10-Q 1 firstgwla10q.txt 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, 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 (I.R.S. Employer Identification Number) of incorporation or organization) 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, 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. TABLE OF CONTENTS Part I FINANCIAL INFORMATION Page ----------- Item 1 Financial Statements 3 Statements of Income 3 Balance Sheets 4 Statements of Cash Flows 6 Statements of Stockholder's Equity 7 Notes to Financial Statements 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3 Quantitative and Qualitative Disclosures About Market Risk 15 Part II OTHER INFORMATION 15 Item 1 Legal Proceedings 15 Item 6 Exhibits and Reports on Form 8-K 15 Signature 15 PART I FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY STATEMENTS OF INCOME [Dollars in Thousands]

See notes to financial statements. FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY BALANCE SHEETS [Dollars in Thousands Except for Share Information]

FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY STATEMENTS OF CASH FLOWS [Dollars in Thousands]

FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001

See notes to financial statements. FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Amounts in Thousands] -------------------------------------------------------------------------------- [Unaudited] 1. BASIS OF PRESENTATION First Great-West Life & Annuity Insurance Company (the Company) is a wholly-owned subsidiary of Great-West Life & Annuity Insurance Company (the Parent Corporation or GWL&A). The Company was incorporated as a stock life insurance company in the State of New York and was capitalized on April 4, 1997. The Company was licensed as an insurance company in the State of New York on May 28, 1997. The financial statements and related notes of the Company have been prepared in accordance with generally accepted accounting principles 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, 2000. Operating results for the nine months ended September 30, 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. NEW ACCOUNTING PRONOUNCEMENTS In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - A replacement of FASB Statement No. 125", which revises the standards for accounting for securitizations, and other transfers of financial assets and collateral, and requires certain disclosures. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of the new SFAS did not have a significant effect on earnings or the financial position of the Company. Effective April 1, 2001, the Company adopted Emerging Issues Task Force Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interest in Securitized Financial Assets (EITF 99-20). This pronouncement requires investors in certain asset-backed securities to record changes in their estimated yield on a prospective basis and to apply specific evaluation methods to these securities for an other-than-temporary decline in value. The adoption of EITF 99-20 did not have a material impact on the Company's financial position or results of operations. On June 29, 2001 Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" was approved by the FASB. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Goodwill and certain intangible assets will remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. The Company implemented SFAS No. 141 on July 1, 2001. Adoption of the Statement did not have a material impact on the Company's financial position or results of operations. On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" 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 is required to implement SFAS No. 142 on January 1, 2002 and, although it is still reviewing the provisions of this Statement, management's preliminary assessment is that the Statement will not have a material impact on the Company's financial position or results of operations. In August 2001, the FASB issued SFAS 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 is effective beginning January 1, 2002, with earlier adoption encouraged. Although management is still reviewing the provisions of the statement, it does not expect SFAS No.144 to have a material impact on the Company's financial position or results of operations, upon adoption. 3. 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 under-written, 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.

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, 2001, compared with December 31, 2000, and its results of operations for the three months and nine months ended September 30, 2001, 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, 2000 to which the reader is directed for additional information. RESULTS OF OPERATIONS The Company's net income increased $711 thousand and $1.9 million for the third quarter and first nine months of 2001 when compared to the third quarter and first nine months of 2000. This increase was primarily due to the increase in the group health and life business related to the purchase of business from Allmerica. Premium income increased $498 thousand and $3.2 million for the third quarter and first nine months of 2001 when compared to the third quarter and first nine months of 2000. The increases are due to increased premiums related to the group health and life business purchased from Allmerica. Net investment income increased $453 thousand and $1.4 million for the third quarter and first nine months of 2001 when compared to the third quarter and first nine months of 2000. The increase for the third quarter and year to date are due to an increase in invested assets related to Bank Owned Life Insurance (BOLI). The Company had a realized investment gain of $446 thousand for the first nine months of 2001. This gain is due to sales of fixed income securities in a favorable interest rate environment when compared to the same period in 2000. The decrease in benefits and expenses during the third quarter compared to the prior year is due to better morbidity in the third quarter in group health and the increase in benefits and expenses for the nine months of 2001 is primarily due to the additional claims on the group health business associated with the Allmerica purchase. Expenses have also increased as the Company incurred additional costs to administer the larger group health and life business. There were no significant changes in total assets and liabilities for the first nine months of 2001 when compared to year ended December 31, 2000. SEGMENT RESULTS Employee Benefits The results below reflect the operations for the Employee Benefits segment for the third quarter and first nine months of 2001:

Employee Benefits net income increased $787 thousand and $1.9 million for the third quarter and first nine months of 2001 when compared to the third quarter and first nine months of 2000. The increase was primarily due to favorable morbidity in the segment's group health business especially related to the Allmerica acquisition. Premium income increased $500 thousand and $3.3 million for the third quarter and first nine months of 2001 when compared to the third quarter and first nine months of 2000. The increases are due primarily to the acquisition of Allmerica's group life and health business. Net investment income increased $394 thousand and $440 thousand for the third quarter and first nine months of 2001 when compared to the third quarter and first nine months of 2000. The increase was primarily the result of better cash flow in 2001. Total benefits and expenses decreased $205 thousand and increased $289 thousand for the third quarter and first nine months of 2001 when compared to the third quarter and first nine months of 2000. The decrease was due primarily to more favorable morbidity in the group health business, and the increase for the first nine months ended September 30, 2001 was due primarily to increased operating expenses. Financial Services The following is a summary of certain financial data of the Financial Services segment:

Net Income for Financial Services decreased $76 thousand or 24% for the third quarter of 2001 when compared to the third quarter of 2000. The decrease was primarily due to growth in operating expenses exceeding the increase in fee income. Net income for Financial Services had no significant change for the first nine months of 2001 when compared to the first nine months of 2000. Premium income for Financial Services decreased $109 thousand for the first nine months of 2001 when compared to the first nine months of 2000. The decreases were primarily related to BOLI products. The nature of this type of product can lead to large fluctuations from period to period. Net Investment income increased $923 thousand for the first nine months of 2001 when compared to the first nine months of 2000 due to growth in BOLI assets. Deposits for investment-type contracts decreased for the third quarter and the first nine months of 2001 when compared to the third quarter and the first nine months of 2000. The decreases were due to a decrease in sales of BOLI products. BOLI sales generally represent large single-deposit contracts, the timing of which can significantly impact individual quarters. GENERAL ACCOUNT INVESTMENTS The Company's primary investment objective is to acquire assets whose durations and cash flows reflect the characteristics of the Company's liabilities, while meeting industry, size, issuer, and geographic diversification standards. Formal liquidity and credit quality parameters have also been established. One of the Company's primary objectives is to ensure that its fixed maturity portfolio is maintained at a high average quality, so as to limit credit risk. If not externally rated, the securities are rated by the Company on a basis intended to be similar to that of the rating agencies. The distribution of the fixed maturity portfolio (both available-for-sale and held-to-maturity) by credit rating is summarized as 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 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 nine months ended September 30, 2001, net unrealized gains on fixed maturities included in stockholders' equity, which is net of policyholder-related amounts and deferred income taxes, increased surplus by $2.7 million. 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 $4.5 million and $24.4 million as of September 30, 2001 and December 31, 2000, 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, 2000. 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, 2001 -------------------------------------------- ------------------- Glen R. Derback, Vice President and Controller (Duly authorized officer and chief accounting officer)

FIRST GREAT WEST LIFE & ANNUITY INSURANCE CO 10-Q