10-Q 1 gwlafinancial10q.txt GWLA FINANCIAL 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q

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, 50,025 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. 10

PART I FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS GWL&A FINANCIAL INC. CONSOLIDATED STATEMENTS OF INCOME [Dollars in Thousands]

See notes to consolidated financial statements. GWL&A FINANCIAL INC. CONSOLIDATED BALANCE SHEETS [Dollars in Thousands]

GWL&A FINANCIAL INC. CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 [Dollars in Thousands]

GWL&A FINANCIAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Amounts in Thousands] ================================================================================ [Unaudited] 1. BASIS OF PRESENTATION The consolidated financial statements and related notes of GWL&A Financial Inc. (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 consolidated 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. 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. Adoption of this statement did not have a 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. 3. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S JUNIOR SUBORDINATED DEBENTURES On May 4, 1999, Great-West Life & Annuity Insurance Capital I (the Trust), the Company's wholly-owned subsidiary trust created under the laws of the State of Delaware, issued $175,000 of Subordinated Capital Income Securities. The sole assets of the Trust are the $180,412 aggregate principal amount of the Company's 7.25% Junior Subordinated Debentures due June 30, 2048. The obligations of the Trust related to its Junior Subordinated Debentures are fully and unconditionally guaranteed by the Company. 4. OTHER In the second quarter of 2001, the Company recorded a $127 million special charge, ($80.9 million, net of tax) related to Alta Health & Life Insurance Company (Alta). The principal components of the charge include a $46 million premium deficiency reserve related to under-pricing on the block of business, a $29 million reserve for doubtful premium receivables, a $28 million reserve for doubtful accident and health plan claim receivables, and $24 million decrease in goodwill and other. Alta was acquired by the Company on July 8, 1998. During 1999 and 2000 the Alta business continued to be run as a free-standing unit but was converted to the Company's system and accounting processes. This conversion program resulted in significant issues related to pricing, underwriting, and administration of the business. The Company has decided to transition Alta business to other Company products. All Alta sales and administration staff have become employees of the Company and the underwriting functions will be conducted by the underwriting staff of the Company. The Company is involved in various legal proceedings that arise in the ordinary course of its business. In the opinion of management, after consultation with counsel, the resolution of these proceedings should not have a material adverse effect on its financial position or results of operations. Certain reclassifications have been made to the 2001 financial statements to conform to the 2002 presentation. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL This Form 10-Q contains forward-looking statements. Forward-looking statements are statements not based on historical information and that 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 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, 2001 to which the reader is directed for additional information. CONSOLIDATED RESULTS The Company's consolidated net income decreased $7 million or 9.5% for the third quarter and increased $8 million or 4% for the first nine months of 2002 when compared to the third quarter and first nine months of 2001, before one-time charges of $80.9 million and operating losses of $18.7 million, net of tax, related to the Alta Health & Life Insurance Company (Alta) business. Alta was acquired by the Company on July 8, 1998. During 2001 and 2000, the Alta business continued to be run as a free-standing unit but was converted to the Company's systems and accounting processes. This conversion program resulted in significant issues related to pricing, underwriting, and administration of the business. The Company has decided to transition Alta business to other Company products. All Alta sales and administration staff have become employees of the Company and the underwriting functions will be conducted by the underwriting staff of the Company. The $7 million net income decrease quarter over quarter reflects a $14 million decrease in the Employee Benefits segment, offset by an $7 million increase in the Financial Services segment. The $8 million net income increase year over year reflects an increase of $10 million in the Financial Services segment, offset by a decrease of $2 million in the Employee Benefits segment, before one-time charges of $80.9 million and operating losses of $18.7 million, net of tax, related to the Alta business. Total revenues decreased $26 million or 3.3% and $118 million or 5.0% 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 the third quarter was primarily due to a $33 million decrease in fee income. The decrease in total revenues for the first nine months of 2002 was due to a $51 million decrease in premium income, a $56 million decrease in fee income, and a $15 million decrease in net investment income, offset by a $4 million increase in realized investment gains. The decrease in premium income for the first nine months of 2002 is primarily in the Employee Benefits segment reflecting lower case sales. The decreases in fee income in the third quarter and first nine months of 2002 were primarily in the Employee Benefits segment as a result of the decline in membership. The decrease in net investment income for the first nine months of 2002 was primarily the result of decreasing interest rates. The actual earned rate at September 30, 2002 was 6.87% compared to 7.59% at September 30, 2001. The earned rate is expected to trend lower in the next few quarters reflecting the interest rate environment. Benefits and expenses decreased $12 million or 1.8% and $148 million or 7.2% for the third quarter and the first nine months of 2002 when compared to the third quarter and the first nine months of 2001. The decrease in benefits and expenses was a combination of lower group life and health claims and effective cost management. Income tax expense before special charges decreased $7 million or 17.5% for the third quarter of 2002 when compared to the same period in 2001 reflecting the decrease in pretax income. In evaluating its results of operations, the Company also considers net changes in deposits received for investment-type contracts, deposits to separate accounts and self-funded equivalents. Self-funded equivalents represent paid claims under minimum premium and administrative services only contracts, which amounts approximate the additional premiums that would have been earned under such contracts if they had been written as traditional indemnity or HMO programs. Deposits for separate accounts decreased $650 million or 25.4% for the first nine months of 2002 when compared to the first nine months of 2001. The decrease is due primarily to a combination of lower 401(k) single premium deposits and lower BOLI deposits. Self-funded premium equivalents decreased $399 million or 9.2% for the first nine months of 2002 when compared to the first nine months of 2001. The decrease was due to the decrease in membership and improved morbidity. 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, 401(k) 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

The $14 million decrease in earnings for the third quarter of 2002 compared to the third quarter of 2001 is primarily due to a combination of an expense loss from a decrease in membership and poor morbidity experience as a result of accelerating claims payments associated with the July 1, 2002 ERISA change. The ERISA change requires payments of claims within 30 days rather than the previously allowed 45 days. The $2 million decrease in earnings for the first nine months of 2002 compared to a year ago, before one-time charges of $80.9 million and operating losses of $18.7 million, net of tax, related to the Alta business, is primarily related to improved mortality and morbidity results through June 30, 2002, offset by a decrease in the third quarter of 2002 discussed above. Premium and fee income decreased $31 million or 7% for the third quarter of 2002 and decreased $92 million or 7.0% for the first nine months of 2002, when compared to the same periods of 2001. The decreases are primarily due to lower membership levels associated with lower case sales. There was a 4% decrease in total health care membership from 2,321,400 at June 30, 2002 to 2,239,300 at September 30, 2002. There was a 16% decrease in total health care membership from 2,668,700 at September 30, 2001 to 2,239,300 at September 30, 2002. Much of the health care membership decline can be attributed to lower case sales. The decline in membership was also, in part, due to difficulties with the implementation of a systems enhancement, which was resolved by the end of 2001; a decrease in the employee base for existing group health care customers; and the general decline in the economy. Total benefits and expenses decreased $108 million or 9% for the first nine months of 2002 when compared to the first nine months of 2001. The decreases are due primarily to a combination of lower group life and health claims due to decreasing membership and a reduction in operating expenses. Self-funded premium equivalents decreased $65 million and $399 million for the third quarter and first nine months of 2002 compared to the third quarter and first nine months of 2001. The decrease was due to improved morbidity as well as a decrease in membership. The Company recorded $14.0 million ($9.1 million, net of tax) and $4.5 million ($2.9 million, net of tax) of restructuring costs in the first quarter of 2002 and in the second quarter of 2002 related to the costs associated with the consolidation of benefit payment offices and sales offices throughout the United States. The charges relate to severance of $2.8 million and $1.5 million, disposal of furniture and equipment of $4.4 million and $0.5 million, and termination of leasing agreements of $6.8 million and $2.5 million. During the first quarter of 2002, 304 employees were terminated, of which 250 employees were from the Employee Benefits division. During the second quarter of 2002, 252 employees were terminated, all of which were from the Employee Benefits division. The Company established a premium deficiency reserve of $46 million (included in one-time charges previously discussed) on the Alta block of business in 2001. Releases of $18.7 million in 2001, $6.2 million in the first quarter of 2002, and $2.1 million in the second quarter of 2002 were made to offset the underwriting losses incurred on the under-priced block of business. During the first quarter of 2002 the reserve was reduced by $15.0 million ($9.8 million net of tax) and during the second quarter of 2002 the reserve was reduced by $4.0 million ($2.6 million, net of tax) based on an analysis of emerging experience which was more favorable than originally estimated. The balance of the premium deficiency reserve at September 30, 2002 was zero. Financial Services The following is a summary of certain financial data of the Financial Services segment.

Net income for Financial Services increased $7 million and $10 million for the third quarter and first nine months ended September 30, 2002 when compared to the same periods last year. The increase reflects an improvement in interest margins on guaranteed public/nonprofit business and reductions in operating expenses. Savings Savings premiums and deposits and fees increased $163 million to $370 million or 79% for the third quarter of 2002 when compared to the same period last year, and increased $95 million (from $1,089 million to $1,184 million) or 9% for the first nine months of 2002 when compared to the first nine months of 2001. The increases primarily reflect a combination of an increase in deposits for investment-type contracts and an increase in the deposits to separate accounts. The Financial Services segment's core savings business is in the public/non-profit pension market. The assets of the public/non-profit pension business including separate accounts but excluding Guaranteed Investment Contracts decreased $207 million or 2.5% from December 31, 2001 due to the influence of the volatility of the U.S. equity markets. The Financial Services segment's savings business experienced growth during the first nine months of 2002. The total lives under administration increased 4.7% from 1,268,549 at December 31, 2001 to 1,329,388 at September 30, 2002. Customer participation in guaranteed separate accounts increased during 2002, as many customers prefer the security of fixed income securities in separate account assets. Assets under management for guaranteed separate account funds were $1,658.6 million at September 30, 2002 compared to $1,214.4 million at December 31, 2001. Life Insurance Individual life insurance deposits and premiums and fees of $116 million and $362 million for the third quarter and first nine months of 2002 represent a decrease of $458 million or 80% and a decrease of $466 million or 56% from the same periods last year. The decreases are primarily due to slow sales in the BOLI markets due to low fixed interest rates. 401(k) 401(k) premiums and deposits decreased 26% for the third quarter of 2002 when compared to the third quarter of 2001 (from $438 million to $324 million). 401(k) premiums and deposits decreased 24% for the nine months of 2002 (from $1,526 million to $1,164 million) when compared to the nine months of 2001. Assets under administration (including third-party administration) in 401(k) decreased 18.0% during the first nine months of 2002 due to the impact of lower U.S. equity markets and a decreasing number of participants. The number of participants decreased from 564,025 at September 30, 2001 to 501,564 at September 30, 2002, reflecting higher termination rates. 401(K) case terminations increased 45% to 702 for the first nine months of 2002 as compared to the first nine months of 2001. 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. 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 market conditions, the Company's assets will 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. Fixed Maturities Fixed maturities investments include public and privately placed corporate bonds, public and privately placed structured assets and government bonds. This latter category contains both asset-backed and mortgage-backed securities, including collateralized mortgage obligations (CMOs). The Company's strategy related to structured assets is to focus on those with lower volatility and minimal credit risk. The Company does not invest in higher risk CMOs such as interest-only and principal-only strips, and currently has no plans to invest in such securities. Private placement investments 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 rating agencies. The distribution of the fixed maturity portfolio by credit rating is summarized as follows:

During the first nine months of 2002, net unrealized gains on fixed maturities included in stockholder's equity, which is net of policyholder-related amounts and deferred income taxes, increased stockholder's equity by $101.7 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 a maximum of $1.5 million 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, and to absorb credit losses on its impaired loans. Management's judgement is based on past loss experience and current and projected economic conditions, and extensive situational analysis of each individual loan. The measurement of impaired loans is based on the fair value of the collateral. 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 vary among the principal product lines. Life insurance and pension plan reserves are primarily long-term liabilities. Accident and health reserves, including long-term disability, consist of both short-term and 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. Accident and health claim demands are stable and predictable but generally shorter term, requiring greater liquidity. 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 $488.0 million and $641.4 million as of September 30, 2002 and December 31, 2001, respectively. Funds provided from premiums and fees, investment income and maturities of investment assets are reasonably predictable and normally exceed liquidity requirements for payment of claims, benefits, and expenses. However, since the timing of available funds cannot always be matched precisely to commitments, imbalances may arise when demands for funds exceed those on hand. Also, a demand for funds may arise as a result of the Company taking advantage of current investment opportunities. The Company's capital resources represent funds available for long-term business commitments and primarily consist of retained earnings and proceeds from the issuance of equity securities. Capital resources provide protection for policyholders and the financial strength to support the underwriting of insurance risks, and allow for continued business growth. The amount of capital resources that may be needed is determined by the Company's senior management and Board of Directors, as well as by regulatory requirements. The allocation of resources to new long-term business commitments is designed to achieve an attractive return, tempered by considerations of risk and the need to support the Company's existing business. Additional liquidity is available through the Company's participation in repurchase agreements with third party brokers and the issuance of commercial paper. The Company had $281.1 million of repurchase agreements at September 30, 2002, compared to $250.9 at December 31, 2001. The Company's participation in repurchase agreements depends on current market conditions, and as a result, fluctuations may occur. The Company's financial strength provides the capacity and flexibility to enable it to raise funds in the capital markets through the issuance of commercial paper. The Company continues to be well capitalized, with sufficient borrowing capacity to meet the anticipated needs of its business. The Company had $97.0 million of commercial paper outstanding at September 30, 2002, and December 31, 2001. The commercial paper has been given a rating of A-1 + by Standard & Poor's Corporation and a rating of P-1 by Moody's Investors Service, each being the highest rating available. OBLIGATIONS RELATING TO DEBT AND LEASES FOR THE FULL YEAR ARE AS FOLLOWS:

Item 3. QUALITATIVE AND QUANTITATIVE 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. The Company's exposure to foreign currency exchange rate fluctuations is minimal as only nominal foreign investments are held. To manage interest rate risk, the Company invests in assets that are suited to the products that it sells. For products with fixed and highly predictable benefit payments such as certificate annuities and payout annuities, the Company invests in fixed income assets with cash flows that closely match the liability product cash flows. The Company is then protected against interest rate changes, as any change in the fair value of the assets will be offset by a similar change in the fair value of the liabilities. For products with uncertain timing of benefit payments such as portfolio annuities and 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 sooner as these assets mature for reinvestment. The Company also manages risk with interest rate derivatives such as interest rate caps that would pay the Company investment income if interest rates rise above the level specified in the cap. The Company also uses interest rate swaps to convert cash flow from variable-rate investments to fixed amounts to match such cash flows to expected cash flows on its liabilities to policyholders. These derivatives are only used to reduce risk and are not used for speculative purposes. To manage foreign currency exchange risk, the Company uses currency swaps to convert foreign currency back to United States dollars. These swaps are purchased each time a foreign currency denominated asset is purchased. There are no significant changes to the Company's market risk position 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 A report on Form 8-K, dated July 30, 2002, was filed disclosing the Company's second quarter results as of June 30, 2002. 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. GWL&A FINANCIAL INC. BY: /s/ Glen R. Derback DATE: November 14, 2002 --------------------------------------- ------------------------ Glen R. Derback, Vice President and Controller (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 GWL&A Financial Inc. (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 President and Chief Executive Officer I, Mitchell T.G. Graye, certify that: 1. I have reviewed this quarterly report on Form 10-Q of GWL&A Financial Inc. (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

GWL&A FINANCIAL INC 10-Q