10-Q 1 firstgwla10q-0501.txt FIRST GWLA UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transaction period from to Commission file number 333-25269 FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY (Exact name of registrant as specified in its charter) New York 93-1225432 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) 125 Wolf Road, Albany, New York (Address of principal executive offices) (Zip Code) (518) 437-1816 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of May 10, 2001, 2,500 shares of the registrant's common stock were outstanding, all of which were owned by the registrant's parent company. NOTE: This Form 10-Q is filed by the registrant only as a consequence of the sale by the registrant of a market value adjusted annuity product. 14 TABLE OF CONTENTS Part I FINANCIAL INFORMATION Item 1 Financial Statements Statements of Income Balance Sheets Statements of Cash Flows Statements of Stockholder's Equity Notes to Financial Statements Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Part II OTHER INFORMATION Item 1 Legal Proceedings Item 6 Exhibits and Reports on Form 8-K Signatures PART I FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY STATEMENTS OF INCOME (Dollars in Thousands) ----------------------------------------------------------------------------------------------- (Unaudited) Three Months Ended March 31, ----------------------------------- 2001 2000 ----------------- ---------------- REVENUES: Premium income $ 4,567 $ 3,063 Fee income 1,819 2,072 Net investment income 2,858 2,292 Realized gains on investments 492 97 ----------------- ---------------- 9,736 7,524 ----------------- ---------------- BENEFITS AND EXPENSES: Life and other policy benefits 5,793 4,844 Decrease in reserves (368) (956) Interest paid or credited to contractholders 2,032 1,194 General and administrative expenses 1,795 1,054 ----------------- ---------------- 9,252 6,136 ----------------- ---------------- INCOME BEFORE INCOME TAXES 484 1,388 PROVISION FOR INCOME TAXES: Current 190 467 Deferred 15 102 ----------------- ---------------- 205 569 ----------------- ---------------- NET INCOME $ 279 $ 819 ================= ================

See notes to financial statements. FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY BALANCE SHEETS (Dollars in Thousands except for share information) ----------------------------------------------------------------------------------------------- March 31, December 31, 2001 2000 -------------- -------------- ASSETS (Unaudited) ------ INVESTMENTS: Fixed maturies: Available-for-sale, at fair value (amortized cost $156,047 and $148,522) $ 160,782 $ 150,631 Short-term investments, available-for-sale (cost approximates fair value) 1,340 15,907 -------------- -------------- Total Investments 162,122 166,538 Cash 11,561 8,462 Reinsurance receivable 1,925 1,924 Deferred policy acquisition costs 409 1,717 Investment income due and accrued 1,794 1,325 Uninsured claims receivable 3,468 2,069 Due from Parent Corporation 9,572 10,207 Other assets 1,976 4,596 Premiums in course of collection 2,469 2,502 Deferred income taxes 678 1,107 Separate account assets 44,613 47,359 -------------- -------------- TOTAL ASSETS $ 240,587 $ 247,806 ============== ============== LIABILITIES AND STOCKHOLDER'S EQUITY POLICY BENEFIT LIABILITIES: Policy reserves $ 144,191 $ 137,657 Policy and contract claims 3,940 3,851 Policyholder's funds 278 262 GENERAL LIABILITIES: Other liabilities 10,441 22,603 Separate account liabilities 44,613 47,359 -------------- -------------- Total Liabilities 203,463 211,732 -------------- -------------- STOCKHOLDER'S EQUITY: Common stock, $1,000 par value, 2,500 shares authorized, 2,500 shares issued and outstanding 2,500 2,500 Additional paid-in capital 28,600 28,600 Accumulated other comprehensive income 1,853 1,082 Retained earnings 4,171 3,892 -------------- -------------- Total Stockholder's Equity 37,124 36,074 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 240,587 $ 247,806 ============== ============== See notes to financial statements.

FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY STATEMENTS OF CASH FLOWS (Dollars in Thousands) ----------------------------------------------------------------------------------------------- (Unaudited) Three Months Ended March 31, ----------------------------- 2001 2000 ------------- ------------- OPERATING ACTIVITIES: Net income $ 279 $ 819 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Amortization of investments (325) (6) Realized gains on investments (492) (97) Amortization of deferred acquisition costs 110 Deferred income taxes 15 102 Changes in assets and liabilities: Accrued interest and other receivables (436) (1,304) Policy benefit liabilities 1,737 (2,285) Reinsurance recoverable (1) (567) Other, net (11,183) 38,881 ------------- ------------- Net cash (used in) provided by operating (10,296) 35,543 activities ------------- ------------- INVESTING ACTIVITIES: Proceeds from maturities and redemptions investments: Fixed maturities: Held-to-maturity 457 Available-for-sale 29,448 23,101 Purchases of investments: Fixed maturities: Held-to-maturity (14,144) Available-for-sale (21,590) (41,863) Due from Parent Corporation 635 878 ------------- ------------- Net cash provided by (used in) investing 8,493 (31,571) activities ------------- ------------- FINANCING ACTIVITIES: Contract deposits, net of withdrawals 4,902 869 Net cash provided by financing activities 4,902 869 ------------- ------------- NET INCREASE IN CASH 3,099 4,841 CASH, BEGINNING OF YEAR 8,462 5,443 ------------- ------------- CASH, END OF PERIOD $ 11,561 $ 10,284 ============= =============

See notes to financial statements. FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2001 (Unaudited) ---------------------------------------------------------------------------------------------- [Dollars in thousands except for share information] Accumulated Additional Other Common Stock Paid-in Comprehensive Retained ------------------------- Shares Amount Capital Income Earnings Total ------------ ----------- ----------------- ------------ ----------- ----------- BALANCES, JANUARY 1, 2001 2,500 $ 2,500 $ 28,600 $ 1,082 $ 3,892 $ 36,074 Net income 279 279 Other comprehensive income Change in unrealized gains 771 771 ----------- Comprehensive income 1,050 ------------ ----------- ----------- ----------------- ------------ ----------- BALANCES, MARCH 31, 2001 2,500 $ 2,500 $ 28,600 $ 1,853 $ 4,171 $ 37,124 ============ =========== =========== ================= ============ ===========

See notes to financial statements. FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- (Unaudited) 1. BASIS OF PRESENTATION First Great-West Life & Annuity Insurance Company (the Company) is a wholly owned subsidiary of Great-West Life & Annuity Insurance Company (the Parent Corporation or GWL&A). The Company was incorporated as a stock life insurance company in the State of New York and was capitalized on April 4, 1997. The Company was licensed as an insurance company in the State of New York on May 28, 1997. The financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America applicable to interim financial reporting and do not include all of the information and footnotes required for complete financial statements. However, in the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the results. These financial statements should be read in conjunction with the audited financial statements and the accompanying notes included in the Company's latest annual report on Form 10-K, as amended, for the year ended December 31, 2000. Operating results for the three months ended March 31, 2001 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2001. Certain reclassifications have been made to the 2000 financial statements to conform to the 2001 presentation. 2. OTHER On December 31, 2000, the Company and certain affiliated companies completed a corporate reorganization. Prior to December 31, 2000, GWL&A Financial, was an indirect wholly owned subsidiary of The Great-West Life Assurance Company (GWL). Under the new structure, GWL&A Financial and GWL each continue to be indirectly and directly, respectively, owned by Great-West Lifeco Inc., a Canadian holding company (the Parent or Lifeco), but GWL no longer holds an equity interest in the Company or GWL&A Financial. Refer to the Company's report on Form 10-K for the year ended December 31, 2000, for additional information on the Company's organization. On October 6, 1999, the Parent entered into an agreement (the Agreement) with Allmerica Financial Corporation (Allmerica) to acquire Allmerica's group life and health insurance business on March 1, 2000. The policies resident in the State of New York have been assigned to the Company as part of the Agreement. This business primarily consists of administrative services only and stop loss policies. The in-force business is expected to be underwritten and retained by the Company upon each policy renewal date. The purchase price was based on a percentage of the premium and administrative fees in-force at March 1, 2000, and March 1, 2001, 1.9 million and 370 thousand, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended March 31, ------------------------------------ Operating Summary (Thousands) 2001 2000 ------------------------------------------------ ----------------- ----------------- Premium income $ 4,567 $ 3,063 Fee income 1,819 2,072 Net investment income 2,858 2,292 Realized gains on investments 492 97 ----------------- ----------------- Total Revenues 9,736 7,524 Total benefits and expenses 9,252 6,136 Income tax expense 205 569 ----------------- ----------------- Net income $ 279 $ 819 ================= ================= Deposits for investment-type contracts $ 5,000 $ 350 Deposits to separate accounts 2,875 2,001 Self-funded premium equivalents 4,749 4,340 March 31, December 31, Balance Sheet (Thousands) 2001 2000 ----------------------------------------------- ----------------- ----------------- Investment assets $ 162,122 $ 166,538 Separate account assets 44,613 47,359 Total assets 240,587 247,806 Total policy benefit liabilities 148,409 141,770 Total stockholder's equity 37,124 36,074

GENERAL This Form 10-Q contains forward-looking statements. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. In particular, statements using verbs such as "expect," "anticipate," "believe" or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent the Company's beliefs concerning future or projected levels of sales of the Company's products, investment spreads or yields, or the earnings or profitability of the Company's activities. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments, some of which may be national in scope, such as general economic conditions and interest rates, some of which may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation, and others of which may relate to the Company specifically, such as credit, volatility and other risks associated with the Company's investment portfolio, and other factors. Readers are also directed to consider other risks and uncertainties discussed in documents filed by the Company and certain of its subsidiaries with the Securities and Exchange Commission. The following discussion addresses the financial condition of the Company as of March 31, 2001, compared with December 31, 2000, and its results of operations for the three months ended March 31, 2001, compared with the same period last year. The discussion should be read in conjunction with the Management's Discussion and Analysis section included in the Company's report on Form 10-K for the year-ended December 31, 2000, to which the reader is directed, for additional information. RESULTS OF OPERATIONS The Company's net income decreased $540 thousand for the first three months of 2001 when compared to the first three months of 2000. This decrease was primarily due to poor morbidity experience in the group health business and increased expenses associated with a refinement of the administrative services agreement. Premium and fee income increased $1.3 million for the first three months of 2001 when compared to the first three months of 2000, which is due to increased premiums and fees related to the group health and life business acquired from Allmerica. Net investment income increased $566 thousand for the first three months of 2001 when compared to the first three months of 2000, primarily due to an increase in invested assets related to Bank Owned Life Insurance (BOLI). The Company had a realized investment gain of $492 thousand during the first three months of 2001 when compared to the first three months of 2000. The gain was the result of investment yield enhancement activity on the sale of available-for-sale securities of $25.3 million. Total benefits and expenses have increased primarily for the first three months of 2001 when compared to the first three months of 2000 due the additional group life and health business related to the purchase of Allmerica. SEGMENT RESULTS Employee Benefits The following is a summary of certain financial data of the Employee Benefits segment: Three Months Ended March 31, ------------------------------------ Operating Summary (Thousands) 2001 2000 ----------------------------------------------- ---------------- ---------------- Premium income $ 4,569 $ 3,066 Fee income 1,725 1,985 Net investment income 299 546 Realized investment gains (losses) 0 0 ---------------- -- ---------------- Total revenues 6,593 5,597 Total benefits and expenses 6,494 4,568 Income tax expenses 32 422 ---------------- ---------------- Net income $ 67 $ 607 ================ ================ Deposits to separate accounts $ 202 $ - Self-funded premium equivalents 4,749 4,340

Net income for Employee Benefits decreased $540 thousand for the first three months of 2001 when compared to the first three months of 2000. The decrease was primarily due to poor morbidity in the segment's group health business and increased expenses related to the group life and health business. Premium income increased $1.5 million for the first three months of 2001 when compared to the first three months of 2000. The increase was due to the acquisition of Allmerica's group life and health business. Fee income decreased $260 thousand for the first three months of 2001 when compared to the first three months of 2000. The decrease is due to the segment's move towards a simpler fee, causing more deferral of fees. This may cause fluctuations from period to period. Net investment income decreased $247 thousand for the first three months of 2001 when compared to the first three months of 2000. The decrease was primarily due to fewer invested assets in the segment's investment portfolio. Total benefits and expenses increased $1.9 million for the first three months of 2001 when compared to the first three months of 2000. The increase was due to the additional benefits and expenses related to the purchase of Allmerica's group life and health business. Financial Services The following is a summary of certain financial data of the Financial Services segment: Three Months Ended March 31, ------------------------------------ Operating Summary (Thousands) 2001 2000 ----------------------------------------------- ---------------- ---------------- Premium income $ (2) $ (3) Fee income 94 87 Net investment income 2,559 1,746 Realized investment gains 492 97 ---------------- -- ---------------- Total revenues 3,143 1,927 Total benefits and expenses 2,758 1,568 Income tax expenses 173 147 ---------------- ---------------- Net income $ 212 $ 212 ================ ================ Deposits for investment type contracts 5,000 350 Deposits to separate accounts 2,875 2,001

Premium and fee income for Financial Services increased $8 thousand for the first three months of 2001 when compared to the first three months of 2000. The increase was primarily related to BOLI products and increased fee income related to the segment's variable annuity product. Net investment income increased $813 thousand for the first three months of 2001 when compared to the first three months of 2000. The increase was due primarily to an increase in invested assets related to the segment's BOLI product. Total benefits and expenses increased $1.2 million for the first three months of 2001 when compared to the first three months of 2000. The increase is primarily related to an increase in interest credited in the individual insurance BOLI line of business. Deposits for investment type contracts increased $4.6 million for the first three months of 2001 when compared to the first three months of 2000. The increase was due to an increase in sales of BOLI products. The nature of this type of product can lead to large fluctuations. GENERAL ACCOUNT INVESTMENTS The Company's primary investment objective is to acquire assets whose duration and cash flow 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. One of the Company's primary objectives is to ensure that its fixed maturity portfolio is maintained at a high average quality, so as to limit credit risk. If not externally rated, the securities are rated by the Company on a basis intended to be similar to that of the rating agencies. The distribution of the fixed maturity portfolio by credit rating is summarized as follows: March 31, December 31, Credit Rating 2001 2000 -------------------------- ------------------- ------------------- AAA 57.3% 62.8% AA 13.5% 14.3% A 10.1% 7.3% BBB 19.1% 15.6% ------------------- ------------------- TOTAL 100.0% 100.0% =================== =================== The Company follows rigorous procedures to control interest rate risk and observes strict asset and liability matching guidelines. These guidelines are designed to ensure that even in changing interest rate environments, the Company's assets will always be able to meet the cash flow and income requirements of its liabilities. Using dynamic modeling to analyze the effects of a wide range of possible market changes upon investments and policyholder benefits, the Company ensures that its investment portfolio is appropriately structured to fulfill financial obligations to its policyholders. During the three months ended March 31, 2001, net unrealized gains on fixed maturities included in stockholders' equity, which is net of policyholder-related amounts and deferred income taxes, increased stockholder's equity by $771 thousand. LIQUIDITY AND CAPITAL RESOURCES The Company's operations have liquidity requirements that are dependent upon the principal product lines. Life insurance and pension plan reserves are primarily long-term liabilities. Life insurance and pension plan reserve requirements are usually stable and predictable, and are supported primarily by long-term, fixed income investments. Generally, the Company has met its operating requirements by maintaining appropriate levels of liquidity in its investment portfolio. Liquidity for the Company is strong, as evidenced by significant amounts of short-term investments and cash, which totaled $12.9 million and $24.4 million as of March 31, 2001 and December 31, 2000, respectively. PART II OTHER INFORMATION Item 1. Legal Proceedings There are no material pending legal proceedings to which the Company is a party or of which any of their property is the subject. Item 6 Exhibits and Reports on Form 8-K (a) Index to Exhibits None (b) Reports on Form 8-K A report on Form 8-K, dated January 12, 2001, was filed disclosing the Company's reorganization. SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY DATE: May 14, 2001 BY: /s/ Glen R. Derback ---------------------- ----------------------------------------------------- Glen R. Derback, Vice President and Treasurer (Duly authorized officer & chief accounting Officer)

FIRST GREAT WEST LIFE & ANNUITY INSURANCE CO 10-Q