | 60,011,673 | ||||||
Commitments and contingencies (See Note 14) | ||||||||
Stockholder’s equity: | ||||||||
Preferred stock, $1 par value, 50,000,000 shares authorized; none issued and outstanding | — | — | ||||||
Common stock, $1 par value, 50,000,000 shares authorized; 7,320,176 shares issued and outstanding | 7,320 | 7,320 | ||||||
Additional paid-in capital | 951,640 | 949,520 | ||||||
Accumulated other comprehensive (loss) income | (51,100 | ) | 440,957 | |||||
Retained earnings | 1,132,136 | 1,051,792 | ||||||
Total stockholder’s equity | 2,039,996 | 2,449,589 | ||||||
Total liabilities and stockholder’s equity | $ | 61,344,406 | $ | 62,461,262 | ||||
See notes to condensed consolidated financial statements. | (Concluded) | |
4
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Income
Three and Six Months Ended June 30, 2018 and 2017
(In Thousands)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues: | ||||||||||||||||
Premium income | $ | 78,155 | $ | 67,663 | $ | 222,836 | $ | 219,904 | ||||||||
Fee income | 286,696 | 267,338 | 562,660 | 522,453 | ||||||||||||
Other revenue | 3,077 | 3,661 | 6,062 | 6,045 | ||||||||||||
Net investment income | 327,471 | 297,221 | 665,612 | 610,691 | ||||||||||||
Investment gains (losses), net | 40,256 | 22,064 | (3,487 | ) | 10,310 | |||||||||||
Total revenues | 735,655 | 657,947 | 1,453,683 | 1,369,403 | ||||||||||||
Benefits and expenses: | ||||||||||||||||
Life and other policy benefits | 166,613 | 166,995 | 354,157 | 337,283 | ||||||||||||
Decrease in future policy benefits | (77,381 | ) | (63,978 | ) | (99,390 | ) | (63,852 | ) | ||||||||
Interest credited or paid to contractholders | 164,397 | 157,544 | 325,680 | 311,490 | ||||||||||||
Provision for policyholders’ share of losses on participating business | (340 | ) | (62 | ) | (856 | ) | (64 | ) | ||||||||
Dividends to policyholders | 7,397 | 9,045 | 19,679 | 24,114 | ||||||||||||
Total benefits | 260,686 | 269,544 | 599,270 | 608,971 | ||||||||||||
General insurance expenses | 308,545 | 284,364 | 606,677 | 591,495 | ||||||||||||
Amortization of DAC and VOBA | 30,957 | 20,401 | 42,249 | 25,723 | ||||||||||||
Interest expense | 9,588 | 7,646 | 17,397 | 15,276 | ||||||||||||
Total benefits and expenses | 609,776 | 581,955 | 1,265,593 | 1,241,465 | ||||||||||||
Income before income taxes | 125,879 | 75,992 | 188,090 | 127,938 | ||||||||||||
Income tax expense | 27,251 | 26,168 | 40,804 | 43,286 | ||||||||||||
Net income | $ | 98,628 | $ | 49,824 | $ | 147,286 | $ | 84,652 | ||||||||
See notes to condensed consolidated financial statements.
5
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Comprehensive (Loss) Income
Three and Six Months Ended June 30, 2018 and 2017
(In Thousands)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net income | $ | 98,628 | $ | 49,824 | $ | 147,286 | $ | 84,652 | ||||||||
Components of other comprehensive (loss) income | ||||||||||||||||
Unrealized holding (losses) gains, net, arising on available-for-sale fixed maturity investments | (353,834 | ) | 236,996 | (813,514 | ) | 367,225 | ||||||||||
Unrealized holding gains (losses), net, arising on cash flow hedges | 58,939 | (18,245 | ) | 52,443 | (25,200 | ) | ||||||||||
Reclassification adjustment for (gains) losses, net, realized in net income | (11,720 | ) | (1,832 | ) | (17,307 | ) | (357 | ) | ||||||||
Net unrealized (losses) gains related to investments | (306,615 | ) | 216,919 | (778,378 | ) | 341,668 | ||||||||||
Future policy benefits, DAC and VOBA adjustments | 66,954 | (55,549 | ) | 154,362 | (84,015 | ) | ||||||||||
Employee benefit plan adjustment | 579 | 2,146 | 1,159 | 4,292 | ||||||||||||
Other comprehensive (loss) income before income taxes | (239,082 | ) | 163,516 | (622,857 | ) | 261,945 | ||||||||||
Income tax (benefit) expense related to items of other comprehensive income | (50,207 | ) | 57,231 | (130,800 | ) | 91,681 | ||||||||||
Other comprehensive (loss) income(1) | (188,875 | ) | 106,285 | (492,057 | ) | 170,264 | ||||||||||
Total comprehensive (loss) income | $ | (90,247 | ) | $ | 156,109 | $ | (344,771 | ) | $ | 254,916 | ||||||
(1) Other comprehensive (loss) income includes the non-credit component of impaired (losses) gains, net, on fixed maturities available-for-sale in the amounts of $2,976 and $(520) for the three months ended June 30, 2018 and 2017, respectively and $(13,246) and $(1,609) for the six months ended June 30, 2018 and 2017, respectively.
See notes to condensed consolidated financial statements.
6
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Stockholder’s Equity
Six Months Ended June 30, 2018 and 2017
(In Thousands)
(Unaudited)
Six Months Ended June 30, 2018 | ||||||||||||||||||||
Common stock | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Total | ||||||||||||||||
Balances, January 1, 2018 | $ | 7,320 | $ | 949,520 | $ | 440,957 | $ | 1,051,792 | $ | 2,449,589 | ||||||||||
Cumulative impact of adopting ASC 606, net of tax | — | — | — | 32,952 | 32,952 | |||||||||||||||
Adjusted balances, January 1, 2018 | 7,320 | 949,520 | 440,957 | 1,084,744 | 2,482,541 | |||||||||||||||
Net income | — | — | — | 147,286 | 147,286 | |||||||||||||||
Other comprehensive loss, net of income taxes | — | — | (492,057 | ) | — | (492,057 | ) | |||||||||||||
Dividends | — | — | — | (99,894 | ) | (99,894 | ) | |||||||||||||
Capital contribution(1) | — | 1,688 | — | — | 1,688 | |||||||||||||||
Capital contribution - stock-based compensation | — | 432 | — | — | 432 | |||||||||||||||
Balances, June 30, 2018 | $ | 7,320 | $ | 951,640 | $ | (51,100 | ) | $ | 1,132,136 | $ | 2,039,996 | |||||||||
(1) In February 2018, the Company received a capital contribution from its parent, GWL&A Financial Inc., in the amount of $848. In May 2018, an additional capital contribution was received in the amount of $840. No additional shares of the Company were issued in relation to these contributions.
Six Months Ended June 30, 2017 | ||||||||||||||||||||
Common stock | Additional paid-in capital | Accumulated other comprehensive income | Retained earnings | Total | ||||||||||||||||
Balances, January 1, 2017 | $ | 7,293 | $ | 863,031 | $ | 235,875 | $ | 906,122 | $ | 2,012,321 | ||||||||||
Net income | — | — | — | 84,652 | 84,652 | |||||||||||||||
Other comprehensive income, net of income taxes | — | — | 170,264 | — | 170,264 | |||||||||||||||
Dividends | — | — | — | (137,301 | ) | (137,301 | ) | |||||||||||||
Capital Contribution(1) | — | 76,429 | — | — | 76,429 | |||||||||||||||
Capital contribution - stock-based compensation | — | 925 | — | — | 925 | |||||||||||||||
Balances, June 30, 2017 | $ | 7,293 | $ | 940,385 | $ | 406,139 | $ | 853,473 | $ | 2,207,290 | ||||||||||
(1) In May 2017, the Company received a capital contribution from its parent, GWL&A Financial Inc., in the amount of $76,429. No additional shares of the Company were issued in relation to this contribution.
See notes to condensed consolidated financial statements.
7
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2018 and 2017
(In Thousands)
(Unaudited)
Six Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
Net cash provided by operating activities | $ | 261,940 | $ | 481,107 | ||||
Cash flows from investing activities: | ||||||||
Proceeds from sales, maturities and redemptions of investments: | ||||||||
Fixed maturities, available-for-sale | 2,130,539 | 3,132,414 | ||||||
Mortgage loans on real estate | 223,785 | 209,888 | ||||||
Limited partnership interests and other investments | 4,438 | 6,425 | ||||||
Purchases of investments: | ||||||||
Fixed maturities, available-for-sale | (2,108,487 | ) | (2,840,513 | ) | ||||
Mortgage loans on real estate | (536,765 | ) | (565,217 | ) | ||||
Limited partnership interests and other investments | (15,581 | ) | (8,114 | ) | ||||
Net change in short-term investments | 81,207 | (612,835 | ) | |||||
Net change in policy loans | 3,783 | (9,037 | ) | |||||
Purchases of furniture, equipment, and software | (26,247 | ) | (21,710 | ) | ||||
Net cash used in investing activities | (243,328 | ) | (708,699 | ) | ||||
Cash flows from financing activities: | ||||||||
Contract deposits | 1,330,196 | 1,405,204 | ||||||
Contract withdrawals | (1,176,725 | ) | (1,087,940 | ) | ||||
Proceeds from surplus note issued to parent | 346,218 | — | ||||||
Redemption of surplus note issued to parent | (333,400 | ) | — | |||||
Dividends paid | (99,894 | ) | (137,301 | ) | ||||
Capital contribution | 1,688 | 76,429 | ||||||
Payments for and interest paid on financing element derivatives, net | (1,673 | ) | (3,461 | ) | ||||
Net change in commercial paper borrowings | (505 | ) | (27,796 | ) | ||||
Net change in book overdrafts | (13,590 | ) | 1,623 | |||||
Employee taxes paid for withheld shares | (32 | ) | (648 | ) | ||||
Net cash provided by financing activities | 52,283 | 226,110 | ||||||
Net increase (decrease) in cash and cash equivalents | 70,895 | (1,482 | ) | |||||
Cash and cash equivalents, beginning of year | 17,211 | 18,321 | ||||||
Cash and cash equivalents, end of period | $ | 88,106 | $ | 16,839 | ||||
See notes to condensed consolidated financial statements. | (Continued) | |
8
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2018 and 2017
(In Thousands)
(Unaudited)
Six Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
Supplemental disclosures of cash flow information: | ||||||||
Net cash paid during the year for: | ||||||||
Income taxes | $ | (9,323 | ) | $ | (10,449 | ) | ||
Interest | (16,194 | ) | (12,931 | ) | ||||
Non-cash investing and financing transactions during the years: | ||||||||
Share-based compensation expense | $ | 432 | $ | 925 | ||||
Fair value of assets acquired in settlement of fixed maturity investments | 28,315 | — | ||||||
See notes to condensed consolidated financial statements. | (Concluded) | |
9
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
1. Organization and Basis of Presentation
Organization
Great-West Life & Annuity Insurance Company (“GWLA”) and its subsidiaries (collectively, the “Company”) is a direct wholly-owned subsidiary of GWL&A Financial Inc. (“GWL&A Financial”), a holding company. GWL&A Financial is a direct wholly-owned subsidiary of Great-West Lifeco U.S. LLC (“Lifeco U.S.”) and an indirect wholly-owned subsidiary of Great-West Lifeco Inc. (“Lifeco”), a Canadian holding company. The Company offers a wide range of life insurance, retirement, and investment products to individuals, businesses, and other private and public organizations throughout the United States. The Company is an insurance company domiciled in the State of Colorado and is subject to regulation by the Colorado Division of Insurance.
Basis of Presentation
The condensed consolidated financial statements include the accounts of the Company and the accounts of its subsidiaries over which it exercises control and are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Intercompany transactions and balances have been eliminated in consolidation.
The condensed consolidated balance sheet as of December 31, 2017, which was derived from the Company’s audited consolidated financial statements, and the unaudited interim condensed consolidated financial statements as of and for the three and six months ended June 30, 2018, have been prepared in accordance with the instructions for Form 10-Q. In compliance with those instructions, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. As such, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
In the opinion of management, these statements include all normal recurring adjustments necessary to fairly present the Company’s condensed consolidated results of operations, financial position, and cash flows as of June 30, 2018, and for all periods presented. The condensed consolidated results of operations and condensed consolidated statement of cash flows for the six months ended June 30, 2018, are not necessarily indicative of the results or cash flows expected for the full year.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP 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. Application of Recent Accounting Pronouncements
Recently adopted accounting pronouncements
In May, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, and all the related amendments to customer contracts (collectively “ASC 606”), effective for interim and annual periods beginning after December 15, 2017. ASC 606 supersedes nearly all existing revenue recognition guidance under U.S. GAAP; however, it did not impact the accounting for insurance and investment contracts within the scope of financial services insurance, leases, financial instruments and guarantees. The core principle of the model requires that an entity recognizes revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The update also requires increased disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. See Note 10 for additional information.
10
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, Revenue Recognition (“ASC 605”).
The primary impact of ASC 606 to the Company relates to the accounting for certain contract costs and contract fulfillment costs, which were expensed as incurred under ASC 605. Under ASC 606, these costs are deferred and amortized over the expected life of the customer contract, which the Company determined to be 10 years. The Company presents these contract costs and contract fulfillment costs on the condensed consolidated balance sheet as a part of the DAC and VOBA balance.
The Company recorded a net increase to opening retained earnings of $32,952, net of tax, as of January 1, 2018 due to the cumulative impact of adopting ASC 606.
In January, 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, effective for interim and annual periods beginning after December 15, 2017. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments including requiring equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income, eliminating certain disclosure requirements related to financial instruments measured at amortized cost, and adding disclosures related to the measurement categories of financial assets and financial liabilities. The primary impact to the Company’s condensed consolidated financial statements was that the Company’s limited partnership interests, that were accounted for under the cost method, are now measured at fair value with changes in the fair value recognized in net income. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), effective for fiscal years and interim periods within those beginning after December 15, 2017. This ASU addresses diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The primary impacts to the Company’s condensed consolidated financial statement include reclassification of proceeds received from the settlement of corporate-owned life insurance policies (“COLI”) from cash flow from operations to cash flow from investing and reclassification of certain change in due to / from parent and affiliate from investing to operating. As the Company has retroactively applied this guidance as required by the ASU, the following updates were made to the condensed consolidated cash flow statement for the six months ended June 30, 2017 to conform to current year presentation:
• | Reclassification of proceeds received from the settlement of COLIs of $1,680 from cash flow from operations to cash flows from investing; and |
• | Reclassification of change in due to / from parent and affiliate of $21,388 from cash flow from financing to cash flows from operations. |
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash (a consensus of the Emerging Issues Task Force), effective for fiscal years and interim periods within those beginning after December 15, 2017. This update requires organizations to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The adoption of this standard did not have a material impact on the condensed consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, effective for annual reporting periods beginning on or after December 15, 2017, and interim periods within those annual periods. This update requires organizations to disaggregate the service cost component from the other components of net benefit costs in the income statement and present it with other current compensation costs for the related employees while providing guidance for capitalization eligibility for service costs. The adoption of this standard did not have a material impact on the condensed consolidated financial statements.
11
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Future adoption of new accounting pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases, and all the related amendments to leases (collectively “ASU 2016-02”) effective for annual reporting periods beginning on or after December 15, 2018, and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual period. This update requires organizations to recognize lease assets and lease liabilities on the balance sheet with lease terms of more than 12 months and also disclose certain qualitative and quantitative information about leasing arrangements. The Company’s implementation efforts are primarily focused on identifying a new lease accounting system, the review of its existing lease contracts and performing a completeness assessment over the lease population. The Company continues to evaluate the impact of this update on its condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments: Credit Losses: Measurement of Credit Losses on Financial Instruments, effective for fiscal years and interim periods within those beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018. This update amends guidance on the impairment of financial instruments by adding an impairment model that is based on expected losses rather than incurred losses and is intended to result in more timely recognition of losses. The standard also simplifies the accounting by decreasing the number of credit impairment models that an entity can use to account for debt instruments. The Company continues to evaluate the impact of this update on its condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other, effective for annual or any interim goodwill impairment tests after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The update eliminates Step 2 from the goodwill impairment test and will require management to perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Any amount by which the carrying amount exceeds the reporting unit’s fair value (not to exceed the goodwill allocated to that reporting unit) is recognized as an impairment charge. The Company performs its goodwill impairment annually in the 4th quarter or more frequently if events or circumstances indicate that there may be justification for performing an interim test. The adoption of this standard is not anticipated to have a material impact on the condensed consolidated financial statements.
3. Related Party Transactions
A note payable to GWL&A Financial was issued as a surplus note on May 17, 2018, with a face and carrying amount of $346,218. The surplus note bears a fixed interest rate of 4.881%. The note matures on May 17, 2048.
On June 15, 2018, the surplus note with a principal amount of $333,400 was redeemed in full. The surplus note to GWL&A Financial was issued on May 19, 2006. The surplus note bore an interest rate of 2.588% plus the then-current three-month London Interbank Offering Rate (“LIBOR”). The surplus note became redeemable by the Company at the principal amount plus any accrued and unpaid interest after May 16, 2016.
From time to time, the Company makes direct investments in mutual funds of Great-West Funds, Inc., an open-end management investment company, which is a related party of GWL&A, to seed new investment products. As of June 30, 2018, the Company held $35,268 in seed investments.
4. Dividends
The maximum amount of dividends, which can be paid to stockholders by insurance companies domiciled in the State of Colorado, is subject to restrictions relating to statutory surplus and statutory net gain from operations. Prior to the payment of any dividends, the Company seeks approval from the Colorado Insurance Commissioner. During the six months ended June 30, 2018 and 2017, the Company paid dividends of $99,894 and $137,301, respectively, to its parent, GWL&A Financial.
12
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
5. Summary of Investments
The following tables summarize fixed maturity investments classified as available-for-sale and the non-credit-related component of other-than-temporary impairments (“OTTI”) in accumulated other comprehensive income (loss) (“AOCI”):
June 30, 2018 | ||||||||||||||||||||
Amortized | Gross unrealized | Gross unrealized | Estimated fair value | OTTI (gain) loss | ||||||||||||||||
Fixed maturities: | cost | gains | losses | and carrying value | included in AOCI (1) | |||||||||||||||
U.S. government direct obligations and U.S. agencies | $ | 1,362,245 | $ | 26,310 | $ | 32,382 | $ | 1,356,173 | $ | — | ||||||||||
Obligations of U.S. states and their subdivisions | 1,841,971 | 165,819 | 4,368 | 2,003,422 | — | |||||||||||||||
Corporate debt securities (2) | 15,596,700 | 262,319 | 420,281 | 15,438,738 | (779 | ) | ||||||||||||||
Asset-backed securities | 1,609,259 | 68,040 | 23,498 | 1,653,801 | (36,665 | ) | ||||||||||||||
Residential mortgage-backed securities | 56,655 | 2,056 | 886 | 57,825 | (70 | ) | ||||||||||||||
Commercial mortgage-backed securities | 1,358,117 | 4,899 | 43,216 | 1,319,800 | — | |||||||||||||||
Collateralized debt obligations | 932,625 | 1,544 | 1,191 | 932,978 | — | |||||||||||||||
Total fixed maturities | $ | 22,757,572 | $ | 530,987 | $ | 525,822 | $ | 22,762,737 | $ | (37,514 | ) | |||||||||
(1) Indicates the amount of any OTTI (gain) loss included in AOCI that is included in gross unrealized gains and losses. OTTI (gain) loss included in AOCI, as presented above, includes both the initial recognition of non-credit losses and the effects of subsequent increases and decreases in estimated fair value for those fixed maturity securities with previous non-credit impairment. The non-credit loss component of OTTI (gain) loss was in an unrealized gain position due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.
(2) Includes perpetual debt investments with amortized cost of $89,267 and estimated fair value of $81,435.
December 31, 2017 | ||||||||||||||||||||
Amortized | Gross unrealized | Gross unrealized | Estimated fair value | OTTI (gain) loss | ||||||||||||||||
Fixed maturities: | cost | gains | losses | and carrying value | included in AOCI (1) | |||||||||||||||
U.S. government direct obligations and U.S. agencies | $ | 1,837,748 | $ | 41,777 | $ | 7,883 | $ | 1,871,642 | $ | — | ||||||||||
Obligations of U.S. states and their subdivisions | 1,872,120 | 220,507 | 1,655 | 2,090,972 | — | |||||||||||||||
Corporate debt securities (2) | 15,234,473 | 581,991 | 110,377 | 15,706,087 | (1,018 | ) | ||||||||||||||
Asset-backed securities | 1,622,806 | 105,301 | 10,131 | 1,717,976 | (56,735 | ) | ||||||||||||||
Residential mortgage-backed securities | 63,187 | 2,446 | 649 | 64,984 | (140 | ) | ||||||||||||||
Commercial mortgage-backed securities | 1,352,906 | 17,692 | 12,989 | 1,357,609 | — | |||||||||||||||
Collateralized debt obligations | 779,722 | 4,227 | 80 | 783,869 | — | |||||||||||||||
Total fixed maturities | $ | 22,762,962 | $ | 973,941 | $ | 143,764 | $ | 23,593,139 | $ | (57,893 | ) | |||||||||
(1) Indicates the amount of any OTTI (gain) loss included in AOCI that is included in gross unrealized gains and losses. OTTI (gain) loss included in AOCI, as presented above, includes both the initial recognition of non-credit losses and the effects of subsequent increases and decreases in estimated fair value for those fixed maturity securities with previous non-credit impairment. The non-credit loss component of OTTI (gain) loss was in an unrealized gain position due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.
(2) Includes perpetual debt investments with amortized cost of $89,267 and estimated fair value of $87,348.
See Note 8 for additional discussion regarding fair value measurements.
13
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
The amortized cost and estimated fair value of fixed maturity investments classified as available-for-sale, by contractual maturity date, are shown in the table 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.
June 30, 2018 | |||||||
Amortized cost | Estimated fair value | ||||||
Maturing in one year or less | $ | 619,874 | $ | 620,381 | |||
Maturing after one year through five years | 3,447,149 | 3,441,249 | |||||
Maturing after five years through ten years | 8,216,510 | 8,066,134 | |||||
Maturing after ten years | 5,500,704 | 5,670,372 | |||||
Mortgage-backed and asset-backed securities | 4,973,335 | 4,964,601 | |||||
Total fixed maturities | $ | 22,757,572 | $ | 22,762,737 | |||
Mortgage-backed (commercial and residential) and asset-backed securities include those issued by the U.S. government and U.S. agencies.
The following table summarizes information regarding the sales of securities classified as available-for-sale:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Proceeds from sales | $ | 511,199 | $ | 891,026 | $ | 1,477,619 | $ | 2,471,548 | |||||||
Gross realized gains from sales | 12,452 | 8,488 | 24,726 | 20,921 | |||||||||||
Gross realized losses from sales | 9,789 | 6,080 | 16,072 | 21,337 | |||||||||||
Mortgage loans on real estate — The recorded investment of the mortgage loan portfolio categorized as performing was $4,316,971 and $4,005,960 as of June 30, 2018 and December 31, 2017, respectively.
The following table summarizes activity in the mortgage provision allowance:
Six Months Ended June 30, 2018 | Year Ended December 31, 2017 | ||||||
Commercial mortgages | Commercial mortgages | ||||||
Beginning balance | $ | 773 | $ | 2,882 | |||
Provision increases | — | 157 | |||||
Charge-off | — | (663 | ) | ||||
Recovery | — | (30 | ) | ||||
Provision decreases | — | (1,573 | ) | ||||
Ending balance | $ | 773 | $ | 773 | |||
Allowance ending balance by basis of impairment method: | |||||||
Collectively evaluated for impairment | 773 | 773 | |||||
Recorded investment balance in the mortgage loan portfolio, gross of allowance, by basis of impairment method: | $ | 4,316,971 | $ | 4,005,960 | |||
Individually evaluated for impairment | 2,799 | 2,942 | |||||
Collectively evaluated for impairment | 4,314,172 | 4,003,018 | |||||
14
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Limited partnership interests — Limited partnership interests represent the Company’s minority ownership interests in pooled investment funds that primarily make private equity investments across diverse industries and geographical focuses. The Company has determined its interest in each limited partnership to be considered a variable interest entity (“VIE”). Consolidation is not required as the Company is not deemed to be the primary beneficiary of the VIEs. The carrying value and maximum exposure to loss in relation to the activities of the VIEs was $63,586 and $45,540 at June 30, 2018 and December 31, 2017, respectively.
Securities lending — Securities with a cost or amortized cost of $98,705 and estimated fair values of $93,255 were on loan under the program at June 30, 2018. There were no securities on loan at December 31, 2017. The Company received cash of $80,013 and securities with a fair value of $16,502 as collateral at June 30, 2018. The Company bears the risk of any deficiency in the amount of collateral available for return to a borrower due to a loss in an approved investment.
Under the securities lending program the collateral pledged is, by definition, the securities loaned against the cash borrowed. The cash collateral liability under the securities lending program is $80,013, and the class of securities loaned consists entirely of corporate debt securities.
The Company’s securities lending agreements are open agreements meaning the borrower can return and the Company can recall the loaned securities at any time. The assets and liabilities associated with securities lending program are not subject to master netting arrangements and are not offset in the condensed consolidated balance sheets.
Unrealized losses on fixed maturity investments classified as available-for-sale — The following tables summarize unrealized investment losses, including the non-credit-related portion of OTTI losses reported in AOCI, by class of investment:
June 30, 2018 | ||||||||||||||||||||||||
Less than twelve months | Twelve months or longer | Total | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
Fixed maturities: | fair value | loss and OTTI | fair value | loss and OTTI | fair value | loss and OTTI | ||||||||||||||||||
U.S. government direct obligations and U.S. agencies | $ | 833,130 | $ | 25,923 | $ | 150,012 | $ | 6,459 | $ | 983,142 | $ | 32,382 | ||||||||||||
Obligations of U.S. states and their subdivisions | 157,066 | 1,958 | 36,003 | 2,410 | 193,069 | 4,368 | ||||||||||||||||||
Corporate debt securities | 8,687,225 | 278,236 | 1,591,254 | 142,045 | 10,278,479 | 420,281 | ||||||||||||||||||
Asset-backed securities | 764,102 | 14,417 | 211,254 | 9,081 | 975,356 | 23,498 | ||||||||||||||||||
Residential mortgage-backed securities | 3,679 | 63 | 10,029 | 823 | 13,708 | 886 | ||||||||||||||||||
Commercial mortgage-backed securities | 838,617 | 24,039 | 280,386 | 19,177 | 1,119,003 | 43,216 | ||||||||||||||||||
Collateralized debt obligations | 296,314 | 1,191 | — | — | 296,314 | 1,191 | ||||||||||||||||||
Total fixed maturities | $ | 11,580,133 | $ | 345,827 | $ | 2,278,938 | $ | 179,995 | $ | 13,859,071 | $ | 525,822 | ||||||||||||
Total number of securities in an unrealized loss position | 1,076 | 268 | 1,344 | |||||||||||||||||||||
15
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
December 31, 2017 | ||||||||||||||||||||||||
Less than twelve months | Twelve months or longer | Total | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
Fixed maturities: | fair value | loss and OTTI | fair value | loss and OTTI | fair value | loss and OTTI | ||||||||||||||||||
U.S. government direct obligations and U.S. agencies | $ | 755,861 | $ | 4,159 | $ | 230,447 | $ | 3,724 | $ | 986,308 | $ | 7,883 | ||||||||||||
Obligations of U.S. states and their subdivisions | 24,908 | 180 | 37,012 | 1,475 | 61,920 | 1,655 | ||||||||||||||||||
Corporate debt securities | 2,229,585 | 19,568 | 2,036,323 | 90,809 | 4,265,908 | 110,377 | ||||||||||||||||||
Asset-backed securities | 544,778 | 3,011 | 245,341 | 7,120 | 790,119 | 10,131 | ||||||||||||||||||
Residential mortgage-backed securities | 4,405 | 23 | 11,416 | 626 | 15,821 | 649 | ||||||||||||||||||
Commercial mortgage-backed securities | 342,820 | 2,451 | 295,164 | 10,538 | 637,984 | 12,989 | ||||||||||||||||||
Collateralized debt obligations | 7,277 | 80 | — | — | 7,277 | 80 | ||||||||||||||||||
Total fixed maturities | $ | 3,909,634 | $ | 29,472 | $ | 2,855,703 | $ | 114,292 | $ | 6,765,337 | $ | 143,764 | ||||||||||||
Total number of securities in an unrealized loss position | 368 | 293 | 661 | |||||||||||||||||||||
Fixed maturity investments — Total unrealized losses and OTTI increased by $382,058, or 266%, from December 31, 2017 to June 30, 2018. The majority, or $316,355, of the increase was in the less than twelve months category. The overall increase in unrealized losses was across most asset classes and reflects higher interest rates at June 30, 2018, compared to December 31, 2017, resulting in generally lower valuations of these fixed maturity securities.
Total unrealized losses greater than twelve months increased by $65,703 from December 31, 2017 to June 30, 2018. Corporate debt securities account for 79%, or $142,045, of the unrealized losses and OTTI greater than twelve months at June 30, 2018. Non-investment grade corporate debt securities account for $6,676 of the unrealized losses and OTTI greater than twelve months. Management does not have the intent to sell these assets; therefore, an OTTI was not recognized in earnings.
Asset-backed and commercial-backed securities account for 16% of the unrealized losses and OTTI greater than twelve months at June 30, 2018. The present value of the cash flows expected to be collected is not less than amortized cost and management does not have the intent to sell these assets; therefore, an OTTI was not recognized in earnings.
Other-than-temporary impairment recognition — The OTTI on fixed maturity securities where the loss portion is bifurcated and the credit related component is recognized in investment (losses) gains is summarized as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Beginning balance | $ | 52,775 | $ | 80,359 | $ | 62,231 | $ | 83,665 | |||||||
Reductions: | |||||||||||||||
Due to sales, maturities or payoffs during the period | — | — | (1,510 | ) | — | ||||||||||
Due to increases in cash flows expected to be collected that are recognized over the remaining life of the security | (3,092 | ) | (2,948 | ) | (11,038 | ) | (6,254 | ) | |||||||
Ending balance | $ | 49,683 | $ | 77,411 | $ | 49,683 | $ | 77,411 | |||||||
16
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
6. Derivative Financial Instruments
Derivative transactions are generally entered into pursuant to International Swaps and Derivatives Association (“ISDA”) Master Agreements or Master Securities Forward Transaction Agreements (“MSFTA”) with approved counterparties that provide for a single net payment to be made by one party to the other on a daily basis, periodic payment dates, or at the due date, expiration, or termination of the agreement.
The ISDA Master Agreements contain provisions that would allow the counterparties to require immediate settlement of all derivative instruments in a net liability position if the Company were to default on any debt obligations over a certain threshold. The MSFTA contain provisions which do not stipulate a threshold for default and only apply to debt obligations between the Company and the specific counterparty. The aggregate fair value, inclusive of accrued income and expense, of derivative instruments with credit-risk-related contingent features that were in a net liability position was $72,759 and $93,761 as of June 30, 2018, and December 31, 2017, respectively. The Company had pledged collateral related to these derivatives of $15,900 and $42,750 as of June 30, 2018, and December 31, 2017, respectively, in the normal course of business. If the credit-risk-related contingent features were triggered on June 30, 2018, the fair value of assets that could be required to settle the derivatives in a net liability position was $56,859.
At June 30, 2018, and December 31, 2017, the Company had pledged $27,169 and $52,330 of unrestricted cash collateral to counterparties in the normal course of business, while other counterparties had pledged $12,696 and $5,490 of unrestricted cash collateral to the Company to satisfy collateral netting agreements, respectively.
At June 30, 2018, the Company estimated $15,222 of net derivative gains related to cash flow hedges included in AOCI will be reclassified into net income within the next twelve months. Gains and losses included in AOCI are reclassified into net income when the hedged item affects earnings.
Types of derivative instruments and derivative strategies
Interest rate contracts
Cash flow hedges
Interest rate swap agreements are used to convert the interest rate on certain debt security investments and debt obligations from a floating rate to a fixed rate.
Not designated as hedging instruments
The Company enters into certain transactions in which derivatives are hedging an economic risk but hedge accounting is either not elected or the transactions are not eligible for hedge accounting. These derivative instruments include: exchange-traded interest rate swap futures, over-the-counter (“OTC”) interest rate swaptions, OTC interest rate swaps, exchange-traded Eurodollar interest rate futures, and treasury interest rate futures. Certain of the Company’s OTC derivatives are cleared and settled through the Chicago Mercantile Exchange ("CME") while others are bilateral contracts between the Company and a counterparty.
In 2017, the CME amended its rulebook to classify variation margin transfers as settlement payments instead of collateral. The Company adjusts the fair value by the variation margin payments on derivatives cleared through the CME.
The derivative instruments mentioned above are economic hedges and used to manage risk. These transactions are used to offset changes in liabilities including those in variable annuity products, hedge the economic effect of a large increase in interest rates, manage the potential variability in future interest payments due to a change in credited interest rates and the related change in cash flows due to increased surrenders, and manage interest rate risks of forecasted acquisitions of fixed rate maturity investments and forecasted liability pricing.
17
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Foreign currency contracts
Cross-currency swaps and foreign currency forwards are used to manage the foreign currency exchange rate risk associated with investments denominated in other than U.S. dollars. The Company uses cross-currency swaps to convert interest and principal payments on foreign denominated debt instruments into U.S. dollars. Cross-currency swaps may be designated as cash flow hedges; however, some are not eligible for hedge accounting. The Company uses foreign currency forwards to reduce the risk of foreign currency exchange rate changes on proceeds received on sales of foreign denominated debt instruments; however, hedge accounting is not elected.
Equity contracts
The Company uses futures on equity indices to offset changes in guaranteed lifetime withdrawal benefit liabilities; however, they are not eligible for hedge accounting.
Other forward contracts
The Company uses forward settling to be announced (“TBA”) securities to gain exposure to the investment risk and return of agency mortgage-backed securities (pass-throughs). These transactions enhance the return on the Company’s investment portfolio and provide a more liquid and cost effective method of achieving these goals than purchasing or selling individual agency mortgage-backed pools. As the Company does not regularly accept delivery of such securities, they are accounted for as derivatives but are not eligible for hedge accounting.
The following tables summarize the notional amount and fair value of derivative financial instruments, excluding embedded derivatives:
June 30, 2018 | |||||||||||||||
Net derivatives | Asset derivatives | Liability derivatives | |||||||||||||
Notional amount | Fair value | Fair value (1) | Fair value (1) | ||||||||||||
Hedge designation/derivative type: | |||||||||||||||
Derivatives designated as hedges: | |||||||||||||||
Cash flow hedges: | |||||||||||||||
Interest rate swaps | $ | 22,300 | $ | 5,917 | $ | 5,917 | $ | — | |||||||
Cross-currency swaps | 864,154 | (8,854 | ) | 30,471 | 39,325 | ||||||||||
Total cash flow hedges | 886,454 | (2,937 | ) | 36,388 | 39,325 | ||||||||||
Total derivatives designated as hedges | 886,454 | (2,937 | ) | 36,388 | 39,325 | ||||||||||
Derivatives not designated as hedges: | |||||||||||||||
Interest rate swaps | 548,500 | 577 | 1,461 | 884 | |||||||||||
Futures on equity indices | 56,521 | — | — | — | |||||||||||
Interest rate futures | 34,300 | — | — | — | |||||||||||
Interest rate swaptions | 190,400 | 163 | 163 | — | |||||||||||
Other forward contracts | 2,460,000 | 3,294 | 4,565 | 1,271 | |||||||||||
Cross-currency swaps | 573,703 | (11,778 | ) | 20,292 | 32,070 | ||||||||||
Total derivatives not designated as hedges | 3,863,424 | (7,744 | ) | 26,481 | 34,225 | ||||||||||
Total derivative financial instruments | $ | 4,749,878 | $ | (10,681 | ) | $ | 62,869 | $ | 73,550 | ||||||
(1) The estimated fair value includes accrued income and expense. The estimated fair value of all derivatives in an asset position is reported within other assets and the estimated fair value of all derivatives in a liability position is reported within other liabilities in the condensed consolidated balance sheets.
18
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
December 31, 2017 | |||||||||||||||
Net derivatives | Asset derivatives | Liability derivatives | |||||||||||||
Notional amount | Fair value | Fair value (1) | Fair value (1) | ||||||||||||
Hedge designation/derivative type: | |||||||||||||||
Derivatives designated as hedges: | |||||||||||||||
Cash flow hedges: | |||||||||||||||
Interest rate swaps | $ | 388,800 | $ | 7,476 | $ | 7,476 | $ | — | |||||||
Cross-currency swaps | 800,060 | (31,358 | ) | 19,958 | 51,316 | ||||||||||
Total cash flow hedges | 1,188,860 | (23,882 | ) | 27,434 | 51,316 | ||||||||||
Total derivatives designated as hedges | 1,188,860 | (23,882 | ) | 27,434 | 51,316 | ||||||||||
Derivatives not designated as hedges: | |||||||||||||||
Interest rate swaps | 519,100 | 1,902 | 3,530 | 1,628 | |||||||||||
Futures on equity indices | 22,074 | — | — | — | |||||||||||
Interest rate futures | 60,700 | — | — | — | |||||||||||
Interest rate swaptions | 164,522 | 75 | 75 | — | |||||||||||
Cross-currency swaps | 612,733 | (21,279 | ) | 20,320 | 41,599 | ||||||||||
Total derivatives not designated as hedges | 1,379,129 | (19,302 | ) | 23,925 | 43,227 | ||||||||||
Total derivative financial instruments | $ | 2,567,989 | $ | (43,184 | ) | $ | 51,359 | $ | 94,543 | ||||||
(1) The estimated fair value excludes accrued income and expense. The estimated fair value of all derivatives in an asset position is reported within other assets and the estimated fair value of all derivatives in a liability position is reported within other liabilities in the condensed consolidated balance sheets.
Notional amounts are used to express the extent of the Company’s involvement in derivative transactions and represent a standard measurement of the volume of its derivative activity. Notional amounts represent those amounts used to calculate contractual flows to be exchanged and are not paid or received. The average notional outstanding during the six months ended June 30, 2018, was $672,886, $1,451,399, $90,541, $179,348, and $1,764,286 for interest rate swaps, cross-currency swaps, futures, swaptions, and other forward contracts, respectively. The average notional outstanding during the year ended December 31, 2017, was $905,977, $1,323,398, $108,438, $162,896, and $2,231,196 for interest rate swaps, cross-currency swaps, futures, swaptions, and other forward contracts, respectively.
The following tables present the effect of derivative instruments in the condensed consolidated statements of income and comprehensive income reported by cash flow hedges and derivatives not designated as hedges, excluding embedded derivatives:
Gain (loss) recognized in OCI on derivatives (Effective portion) | Gain (loss) reclassified from OCI into net income (Effective portion) | |||||||||||||||
Three Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Cash flow hedges: | ||||||||||||||||
Interest rate swaps | $ | (319 | ) | $ | 644 | $ | 705 | $ | 1,186 | (A) | ||||||
Interest rate swaps | 1 | (8,193 | ) | 887 | (787 | ) | (B) | |||||||||
Cross-currency swaps | 59,257 | (10,696 | ) | 7,467 | (973 | ) | (A) | |||||||||
Total cash flow hedges | $ | 58,939 | $ | (18,245 | ) | $ | 9,059 | $ | (574 | ) | ||||||
(A) Net investment income.
(B) Interest expense.
19
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Gain (loss) recognized in OCI on derivatives (Effective portion) | Gain (loss) reclassified from OCI into net income (Effective portion) | |||||||||||||||
Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Cash flow hedges: | ||||||||||||||||
Interest rate swaps | $ | (1,331 | ) | $ | 496 | $ | 1,633 | $ | 2,406 | (A) | ||||||
Interest rate swaps | 29,030 | (4,350 | ) | 632 | (1,667 | ) | (B) | |||||||||
Cross-currency swaps | 24,744 | (21,346 | ) | 6,941 | 129 | (A) | ||||||||||
Total cash flow hedges | $ | 52,443 | $ | (25,200 | ) | $ | 9,206 | $ | 868 | |||||||
(A) Net investment income.
(B) Interest expense.
Gain (loss) on derivatives recognized in net income | ||||||||
Three Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
Derivatives not designated as hedging instruments: | ||||||||
Futures on equity indices | $ | — | (A) | $ | 350 | (A) | ||
Futures on equity indices | (1,504 | ) | (B) | (1,536 | ) | (B) | ||
Interest rate swaps | — | (A) | 4,976 | (A) | ||||
Interest rate swaps | (3,336 | ) | (B) | — | (B) | |||
Interest rate futures | — | (A) | 116 | (A) | ||||
Interest rate futures | 67 | (B) | (206 | ) | (B) | |||
Interest rate swaptions | — | (A) | (4 | ) | (A) | |||
Interest rate swaptions | (187 | ) | (B) | (77 | ) | (B) | ||
Other forward contracts | — | (A) | (9,363 | ) | (A) | |||
Other forward contracts | (1,575 | ) | (B) | 18,716 | (B) | |||
Cross-currency swaps | — | (A) | (8,083 | ) | (A) | |||
Cross-currency swaps | 40,739 | (B) | — | (B) | ||||
Total derivatives not designated as hedging instruments | $ | 34,204 | $ | 4,889 | ||||
(A) Net investment income.
(B) Represents investment (losses) gains, net.
20
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Gain (loss) on derivatives recognized in net income | ||||||||
Six Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
Derivatives not designated as hedging instruments: | ||||||||
Futures on equity indices | $ | — | (A) | $ | (334 | ) | (A) | |
Futures on equity indices | (2,145 | ) | (B) | (2,820 | ) | (B) | ||
Interest rate swaps | — | (A) | 3,427 | (A) | ||||
Interest rate swaps | (14,302 | ) | (B) | — | (B) | |||
Interest rate futures | — | (A) | 102 | (A) | ||||
Interest rate futures | 115 | (B) | (201 | ) | (B) | |||
Interest rate swaptions | — | (A) | (31 | ) | (A) | |||
Interest rate swaptions | (151 | ) | (B) | (151 | ) | (B) | ||
Other forward contracts | — | (A) | (2,580 | ) | (A) | |||
Other forward contracts | (21,943 | ) | (B) | 13,119 | (B) | |||
Cross-currency swaps | — | (A) | (22,251 | ) | (A) | |||
Cross-currency swaps | 12,595 | (B) | — | (B) | ||||
Total derivatives not designated as hedging instruments | $ | (25,831 | ) | $ | (11,720 | ) | ||
(A) Net investment income.
(B) Represents investment (losses) gains, net.
Embedded derivative - Guaranteed Lifetime Withdrawal Benefit
The Company offers a guaranteed lifetime withdrawal benefit (“GLWB”) through a variable annuity or a contingent deferred annuity. The GLWB is deemed to be an embedded derivative. The GLWB is recorded at fair value within future policy benefits on the condensed consolidated balance sheets. Changes in fair value of the GLWB are recorded in investment gains (losses), net in the condensed consolidated statements of income.
The estimated fair value of the GLWB was $513 and $11,095 at June 30, 2018, and December 31, 2017, respectively. The changes in fair value of the GLWB were $3,480 and $(5,553) for the three months ended June 30, 2018 and 2017, respectively, and $10,582 and $(3,883) for the six months ended June 30, 2018 and 2017, respectively.
21
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
7. Summary of Offsetting Assets and Liabilities
The Company enters into derivative transactions and short-term reverse repurchase agreements with several approved counterparties. The Company’s derivative transactions are generally governed by MSFTA or ISDA Master Agreements which provide for legally enforceable set-off and close-out netting in the event of default or bankruptcy of the Company’s counterparties. The Company’s MSFTA and ISDA Master Agreements generally include provisions which require both the pledging and accepting of collateral in connection with its derivative transactions. These provisions have the effect of securing each party’s position to the extent of collateral held. Short-term reverse repurchase agreements also include collateral provisions with the counterparty. The following tables summarize the effect of master netting arrangements on the Company’s financial position in the normal course of business and in the event of default or bankruptcy of the Company’s counterparties:
June 30, 2018 | ||||||||||||||||
Gross fair value not offset | ||||||||||||||||
in balance sheets | ||||||||||||||||
Gross fair value of | Financial | Net | ||||||||||||||
Financial instruments: | recognized assets/liabilities (1) | instruments | Cash collateral | fair value | ||||||||||||
Derivative instruments (assets) (2) | $ | 62,869 | $ | (50,356 | ) | $ | (10,612 | ) | $ | 1,901 | ||||||
Derivative instruments (liabilities) (3) | $ | 73,550 | $ | (50,356 | ) | $ | (16,310 | ) | $ | 6,884 | ||||||
(1) The gross fair value of derivative instrument assets is not netted against offsetting liabilities for presentation on the condensed consolidated balance sheets.
(2) The estimated fair value of derivative instrument assets is reported in other assets in the condensed consolidated balance sheets. Derivative transactions entered into under ISDA master agreements include income and expense accruals.
(3) The estimated fair value of derivative instrument liabilities is reported in other liabilities in the condensed consolidated balance sheets. Derivative transactions entered into under ISDA master agreements include income and expense accruals.
December 31, 2017 | ||||||||||||||||
Gross fair value not offset | ||||||||||||||||
in balance sheets | ||||||||||||||||
Gross fair value of | Financial | Net | ||||||||||||||
Financial instruments (assets): | recognized assets (1) | instruments | Cash collateral | fair value | ||||||||||||
Derivative instruments (2) | $ | 52,738 | $ | (47,827 | ) | $ | (4,911 | ) | $ | — | ||||||
Short-term reverse repurchase agreements (3) | 23,200 | (23,200 | ) | — | — | |||||||||||
Total financial instruments (assets) | $ | 75,938 | $ | (71,027 | ) | $ | (4,911 | ) | $ | — | ||||||