10-Q 1 form10qfirstgwla.txt FGWLA QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 --------------------------------------------- OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transaction period from to ---------------- --------------------- 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 12205 ------------------------------------------------------ (Address of principal executive offices) (Zip Code) [518] 437-1816 ------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----------------- ----------------- As of September 30, 2002, 2,500 shares of the registrant's common stock were outstanding, all of which were owned by the registrant's parent company. NOTE: This Form 10-Q is filed by the registrant only as a consequence of the sale by the registrant of a market value adjusted annuity product. 18 TABLE OF CONTENTS Part I FINANCIAL INFORMATION Page ----------- Item 1 Financial Statements Statements of Income 3 Balance Sheets 4 Statements of Cash Flows 6 Statement of Stockholder's Equity 7 Notes to Financial Statements 8 Item 2 Management's Discussion and Analysis 9 of Financial Condition and Results of Operations Item 3 Quantitative and Qualitative 15 Disclosures About Market Risk Item 4 Controls and Procedures 15 Part II OTHER INFORMATION 16 Item 1 Legal Proceedings 16 Item 6 Exhibits and Reports on Form 8-K 16 Signature 16 Certification 17

FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Amounts in Thousands] =============================================================================== [Unaudited] 1. BASIS OF PRESENTATION First Great-West Life & Annuity Insurance Company (the Company) is a wholly-owned subsidiary of Great-West Life & Annuity Insurance Company (the Parent Corporation or GWL&A). The Company was incorporated as a stock life insurance company in the State of New York and was capitalized on April 4, 1997. The Company was licensed as an insurance company in the State of New York on May 28, 1997. The financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America applicable to interim financial reporting and do not include all of the information and footnotes required for complete financial statements. However, in the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the results. These financial statements should be read in conjunction with the audited financial statements and the accompanying notes included in the Company's latest annual report on Form 10-K for the year ended December 31, 2001. Operating results for the nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2002. Certain reclassifications have been made to the 2001 financial statements to conform to the 2002 presentation. 2. NEW ACCOUNTING PRONOUNCEMENTS On June 29, 2001, Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142) was approved by the FASB. SFAS No. 142 changes the accounting for goodwill and certain other intangibles from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. The Company implemented SFAS No. 142 on January 1, 2002 without material impact on the Company's financial position or results of operations. In August 2001, the FASB issued Statement No.144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No.144). SFAS No. 144 supercedes current accounting guidance relating to impairment of long-lived assets and provides a single accounting methodology for long-lived assets to be disposed of, and also supercedes existing guidance with respect to reporting the effects of the disposal of a business. SFAS No.144 was adopted January 1, 2002 without a material impact on the Company's financial position or results of operations. In April 2002, the FASB issued Statement No. 145 "Rescission of FASB No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS No. 145). FASB No. 4 required all gains or losses from extinguishment of debt to be classified as extraordinary items net of income taxes. SFAS No. 145 requires that gains and losses from extinguishment of debt be evaluated under the provision of Accounting Principles Board Opinion No. 30, and be classified as ordinary items unless they are unusual or infrequent or meet the specific criteria for treatment as an extraordinary item. This statement is effective January 1, 2003. The Company does not expect this statement to have a material effect on the Company's financial position or results of operations. In July 2002, the FASB issued Statement No. 146 " Accounting for Costs Associated With Exit or Disposal Activities" (SFAS No. 146). This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This statement requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred, as opposed to when the entity commits to an exit plan under EITF 94-3. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not expect this statement to have a material impact on the Company's financial position or results of operations.

GENERAL This Form 10-Q contains forward-looking statements. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. In particular, statements using verbs such as "expect," "anticipate," "believe" or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent the Company's beliefs concerning future or projected levels of sales of the Company's products, investment spreads or yields, or the earnings or profitability of the Company's activities. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments, some of which may be national in scope, such as general economic conditions and interest rates, some of which may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation, and others of which may relate to the Company specifically, such as credit, volatility and other risks associated with the Company's investment portfolio, and other factors. Readers are also directed to consider other risks and uncertainties discussed in documents filed by the Company and certain of its subsidiaries with the Securities and Exchange Commission. The following discussion addresses the financial condition of the Company as of September 30, 2002, compared with December 31, 2001, and its results of operations for the quarter and nine months ended September 30, 2002, compared with the same periods last year. The discussion should be read in conjunction with the Management's Discussion and Analysis section included in the Company's report on Form 10-K for the year-ended December 31, 2001 to which the reader is directed for additional information. RESULTS OF OPERATIONS The Company's net income decreased $1.8 million and $2.5 million for the third quarter and first nine months of 2002 when compared to the third quarter and first nine months of 2001. The decreases are primarily in the Employee Benefits segment. Premium and fee income decreased $1.7 million and $7.0 million for the third quarter and first nine months of 2002 when compared to the third quarter and first nine months of 2001. The decreases are primarily due to membership decline in the Employee Benefits segment. Net investment income decreased $66 thousand for the third quarter and increased $625 thousand for the first nine months of 2002 when compared to the third quarter and first nine months of 2001. The increase for the first nine months is due to an increase in investment assets associated with an increase in Business Owned Life Insurance (BOLI) policy reserves. The Company had a realized investment gain of $77 thousand for the first nine months of 2002. The $369 thousand decrease from the same period last year is the result of investment yield enhancement activity on the sale of available-for-sale securities in the first nine months of 2001. Benefits and expenses increased $1.3 million for the third quarter of 2002 when compared to the third quarter of 2001. The increase is primarily in the Financial Services segment. Benefits and expenses decreased $2.3 million for the first nine months of 2002 when compared to the same period last year due to a combination of lower group life and health claims and an administrative expense reduction related to reduced membership in the Employee Benefits segment. General account assets are up $20.8 million at September 30, 2002 when compared to year ended December 31, 2001 primarily due to growth in BOLI policy reserves. Historically, the 401(k) business unit had been included with the Employee Benefits segment. In order to capitalize on administrative system efficiencies and group pension expertise, the 401(k) business is now administered by the Financial Services segment. As a result, prior period segment results have been reclassified to conform with this change. SEGMENT RESULTS Employee Benefits Following is a summary of certain financial data of the Employee Benefits segment:

Net Income for Financial Services decreased $197 thousand and $68 thousand for the third quarter and first nine months of 2002 when compared to the third quarter and first nine months of 2001. The decrease in quarter is the result of expense losses in public/ nonprofit and 401(K) lines of business. The decrease in earnings for the nine months ended is related to the reduction of capital gains from 2001. Premium income increased $661 thousand and $547 thousand for the third quarter and for the first nine months of 2002 when compared to the same periods in 2001 primarily due to the new insurance premiums on the individual life policies sold in the quarter. Fee income increased $116 thousand and $112 thousand for the third quarter and for the first nine months of 2002 when compared to the same periods in 2001 primarily due to fees received on the 5,153 new group annuity participants. The Company had a realized investment gain of $18 thousand for the nine months of 2002. The $467 thousand decrease from the same period last year is the result of investment yield enhancement activity on the sale of available-for-sale securities during the first nine months of 2001. Benefits and expenses increased $1.1 million and $895 thousand in third quarter and first nine months of 2002, when compared to the same periods in 2001, due to increased administrative costs and commission costs on the new business sold in 2002. Deposits for investment-type contracts decreased $1.2 million and $6.6 million for the third quarter and first nine months of 2002 when compared to the third quarter and first nine months of 2001. The decrease was due to lower sales of BOLI products. BOLI sales generally represent large single-deposit contracts, the timing of which can significantly impact individual quarters. Deposits to separate accounts increased $2.0 million and $606 thousand for the third quarter and the first nine months of 2002 when compared to the third quarter and the first nine months of 2001 due to volatility in U.S. equity markets. GENERAL ACCOUNT INVESTMENTS The Company's primary investment objective is to acquire assets with duration and cash flow characteristics reflective of the Company's liabilities, while meeting industry, size, issuer, and geographic diversification standards. Formal liquidity and credit quality parameters have also been established. Fixed maturity investments include public and privately placed corporate bonds, government bonds and mortgage-backed and asset-backed securities. Private placement investments that are primarily in the held-to-maturity category are generally less marketable than publicly traded assets, yet they typically offer covenant protection that allows the Company, if necessary, to take appropriate action to protect its investment. The Company believes that the cost of the additional monitoring and analysis, required by private placements, is more than offset by their enhanced yield. One of the Company's primary objectives is to ensure that its fixed maturity portfolio is maintained at a high average quality, so as to limit credit risk. If not externally rated, the securities are rated by the Company on a basis intended to be similar to that of the rating agencies. The distribution of the fixed maturity portfolio by credit rating is summarized as follows:

The Company follows rigorous procedures to control interest rate risk and observes strict asset and liability matching guidelines. These guidelines are designed to ensure that even under changing market conditions, the Company's assets will always be able to meet the cash flow and income requirements of its liabilities. Using dynamic modeling to analyze the effects of a wide range of possible market changes upon investments and policyholder benefits, the Company ensures that its investment portfolio is appropriately structured to fulfill financial obligations to its policyholders. During the nine months ended September 30, 2002, net unrealized gains on fixed maturities included in stockholders' equity, which is net of policyholder-related amounts and deferred income taxes, increased surplus by $3.6 million. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company's management to make a variety of estimates and assumptions. These estimates and assumptions affect, among other things, the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. Actual results can differ from the amounts previously estimated, which were based on the information available at the time the estimates were made. The critical accounting policies described below are those that the Company believes are important to the portrayal of the Company's financial condition and results, and which require management to make difficult, subjective and/or complex judgments. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. The Company believes that critical accounting policies include policy reserves, allowances for credit losses, deferred policy acquisition costs, and valuation of privately placed fixed maturities. Policy Reserves Life Insurance and Annuity Reserves - Life insurance and annuity policy reserves with life contingencies are computed on the basis of estimated mortality, investment yield, withdrawals, future maintenance and settlement expenses, and retrospective experience rating premium refunds. Annuity contract reserves without life contingencies are established at the contractholder's account value. Reinsurance - Policy reserves ceded to other insurance companies are carried as a reinsurance receivable on the balance sheet. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding risks to other insurance enterprises under excess coverage and co-insurance contracts. The Company retains 100% of the first $50 thousand of coverage per individual life and has a maximum of $250 thousand of coverage per individual life. Policy and Contract Claims - Policy and contract claims include provisions for reported life and health claims in process of settlement, valued in accordance with the terms of the related policies and contracts, as well as provisions for claims incurred and unreported based primarily on prior experience of the Company. Allowance For Credit Losses The Company maintains an allowance for credit losses at a level that, in management's opinion, is sufficient to absorb credit losses on its amounts receivable related to uninsured accident and health plan claims paid on behalf of policyholders and premiums in course of collection. Management's judgement is based on past loss experience and current and projected economic conditions. Deferred Policy Acquisition Costs Policy acquisition costs, which primarily consist of sales commissions and costs associated with the Company's group sales representatives related to the production of new business, have been deferred to the extent recoverable. These costs are variable in nature and are dependent upon sales volume. Deferred costs associated with the annuity products are being amortized over the life of the contracts in proportion to the emergence of gross profits. Retrospective adjustments of these amounts are made when the Company revises its estimates of current or future gross profits. Deferred costs associated with traditional life insurance are amortized over the premium paying period of the related policies in proportion to premium revenues recognized. Valuation Of Privately Placed Fixed Maturities The estimated fair values of financial instruments have been determined using available information and appropriate valuation methodologies. However, considerable judgement is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. To determine fair value for fixed maturities not actively traded, the Company utilizes discounted cash flows calculated at current market rates on investments of similar quality and term. LIQUIDITY AND CAPITAL RESOURCES The Company's operations have liquidity requirements that are dependent upon the principal product lines. Life insurance and pension plan reserves are primarily long-term liabilities. Life insurance and pension plan reserve requirements are usually stable and predictable, and are supported primarily by long-term, fixed income investments. Generally, the Company has met its operating requirements by maintaining appropriate levels of liquidity in its investment portfolio. Liquidity for the Company has remained strong, as evidenced by significant amounts of short-term investments and cash that totaled $15.6 million and $11.7 million as of September 30, 2002 and December 31, 2001, respectively. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's assets are purchased to fund future benefit payments to its policyholders and contractholders. The primary risk of these assets is exposure to rising interest rates. To manage interest rate risk, the Company invests in assets that are suited to the products that it sells. For products with uncertain timing of benefit payments such as life insurance, the Company invests in fixed income assets with expected cash flows that are earlier than the expected timing of the benefit payments. The Company can then react to changing interest rates as these assets mature for reinvestment. There are no significant changes to the Company's risk from December 31, 2001. Item 4. CONTROLS AND PROCEDURES Based on their evaluation as of October 25, 2002, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's Disclosure Controls and Procedures are effective in ensuring that information relating to the Company and its subsidiaries which is required to be disclosed in reports filed under the Securities Exchange Act of 1934 is (i) accumulated, processed and reported in a timely manner; and (ii) communicated to the Company's senior management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, so that timely decisions may be made regarding disclosure. The Chief Executive Officer and Chief Financial Officer hereby confirm that, since the date of their evaluation on October 25, 2002, there were no significant changes in the Company's internal controls or in other factors that could significantly affect these internal controls including any corrective actions with regard to significant deficiencies and material weaknesses. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Index to Exhibits None (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY BY: /s/ Glen R. Derback DATE:November 14, 2002 ----------------------------------------------------- ----------------- Glen R. Derback, Vice President and Treasurer (Duly authorized officer and chief accounting officer) CERTIFICATIONS I, William T. McCallum, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Great-West Life & Annuity Insurance Company (the "registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusion about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ William T. McCallum -------------------------------------- William T. McCallum Chairman, President and Chief Executive Officer I, Mitchell T.G. Graye, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Great-West Life & Annuity Insurance Company (the "registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusion about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Mitchell T.G. Graye --------------------------------- Mitchell T.G. Graye Executive Vice President and Chief Financial Officer

FIRST GREAT WEST LIFE & ANNUITY INSURANCE CO 10-Q