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EXCEL - IDEA: XBRL DOCUMENT - GREAT WEST LIFE & ANNUITY INSURANCE CO | Financial_Report.xls |
EX-31.1 - EXHIBIT 31.1 - GREAT WEST LIFE & ANNUITY INSURANCE CO | greatwest-ex311.htm |
EX-31.2 - EXHIBIT 31.2 - GREAT WEST LIFE & ANNUITY INSURANCE CO | greatwestex-312.htm |
EX-32 - EXHIBIT 32 - GREAT WEST LIFE & ANNUITY INSURANCE CO | greatwest-exx32.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2014
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 333-1173
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
COLORADO | 84-0467907 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
8515 EAST ORCHARD ROAD, GREENWOOD VILLAGE, CO 80111
(Address of principal executive offices)
(303) 737-3000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined in Rule 12b-2 of the Act.
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer x | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Act.
Yes ¨ No x
As of August 1, 2014, 7,032,000 shares of the registrant’s common stock were outstanding, all of which were owned by the registrant’s parent company.
Page | |||
Number | |||
Part I | |||
Item 1 | |||
Item 2 | |||
Item 3 | |||
Item 4 | |||
Part II | |||
Item 1 | |||
Item 1A | |||
Item 6 | |||
2
Part I Financial Information
Item1. Interim Financial Statements
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Balance Sheets
June 30, 2014 and December 31, 2013
(In Thousands, Except Share Amounts)
(Unaudited)
June 30, 2014 | December 31, 2013 | ||||||
Assets | |||||||
Investments: | |||||||
Fixed maturities, available-for-sale, at fair value (amortized cost $16,030,228 and $17,807,359) | $ | 17,246,249 | $ | 18,469,544 | |||
Fixed maturities, held for trading, at fair value (amortized cost $110,677 and $333,892) | 117,065 | 336,055 | |||||
Mortgage loans on real estate (net of allowances of $2,890 and $2,890) | 3,095,903 | 3,134,255 | |||||
Policy loans | 4,239,130 | 4,185,472 | |||||
Short-term investments, available-for-sale (amortized cost $2,925,135 and $294,287) | 2,925,135 | 294,287 | |||||
Limited partnership and other corporation interests | 63,148 | 79,236 | |||||
Other investments | 17,082 | 17,574 | |||||
Total investments | 27,703,712 | 26,516,423 | |||||
Other assets: | |||||||
Cash | 12,972 | 7,491 | |||||
Reinsurance receivable | 593,825 | 588,533 | |||||
Deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”) | 288,577 | 343,288 | |||||
Investment income due and accrued | 247,905 | 270,024 | |||||
Collateral under securities lending agreements | 32,275 | 18,534 | |||||
Due from parent and affiliates | 60,791 | 91,057 | |||||
Goodwill | 105,255 | 105,255 | |||||
Other intangible assets | 13,632 | 15,155 | |||||
Other assets | 778,318 | 707,856 | |||||
Assets of discontinued operations | 25,777 | 29,007 | |||||
Separate account assets | 27,718,733 | 26,630,904 | |||||
Total assets | $ | 57,581,772 | $ | 55,323,527 |
See notes to condensed consolidated financial statements. | (Continued) |
3
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Balance Sheets
June 30, 2014 and December 31, 2013
(In Thousands, Except Share Amounts)
(Unaudited)
June 30, 2014 | December 31, 2013 | ||||||
Liabilities and stockholder’s equity | |||||||
Policy benefit liabilities: | |||||||
Future policy benefits | $ | 25,212,756 | $ | 24,609,155 | |||
Policy and contract claims | 347,967 | 345,261 | |||||
Policyholders’ funds | 343,838 | 345,689 | |||||
Provision for policyholders’ dividends | 62,691 | 62,797 | |||||
Undistributed earnings on participating business | 19,397 | 10,776 | |||||
Total policy benefit liabilities | 25,986,649 | 25,373,678 | |||||
General liabilities: | |||||||
Due to parent and affiliates | 535,539 | 541,793 | |||||
Commercial paper | 99,891 | 98,990 | |||||
Payable under securities lending agreements | 32,275 | 18,534 | |||||
Deferred income tax liabilities, net | 299,163 | 106,849 | |||||
Other liabilities | 672,149 | 648,040 | |||||
Liabilities of discontinued operations | 25,777 | 29,007 | |||||
Separate account liabilities | 27,718,733 | 26,630,904 | |||||
Total liabilities | 55,370,176 | 53,447,795 | |||||
Commitments and contingencies (See Note 14) | |||||||
Stockholder’s equity: | |||||||
Preferred stock, $1 par value, 50,000,000 shares authorized; none issued and outstanding | — | — | |||||
Common stock, $1 par value, 50,000,000 shares authorized; 7,032,000 shares issued and outstanding | 7,032 | 7,032 | |||||
Additional paid-in capital | 776,546 | 774,115 | |||||
Accumulated other comprehensive income | 645,085 | 345,754 | |||||
Retained earnings | 782,933 | 748,831 | |||||
Total stockholder’s equity | 2,211,596 | 1,875,732 | |||||
Total liabilities and stockholder’s equity | $ | 57,581,772 | $ | 55,323,527 |
See notes to condensed consolidated financial statements. | (Concluded) |
4
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Income (Loss)
Three and Six Months Ended June 30, 2014 and 2013
(In Thousands)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenues: | |||||||||||||||
Premium income | $ | 62,496 | $ | 66,357 | $ | 194,350 | $ | 244,678 | |||||||
Fee income | 172,005 | 154,307 | 338,518 | 301,253 | |||||||||||
Other revenue | — | — | — | 7,355 | |||||||||||
Net investment income | 319,610 | 248,603 | 619,633 | 533,965 | |||||||||||
Realized investment gains (losses), net: | |||||||||||||||
Total other-than-temporary gains (losses) | (1,241 | ) | 359 | (1,929 | ) | (61 | ) | ||||||||
Other-than-temporary (gains) losses transferred to other comprehensive income (loss) | — | — | — | (434 | ) | ||||||||||
Other realized investment gains (losses), net | 38,297 | (24,673 | ) | 65,894 | (9,080 | ) | |||||||||
Total realized investment gains (losses), net | 37,056 | (24,314 | ) | 63,965 | (9,575 | ) | |||||||||
Total revenues | 591,167 | 444,953 | 1,216,466 | 1,077,676 | |||||||||||
Benefits and expenses: | |||||||||||||||
Life and other policy benefits | 159,058 | 164,044 | 308,947 | 309,636 | |||||||||||
(Decrease) increase in future policy benefits | (43,554 | ) | (32,985 | ) | (38,974 | ) | 12,286 | ||||||||
Interest credited or paid to contractholders | 135,182 | 121,796 | 267,315 | 248,727 | |||||||||||
Provision for policyholders’ share of (losses) earnings on participating business | (128 | ) | (483 | ) | (479 | ) | 4,496 | ||||||||
Dividends to policyholders | 12,138 | 12,868 | 32,266 | 34,720 | |||||||||||
Total benefits, net | 262,696 | 265,240 | 569,075 | 609,865 | |||||||||||
General insurance expenses | 174,494 | 163,704 | 338,581 | 322,182 | |||||||||||
Amortization of DAC and VOBA | 29,524 | 14,797 | 29,927 | 30,304 | |||||||||||
Interest expense | 9,320 | 9,335 | 18,646 | 18,673 | |||||||||||
Total benefits and expenses, net | 476,034 | 453,076 | 956,229 | 981,024 | |||||||||||
Income (loss) before income taxes | 115,133 | (8,123 | ) | 260,237 | 96,652 | ||||||||||
Income tax expense (benefit) | 40,180 | (4,069 | ) | 90,534 | 33,872 | ||||||||||
Net income (loss) | $ | 74,953 | $ | (4,054 | ) | $ | 169,703 | $ | 62,780 |
See notes to condensed consolidated financial statements.
5
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Comprehensive Income (Loss)
Three and Six Months Ended June 30, 2014 and 2013
(In Thousands)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Net income (loss) | $ | 74,953 | $ | (4,054 | ) | $ | 169,703 | $ | 62,780 | ||||||
Components of other comprehensive income (loss) | |||||||||||||||
Unrealized holding gains (losses) arising on available-for-sale fixed maturity investments | 261,039 | (588,693 | ) | 572,337 | (629,873 | ) | |||||||||
Unrealized holding gains (losses) arising on cash flow hedges | 3,010 | (7,040 | ) | 3,894 | 16,908 | ||||||||||
Reclassification adjustment for (gains) losses realized in net income | (6,536 | ) | 2,524 | (28,754 | ) | (22,056 | ) | ||||||||
Net unrealized gains (losses) related to investments | 257,513 | (593,209 | ) | 547,477 | (635,021 | ) | |||||||||
Future policy benefits, DAC and VOBA adjustments | (29,720 | ) | 121,174 | (86,968 | ) | 136,532 | |||||||||
Other comprehensive income (loss) before income taxes | 227,793 | (472,035 | ) | 460,509 | (498,489 | ) | |||||||||
Income tax expense (benefit) related to items of other comprehensive income | 79,728 | (165,213 | ) | 161,178 | (174,472 | ) | |||||||||
Other comprehensive income (loss) (1) | 148,065 | (306,822 | ) | 299,331 | (324,017 | ) | |||||||||
Total comprehensive income (loss) | $ | 223,018 | $ | (310,876 | ) | $ | 469,034 | $ | (261,237 | ) |
(1) Other comprehensive income (loss) includes the non-credit component of impaired losses on fixed maturities available-for-sale in the amounts of $(4,588) and $2,919 for the three months ended June 30, 2014 and 2013, respectively, and $(2,816) and $6,645 for the six months ended June 30, 2014 and 2013, respectively.
See notes to condensed consolidated financial statements.
6
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Stockholder’s Equity
Six Months Ended June 30, 2014 and 2013
(In Thousands)
(Unaudited)
Six Months Ended June 30, 2014 | |||||||||||||||||||
Common stock | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Total | |||||||||||||||
Balances, January 1, 2014 | $ | 7,032 | $ | 774,115 | $ | 345,754 | $ | 748,831 | $ | 1,875,732 | |||||||||
Net income | 169,703 | 169,703 | |||||||||||||||||
Other comprehensive income (loss), net of income taxes | 299,331 | 299,331 | |||||||||||||||||
Dividends | (135,601 | ) | (135,601 | ) | |||||||||||||||
Capital contribution - stock-based compensation | 2,383 | 2,383 | |||||||||||||||||
Income tax benefit on stock-based compensation | 48 | 48 | |||||||||||||||||
Balances, June 30, 2014 | $ | 7,032 | $ | 776,546 | $ | 645,085 | $ | 782,933 | $ | 2,211,596 |
Six Months Ended June 30, 2013 | |||||||||||||||||||
Common stock | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Total | |||||||||||||||
Balances, January 1, 2013 | $ | 7,032 | $ | 771,041 | $ | 635,699 | $ | 722,525 | $ | 2,136,297 | |||||||||
Net income | 62,780 | 62,780 | |||||||||||||||||
Other comprehensive income (loss), net of income taxes | (324,017 | ) | (324,017 | ) | |||||||||||||||
Dividends | (46,435 | ) | (46,435 | ) | |||||||||||||||
Capital contribution - stock-based compensation | 1,266 | 1,266 | |||||||||||||||||
Income tax benefit on stock-based compensation | 53 | 53 | |||||||||||||||||
Balances, June 30, 2013 | $ | 7,032 | $ | 772,360 | $ | 311,682 | $ | 738,870 | $ | 1,829,944 |
See notes to condensed consolidated financial statements.
7
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2014 and 2013
(In Thousands)
(Unaudited)
Six Months Ended June 30, | |||||||
2014 | 2013 | ||||||
(Restated, See Note 2) | |||||||
Net cash provided by operating activities | $ | 467,517 | $ | 498,927 | |||
Cash flows from investing activities: | |||||||
Proceeds from sales, maturities and redemptions of investments: | |||||||
Fixed maturities, available-for-sale | 3,029,196 | 2,890,562 | |||||
Mortgage loans on real estate | 195,091 | 86,171 | |||||
Limited partnership interests, other corporation interests and other investments | 5,243 | 18,374 | |||||
Purchases of investments: | |||||||
Fixed maturities, available-for-sale | (1,178,368 | ) | (1,635,802 | ) | |||
Mortgage loans on real estate | (156,889 | ) | (258,206 | ) | |||
Limited partnership interests, other corporation interests and other investments | (1,745 | ) | (1,360 | ) | |||
Net change in short-term investments | (2,630,848 | ) | (1,731,348 | ) | |||
Net change in policy loans | (4,314 | ) | 37 | ||||
Purchases of furniture, equipment and software | (11,500 | ) | (10,127 | ) | |||
Net cash used in investing activities | (754,134 | ) | (641,699 | ) | |||
Cash flows from financing activities: | |||||||
Contract deposits | 1,258,359 | 1,062,743 | |||||
Contract withdrawals | (850,678 | ) | (919,009 | ) | |||
Change in due to/from parent and affiliates | 24,012 | (19,013 | ) | ||||
Dividends paid | (135,601 | ) | (46,435 | ) | |||
Proceeds from financing element derivatives | 1,556 | 51,832 | |||||
Payments for and interest (paid) received on financing element derivatives, net | (6,689 | ) | (6,453 | ) | |||
Net commercial paper borrowings | 901 | (4,199 | ) | ||||
Change in book overdrafts | 190 | 17,424 | |||||
Income tax benefit of stock option exercises | 48 | 53 | |||||
Net cash provided by financing activities | 292,098 | 136,943 | |||||
Net increase (decrease) in cash | 5,481 | (5,829 | ) | ||||
Cash, beginning of year | 7,491 | 11,387 | |||||
Cash, end of period | $ | 12,972 | $ | 5,558 |
See notes to condensed consolidated financial statements. | (Continued) |
8
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2014 and 2013
(In Thousands)
(Unaudited)
Six Months Ended June 30, | |||||||
2014 | 2013 | ||||||
(Restated, See Note 2) | |||||||
Supplemental disclosures of cash flow information: | |||||||
Net cash received (paid) during the year for: | |||||||
Income taxes | $ | 19,553 | $ | 8,265 | |||
Interest | (18,646 | ) | (18,673 | ) | |||
Non-cash investing and financing transactions during the years: | |||||||
Share-based compensation expense | $ | 2,383 | $ | 1,266 | |||
Assets received from limited partnership investment distributions | — | (4,571 | ) | ||||
Fixed maturity investments, available-for-sale acquired in reinsurance termination (See Note 5) | — | (44,104 | ) | ||||
Policy loans acquired in reinsurance termination (See Note 5) | — | (6,468 | ) |
See notes to condensed consolidated financial statements. | (Concluded) |
9
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
1. Organization and Basis of Presentation
Organization
Great-West Life & Annuity Insurance Company (“GWLA”) and its subsidiaries (collectively, the “Company”) is a direct wholly-owned subsidiary of GWL&A Financial Inc. (“GWL&A Financial”), a holding company formed in 1998. GWL&A Financial is a direct wholly-owned subsidiary of Great-West Lifeco U.S. Inc. (“Lifeco U.S.”) and an indirect wholly-owned subsidiary of Great-West Lifeco Inc. (“Lifeco”), a Canadian holding company. The Company offers a wide range of life insurance, retirement and investment products to individuals, businesses and other private and public organizations throughout the United States. The Company is an insurance company domiciled in the State of Colorado and is subject to regulation by the Colorado Division of Insurance.
Basis of Presentation
The condensed consolidated financial statements include the accounts of the Company and the accounts of its subsidiaries over which it exercises control and are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Intercompany transactions and balances have been eliminated in consolidation.
The condensed consolidated balance sheet as of December 31, 2013, which was derived from the Company’s audited financial statements, and the unaudited interim condensed consolidated financial statements as of and for the three and six months ended June 30, 2014, have been prepared in accordance with the instructions for Form 10-Q. In compliance with those instructions, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The Company believes that the disclosures made are adequate such that the information presented is not misleading.
In the opinion of management, these statements include all normal recurring adjustments necessary to fairly present the Company’s condensed consolidated results of operations, financial position and cash flows as of June 30, 2014, and for all periods presented. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
The condensed consolidated results of operations and condensed consolidated statement of cash flows for the six months ended June 30, 2014 are not necessarily indicative of the results or cash flows expected for the full year.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates are required to account for items and matters such as, but not limited to, the valuation of investments and derivatives in the absence of quoted market values, impairment of investments, accounting for derivative financial instruments, valuation of DAC, valuation of unearned revenue liabilities (“URL”), valuation of policy benefit liabilities, valuation of employee benefit plan obligations and the valuation of deferred tax assets or liabilities, net. Actual results could differ from those estimates.
Acquisitions
On April 3, 2014, the Company announced it has reached an agreement to acquire the J.P. Morgan Retirement Plan Services large-market recordkeeping business. The transaction is expected to close during the third quarter pending regulatory approval. The J.P. Morgan Retirement Plan Services business comprises 200 clients with approximately 1.9 million participants and $167 billion in assets under administration. It also includes the more than 1,000 personnel affiliated with J.P. Morgan Retirement Plan Services, including sales staff, consultant relations, relationship managers and client service specialists.
10
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
2. Restatement of the June 30, 2013 Statement of Cash Flows
The accompanying statement of cash flows for the six months ended June 30, 2013 has been restated to reflect the following corrections of misstatements identified subsequent to the issuance of the June 30, 2013 quarterly financial statements:
• | During the fourth quarter of 2013, the Company recorded a cumulative out-of-period adjustment in connection with certain derivative instruments not qualifying for hedge accounting due to ineffectiveness. These derivative instruments were deemed to have a financing element at inception which should be classified as a financing activity instead of an operating activity within the statement of cash flows. As a result, net cash provided by operating activities was overstated by $45,379 and net cash provided by financing activities was understated by the same amount for the six months ended June 30, 2013. The Company believes the effects of this error are immaterial to the prior period. |
• | The Company holds certain forward settling to be announced (“TBA”) securities that are accounted for as derivative instruments as the Company does not regularly accept delivery of such securities when issued. In certain limited circumstances, the Company will accept delivery of the securities from one broker and then immediately deliver the securities to another broker. In these limited circumstances, the Company recorded the purchase and sale of the securities as an equal and offsetting purchase and sale of investments in the net cash provided by investing activities. Because the Company did not hold the securities as an investment, the cash flows should be accounted for net within operating activities. As a result of this misstatement, both proceeds from sales, maturities and redemptions of investments and purchases of investments were overstated by $3,187,634 for the six months ended June 30, 2013. The Company believes the effects of this error are immaterial to the prior period. |
The following table summarizes the effect of the adjustments the Company made to its financial statements:
As previously reported | Adjustments | As restated | |||||||||
Statements of Cash Flows | |||||||||||
Net cash provided by operating activities | $ | 544,306 | $ | (45,379 | ) | $ | 498,927 | ||||
Proceeds from sales, maturities and redemptions of investments: | |||||||||||
Fixed maturities, available-for-sale | 6,078,196 | (3,187,634 | ) | 2,890,562 | |||||||
Purchases of investments: | |||||||||||
Fixed maturities, available-for-sale | (4,823,436 | ) | 3,187,634 | (1,635,802 | ) | ||||||
Proceeds from financing element derivatives | — | 51,832 | 51,832 | ||||||||
Payments for and interest (paid) received on financing element derivatives, net | — | (6,453 | ) | (6,453 | ) | ||||||
Net cash provided by financing activities | 91,564 | 45,379 | 136,943 |
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
3. Application of Recent Accounting Pronouncements
Future adoption of new accounting pronouncements
In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-01 Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (“ASU No. 2014-01”). ASU No. 2014-01 permits reporting entities to make an accounting election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those pre-existing investments. ASU 2014-01 is effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. The Company currently uses the effective yield method for its investments in qualified affordable housing projects. As such, the Company does not expect the adoption of this ASU to have a material effect on the Company's financial position or results of operations.
In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”). The update outlines a comprehensive model for accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. While the update does not apply to insurance contracts within the scope of Topic 944, it does apply to other fee income earned by the Company which includes fees from assets under management, assets under administration, shareholder servicing, administration and record-keeping services and investment advisory services. The core principle of the model requires that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The update also requires increased disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In adopting ASU No. 2014-09, the Company may use either a full retrospective or a modified retrospective approach. The update is effective for public business entities for interim and annual periods beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the impact of this update on its financial statements.
In June 2014, the FASB issued ASU No. 2014-11 Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU No. 2014-11”). ASU No. 2014-11 amends the accounting for entities that enter into repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings. ASU No. 2014-11 requires new footnote disclosures for repurchase agreements and securities lending transactions accounted for as secured borrowings. The accounting changes in ASU 2014-11 are effective for public business entities for the first interim or annual period beginning after December 15, 2014. The disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. ASU No. 2014-11 will not have an impact on the Company’s condensed consolidated financial position or the results of its operations.
4. Dividends
The maximum amount of dividends, which can be paid to stockholders by insurance companies domiciled in the State of Colorado, is subject to restrictions relating to statutory capital and surplus and statutory net gain from operations. Prior to the payment of any dividends, the Company provides notice to the Colorado Insurance Commissioner. During the six months ended June 30, 2014, and 2013, the Company paid dividends of $135,601 and $46,435, respectively, to its parent, GWL&A Financial.
12
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
5. Related Party Transactions
On January 1, 2013, the Company terminated its reinsurance agreement with an affiliate, The Canada Life Assurance Company (“CLAC”), pursuant to which it had ceded certain participating life business on a coinsurance basis. As a result of that termination, on January 1, 2013, the Company recorded the following increases (decreases) in its statement of income in connection with the termination of the reinsurance agreement:
Premium income | $ | 42,297 | |
Other revenue | 7,355 | ||
Total | 49,652 | ||
Increase in future policy benefits | 41,297 | ||
Dividends to policyholders | 1,000 | ||
Total | 42,297 | ||
Participating policyholders’ net income before income taxes | 7,355 | ||
Income tax expense (benefit) | 2,574 | ||
Participating policyholders’ income | 4,781 | ||
Provision for policyholders’ share of (losses) earnings on participating business | 4,781 | ||
Net income available to shareholder | $ | — |
Participating policyholders share in the financial results of the participating business in the form of policyholder dividends. The policyholder dividends can be distributed directly to the policyholders in the form of cash or through an increase in benefits such as paid-up additions. The participating policyholder earnings that cannot be distributed to the Company’s shareholder and have not been distributed to participating policyholders are not included in the Company’s net income and are reflected in liabilities in undistributed earnings on participating business in the Company’s balance sheets. As such, the transaction above had no impact on net income available to the Company’s shareholder.
13
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
6. Summary of Investments
The following tables summarize fixed maturity investments classified as available-for-sale and the non-credit-related component of other-than-temporary impairments (“OTTI”) in accumulated other comprehensive income (loss) (“AOCI”):
June 30, 2014 | ||||||||||||||||||||
Amortized | Gross unrealized | Gross unrealized | Estimated fair value | OTTI (gain) loss | ||||||||||||||||
Fixed maturities: | cost | gains | losses | and carrying value | included in AOCI (1) | |||||||||||||||
U.S. government direct obligations and U.S. agencies | $ | 873,742 | $ | 62,175 | $ | 4,270 | $ | 931,647 | — | |||||||||||
Obligations of U.S. states and their subdivisions | 1,890,258 | 262,597 | 2,557 | 2,150,298 | — | |||||||||||||||
Foreign government securities | 2,535 | — | 2 | 2,533 | — | |||||||||||||||
Corporate debt securities (2) | 10,697,301 | 809,764 | 73,182 | 11,433,883 | (2,522 | ) | ||||||||||||||
Asset-backed securities | 1,470,891 | 141,348 | 14,124 | 1,598,115 | (93,147 | ) | ||||||||||||||
Residential mortgage-backed securities | 214,208 | 10,028 | 2,644 | 221,592 | (280 | ) | ||||||||||||||
Commercial mortgage-backed securities | 870,102 | 31,065 | 3,951 | 897,216 | — | |||||||||||||||
Collateralized debt obligations | 11,191 | 11 | 237 | 10,965 | — | |||||||||||||||
Total fixed maturities | $ | 16,030,228 | $ | 1,316,988 | $ | 100,967 | $ | 17,246,249 | $ | (95,949 | ) |
(1) Indicates the amount of any OTTI (gain) loss included in AOCI that is included in gross unrealized gains and losses. OTTI (gain) loss included in AOCI, as presented above, includes both the initial recognition of non-credit losses and the effects of subsequent increases and decreases in estimated fair value for those fixed maturity securities with previous non-credit impairment. The non-credit loss component of OTTI (gain) loss was in an unrealized gain position due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.
(2) Includes perpetual debt investments with amortized cost of $157,742 and estimated fair value of $136,736.
December 31, 2013 | ||||||||||||||||||||
Amortized | Gross unrealized | Gross unrealized | Estimated fair value | OTTI (gain) loss | ||||||||||||||||
Fixed maturities: | cost | gains | losses | and carrying value | included in AOCI (1) | |||||||||||||||
U.S. government direct obligations and U.S. agencies | $ | 3,044,185 | $ | 43,827 | $ | 23,373 | $ | 3,064,639 | — | |||||||||||
Obligations of U.S. states and their subdivisions | 1,763,797 | 196,742 | 16,952 | 1,943,587 | — | |||||||||||||||
Foreign government securities | 2,617 | — | 14 | 2,603 | — | |||||||||||||||
Corporate debt securities (2) | 10,454,252 | 568,261 | 223,532 | 10,798,981 | (2,553 | ) | ||||||||||||||
Asset-backed securities | 1,553,510 | 131,277 | 29,150 | 1,655,637 | (98,502 | ) | ||||||||||||||
Residential mortgage-backed securities | 244,723 | 8,335 | 3,473 | 249,585 | (129 | ) | ||||||||||||||
Commercial mortgage-backed securities | 731,688 | 21,951 | 11,515 | 742,124 | — | |||||||||||||||
Collateralized debt obligations | 12,587 | 14 | 213 | 12,388 | — | |||||||||||||||
Total fixed maturities | $ | 17,807,359 | $ | 970,407 | $ | 308,222 | $ | 18,469,544 | $ | (101,184 | ) |
(1) Indicates the amount of any OTTI (gain) loss included in AOCI that is included in gross unrealized gains and losses. OTTI (gain) loss included in AOCI, as presented above, includes both the initial recognition of non-credit losses and the effects of subsequent increases and decreases in estimated fair value for those fixed maturity securities with previous non-credit impairment. The non-credit loss component of OTTI (gain) loss was in an unrealized gain position due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.
(2) Includes perpetual debt investments with amortized cost of $172,054 and estimated fair value of $143,644.
14
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
See Note 9 for additional discussion regarding fair value measurements.
The amortized cost and estimated fair value of fixed maturity investments classified as available-for-sale, based on estimated cash flows, are shown in the table below. Actual maturities will likely differ from these projections because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
June 30, 2014 | |||||||
Amortized cost | Estimated fair value | ||||||
Maturing in one year or less | $ | 556,694 | $ | 587,578 | |||
Maturing after one year through five years | 3,619,220 | 3,968,349 | |||||
Maturing after five years through ten years | 3,701,470 | 3,973,718 | |||||
Maturing after ten years | 4,970,042 | 5,333,663 | |||||
Mortgage-backed and asset-backed securities | 3,182,802 | 3,382,941 | |||||
$ | 16,030,228 | $ | 17,246,249 |
Mortgage-backed (commercial and residential) and asset-backed securities include those issued by the U.S. government and U.S. agencies.
The following table summarizes information regarding the sales of securities classified as available-for-sale:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Proceeds from sales | $ | 59,643 | $ | 2,059,748 | $ | 2,299,304 | $ | 5,360,913 | |||||||
Gross realized gains from sales | 2,465 | 18,191 | 22,239 | 51,404 | |||||||||||
Gross realized losses from sales | 28 | 19,636 | 1,090 | 26,912 |
Included in net investment income are unrealized gains (losses) of $(763) and $(5,724) for the three months ended June 30, 2014 and 2013, respectively, and $2,043 and $(6,575) for the six months ended June 30, 2014 and 2013 respectively, on held-for-trading fixed maturity investments still held at period end.
Mortgage loans on real estate — The following table summarizes the carrying value of the mortgage loan portfolio by component:
June 30, 2014 | December 31, 2013 | ||||||
Principal | $ | 3,087,625 | $ | 3,124,626 | |||
Unamortized premium (discount) and fees, net | 11,168 | 12,519 | |||||
Mortgage provision allowance | (2,890 | ) | (2,890 | ) | |||
Total mortgage loans | $ | 3,095,903 | $ | 3,134,255 |
15
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
The recorded investment of the mortgage loan portfolio categorized as performing was $3,098,793 and $3,137,145 as of June 30, 2014 and December 31, 2013, respectively.
The following table summarizes activity in the mortgage provision allowance:
Six Months Ended June 30, 2014 | Year Ended December 31, 2013 | ||||||
Commercial mortgages | Commercial mortgages | ||||||
Beginning balance | $ | 2,890 | $ | 2,890 | |||
Provision increases | — | 273 | |||||
Charge-off | — | (273 | ) | ||||
Ending balance | $ | 2,890 | $ | 2,890 | |||
Allowance ending balance by basis of impairment method: | |||||||
Collectively evaluated for impairment | $ | 2,890 | $ | 2,890 | |||
Recorded investment balance in the mortgage loan portfolio, gross of allowance, by basis of impairment method: | $ | 3,098,793 | $ | 3,137,145 | |||
Individually evaluated for impairment | 13,623 | 13,906 | |||||
Collectively evaluated for impairment | 3,085,170 | 3,123,239 |
Limited partnership and other corporation interests — At June 30, 2014 and December 31, 2013, the Company had $63,148 and $79,236, respectively, invested in limited partnership and other corporation interests. Included in limited partnership interests are investments in low-income housing limited partnerships (“LIHLP”) that qualify for federal and state tax credits and ownership interests in pooled investment funds.
The Company has determined each investment in LIHLPs to be considered a variable interest entity (“VIE”). Although the Company is involved with the VIE, it determined that consolidation was not required because it has no power to direct the activities that most significantly impact the entities’ economic performance.
As a 99% limited partner in various upper-tier LIHLPs, the Company has few or no voting rights, but expects to receive the tax credits allocated to the partnership and operating losses from depreciation and interest expense. The Company is only an equity investor and views the LIHLP as a single investment. The general partner of the LIHLPs is most closely involved in the development and management of the LIHLP project. The general partner has a small ownership of the partnership, which requires a de minimus capital contribution. This equity investment is reduced based on fees paid at inception by the limited partner; therefore, the general partner does not qualify as having an equity investment at risk in the LIHLP project. However, the limited partner does not have the direct or indirect ability through voting rights or similar rights to make decisions about the general partner’s activities that have a significant effect on the success of the partnership.
The carrying value and maximum exposure to loss in relation to the activities of the VIEs was $18,473 and $31,563 at June 30, 2014 and December 31, 2013, respectively.
Special deposits and securities lending — The Company had securities on deposit with government authorities as required by certain insurance laws with fair values of $14,491 and $14,072 at June 30, 2014 and December 31, 2013, respectively.
The Company participates in a securities lending program whereby securities are loaned to third parties. Securities with a cost or amortized cost of $38,506 and $28,178 and estimated fair values of $37,904 and $27,166 were on loan under the program at June 30, 2014 and December 31, 2013, respectively. The Company received restricted cash of $32,275 and $18,534 and securities with a fair value of $6,949 and $9,424 as collateral at June 30, 2014 and December 31, 2013, respectively.
16
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Unrealized losses on fixed maturity investments classified as available-for-sale — The following tables summarize unrealized investment losses, including the non-credit-related portion of OTTI losses reported in AOCI, by class of investment:
June 30, 2014 | ||||||||||||||||||||||||
Less than twelve months | Twelve months or longer | Total | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
Fixed maturities: | fair value | loss and OTTI | fair value | loss and OTTI | fair value | loss and OTTI | ||||||||||||||||||
U.S. government direct obligations and U.S. agencies | $ | 9,449 | $ | 30 | $ | 123,126 | $ | 4,240 | $ | 132,575 | $ | 4,270 | ||||||||||||
Obligations of U.S. states and their subdivisions | 41,781 | 41 | 59,540 | 2,516 | 101,321 | 2,557 | ||||||||||||||||||
Foreign government securities | 2,534 | 2 | — | — | 2,534 | 2 | ||||||||||||||||||
Corporate debt securities | 175,871 | 1,741 | 1,239,584 | 71,441 | 1,415,455 | 73,182 | ||||||||||||||||||
Asset-backed securities | 49,701 | 256 | 304,182 | 13,868 | 353,883 | 14,124 | ||||||||||||||||||
Residential mortgage-backed securities | 5,904 | 13 | 25,687 | 2,631 | 31,591 | 2,644 | ||||||||||||||||||
Commercial mortgage-backed securities | 32,883 | 224 | 98,018 | 3,727 | 130,901 | 3,951 | ||||||||||||||||||
Collateralized debt obligations | 10,936 | 237 | — | — | 10,936 | 237 | ||||||||||||||||||
Total fixed maturities | $ | 329,059 | $ | 2,544 | $ | 1,850,137 | $ | 98,423 | $ | 2,179,196 | $ | 100,967 | ||||||||||||
Total number of securities in an unrealized loss position | 43 | 221 | 264 |
December 31, 2013 | ||||||||||||||||||||||||
Less than twelve months | Twelve months or longer | Total | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
Fixed maturities: | fair value | loss and OTTI | fair value | loss and OTTI | fair value | loss and OTTI | ||||||||||||||||||
U.S. government direct obligations and U.S. agencies | $ | 2,399,373 | $ | 23,156 | $ | 5,192 | $ | 217 | $ | 2,404,565 | $ | 23,373 | ||||||||||||
Obligations of U.S. states and their subdivisions | 214,979 | 16,713 | 837 | 239 | 215,816 | 16,952 | ||||||||||||||||||
Foreign government securities | 2,603 | 14 | — | — | 2,603 | 14 | ||||||||||||||||||
Corporate debt securities | 2,632,093 | 144,367 | 511,376 | 79,165 | 3,143,469 | 223,532 | ||||||||||||||||||
Asset-backed securities | 305,377 | 12,763 | 305,740 | 16,387 | 611,117 | 29,150 | ||||||||||||||||||
Residential mortgage-backed securities | 32,131 | 3,454 | 1,011 | 19 | 33,142 | 3,473 | ||||||||||||||||||
Commercial mortgage-backed securities | 177,395 | 6,703 | 48,825 | 4,812 | 226,220 | 11,515 | ||||||||||||||||||
Collateralized debt obligations | — | — | 12,356 | 213 | 12,356 | 213 | ||||||||||||||||||
Total fixed maturities | $ | 5,763,951 | $ | 207,170 | $ | 885,337 | $ | 101,052 | $ | 6,649,288 | $ | 308,222 | ||||||||||||
Total number of securities in an unrealized loss position | 458 | 109 | 567 |
Fixed maturity investments — Total unrealized losses and OTTI decreased by $207,255, or 67%, from December 31, 2013 to June 30, 2014. The majority, or $204,626, of the decrease was in the less than twelve months category. The decrease in unrealized losses was across most asset classes and reflects lower interest rates and tightening of credit spreads, although economic uncertainty in certain asset classes still remains.
Total unrealized losses greater than twelve months decreased by $2,629 from December 31, 2013 to June 30, 2014. Corporate debt securities account for 73%, or $71,441, of the unrealized losses and OTTI greater than twelve months at June 30, 2014.
17
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Non-investment grade corporate debt securities account for $9,090 of the unrealized losses and OTTI greater than twelve months and $8,231 of the losses are on perpetual debt investments issued by banks in the United Kingdom, all of which have investment grade ratings. The Company determined the majority of the unrealized losses on perpetual securities were due to widening credit spreads and low London Interbank Offered Rate (“LIBOR”) based coupon rates on the securities, which are not expected to compromise the issuers’ ability to service the investments. Management does not have the intent to sell these assets; therefore, an OTTI was not recognized in earnings.
Asset-backed securities account for 14% of the unrealized losses and OTTI greater than twelve months at June 30, 2014. The present value of the cash flows expected to be collected is not less than amortized cost and management does not have the intent to sell these assets; therefore, an OTTI was not recognized in earnings.
Other-than-temporary impairment recognition — The cumulative balance of OTTI on fixed maturity securities where the loss portion is bifurcated and the credit related component is recognized in realized investment gains (losses) was $167,961 for the three and six month periods ended June 30, 2014 and 2013.
7. Derivative Financial Instruments
Derivative transactions are generally entered into pursuant to International Swaps and Derivatives Association (“ISDA”) Master agreements or Master Securities Forward Transaction Agreements (“MSFTA") with approved counterparties that provide for a single net payment to be made by one party to the other on a daily basis, periodic payment dates, or at the due date, expiration or termination of the agreement.
The ISDA master agreements contain provisions that would allow the counterparties to require immediate settlement of all derivative instruments in a net liability position if the Company were to default on any debt obligations over a certain threshold. The MSFTA contain provisions which do not stipulate a threshold for default and only apply to debt obligations between the Company and the specific counterparty. The aggregate fair value of derivative instruments with credit-risk-related contingent features that were in a net liability position was $174,371 and $167,743 as of June 30, 2014 and December 31, 2013, respectively. The Company had pledged collateral related to these derivatives of $147,960 and $143,540 as of June 30, 2014 and December 31, 2013, respectively, in the normal course of business. If the credit-risk-related contingent features were triggered on June 30, 2014 the fair value of assets that could be required to settle the derivatives in a net liability position was $26,411.
At June 30, 2014 and December 31, 2013, the Company had pledged $149,610 and $143,710, respectively, of unrestricted cash collateral to counterparties in the normal course of business.
At June 30, 2014, the Company estimated $8,044 of net derivative gains related to cash flow hedges included in AOCI will be reclassified into net income within the next twelve months. Gains and losses included in AOCI are reclassified into net income when the hedged item affects earnings.
Types of derivative instruments and derivative strategies
Interest rate contracts
Cash flow hedges
Interest rate swap agreements are used to convert the interest rate on certain debt securities from a floating rate to a fixed rate. Interest rate futures are used to manage the interest rate risks of forecasted acquisitions of fixed rate maturity investments. These derivatives are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities.
Fair value hedges
Interest rate swap agreements are used to convert the interest rate on certain debt securities from a fixed rate to a floating rate to manage the interest rate risk of the change in the fair value of certain fixed rate maturity investments.
18
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Not designated as hedging instruments
The Company enters into certain transactions in which derivatives are hedging an economic risk but hedge accounting is not elected. These derivative instruments include: exchange-traded interest rate swap futures, over-the-counter (“OTC”) interest rate swaptions, OTC interest rate swaps, exchange-traded Eurodollar interest rate futures and treasury interest rate futures. Certain of the Company’s OTC derivatives are cleared and settled through a central clearing counterparty while others are bilateral contracts between the Company and a counterparty.
The derivative instruments mentioned above are economic hedges and used to manage risk. These transactions are used to offset changes in liabilities including those in variable annuity products, hedge the economic effect of a large increase in interest rates, manage the potential variability in future interest payments due to a change in credited interest rates and the related change in cash flows due to increased surrenders and manage interest rate risks of forecasted acquisitions of fixed rate maturity investments and forecasted liability pricing.
Cross-currency contracts
Cross-currency swaps are used to manage the foreign currency exchange rate risk associated with investments denominated in other than U.S. dollars. The Company uses cross-currency swaps to convert interest and principal payments on foreign denominated debt instruments into U.S. dollars. Cross-currency swaps may be designated as cash flow hedges; however, hedge accounting is not always elected.
Equity contracts
Futures on equity indices are used to reduce the Company’s exposure to equity market risks; however, hedge accounting is not elected. The Company is hedging the risk of declining equity market values having an adverse effect on fee income collected on equity funds. The Company also uses futures on equity indices to offset changes in guaranteed minimum withdrawal benefit liabilities.
Other contracts
The Company uses forward settling TBA securities to gain exposure to the investment risk and return of agency mortgage-backed securities (pass-throughs). These transactions enhance the return on the Company’s investment portfolio and provide a more liquid and cost effective method of achieving these goals than purchasing or selling individual agency mortgage-backed pools. As the Company does not regularly accept delivery of such securities, they are accounted for as derivatives but hedge accounting is not elected. These transactions are disclosed as Other forward contracts.
19
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
The following tables summarize derivative financial instruments:
June 30, 2014 | |||||||||||||||
Net derivatives | Asset derivatives | Liability derivatives | |||||||||||||
Notional amount | Fair value | Fair value (1) | Fair value (1) | ||||||||||||
Hedge designation/derivative type: | |||||||||||||||
Derivatives designated as hedges: | |||||||||||||||
Cash flow hedges: | |||||||||||||||
Interest rate swaps | $ | 184,200 | $ | 16,400 | $ | 16,400 | $ | — | |||||||
Cross-currency swaps | 154,821 | (9,938 | ) | 27 | 9,965 | ||||||||||
Total cash flow hedges | 339,021 | 6,462 | 16,427 | 9,965 | |||||||||||
Fair value hedges: | |||||||||||||||
Interest rate swaps | 78,000 | 2,550 | 2,739 | 189 | |||||||||||
Total fair value hedges | 78,000 | 2,550 | 2,739 | 189 | |||||||||||
Total derivatives designated as hedges | 417,021 | 9,012 | 19,166 | 10,154 | |||||||||||
Derivatives not designated as hedges: | |||||||||||||||
Interest rate swaps | 72,100 | (22 | ) | 1,567 | 1,589 | ||||||||||
Futures on equity indices | 3,409 | — | — | — | |||||||||||
Interest rate futures | 15,492 | — | — | — | |||||||||||
Interest rate swaptions | 395,104 | 456 | 456 | — | |||||||||||
Other forward contracts | 5,999,500 | 14,060 | 25,748 | 11,688 | |||||||||||
Cross-currency swaps | 560,236 | (157,663 | ) | 279 | 157,942 | ||||||||||
Total derivatives not designated as hedges | 7,045,841 | (143,169 | ) | 28,050 | 171,219 | ||||||||||
Total derivative financial instruments | $ | 7,462,862 | $ | (134,157 | ) | $ | 47,216 | $ | 181,373 |
(1) The estimated fair value of all derivatives in an asset position is reported within other assets and the estimated fair value of all derivatives in a liability position is reported within other liabilities in the condensed consolidated balance sheets.
20
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
December 31, 2013 | |||||||||||||||
Net derivatives | Asset derivatives | Liability derivatives | |||||||||||||
Notional amount | Fair value | Fair value (1) | Fair value (1) | ||||||||||||
Hedge designation/derivative type: | |||||||||||||||
Derivatives designated as hedges: | |||||||||||||||
Cash flow hedges: | |||||||||||||||
Interest rate swaps | $ | 184,200 | $ | 13,829 | $ | 13,829 | $ | — | |||||||
Cross-currency swaps | 102,545 | (7,843 | ) | — | 7,843 | ||||||||||
Total cash flow hedges | 286,745 | 5,986 | 13,829 | 7,843 | |||||||||||
Fair value hedges: | |||||||||||||||
Interest rate swaps | 78,000 | 4,951 | 5,098 | 147 | |||||||||||
Total fair value hedges | 78,000 | 4,951 | 5,098 | 147 | |||||||||||
Total derivatives designated as hedges | 364,745 | 10,937 | 18,927 | 7,990 | |||||||||||
Derivatives not designated as hedges: | |||||||||||||||
Interest rate swaps | 55,600 | (2,038 | ) | 1,454 | 3,492 | ||||||||||
Futures on equity indices | 3,483 | — | — | — | |||||||||||
Interest rate futures | 16,233 | — | — | — | |||||||||||
Interest rate swaptions | 494,774 | 1,176 | 1,176 | — | |||||||||||
Cross-currency swaps | 557,676 | (154,340 | ) | 1,921 | 156,261 | ||||||||||
Total derivatives not designated as hedges | 1,127,766 | (155,202 | ) | 4,551 | 159,753 | ||||||||||
Total derivative financial instruments | $ | 1,492,511 | $ | (144,265 | ) | $ | 23,478 | $ | 167,743 |
(1) The estimated fair value of all derivatives in an asset position is reported within other assets and the estimated fair value of all derivatives in a liability position is reported within other liabilities in the condensed consolidated balance sheets.
Notional amounts are used to express the extent of the Company’s involvement in derivative transactions and represent a standard measurement of the volume of its derivative activity. Notional amounts represent those amounts used to calculate contractual flows to be exchanged and are not paid or received. The notional amounts depicted in the June 30, 2014 table above are representative of the average notional for the six months ended June 30, 2014 for all derivative types except for Other forward contracts. During the six months ended June 30, 2014 and 2013, the average notional for Other forward contracts was approximately $3,000,000.
21
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
The following tables present the effect of derivative instruments in the condensed consolidated statements of income reported by cash flow hedges, fair value hedges and economic hedges:
Gain (loss) recognized in OCI on derivatives (Effective portion) | Gain (loss) reclassified from OCI into net income (Effective portion) | |||||||||||||||
Three Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Cash flow hedges: | ||||||||||||||||
Interest rate swaps | $ | 3,900 | $ | (7,108 | ) | $ | 3,142 | $ | 3,225 | (A) | ||||||
Cross-currency swaps | (890 | ) | 68 | 845 | — | (A) | ||||||||||
Interest rate futures | — | — | 18 | 16 | (A) | |||||||||||
Total cash flow hedges | $ | 3,010 | $ | (7,040 | ) | $ | 4,005 | $ | 3,241 |
(A) Net investment income.
Gain (loss) recognized in OCI on derivatives (Effective portion) | Gain (loss) reclassified from OCI into net income (Effective portion) | |||||||||||||||
Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Cash flow hedges: | ||||||||||||||||
Interest rate swaps | $ | 5,144 | $ | (9,801 | ) | $ | 3,705 | $ | 3,916 | (A) | ||||||
Cross-currency swaps | (1,250 | ) | 26,709 | 845 | — | (A) | ||||||||||
Interest rate futures | — | — | 35 | 32 | (A) | |||||||||||
Total cash flow hedges | $ | 3,894 | $ | 16,908 | $ | 4,585 | $ | 3,948 |
(A) Net investment income.
Gain (loss) on derivatives recognized in net income | Gain (loss) on hedged assets recognized in net income | |||||||||||||||
Three Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Fair value hedges: | ||||||||||||||||
Interest rate swaps | $ | (1,333 | ) | $ | 5,188 | (A) | $ | — | $ | — | ||||||
Interest rate swaps | — | (569 | ) | (B) | — | — | ||||||||||
Items hedged in interest rate swaps | — | — | 1,333 | (4,166 | ) | (A) | ||||||||||
Items hedged in interest rate swaps | — | — | — | (453 | ) | (B) | ||||||||||
Total fair value hedges | $ | (1,333 | ) | $ | 4,619 | $ | 1,333 | $ | (4,619 | ) |
(A) Net investment income.
(B) Represents realized gains (losses) on closed positions recorded in realized investment gains (losses), net.
Gain (loss) on derivatives recognized in net income | Gain (loss) on hedged assets recognized in net income | |||||||||||||||
Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Fair value hedges: | ||||||||||||||||
Interest rate swaps | $ | (2,400 | ) | $ | 7,080 | (A) | $ | — | $ | — | ||||||
Interest rate swaps | — | (185 | ) | (B) | — | — | ||||||||||
Items hedged in interest rate swaps | — | — | 2,400 | (6,058 | ) | (A) | ||||||||||
Items hedged in interest rate swaps | — | — | — | (837 | ) | (B) | ||||||||||
Total fair value hedges | $ | (2,400 | ) | $ | 6,895 | $ | 2,400 | $ | (6,895 | ) |
22
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
(A) Net investment income.
(B) Represents realized gains (losses) on closed positions recorded in realized investment gains (losses), net.
Gain (loss) on derivatives recognized in net income | ||||||||
Three Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
Derivatives not designated as hedging instruments: | ||||||||
Futures on equity indices | $ | 13 | (A) | $ | 62 | (A) | ||
Futures on equity indices | (196 | ) | (B) | (878 | ) | (B) | ||
Interest rate swaps | 941 | (A) | (800 | ) | (A) | |||
Interest rate swaps | — | (B) | (473 | ) | (B) | |||
Interest rate futures | (62 | ) | (A) | 860 | (A) | |||
Interest rate futures | 111 | (B) | (982 | ) | (B) | |||
Interest rate swaptions | 640 | (A) | 894 | (A) | ||||
Interest rate swaptions | (877 | ) | (B) | (683 | ) | (B) | ||
Other forward contracts | 20,402 | (A) | (36,611 | ) | (A) | |||
Other forward contracts | 31,996 | (B) | (23,084 | ) | (B) | |||
Cross-currency swaps | (5,453 | ) | (A) | — | (A) | |||
Total derivatives not designated as hedging instruments | $ | 47,515 | $ | (61,695 | ) |
(A) Net investment income.
(B) Represents realized gains (losses) on closed positions recorded in realized investment gains (losses), net.
Gain (loss) on derivatives recognized in net income | ||||||||
Six Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
Derivatives not designated as hedging instruments: | ||||||||
Futures on equity indices | $ | 90 | (A) | $ | 86 | (A) | ||
Futures on equity indices | (359 | ) | (B) | (1,112 | ) | (B) | ||
Interest rate swaps | 2,050 | (A) | (1,315 | ) | (A) | |||
Interest rate swaps | — | (B) | (636 | ) | (B) | |||
Interest rate futures | (65 | ) | (A) | (520 | ) | (A) | ||
Interest rate futures | 87 | (B) | 490 | (B) | ||||
Interest rate swaptions | 842 | (A) | 1,584 | (A) | ||||
Interest rate swaptions | (1,710 | ) | (B) | (1,308 | ) | (B) | ||
Other forward contracts | 14,060 | (A) | (31,060 | ) | (A) | |||
Other forward contracts | 39,577 | (B) | (32,735 | ) | (B) | |||
Cross-currency swaps | (7,085 | ) | (A) | — | (A) | |||
Total derivatives not designated as hedging instruments | $ | 47,487 | $ | (66,526 | ) |
(A) Net investment income.
(B) Represents realized gains (losses) on closed positions recorded in realized investment gains (losses), net.
23
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
8. Summary of Offsetting Assets and Liabilities
The Company enters into derivative transactions and short-term reverse repurchase agreements with several approved counterparties. The Company’s derivative transactions are generally governed by ISDA or MSFTA Master Agreements which provide for legally enforceable set-off and close-out netting in the event of default or bankruptcy of the Company’s counterparties. The Company’s ISDA and MSFTA Master Agreements generally include provisions which require both the pledging and accepting of collateral in connection with its derivative transactions. These provisions have the effect of securing each party’s position to the extent of collateral held. Short-term reverse repurchase agreements also include collateral provisions with the counterparty. The following tables summarize the effect of master netting arrangements on the Company’s financial position in the normal course of business and in the event of default or bankruptcy of the Company’s counterparties:
June 30, 2014 | ||||||||||||||||
Gross fair value not offset | ||||||||||||||||
in balance sheets | ||||||||||||||||
Gross fair value of | Financial | Cash collateral | Net | |||||||||||||
Financial instruments (assets): | recognized assets (1) | instruments | received | fair value | ||||||||||||
Derivative instruments (2) | $ | 41,887 | $ | (31,114 | ) | $ | 1,358 | $ | 9,415 | |||||||
Short-term reverse repurchase agreements (3) | 600,000 | (600,000 | ) | — | — | |||||||||||
Total financial instruments (assets) | $ | 641,887 | $ | (631,114 | ) | $ | 1,358 | $ | 9,415 |
June 30, 2014 | ||||||||||||||||
Gross fair value not offset | ||||||||||||||||
in balance sheets | ||||||||||||||||
Gross fair value of | Financial | Cash collateral | Net | |||||||||||||
Financial instruments (liabilities): | recognized liabilities (1) | instruments | pledged | fair value | ||||||||||||
Derivative instruments (4) | $ | 177,685 | $ | (31,114 | ) | $ | (146,362 | ) | $ | 209 |
(1) The gross fair value of derivative instrument and short-term reverse repurchase agreement assets are not netted against offsetting liabilities for presentation on the condensed consolidated balance sheets.
(2) The estimated fair value of derivative instrument assets is reported in other assets in the condensed consolidated balance sheets. Derivative transactions entered into under ISDA master agreements include income and expense accruals.
(3) The estimated fair value of short-term reverse repurchase agreement assets is reported in short-term investments, available-for-sale in the condensed consolidated balance sheets. The collateral is held by an independent third-party custodian under a tri-party agreement.
(4) The estimated fair value of derivative instrument liabilities is reported in other liabilities in the condensed consolidated balance sheets. Derivative transactions entered into under ISDA master agreements include income and expense accruals.
December 31, 2013 | ||||||||||||||||
Gross fair value not offset | ||||||||||||||||
in balance sheets | ||||||||||||||||
Gross fair value of | Financial | Cash collateral | Net | |||||||||||||
Financial instruments: | recognized assets/liabilities (1) | instruments | received/(pledged) | fair value | ||||||||||||
Derivative instruments (assets) (2) | $ | 25,250 | $ | (25,023 | ) | $ | — | $ | 227 | |||||||
Derivative instruments (liabilities) (3) | 171,387 | (25,023 | ) | (143,540 | ) | 2,824 |
(1) The gross fair value of derivative instrument assets is not netted against offsetting liabilities for presentation on the condensed consolidated balance sheets.
(2) The estimated fair value of derivative instrument assets is reported in other assets in the condensed consolidated balance sheets and includes income and expense accruals.
(3) The estimated fair value of derivative instrument liabilities is reported in other liabilities in the condensed consolidated balance sheets and includes income and expense accruals.
24
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
9. Fair Value Measurements
Recurring fair value measurements
The following tables present the Company’s financial assets and liabilities carried at fair value on a recurring basis by fair value hierarchy category:
Assets and liabilities measured at fair value on a recurring basis | |||||||||||||||
June 30, 2014 | |||||||||||||||
Quoted prices | Significant | ||||||||||||||
in active markets for identical assets (Level 1) | other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | ||||||||||||
Assets | |||||||||||||||
Fixed maturities available-for-sale: | |||||||||||||||
U.S. government direct obligations and U.S. agencies | $ | — | $ | 931,647 | $ | — | $ | 931,647 | |||||||
Obligations of U.S. states and their subdivisions | — | 2,150,298 | — | 2,150,298 | |||||||||||
Foreign government securities | — | 2,533 | — | 2,533 | |||||||||||
Corporate debt securities | — | 11,427,512 | 6,371 | 11,433,883 | |||||||||||
Asset-backed securities | — | 1,377,981 | 220,134 | 1,598,115 | |||||||||||
Residential mortgage-backed securities | — | 221,592 | — | 221,592 | |||||||||||
Commercial mortgage-backed securities | — | 897,216 | — | 897,216 | |||||||||||
Collateralized debt obligations | — | 10,936 | 29 | 10,965 | |||||||||||
Total fixed maturities available-for-sale | — | 17,019,715 | 226,534 | 17,246,249 | |||||||||||
Fixed maturities held for trading: | |||||||||||||||
U.S. government direct obligations and U.S. agencies | — | 57,171 | — | 57,171 | |||||||||||
Corporate debt securities | — | 58,818 | — | 58,818 | |||||||||||
Commercial mortgage-backed securities | — | 1,076 | — | 1,076 | |||||||||||
Total fixed maturities held for trading | — | 117,065 | — | 117,065 | |||||||||||
Short-term investments available-for-sale | 356,437 | 2,568,698 | — | 2,925,135 | |||||||||||
Collateral under securities lending agreements | 32,275 | — | — | 32,275 | |||||||||||
Collateral under derivative counterparty collateral agreements | 149,610 | — | — | 149,610 | |||||||||||
Derivative instruments designated as hedges: | |||||||||||||||
Interest rate swaps | — | 19,139 | — | 19,139 | |||||||||||
Cross-currency swaps | — | 27 | — | 27 | |||||||||||
Derivative instruments not designated as hedges: | |||||||||||||||
Interest rate swaps | — | 1,567 | — | 1,567 | |||||||||||
Interest rate swaptions | — | 456 | — | 456 | |||||||||||
Other forward contracts | — | 25,748 | — | 25,748 | |||||||||||
Cross-currency swaps | — | 279 | — | 279 | |||||||||||
Total derivative instruments | — | 47,216 | — | 47,216 | |||||||||||
Separate account assets | 15,897,424 | 11,821,309 | — | 27,718,733 | |||||||||||
Total assets | $ | 16,435,746 | $ | 31,574,003 | $ | 226,534 | $ | 48,236,283 | |||||||
Liabilities | |||||||||||||||
Payable under securities lending agreements | $ | 32,275 | $ | — | $ | — | $ | 32,275 | |||||||
Derivative instruments designated as hedges: | |||||||||||||||
Interest rate swaps | — | 189 | — | 189 | |||||||||||
Cross-currency swaps | — | 9,965 | — | 9,965 | |||||||||||
Derivative instruments not designated as hedges: | |||||||||||||||
Interest rate swaps | — | 1,589 | — | 1,589 | |||||||||||
Other forward contracts | — | 11,688 | — | 11,688 | |||||||||||
Cross-currency swaps | — | 157,942 | — | 157,942 | |||||||||||
Total derivative instruments | — | 181,373 | — | 181,373 | |||||||||||
Separate account liabilities (1) | 16 | 140,045 | — | 140,061 | |||||||||||
Total liabilities | $ | 32,291 | $ | 321,418 | $ | — | $ | 353,709 |
(1) Includes only separate account instruments which are carried at the fair value of the underlying liabilities owned by the separate accounts.
25
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Assets and liabilities measured at fair value on a recurring basis | |||||||||||||||
December 31, 2013 | |||||||||||||||
Quoted prices | Significant | ||||||||||||||
in active markets for identical assets (Level 1) | other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | ||||||||||||
Assets | |||||||||||||||
Fixed maturities available-for-sale: | |||||||||||||||
U.S. government direct obligations and U.S. agencies | $ | — | $ | 3,064,639 | $ | — | $ | 3,064,639 | |||||||
Obligations of U.S. states and their subdivisions | — | 1,943,587 | — | 1,943,587 | |||||||||||
Foreign government securities | — | 2,603 | — | 2,603 | |||||||||||
Corporate debt securities | — | 10,792,329 | 6,652 | 10,798,981 | |||||||||||
Asset-backed securities | — | 1,402,679 | 252,958 | 1,655,637 | |||||||||||
Residential mortgage-backed securities | — | 249,585 | — | 249,585 | |||||||||||
Commercial mortgage-backed securities | — | 742,124 | — | 742,124 | |||||||||||
Collateralized debt obligations | — | 12,356 | 32 | 12,388 | |||||||||||
Total fixed maturities available-for-sale | — | 18,209,902 | 259,642 | 18,469,544 | |||||||||||
Fixed maturities held for trading: | |||||||||||||||
U.S. government direct obligations and U.S. agencies | — | 236,000 | — | 236,000 | |||||||||||
Corporate debt securities | — | 58,171 | — | 58,171 | |||||||||||
Asset-backed securities | — | 40,858 | — | 40,858 | |||||||||||
Commercial mortgage-backed securities | — | 1,026 | — | 1,026 | |||||||||||
Total fixed maturities held for trading | — | 336,055 | — | 336,055 | |||||||||||
Short-term investments available-for-sale | 254,378 | 39,909 | — | 294,287 | |||||||||||
Collateral under securities lending agreements | 18,534 | — | — | 18,534 | |||||||||||
Collateral under derivative counterparty collateral agreements | 143,710 | — | — | 143,710 | |||||||||||
Derivative instruments designated as hedges: | |||||||||||||||
Interest rate swaps | — | 18,927 | — | 18,927 | |||||||||||
Derivative instruments not designated as hedges: | |||||||||||||||
Interest rate swaps | — | 1,454 | — | 1,454 | |||||||||||
Interest rate swaptions | — | 1,176 | — | 1,176 | |||||||||||
Cross-currency swaps | — | 1,921 | — | 1,921 | |||||||||||
Total derivative instruments | — | 23,478 | — | 23,478 | |||||||||||
Separate account assets | 14,861,680 | 11,769,224 | — | 26,630,904 | |||||||||||
Total assets | $ | 15,278,302 | $ | 30,378,568 | $ | 259,642 | $ | 45,916,512 | |||||||
Liabilities | |||||||||||||||
Payable under securities lending agreements | $ | 18,534 | $ | — | $ | — | $ | 18,534 | |||||||
Derivative instruments designated as hedges: | |||||||||||||||
Interest rate swaps | — | 147 | — | 147 | |||||||||||
Cross-currency swaps | — | 7,843 | — | 7,843 | |||||||||||
Derivative instruments not designated as hedges: | |||||||||||||||
Interest rate swaps | — | 3,492 | — | 3,492 | |||||||||||
Cross-currency swaps | — | 156,261 | — | 156,261 | |||||||||||
Total derivative instruments | — | 167,743 | — | 167,743 | |||||||||||
Separate account liabilities (1) | 2 | 166,325 | — | 166,327 | |||||||||||
Total liabilities | $ | 18,536 | $ | 334,068 | $ | — | $ | 352,604 |
(1) Includes only separate account instruments which are carried at the fair value of the underlying liabilities owned by the separate accounts.
26
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
The methods and assumptions used to estimate the fair value of the Company’s financial assets and liabilities carried at fair value on a recurring basis are as follows:
Fixed maturity investments
The fair values for fixed maturity investments are based upon market prices from independent pricing services. In cases where market prices are not readily available, such as for private fixed maturity investments, fair values are estimated by the Company. To determine estimated fair value for these instruments, the Company generally utilizes discounted cash flows calculated at current market rates on investments of similar quality and term. Fair value estimates are made at a specific point in time, based on available market information and judgments about financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty.
Short-term investments and securities lending agreements
The amortized cost of short-term investments, collateral under securities lending agreements and payable under securities lending agreements is a reasonable estimate of fair value due to their short-term nature and high credit quality of the issuers.
Derivative counterparty collateral agreements
Included in other assets is cash collateral received from or pledged to derivative counterparties and included in other liabilities is the obligation to return the cash collateral to the counterparties. The carrying value of the collateral is a reasonable estimate of fair value.
Derivative instruments
Included in other assets and other liabilities are derivative financial instruments. The estimated fair values of OTC derivatives, primarily consisting of cross-currency swaps, interest rate swaps, interest rate swaptions and other forward contracts, are the estimated amounts the Company would receive or pay to terminate the agreements at the end of each reporting period, taking into consideration current interest rates and other relevant factors.
Separate account assets and liabilities
Separate account assets and liabilities primarily include investments in mutual fund, fixed maturity and short-term securities. Mutual funds are recorded at net asset value, which approximates fair value, on a daily basis. The fixed maturity and short-term investments are valued in the same manner and using the same pricing sources and inputs as the fixed maturity and short-term investments of the Company.
The following tables present additional information about assets and liabilities measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
Recurring Level 3 financial assets and liabilities | |||||||||||||||
Three Months Ended June 30, 2014 | |||||||||||||||
Fixed maturities available-for-sale | |||||||||||||||
Corporate | Asset-backed | Collateralized | |||||||||||||
debt securities | securities | debt obligations | Total | ||||||||||||
Balance, April 1, 2014 | $ | 6,523 | $ | 246,025 | $ | 29 | $ | 252,577 | |||||||
Realized and unrealized gains (losses) included in: | |||||||||||||||
Other comprehensive income (loss) | 17 | (12,407 | ) | — | (12,390 | ) | |||||||||
Settlements | (169 | ) | (13,484 | ) | — | (13,653 | ) | ||||||||
Balances, June 30, 2014 | $ | 6,371 | $ | 220,134 | $ | 29 | $ | 226,534 | |||||||
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at June 30, 2014 | $ | — | $ | — | $ | — | $ | — |
27
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Recurring Level 3 financial assets and liabilities | |||||||||||||||
Three Months Ended June 30, 2013 | |||||||||||||||
Fixed maturities available-for-sale | |||||||||||||||
Corporate | Asset-backed | Collateralized | |||||||||||||
debt securities | securities | debt obligations | Total | ||||||||||||
Balance, April 1, 2013 | $ | 1,801 | $ | 261,503 | $ | 32 | $ | 263,336 | |||||||
Realized and unrealized gains (losses) included in: | |||||||||||||||
Other comprehensive income (loss) | (7 | ) | 11,589 | — | 11,582 | ||||||||||
Settlements | 2 | (12,324 | ) | — | (12,322 | ) | |||||||||
Balances, June 30, 2013 | $ | 1,796 | $ | 260,768 | $ | 32 | $ | 262,596 | |||||||
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at June 30, 2013 | $ | — | $ | — | $ | — | $ | — |
Recurring Level 3 financial assets and liabilities | |||||||||||||||
Six Months Ended June 30, 2014 | |||||||||||||||
Fixed maturities available-for-sale | |||||||||||||||
Corporate | Asset-backed | Collateralized | |||||||||||||
debt securities | securities | debt obligations | Total | ||||||||||||
Balance, January 1, 2014 | $ | 6,652 | $ | 252,958 | $ | 32 | $ | 259,642 | |||||||
Realized and unrealized gains (losses) included in: | |||||||||||||||
Other comprehensive income (loss) | 75 | (5,594 | ) | (3 | ) | (5,522 | ) | ||||||||
Settlements | (356 | ) | (27,230 | ) | — | (27,586 | ) | ||||||||
Balances, June 30, 2014 | $ | 6,371 | $ | 220,134 | $ | 29 | $ | 226,534 | |||||||
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at June 30, 2014 | $ | — | $ | — | $ | — | $ | — |
Recurring Level 3 financial assets and liabilities | |||||||||||||||
Six Months Ended June 30, 2013 | |||||||||||||||
Fixed maturities available-for-sale | |||||||||||||||
Corporate | Asset-backed | Collateralized | |||||||||||||
debt securities | securities | debt obligations | Total | ||||||||||||
Balance, January 1, 2013 | $ | 1,822 | $ | 265,538 | $ | 32 | $ | 267,392 | |||||||
Realized and unrealized gains (losses) included in: | |||||||||||||||
Other comprehensive income (loss) | (23 | ) | 18,594 | — | 18,571 | ||||||||||
Settlements | (3 | ) | (23,364 | ) | — | (23,367 | ) | ||||||||
Balance at June 30, 2013 | $ | 1,796 | $ | 260,768 | $ | 32 | $ | 262,596 | |||||||
Total gains (losses) for the period included in net income attributable to the change in unrealized gains and losses relating to assets held at June 30, 2013 | $ | — | $ | — | $ | — | $ | — |
28
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
The following table presents significant unobservable inputs used during the valuation of certain assets categorized within Level 3 of the recurring fair value measurements table:
June 30, 2014 | |||||||||
Fair Value | Valuation Technique | Unobservable Input | Weighted Average | ||||||
Fixed maturities available-for-sale: | |||||||||
Asset-backed securities (1) | $ | 220,094 | Internal model pricing | Prepayment speed assumption | 9 | ||||
Constant default rate assumption | 5 | ||||||||
Adjusted ABX Index spread assumption (2) | 493 |
(1) Includes home improvement loans only.
(2) Includes an internally calculated liquidity premium adjustment of 217.
At June 30, 2014, after adjusting the Asset Backed Securities Index (“ABX Index”) spread assumption by the liquidity premium, the overall discount rate ranged from 284 to 604 basis points. The constant default rate assumption ranged from 2.0 to 12.7.
December 31, 2013 | |||||||||
Fair Value | Valuation Technique | Unobservable Input | Weighted Average | ||||||
Fixed maturities available-for-sale: | |||||||||
Asset-backed securities (1) | $ | 252,902 | Internal model pricing | Prepayment speed assumption | 9 | ||||
Constant default rate assumption | 5 | ||||||||
Adjusted ABX Index spread assumption (2) | 455 |
(1) Includes home improvement loans only.
(2) Includes an internally calculated liquidity premium adjustment of 217.
At December 31, 2013, after adjusting the ABX Index spread assumption by the liquidity premium, the overall discount rate ranged from 327 to 647 basis points. The constant default rate assumption ranged from 2.0 to 12.9.
The significant unobservable inputs used in the fair value measurement of asset-backed securities are prepayment speed assumptions, constant default rate assumptions and the ABX Index spread adjusted by an internally calculated liquidity premium with the primary inputs being the constant default rate assumption and the adjusted ABX Index spread assumption. As the constant default rate assumption or the adjusted ABX Index spread assumption increases, the price and therefore, the fair value, of the securities decreases.
29
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Fair value of financial instruments
The following tables summarize the carrying amounts and estimated fair values of the Company’s financial instruments not carried at fair value on a recurring basis:
June 30, 2014 | December 31, 2013 | ||||||||||||||
Carrying | Estimated | Carrying | Estimated | ||||||||||||
amount | fair value | amount | fair value | ||||||||||||
Assets | |||||||||||||||
Mortgage loans on real estate | $ | 3,095,903 | $ | 3,260,765 | $ | 3,134,255 | $ | 3,197,292 | |||||||
Policy loans | 4,239,130 | 4,239,130 | 4,185,472 | 4,185,472 | |||||||||||
Limited partnership interests | 41,512 | 41,282 | 44,551 | 42,433 | |||||||||||
Other investments | 16,192 | 42,809 | 16,643 | 42,814 | |||||||||||
Liabilities | |||||||||||||||
Annuity contract benefits without life contingencies | $ | 10,337,807 | $ | 10,219,466 | $ | 10,263,043 | $ | 9,986,464 | |||||||
Policyholders’ funds | 343,838 | 343,838 | 345,689 | 345,689 | |||||||||||
Commercial paper | 99,891 | 99,891 | 98,990 | 98,990 | |||||||||||
Notes payable | 532,533 | 556,456 | 532,519 | 541,918 |
The methods and assumptions used to estimate the fair value of financial instruments not carried at fair value on a recurring basis are summarized as follows:
Mortgage loans on real estate
Mortgage loan fair value estimates are generally based on discounted cash flows. A discount rate matrix is used where the discount rate valuing a specific mortgage generally corresponds to that mortgage’s remaining term and credit quality. Management believes the discount rate used is comparable to the credit, interest rate, term, servicing costs and risks of loans similar to the portfolio loans that the Company would make today given its internal pricing strategy. The estimated fair value is classified as Level 2.
Policy loans
Policy loans are funds provided to policy holders in return for a claim on the policy. The funds provided are limited to the cash surrender value of the underlying policy. The nature of policy loans is to have a negligible default risk as the loans are fully collateralized by the value of the policy. Policy loans do not have a stated maturity and the balances and accrued interest are repaid either by the policyholder or with proceeds from the policy. Due to the collateralized nature of policy loans and unpredictable timing of repayments, the Company believes the fair value of policy loans approximates carrying value. The estimated fair value is classified as Level 2.
Limited partnership interests
Limited partnership interests, accounted for using the cost method, represent the Company’s minor ownership interests in pooled investment funds. These funds employ varying investment strategies that principally make private equity investments across diverse industries and geographical focuses. The estimated fair value was determined using the partnership financial statement reported capital account or net asset value adjusted for other relevant information which may impact the exit value of the investments. Distributions by these investments are generated from investment gains, from operating income generated by the underlying investments of the funds and from liquidation of the underlying assets of the funds which are estimated to be liquidated over the next one to 10 years. The estimated fair value is classified as Level 3.
30
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Other investments
Other investments primarily include real estate held for investment. The estimated fair value for real estate is based on the unadjusted annual appraised value which includes factors such as comparable property sales, property income analysis, and capitalization rates. The estimated fair value is classified as Level 2.
Annuity contract benefits without life contingencies
The estimated fair value of annuity contract benefits without life contingencies is estimated by discounting the projected expected cash flows to the maturity of the contracts utilizing risk-free spot interest rates plus a provision for the Company’s credit risk. The estimated fair value is classified as Level 2.
Policyholders’ funds
The carrying amount of policyholders’ funds approximates the fair value since the Company can change the interest credited rates with 30 days notice. The estimated fair value is classified as Level 2.
Commercial paper
The amortized cost of commercial paper is a reasonable estimate of fair value due to its short-term nature and the high credit quality of the obligor. The estimated fair value is classified as Level 2.
Notes payable
The estimated fair value of the notes payable to GWL&A Financial is based upon quoted market prices from independent pricing services of securities with characteristics similar to those of the notes payable. The estimated fair value is classified as Level 2.
31
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
10. Other Comprehensive Income
The following tables present the accumulated balances for each classification of other comprehensive income (loss):
Three Months Ended June 30, 2014 | |||||||||||||||||||
Unrealized holding gains / losses arising on fixed maturities, available-for- sale | Unrealized holding gains / losses arising on cash flow hedges | Future policy benefits, DAC and VOBA adjustments | Employee benefit plan adjustment | Total | |||||||||||||||
Balances, April 1, 2014 | $ | 622,302 | $ | 25,715 | $ | (107,211 | ) | $ | (43,786 | ) | $ | 497,020 | |||||||
Other comprehensive income (loss) before reclassifications | 169,675 | 1,956 | (19,318 | ) | — | 152,313 | |||||||||||||
Amounts reclassified from AOCI | (1,645 | ) | (2,603 | ) | — | — | (4,248 | ) | |||||||||||
Net current period other comprehensive income (loss) | 168,030 | (647 | ) | (19,318 | ) | — | 148,065 | ||||||||||||
Balances, June 30, 2014 | $ | 790,332 | $ | 25,068 | $ | (126,529 | ) | $ | (43,786 | ) | $ | 645,085 |
Three Months Ended June 30, 2013 | |||||||||||||||||||
Unrealized holding gains / losses arising on fixed maturities, available-for- sale | Unrealized holding gains / losses arising on cash flow hedges | Future policy benefits, DAC and VOBA adjustments | Employee benefit plan adjustment | Total | |||||||||||||||
Balances, April 1, 2013 | $ | 885,393 | $ | 40,068 | $ | (184,162 | ) | $ | (122,795 | ) | $ | 618,504 | |||||||
Other comprehensive income (loss) before reclassifications | (382,650 | ) | (4,576 | ) | 78,763 | — | (308,463 | ) | |||||||||||
Amounts reclassified from AOCI | 3,747 | (2,106 | ) | — | — | 1,641 | |||||||||||||
Net current period other comprehensive income (loss) | (378,903 | ) | (6,682 | ) | 78,763 | — | (306,822 | ) | |||||||||||
Balances, June 30, 2013 | $ | 506,490 | $ | 33,386 | $ | (105,399 | ) | $ | (122,795 | ) | $ | 311,682 |
Six Months Ended June 30, 2014 | |||||||||||||||||||
Unrealized holding gains / losses arising on fixed maturities, available-for- sale | Unrealized holding gains / losses arising on cash flow hedges | Future policy benefits, DAC and VOBA adjustments | Employee benefit plan adjustment | Total | |||||||||||||||
Balances, January 1, 2014 | $ | 434,023 | $ | 25,517 | $ | (70,000 | ) | $ | (43,786 | ) | $ | 345,754 | |||||||
Other comprehensive income (loss) before reclassifications | 372,019 | 2,531 | (56,529 | ) | — | 318,021 | |||||||||||||
Amounts reclassified from AOCI | (15,710 | ) | (2,980 | ) | — | — | (18,690 | ) | |||||||||||
Net current period other comprehensive income (loss) | 356,309 | (449 | ) | (56,529 | ) | — | 299,331 | ||||||||||||
Balances, June 30, 2014 | $ | 790,332 | $ | 25,068 | $ | (126,529 | ) | $ | (43,786 | ) | $ | 645,085 |
32
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30, 2013 | |||||||||||||||||||
Unrealized holding gains / losses arising on fixed maturities, available-for- sale | Unrealized holding gains / losses arising on cash flow hedges | Future policy benefits, DAC and VOBA adjustments | Employee benefit plan adjustment | Total | |||||||||||||||
Balances, January 1, 2013 | $ | 927,678 | $ | 24,962 | $ | (194,146 | ) | $ | (122,795 | ) | $ | 635,699 | |||||||
Other comprehensive income (loss) before reclassifications | (409,418 | ) | 10,990 | 88,747 | — | (309,681 | ) | ||||||||||||
Amounts reclassified from AOCI | (11,770 | ) | (2,566 | ) | — | — | (14,336 | ) | |||||||||||
Net current period other comprehensive income (loss) | (421,188 | ) | 8,424 | 88,747 | — | (324,017 | ) | ||||||||||||
Balances, June 30, 2013 | $ | 506,490 | $ | 33,386 | $ | (105,399 | ) | $ | (122,795 | ) | $ | 311,682 |
The following tables present the composition of other comprehensive income (loss):
Three Months Ended June 30, 2014 | |||||||||||
Before-tax | Tax (expense) | Net-of-tax | |||||||||
amount | benefit | amount | |||||||||
Unrealized holding gains (losses) arising on fixed maturities, available-for-sale | $ | 261,039 | $ | (91,364 | ) | $ | 169,675 | ||||
Unrealized holding gains (losses) arising on cash flow hedges | 3,010 | (1,054 | ) | 1,956 | |||||||
Reclassification adjustment for (gains) losses realized in net income | (6,536 | ) | 2,288 | (4,248 | ) | ||||||
Net unrealized gains (losses) | 257,513 | (90,130 | ) | 167,383 | |||||||
Future policy benefits, DAC and VOBA adjustments | (29,720 | ) | 10,402 | (19,318 | ) | ||||||
Net unrealized gains (losses) | 227,793 | (79,728 | ) | 148,065 | |||||||
Other comprehensive income (loss) | $ | 227,793 | $ | (79,728 | ) | $ | 148,065 |
Three Months Ended June 30, 2013 | |||||||||||
Before-tax | Tax (expense) | Net-of-tax | |||||||||
amount | benefit | amount | |||||||||
Unrealized holding gains (losses) arising on fixed maturities, available-for-sale | $ | (588,693 | ) | $ | 206,043 | $ | (382,650 | ) | |||
Unrealized holding gains (losses) arising on cash flow hedges | (7,040 | ) | 2,464 | (4,576 | ) | ||||||
Reclassification adjustment for (gains) losses realized in net income | 2,524 | (883 | ) | 1,641 | |||||||
Net unrealized gains (losses) | (593,209 | ) | 207,624 | (385,585 | ) | ||||||
Future policy benefits, DAC and VOBA adjustments | 121,174 | (42,411 | ) | 78,763 | |||||||
Net unrealized gains (losses) | (472,035 | ) | 165,213 | (306,822 | ) | ||||||
Other comprehensive income (loss) | $ | (472,035 | ) | $ | 165,213 | $ | (306,822 | ) |
33
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30, 2014 | |||||||||||
Before-tax | Tax (expense) | Net-of-tax | |||||||||
amount | benefit | amount | |||||||||
Unrealized holding gains (losses) arising on fixed maturities, available-for-sale | $ | 572,337 | $ | (200,318 | ) | $ | 372,019 | ||||
Unrealized holding gains (losses) arising on cash flow hedges | 3,894 | (1,363 | ) | 2,531 | |||||||
Reclassification adjustment for (gains) losses realized in net income | (28,754 | ) | 10,064 | (18,690 | ) | ||||||
Net unrealized gains (losses) | 547,477 | (191,617 | ) | 355,860 | |||||||
Future policy benefits, DAC and VOBA adjustments | (86,968 | ) | 30,439 | (56,529 | ) | ||||||
Net unrealized gains (losses) | 460,509 | (161,178 | ) | 299,331 | |||||||
Other comprehensive income (loss) | $ | 460,509 | $ | (161,178 | ) | $ | 299,331 |
Six Months Ended June 30, 2013 | |||||||||||
Before-tax | Tax (expense) | Net-of-tax | |||||||||
amount | benefit | amount | |||||||||
Unrealized holding gains (losses) arising on fixed maturities, available-for-sale | $ | (629,873 | ) | $ | 220,455 | $ | (409,418 | ) | |||
Unrealized holding gains (losses) arising on cash flow hedges | 16,908 | (5,918 | ) | 10,990 | |||||||
Reclassification adjustment for (gains) losses realized in net income | (22,056 | ) | 7,720 | (14,336 | ) | ||||||
Net unrealized gains (losses) | (635,021 | ) | 222,257 | (412,764 | ) | ||||||
Future policy benefits, DAC and VOBA adjustments | 136,532 | (47,785 | ) | 88,747 | |||||||
Net unrealized gains (losses) | (498,489 | ) | 174,472 | (324,017 | ) | ||||||
Other comprehensive income (loss) | $ | (498,489 | ) | $ | 174,472 | $ | (324,017 | ) |
The following tables presents the reclassifications out of accumulated other comprehensive income (loss):
Three Months Ended June 30, 2014 | ||||||
Details about accumulated other comprehensive income (loss) components | Amount reclassified from accumulated other comprehensive income (loss) | Affected line item in the statement where net income is presented | ||||
Unrealized (gains) losses arising on fixed maturities, available-for-sale | $ | (2,531 | ) | Other realized investment (gains) losses, net | ||
(2,531 | ) | Total before tax | ||||
(886 | ) | Tax expense or benefit | ||||
$ | (1,645 | ) | Net of tax | |||
Unrealized (gains) losses arising on cash flow hedges | $ | (4,005 | ) | Net investment income | ||
(4,005 | ) | Total before tax | ||||
(1,402 | ) | Tax expense or benefit | ||||
$ | (2,603 | ) | Net of tax | |||
Total reclassification | $ | (4,248 | ) | Net of tax |
34
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Three Months Ended June 30, 2013 | ||||||
Details about accumulated other comprehensive income (loss) components | Amount reclassified from accumulated other comprehensive income (loss) | Affected line item in the statement where net income is presented | ||||
Unrealized (gains) losses arising on fixed maturities, available-for-sale | $ | 5,765 | Other realized investment (gains) losses, net | |||
5,765 | Total before tax | |||||
2,018 | Tax expense or benefit | |||||
$ | 3,747 | Net of tax | ||||
Unrealized (gains) losses arising on cash flow hedges | $ | (3,241 | ) | Net investment income | ||
(3,241 | ) | Total before tax | ||||
(1,135 | ) | Tax expense or benefit | ||||
$ | (2,106 | ) | Net of tax | |||
Total reclassification | $ | 1,641 | Net of tax |
Six Months Ended June 30, 2014 | ||||||
Details about accumulated other comprehensive income (loss) components | Amount reclassified from accumulated other comprehensive income (loss) | Affected line item in the statement where net income is presented | ||||
Unrealized (gains) losses arising on fixed maturities, available-for-sale | $ | (24,169 | ) | Other realized investment (gains) losses, net | ||
(24,169 | ) | Total before tax | ||||
(8,459 | ) | Tax expense or benefit | ||||
$ | (15,710 | ) | Net of tax | |||
Unrealized (gains) losses arising on cash flow hedges | $ | (4,585 | ) | Net investment income | ||
(4,585 | ) | Total before tax | ||||
(1,605 | ) | Tax expense or benefit | ||||
$ | (2,980 | ) | Net of tax | |||
Total reclassification | $ | (18,690 | ) | Net of tax |
35
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30, 2013 | ||||||
Details about accumulated other comprehensive income (loss) components | Amount reclassified from accumulated other comprehensive income (loss) | Affected line item in the statement where net income is presented | ||||
Unrealized (gains) losses arising on fixed maturities, available-for-sale | $ | (18,108 | ) | Other realized investment (gains) losses, net | ||
(18,108 | ) | Total before tax | ||||
(6,338 | ) | Tax expense or benefit | ||||
$ | (11,770 | ) | Net of tax | |||
Unrealized (gains) losses arising on cash flow hedges | $ | (3,948 | ) | Net investment income | ||
(3,948 | ) | Total before tax | ||||
(1,382 | ) | Tax expense or benefit | ||||
$ | (2,566 | ) | Net of tax | |||
Total reclassification | $ | (14,336 | ) | Net of tax |
11. Employee Benefit Plans
Net periodic cost (benefit) of the Defined Benefit Pension, Post-Retirement Medical and Supplemental Executive Retirement plans included in general insurance expenses in the accompanying condensed consolidated statements of income includes the following components:
Three Months Ended June 30, | |||||||||||||||||||||||
Defined Benefit Pension Plan | Post-Retirement Medical Plan | Supplemental Executive Retirement Plan | |||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||
Components of net periodic cost (benefit): | |||||||||||||||||||||||
Service cost | $ | 1,175 | $ | 1,260 | $ | 206 | $ | 233 | $ | 205 | $ | 250 | |||||||||||
Interest cost | 5,739 | 5,171 | 130 | 123 | 696 | 637 | |||||||||||||||||
Expected return on plan assets | (7,319 | ) | (6,029 | ) | — | — | — | — | |||||||||||||||
Amortization of unrecognized prior service cost (benefit) | 13 | 13 | (427 | ) | (413 | ) | 233 | 233 | |||||||||||||||
Amortization of loss (gain) from earlier periods | 644 | 3,895 | (130 | ) | (104 | ) | 93 | 325 | |||||||||||||||
Net periodic cost (benefit) | $ | 252 | $ | 4,310 | $ | (221 | ) | $ | (161 | ) | $ | 1,227 | $ | 1,445 |
36
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30, | |||||||||||||||||||||||
Defined Benefit Pension Plan | Post-Retirement Medical Plan | Supplemental Executive Retirement Plan | |||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||
Components of net periodic cost (benefit): | |||||||||||||||||||||||
Service cost | $ | 2,349 | $ | 2,519 | $ | 412 | $ | 465 | $ | 410 | $ | 501 | |||||||||||
Interest cost | 11,477 | 10,344 | 260 | 246 | 1,393 | 1,274 | |||||||||||||||||
Expected return on plan assets | (14,638 | ) | (12,058 | ) | — | — | — | — | |||||||||||||||
Amortization of unrecognized prior service cost (benefit) | 26 | 26 | (853 | ) | (825 | ) | 466 | 466 | |||||||||||||||
Amortization of loss (gain) from earlier periods | 1,289 | 7,789 | (260 | ) | (207 | ) | 185 | 650 | |||||||||||||||
Net periodic cost (benefit) | $ | 503 | $ | 8,620 | $ | (441 | ) | $ | (321 | ) | $ | 2,454 | $ | 2,891 |
The Company expects to make payments of approximately $430 with respect to its Post-Retirement Medical Plan and $17,003 with respect to its Supplemental Executive Retirement Plan during the year ended December 31, 2014. The Company expects to make contributions of $13,407 to its Defined Benefit Pension Plan during the year ended December 31, 2014. A December 31 measurement date is used for the employee benefit plans.
The following table summarizes contributions to the Defined Benefit Pension Plan and payments made to the Post-Retirement Medical Plan and the Supplemental Executive Retirement Plan:
Three Months Ended June 30, | |||||||
2014 | 2013 | ||||||
Contributions to the Defined Benefit Pension Plan | $ | 2,690 | $ | 2,025 | |||
Payments to the Post-Retirement Medical Plan | 84 | 129 | |||||
Payments to the Supplemental Executive Retirement Plan | 882 | 930 |
Six Months Ended June 30, | |||||||
2014 | 2013 | ||||||
Contributions to the Defined Benefit Pension Plan | $ | 4,714 | $ | 2,025 | |||
Payments to the Post-Retirement Medical Plan | 215 | 282 | |||||
Payments to the Supplemental Executive Retirement Plan | 1,789 | 1,860 |
37
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
12. Income Taxes
The provision for income taxes is comprised of the following:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Current | $ | 22,551 | $ | (933 | ) | $ | 53,596 | $ | 25,902 | ||||||
Deferred | 17,629 | (3,136 | ) | 36,938 | 7,970 | ||||||||||
Total income tax provision | $ | 40,180 | $ | (4,069 | ) | $ | 90,534 | $ | 33,872 |
The following table presents a reconciliation between the statutory federal income tax rate and the Company’s effective income tax rate:
Six Months Ended June 30, | |||||
2014 | 2013 | ||||
Statutory federal income tax rate | 35.0 | % | 35.0 | % | |
Income tax effect of: | |||||
Investment income not subject to federal tax | (1.9 | )% | (2.4 | )% | |
Tax credits | (0.2 | )% | (1.5 | )% | |
State income taxes, net of federal benefit | 1.4 | % | 1.8 | % | |
Other, net | 0.5 | % | 2.1 | % | |
Effective income tax rate | 34.8 | % | 35.0 | % |
During the six months ended June 30, 2014 and 2013, the Company recorded an increase in unrecognized tax benefits in the amount of $4,372 and $5,776, respectively. The Company does not anticipate significant changes to its unrecognized tax benefits in the next twelve months.
The Company files income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years 2009 and prior. Tax years 2010 through 2013 are open to federal examination by the Internal Revenue Service (“IRS”). The Company does not expect significant increases or decreases to unrecognized tax benefits relating to federal, state or local audits.
38
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
13. Segment Information
The Company has three reportable segments: Individual Markets, Retirement Services and Other.
Individual Markets
The Individual Markets reporting and operating segment distributes life insurance, annuity and retirement products (including individual retirement accounts (“IRAs”)) to both individuals and businesses through various distribution channels. Life insurance products in-force include participating and non-participating term life, whole life, universal life and variable universal life.
Retirement Services
The Retirement Services reporting and operating segment provides various retirement plan products and investment options as well as comprehensive administrative and record-keeping services for financial institutions and employers, which include educational, advisory, enrollment and communication services for employer-sponsored defined contribution plans and associated defined benefit plans.
Other
The Company’s Other reporting segment is substantially comprised of activity under the assumption of reinsurance between Great-West Life & Annuity Insurance Company of South Carolina (“GWSC”), a wholly owned subsidiary, and CLAC (“the GWSC operating segment”), corporate items not directly allocated to the other operating segments and interest expense on long-term debt.
The accounting principles used to determine segment results are the same as those used in the consolidated financial statements. The Company evaluates performance of its reportable segments based on their profitability from operations after income taxes. Inter-segment transactions and balances have been eliminated in consolidation. The Company’s operations are not materially dependent on one or a few customers, brokers or agents.
The following tables summarize segment financial information:
Three Months Ended June 30, 2014 | |||||||||||||||
Individual | Retirement | ||||||||||||||
Markets | Services | Other | Total | ||||||||||||
Revenue: | |||||||||||||||
Premium income | $ | 37,461 | $ | 469 | $ | 24,566 | $ | 62,496 | |||||||
Fee income | 26,938 | 144,079 | 988 | 172,005 | |||||||||||
Net investment income | 187,044 | 118,778 | 13,788 | 319,610 | |||||||||||
Realized investment gains (losses), net | 9,987 | 27,003 | 66 | 37,056 | |||||||||||
Total revenues | 261,430 | 290,329 | 39,408 | 591,167 | |||||||||||
Benefits and expenses: | |||||||||||||||
Policyholder benefits | 178,712 | 51,520 | 32,464 | 262,696 | |||||||||||
Operating expenses | 42,091 | 155,573 | 15,674 | 213,338 | |||||||||||
Total benefits and expenses | 220,803 | 207,093 | 48,138 | 476,034 | |||||||||||
Income (loss) before income taxes | 40,627 | 83,236 | (8,730 | ) | 115,133 | ||||||||||
Income tax expense (benefit) | 13,953 | 29,049 | (2,822 | ) | 40,180 | ||||||||||
Net income (loss) | $ | 26,674 | $ | 54,187 | $ | (5,908 | ) | $ | 74,953 |
39
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Three months ended June 30, 2013 | |||||||||||||||
Individual | Retirement | ||||||||||||||
Markets | Services | Other | Total | ||||||||||||
Revenue: | |||||||||||||||
Premium income | $ | 28,908 | $ | 1,184 | $ | 36,265 | $ | 66,357 | |||||||
Fee income | 24,175 | 129,051 | 1,081 | 154,307 | |||||||||||
Net investment income | 172,313 | 64,342 | 11,948 | 248,603 | |||||||||||
Realized investment gains (losses), net | 7,881 | (32,199 | ) | 4 | (24,314 | ) | |||||||||
Total revenues | 233,277 | 162,378 | 49,298 | 444,953 | |||||||||||
Benefits and expenses: | |||||||||||||||
Policyholder benefits | 175,667 | 48,384 | 41,189 | 265,240 | |||||||||||
Operating expenses | 37,525 | 129,335 | 20,976 | 187,836 | |||||||||||
Total benefits and expenses | 213,192 | 177,719 | 62,165 | 453,076 | |||||||||||
Income (loss) before income taxes | 20,085 | (15,341 | ) | (12,867 | ) | (8,123 | ) | ||||||||
Income tax expense (benefit) | 6,106 | (5,465 | ) | (4,710 | ) | (4,069 | ) | ||||||||
Net income (loss) | $ | 13,979 | $ | (9,876 | ) | $ | (8,157 | ) | $ | (4,054 | ) |
Six Months Ended June 30, 2014 | |||||||||||||||
Individual | Retirement | ||||||||||||||
Markets | Services | Other | Total | ||||||||||||
Revenue: | |||||||||||||||
Premium income | $ | 150,239 | $ | 1,040 | $ | 43,071 | $ | 194,350 | |||||||
Fee income | 50,567 | 285,961 | 1,990 | 338,518 | |||||||||||
Net investment income | 372,564 | 219,953 | 27,116 | 619,633 | |||||||||||
Realized investment gains (losses), net | 16,723 | 47,156 | 86 | 63,965 | |||||||||||
Total revenues | 590,093 | 554,110 | 72,263 | 1,216,466 | |||||||||||
Benefits and expenses: | |||||||||||||||
Policyholder benefits | 417,708 | 100,001 | 51,366 | 569,075 | |||||||||||
Operating expenses | 77,431 | 279,559 | 30,164 | 387,154 | |||||||||||
Total benefits and expenses | 495,139 | 379,560 | 81,530 | 956,229 | |||||||||||
Income (loss) before income taxes | 94,954 | 174,550 | (9,267 | ) | 260,237 | ||||||||||
Income tax expense (benefit) | 32,917 | 60,359 | (2,742 | ) | 90,534 | ||||||||||
Net income (loss) | $ | 62,037 | $ | 114,191 | $ | (6,525 | ) | $ | 169,703 |
40
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30, 2013 | |||||||||||||||
Individual | Retirement | ||||||||||||||
Markets | Services | Other | Total | ||||||||||||
Revenue: | |||||||||||||||
Premium income | $ | 182,584 | $ | 1,184 | $ | 60,910 | $ | 244,678 | |||||||
Fee income | 47,374 | 251,706 | 2,173 | 301,253 | |||||||||||
Other revenue | 7,355 | — | — | 7,355 | |||||||||||
Net investment income | 349,439 | 160,633 | 23,893 | 533,965 | |||||||||||
Realized investment gains (losses), net | 16,754 | (26,342 | ) | 13 | (9,575 | ) | |||||||||
Total revenues | 603,506 | 387,181 | 86,989 | 1,077,676 | |||||||||||
Benefits and expenses: | |||||||||||||||
Policyholder benefits | 453,974 | 93,361 | 62,530 | 609,865 | |||||||||||
Operating expenses | 73,408 | 261,231 | 36,520 | 371,159 | |||||||||||
Total benefits and expenses | 527,382 | 354,592 | 99,050 | 981,024 | |||||||||||
Income (loss) before income taxes | 76,124 | 32,589 | (12,061 | ) | 96,652 | ||||||||||
Income tax expense (benefit) | 27,633 | 10,643 | (4,404 | ) | 33,872 | ||||||||||
Net income (loss) | $ | 48,491 | $ | 21,946 | $ | (7,657 | ) | $ | 62,780 |
14. Commitments and Contingencies
Commitments
The Company has a revolving credit facility agreement in the amount of $50,000 for general corporate purposes. The credit facility expires on March 1, 2018. Interest accrues at a rate dependent on various conditions and terms of borrowings. The agreement requires, among other things, the Company to maintain a minimum adjusted net worth, as defined, of $1,147,500 plus 50% of its net income, if positive and as defined in the credit facility agreement (both compiled on the unconsolidated statutory accounting basis prescribed by the National Association of Insurance Commissioners), for each quarter ending after December 31, 2012. The Company was in compliance with all covenants at June 30, 2014 and December 31, 2013. At June 30, 2014 and December 31, 2013, there were no outstanding amounts related to the credit facility.
GWSC and CLAC are parties to a reinsurance agreement pursuant to which GWSC assumes term life insurance from CLAC. GWL&A Financial obtained two letters of credit for the benefit of the Company as collateral under the GWSC and CLAC reinsurance agreement for policy liabilities and capital support. The first letter of credit is for $1,196,100 and renews annually until it expires on December 31, 2025. The second letter of credit is for $70,000 and renews annually for an indefinite period of time. At June 30, 2014 and December 31, 2013, there were no outstanding amounts related to the letters of credit.
The Company makes commitments to fund partnership interests, mortgage loans on real estate and other investments in the normal course of its business. The amounts of these unfunded commitments at June 30, 2014 and December 31, 2013 were $234,065 and $196,933, of which $6,745 and $7,498 were related to cost basis limited partnership interests, respectively, all of which is due within one year from the dates indicated.
Contingencies
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 resolutions of these proceedings are not expected to have a material effect on the Company’s consolidated financial position, results of its operations or cash flows.
41
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
15. Subsequent Event
On August 1, 2014, the Company’s Board of Directors declared a dividend of $42,800, payable on September 30, 2014, to its sole shareholder, GWL&A Financial.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
As used in this Form 10-Q, the “Company” refers to Great-West Life & Annuity Insurance Company, a stock life insurance company originally organized on March 28, 1907 and domiciled in the state of Colorado, and its subsidiaries.
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 words such as “may,” “would,” “could,” “should,” “estimates,” “expected,” “anticipate,” “believe,” or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements that represent the Company’s beliefs concerning future or projected levels of sales of its 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. Some of these risks are described in “Risk Factors” in Item 1A of this report. 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 global or 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 its investment portfolio and other factors. Readers should also consider other matters, including any 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 Company’s results of operations for the three and six months ended June 30, 2014 compared with the same period in 2013. The discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” to which the reader is directed for additional information.
On January 1, 2013, the Company terminated its reinsurance agreement with an affiliate, The Canada Life Assurance Company (“CLAC”), pursuant to which it had ceded certain participating life business on a coinsurance basis. As a result of that termination, on January 1, 2013, the Company recorded the following increases (decreases) in its statement of income in connection with the termination of the reinsurance agreement:
(In millions) | |||
Premium income | $ | 42 | |
Other revenue | 7 | ||
Total | 49 | ||
Increase in future policy benefits | 41 | ||
Dividends to policyholders | 1 | ||
Total | 42 | ||
Participating policyholders’ net income before income taxes | 7 | ||
Income tax expense (benefit) | 2 | ||
Participating policyholders’ income | 5 | ||
Provision for policyholders’ share of (losses) earnings on participating business | 5 | ||
Net income available to shareholder | $ | — |
Participating policyholders share in the financial results of the participating business in the form of policyholder dividends. The policyholder dividends can be distributed directly to the policyholders in the form of cash or through an increase in benefits such as paid-up additions. The participating policyholder earnings that cannot be distributed to the Company’s
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shareholder and have not been distributed to participating policyholders are not included in the Company’s net income and are reflected in liabilities in undistributed earnings on participating business in the Company’s balance sheets. As such, the transaction above had no impact on net income available to the Company’s shareholder.
On March 20, 2014, Great-West Lifeco Inc. announced its intent to combine the retirement business of Putnam Investments, an affiliate of the Company, with the retirement business of the Company. Management is still assessing the form of the combination. The Putnam Investments retirement business comprises 375 clients with approximately 199,000 participants and $15 billion in assets under administration.
On April 3, 2014, the Company announced it has reached an agreement to acquire the J.P. Morgan Retirement Plan Services large-market recordkeeping business. The transaction is expected to close during the third quarter pending regulatory approval. The J.P. Morgan Retirement Plan Services business comprises 200 clients with approximately 1.9 million participants and $167 billion in assets under administration. It also includes the more than 1,000 personnel affiliated with J.P. Morgan Retirement Plan Services, including sales staff, consultant relations, relationship managers and client service specialists.
The Company employs hedging strategies for the purpose of managing the interest rate, foreign currency exchange rate and equity market risks impacting the Company’s business. For some derivative instruments, hedge accounting is not elected; therefore all gains or losses from these transactions are recorded in the consolidated statement of income. As a result, fluctuations in interest rates, foreign currencies or equity markets may cause the Company to experience volatility in net income.
Company Results of Operations
Three months ended June 30, 2014 compared with the three months ended June 30, 2013
The following is a summary of certain financial data of the Company:
Three Months Ended June 30, | ||||||||
Income statement data (In millions) | 2014 | 2013 | ||||||
Premium income | $ | 62 | $ | 66 | ||||
Fee income | 172 | 154 | ||||||
Net investment income | 320 | 250 | ||||||
Realized investment gains (losses), net | 37 | (24 | ) | |||||
Total revenues | 591 | 446 | ||||||
Policyholder benefits | 263 | 265 | ||||||
Operating expenses | 213 | 189 | ||||||
Total benefits and expenses | 476 | 454 | ||||||
Income (loss) before income taxes | 115 | (8 | ) | |||||
Income tax expense (benefit) | 40 | (4 | ) | |||||
Net income (loss) | $ | 75 | $ | (4 | ) |
The Company’s consolidated net income increased by $79 million from a loss of $4 million in 2013 to a gain of $75 million in 2014. The increase in earnings is due to net investment income and realized investment gains (losses), net, attributable to realized and unrealized gains on forward settling to be announced ("TBA") security transactions as a result of decreasing interest rates. Additionally, the Company had higher fee income due to increased average asset levels driven by higher average equity market levels. These increases in earnings were partially offset by higher operating expenses.
Premium income decreased by $4 million, or 6%, to $62 million for the three months ended June 30, 2014 when compared to 2013. This decrease is primarily related to the Company’s Other segment which had a decrease of $12 million due to lapses on a block of 10-year term insurance policies whose original term ended in 2013. The decrease was partially offset by an increase of $8 million in the Individual Markets segment which is driven by increased sales.
Fee income increased by $18 million, or 12%, to $172 million for the three months ended June 30, 2014 when compared to 2013. The increase is primarily related to a $16 million, or 18%, increase in asset-based variable fee income resulting from increased average asset levels driven by sales growth and higher average equity market levels. The equity market performance
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is evidenced by the 18% increase in the average S&P 500 index during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013.
Net investment income increased by $70 million, or 28%, to $320 million during the three months ended June 30, 2014 when compared to 2013. The primary driver of the change is a $57 million increase in unrealized gains from forward settling TBA securities as a result of decreasing interest rates. Additionally, there was a $17 million increase in investment income earned on bonds, mortgages and policy loans as a result of higher invested assets balances partially offset by lower yields and a $12 million increase in unrealized gains from derivatives. The increase in net investment income was partially offset by a $17 million decrease in investment income earned on derivatives.
Realized investment gains (losses), net, increased by $61 million to $37 million during the three months ended June 30, 2014 when compared to 2013. The fluctuation is driven primarily by an increase in gains of $55 million on forward settling TBA security transactions and an increase in gains of $10 million on bonds as a result of decreasing interest rates, offset by a decrease in gains of $5 million on mortgages.
Total benefits and expenses increased by $22 million, or 5%, to $476 million for the three months ended June 30, 2014 when compared to 2013 primarily due to higher operating expenses. The increase in benefits and expenses is primarily attributable to a $29 million increase in the Company’s Retirement Services segment as a result of higher asset based commissions, higher incentive compensation and higher executive compensation. Additionally, the Company had higher deferred acquisition cost ("DAC") amortization as a result of realized gains in 2014 as compared to realized losses in 2013. The Individual Markets segment had an increase of $7 million primarily driven by higher interest credited or paid to contractholders due to higher average liabilities and also driven by higher incentive compensation and higher executive compensation. Offsetting the increases was a decrease of $14 million in the Other segment as a result of actual surrenders coming in lower than previously estimated and lower commissions due to higher lapses.
Income tax expense increased by $44 million from a benefit of $4 million in 2013 to an expense of $40 million in 2014 primarily due to an increase in net income before tax.
Six months ended June 30, 2014 compared with the six months ended June 30, 2013
The following is a summary of certain financial data of the Company:
Six Months Ended June 30, | ||||||||
Income statement data (In millions) | 2014 | 2013 | ||||||
Premium income | $ | 194 | $ | 245 | ||||
Fee income | 339 | 301 | ||||||
Other revenue | — | 7 | ||||||
Net investment income | 620 | 534 | ||||||
Realized investment gains (losses), net | 64 | (9 | ) | |||||
Total revenues | 1,217 | 1,078 | ||||||
Policyholder benefits | 569 | 610 | ||||||
Operating expenses | 387 | 371 | ||||||
Total benefits and expenses | 956 | 981 | ||||||
Income before income taxes | 261 | 97 | ||||||
Income tax expense | 91 | 34 | ||||||
Net income | $ | 170 | $ | 63 |
The Company’s consolidated net income increased by $107 million to $170 million for the six months ended June 30, 2014 when compared to 2013. The increase in earnings is due to net investment income and realized investment gains (losses), net, attributable to realized and unrealized gains on forward settling TBA security transactions as a result of decreasing interest rates. Additionally, the Company had higher fee income due to increased average asset levels driven by higher average equity market levels. These increases in earnings were partially offset by higher operating expenses.
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Premium income decreased by $51 million, or 21%, to $194 million for the six months ended June 30, 2014 when compared to 2013. This decrease is primarily related to the Company’s Individual Markets segment which is driven by the $42 million received in 2013 in conjunction with the termination of the reinsurance agreement with CLAC, partially offset by a $7 million increase driven by higher sales. The Other segment had a decrease of $18 million due to lapses on a block of 10-year term insurance policies whose original term ended in 2013.
Fee income increased by $38 million, or 13%, to $339 million for the six months ended June 30, 2014 when compared to 2013. The increase is primarily related to a $32 million, or 18%, increase in asset-based variable fee income resulting from increased average asset levels driven by sales growth and higher average equity market levels. The equity market performance is evidenced by the 20% increase in the average S&P 500 index during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.
Other revenue decreased by $7 million for the six months ended June 30, 2014 when compared to 2013 as a result of the termination of the reinsurance agreement with CLAC in 2013.
Net investment income increased by $86 million, or 16%, to $620 million during the six months ended June 30, 2014 when compared to 2013. The primary driver of the change is a $45 million increase in unrealized gains from forward settling TBA securities as a result of decreasing interest rates and a $28 million increase in investment income earned on bonds, mortgages and policy loans as a result of higher invested assets balances partially offset by lower yields. Additionally, there was an $18 million and $8 million increase in unrealized gains from derivatives and bonds, respectively, and a $5 million increase in investment income earned on other investments. The increase in net investment income was partially offset by an $18 million decrease in investment income earned on derivatives.
Realized investment gains (losses), net, increased by $73 million to $64 million during the six months ended June 30, 2014 when compared to 2013. The fluctuation is driven primarily by an increase in gains of $72 million on forward settling TBA security transactions and an increase in gains of $7 million on bonds as a result of decreasing interest rates, offset by a decrease in gains of $5 million on mortgages.
Total benefits and expenses decreased by $25 million, or 3%, to $956 million for the six months ended June 30, 2014 when compared to 2013 primarily due to lower policyholder benefits. The decrease in benefits and expenses is attributable to a $32 million decrease in the Company’s Individual Markets segment driven by benefits expense incurred in 2013 in conjunction with the termination of the reinsurance agreement with CLAC. The Other segment had a decrease of $17 million as a result of actual surrenders coming in lower than previously estimated and lower commissions due to fewer renewals. Offsetting the decreases was an increase of $25 million in the Retirement Services segment, of which $18 million is driven by operating expenses as a result of higher asset based commissions, higher incentive compensation and higher executive compensation. Additionally, the Company had higher policyholder benefits due to higher interest credited or paid to contractholders as a result of increased average liabilities.
Income tax expense increased by $57 million to $91 million for the six months ended June 30, 2014 when compared to 2013 primarily due to an increase in net income before tax.
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Individual Markets Segment Results of Operations
Three months ended June 30, 2014 compared with the three months ended June 30, 2013
The following is a summary of certain financial data of the Individual Markets segment:
Three Months Ended June 30, | ||||||||
Income statement data (In millions) | 2014 | 2013 | ||||||
Premium income | $ | 37 | $ | 29 | ||||
Fee income | 27 | 24 | ||||||
Net investment income | 187 | 173 | ||||||
Realized investment gains (losses), net | 10 | 7 | ||||||
Total revenues | 261 | 233 | ||||||
Policyholder benefits | 178 | 176 | ||||||
Operating expenses | 42 | 37 | ||||||
Total benefits and expenses | 220 | 213 | ||||||
Income before income taxes | 41 | 20 | ||||||
Income tax expense | 14 | 6 | ||||||
Net income | $ | 27 | $ | 14 |
Net income for the Individual Markets segment increased by $13 million, or 93%, to $27 million million during the three months ended June 30, 2014 when compared to 2013. The increase in earnings is primarily due to higher net investment income driven by higher invested assets and higher unrealized gains from forward settling TBA securities as a result of decreasing interest rates.
Premium income increased by $8 million, or 28%, to $37 million for the three months ended June 30, 2014 when compared to 2013. This increase is primarily driven by higher sales in 2014.
Fee income increased by $3 million, or 13%, to $27 million for the three months ended June 30, 2014 when compared to 2013. The increase is primarily related to fees earned in the executive benefits market due to increased assets resulting from growing sales.
Net investment income increased by $14 million, or 8%, to $187 million for the three months ended June 30, 2014 when compared to 2013. The primary driver of the change is a $13 million increase in unrealized gains from forward settling TBA securities as a result of decreasing interest rates. Additionally, there was a $6 million increase in investment income earned on bonds, mortgages and policy loans as a result of higher invested assets balances partially offset by lower yields and a $6 million increase in unrealized gains from derivatives. The increase in net investment income was partially offset by an $11 million decrease in investment income earned on derivatives.
Realized investment gains (losses), net, increased by $3 million, or 43%, to $10 million during the three months ended June 30, 2014 when compared to 2013. The fluctuation is driven primarily by an increase in gains of $13 million on forward settling TBA security transactions as a result of decreasing interest rates, offset by a decrease in gains of $6 million and $5 million on bonds and mortgages, respectively.
Total benefits and expenses increased by $7 million, or 3%, to $220 million during the three months ended June 30, 2014 when compared to 2013. The change in benefits and expenses is primarily driven by higher interest credited or paid to contractholders as a result of increased average liabilities and also driven by higher incentive compensation and higher executive compensation.
Income tax expense increased by $8 million to $14 million during the three months ended June 30, 2014 when compared to 2013 primarily due to an increase in net income before tax.
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Six months ended June 30, 2014 compared with the six months ended June 30, 2013
The following is a summary of certain financial data of the Individual Markets segment:
Six Months Ended June 30, | ||||||||
Income statement data (In millions) | 2014 | 2013 | ||||||
Premium income | $ | 150 | $ | 183 | ||||
Fee income | 51 | 47 | ||||||
Other revenue | — | 7 | ||||||
Net investment income | 372 | 350 | ||||||
Realized investment gains (losses), net | 17 | 16 | ||||||
Total revenues | 590 | 603 | ||||||
Policyholder benefits | 418 | 454 | ||||||
Operating expenses | 77 | 73 | ||||||
Total benefits and expenses | 495 | 527 | ||||||
Income before income taxes | 95 | 76 | ||||||
Income tax expense | 33 | 28 | ||||||
Net income | $ | 62 | $ | 48 |
Net income for the Individual Markets segment increased by $14 million, or 29%, to $62 million during the six months ended June 30, 2014 when compared to 2013. The increase in earnings is primarily due to higher net investment income driven by higher invested assets and higher unrealized gains from forward settling TBA securities as a result of decreasing interest rates, partially offset by a decrease in other revenues.
Premium income decreased by $33 million, or 18%, to $150 million for the six months ended June 30, 2014 when compared to 2013. This decrease is primarily driven by the $42 million received in 2013 in conjunction with the termination of the reinsurance agreement with CLAC, partially offset by a $7 million increase driven by higher sales.
Fee income increased by $4 million, or 9%, to $51 million for the six months ended June 30, 2014 when compared to 2013. The increase is primarily related to fees earned in the executive benefits market due to increased assets resulting from growing sales.
Other revenue decreased by $7 million for the six months ended June 30, 2014 when compared to 2013 as a result of the termination of the reinsurance agreement with CLAC in 2013.
Net investment income increased by $22 million, or 6%, to $372 million for the six months ended June 30, 2014 when compared to 2013. The primary driver of the change is a $12 million increase in unrealized gains from forward settling TBA securities as a result of decreasing interest rates and an $11 million increase in investment income earned on bonds, mortgages and policy loans as a result of higher invested assets balances partially offset by lower yields. Additionally, there was an $8 million and $4 million increase in unrealized gains from derivatives and bonds, respectively. The increase in net investment income was partially offset by a $14 million decrease in investment income earned on derivatives.
Realized investment gains (losses), net, increased by $1 million, or 6%, to $17 million during the six months ended June 30, 2014 when compared to 2013. The fluctuation is driven primarily by an increase in gains of $16 million on forward settling TBA security transactions as a result of decreasing interest rates, offset by a decrease in gains of $9 million and $5 million on bonds and mortgages, respectively.
Total benefits and expenses decreased by $32 million, or 6%, to $495 million during the six months ended June 30, 2014 when compared to 2013. The change in benefits and expenses is primarily attributable to a $41 million benefits expense incurred in 2013 in conjunction with the termination of the reinsurance agreement with CLAC, partially offset by a $9 million increase in interest credited or paid to contractholders as a result of increased average liabilities and increased incentive compensation and executive compensation.
Income tax expense increased by $5 million, or 18%, to $33 million during the six months ended June 30, 2014 when compared to 2013 primarily due to an increase in net income before tax.
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Retirement Services Segment Results of Operations
Three months ended June 30, 2014 compared with the three months ended June 30, 2013
The following is a summary of certain financial data of the Retirement Services segment:
Three Months Ended June 30, | ||||||||
Income statement data (In millions) | 2014 | 2013 | ||||||
Premium income | $ | — | $ | 1 | ||||
Fee income | 144 | 129 | ||||||
Net investment income | 119 | 65 | ||||||
Realized investment gains (losses), net | 27 | (32 | ) | |||||
Total revenues | 290 | 163 | ||||||
Policyholder benefits | 51 | 48 | ||||||
Operating expenses | 156 | 130 | ||||||
Total benefits and expenses | 207 | 178 | ||||||
Income (loss) before income taxes | 83 | (15 | ) | |||||
Income tax expense (benefit) | 29 | (5 | ) | |||||
Net income (loss) | $ | 54 | $ | (10 | ) |
Net income (loss) for the Retirement Services segment increased by $64 million from a loss of $10 million in 2013 to a gain of $54 million in 2014. The increase in earnings is primarily due to increases in net investment income and realized investment gains (losses), net, attributable to realized and unrealized gains on forward settling TBA security transactions as a result of decreasing interest rates. Additionally, the Company had higher fee income due to increased average asset levels driven by higher average equity market levels. These increases in earnings were partially offset by higher operating expenses.
Fee income increased by $15 million, or 12%, to $144 million for the three months ended June 30, 2014 when compared to 2013. The increase is primarily related to a $16 million, or 18%, increase in asset-based variable fee income due to increased average asset levels driven by sales growth and higher average equity market levels. The equity market performance is evidenced by an 18% increase in the average S&P 500 index during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013.
Net investment income increased by $54 million, or 83%, to $119 million for the three months ended June 30, 2014 when compared to 2013. The primary driver of the change is a $44 million increase in unrealized gains from forward settling TBA securities as a result of decreasing interest rates. Additionally, there was a $10 million increase in investment income earned on bonds, mortgages and policy loans as a result of higher invested assets balances partially offset by lower yields.
Realized investment gains (losses), net, increased by $59 million to $27 million for the three months ended June 30, 2014 when compared to 2013. The fluctuation is driven primarily by an increase in gains of $42 million on forward settling TBA security transactions and an increase in gains of $16 million on bonds as a result of decreasing interest rates.
Total benefits and expenses increased by $29 million, or 16%, to $207 million for the three months ended June 30, 2014 when compared to 2013. The increase in benefits and expenses is primarily attributable to a $26 million increase in operating expenses as a result of higher asset based commissions due to increased average asset levels, higher incentive compensation due to larger plan sales in 2014 and higher executive compensation. Additionally, the Company had higher DAC amortization as a result of realized gains in 2014 as compared to realized losses in 2013.
Income tax expense increased by $34 million from a benefit of $5 million to an expense of $29 million. The increase is primarily due to an increase in net income before income taxes.
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Six months ended June 30, 2014 compared with the six months ended June 30, 2013
The following is a summary of certain financial data of the Retirement Services segment:
Six Months Ended June 30, | ||||||||
Income statement data (In millions) | 2014 | 2013 | ||||||
Premium income | $ | 1 | $ | 1 | ||||
Fee income | 286 | 252 | ||||||
Net investment income | 220 | 161 | ||||||
Realized investment gains (losses), net | 47 | (26 | ) | |||||
Total revenues | 554 | 388 | ||||||
Policyholder benefits | 100 | 93 | ||||||
Operating expenses | 280 | 262 | ||||||
Total benefits and expenses | 380 | 355 | ||||||
Income before income taxes | 174 | 33 | ||||||
Income tax expense | 60 | 11 | ||||||
Net income | $ | 114 | $ | 22 |
Net income for the Retirement Services segment increased by $92 million to $114 million for the six months ended June 30, 2014 when compared to 2013. The increase in earnings is primarily due to increases in net investment income and realized investment gains (losses), net, attributable to realized and unrealized gains on forward settling TBA security transactions as a result of decreasing interest rates. Additionally, the Company had higher fee income due to increased average asset levels driven by higher average equity market levels. These increases in earnings were partially offset by higher operating expenses.
Fee income increased by $34 million, or 13%, to $286 million for the six months ended June 30, 2014 when compared to 2013. The increase is primarily related to a $32 million, or 18%, increase in asset-based variable fee income due to increased average asset levels driven by sales growth and higher average equity market levels. The equity market performance is evidenced by a 20% increase in the average S&P 500 index during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.
Net investment income increased by $59 million, or 37%, to $220 million for the six months ended June 30, 2014 when compared to 2013. The primary driver of the change is a $33 million increase in unrealized gains from forward settling TBA securities as a result of decreasing interest rates. Additionally, there was a $16 million increase in investment income earned on bonds, mortgages and policy loans as a result of higher invested assets balances partially offset by lower yields and a $10 million increase in unrealized gains from derivatives.
Realized investment gains (losses), net, increased by $73 million to $47 million for the six months ended June 30, 2014 when compared to 2013. The fluctuation is driven primarily by an increase in gains of $56 million on forward settling TBA security transactions and an increase in gains of $16 million on bonds as a result of decreasing interest rates.
Total benefits and expenses increased by $25 million, or 7%, to $380 million for the six months ended June 30, 2014 when compared to 2013. The increase in benefits and expenses is primarily attributable to an $18 million increase in operating expenses as a result of higher asset based commissions due to increased average asset levels, higher incentive compensation due to larger plan sales in 2014 and higher executive compensation. Additionally, the Company had higher policyholder benefits due to higher interest credited or paid to contractholders as a result of increased average liabilities.
Income tax expense increased by $49 million to $60 million during the six months ended June 30, 2014 when compared to 2013. The increase is primarily due to an increase in net income before income taxes.
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Other Segment Results of Operations
Three months ended June 30, 2014 compared with the three months ended June 30, 2013
The following is a summary of certain financial data of the Company’s Other segment:
Three Months Ended June 30, | ||||||||
Income statement data (In millions) | 2014 | 2013 | ||||||
Premium income | $ | 24 | $ | 36 | ||||
Fee income | 1 | 1 | ||||||
Net investment income | 14 | 12 | ||||||
Total revenues | 39 | 49 | ||||||
Policyholder benefits | 32 | 41 | ||||||
Operating expenses | 16 | 21 | ||||||
Total benefits and expenses | 48 | 62 | ||||||
Loss before income taxes | (9 | ) | (13 | ) | ||||
Income tax benefit | (3 | ) | (5 | ) | ||||
Net loss | $ | (6 | ) | $ | (8 | ) |
Net loss for the Company’s Other segment decreased by $2 million, or 25%, to $6 million for the three months ended June 30, 2014. Policyholder benefits decreased by $9 million as a result of lower surrenders in 2014 than expected as compared to 2013 and operating expenses decreased by $5 million as a result of lower commissions due to fewer policy renewals on 10-year term insurance policies. Offsetting the decrease was a $12 million decrease in premium due to lapses on a block of 10-year term insurance policies whose original term ended in 2013.
Six months ended June 30, 2014 compared with the six months ended June 30, 2013
The following is a summary of certain financial data of the Company’s Other segment:
Six Months Ended June 30, | ||||||||
Income statement data (In millions) | 2014 | 2013 | ||||||
Premium income | $ | 43 | $ | 61 | ||||
Fee income | 2 | 2 | ||||||
Net investment income | 27 | 24 | ||||||
Total revenues | 72 | 87 | ||||||
Policyholder benefits | 51 | 63 | ||||||
Operating expenses | 31 | 36 | ||||||
Total benefits and expenses | 82 | 99 | ||||||
Loss before income taxes | (10 | ) | (12 | ) | ||||
Income tax benefit | (3 | ) | (4 | ) | ||||
Net loss | $ | (7 | ) | $ | (8 | ) |
Net loss for the Company’s Other segment decreased by $1 million, or 13%, to $7 million for the six months ended June 30, 2014. Policyholder benefits decreased by $12 million as a result of fewer surrenders in 2014 than expected as compared to 2013 and operating expenses decreased by $5 million as a result of lower commissions due to fewer policy renewals on 10-year term insurance policies. Offsetting the decrease was a $18 million decrease in premium due to lapses on a block of 10-year term insurance policies whose original term ended in 2013.
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Investment Operations
The Company’s primary investment objective is to acquire assets with duration and cash flow characteristics reflective of its 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 ensure that even under changing market conditions, the Company’s assets should meet the cash flow and income requirements of its liabilities. Using dynamic modeling to analyze the effects of a range of possible market changes upon investments and policyholder benefits, the Company works to ensure that its investment portfolio is appropriately structured to fulfill financial obligations to its policyholders.
A summary of the Company’s general account investment assets and the assets as a percentage of total general account investments follows:
(In millions) | June 30, 2014 | December 31, 2013 | ||||||||||||
Fixed maturities, available-for-sale | $ | 17,246 | 62.3 | % | $ | 18,470 | 69.6 | % | ||||||
Fixed maturities, held for trading | 117 | 0.4 | % | 336 | 1.3 | % | ||||||||
Mortgage loans on real estate | 3,096 | 11.2 | % | 3,134 | 11.8 | % | ||||||||
Policy loans | 4,239 | 15.3 | % | 4,185 | 15.8 | % | ||||||||
Short-term investments, available-for-sale | 2,925 | 10.5 | % | 294 | 1.1 | % | ||||||||
Limited partnership and other corporation interests | 63 | 0.2 | % | 79 | 0.3 | % | ||||||||
Other investments | 17 | 0.1 | % | 18 | 0.1 | % | ||||||||
Total investments | $ | 27,703 | 100.0 | % | $ | 26,516 | 100.0 | % |
The June 30, 2014 fixed maturities, available-for-sale amount decreased as compared to December 31, 2013 as the Company sold government agency mortgage-backed security (“MBS”) pools to enter into forward settling TBA contracts which are treated as derivatives. There is a corresponding increase in short-term investments, available-for-sale as the Company holds these investments in order to settle the forward settling TBA contracts.
Fixed Maturity Investments
Fixed maturity investments include public and privately placed corporate bonds, government bonds and mortgage-backed and asset-backed securities. Included in available-for-sale fixed maturities are perpetual debt investments which primarily consist of junior subordinated debt instruments that have no stated maturity date but pay fixed or floating interest in perpetuity. The Company’s strategy related to mortgage-backed and asset-backed securities is to focus on those investments with low prepayment risk and minimal credit risk.
Private placement investments are generally less marketable than publicly traded assets, yet they typically offer enhanced 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 placement investments 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 credit quality to limit credit risk. All securities are internally rated by the Company on a basis intended to be similar to that of the rating agencies. The Company’s internal rating methodology generally takes into account ratings from Standard & Poor’s Ratings Services, Fitch Ratings and Moody’s Investor Services, Inc. In addition, the National Association of Insurance Commissioners (“NAIC”) implemented a ratings methodology for residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and other structured securities. The Company may also utilize inputs from this ratings process to develop its internal rating.
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The distribution of the Company’s fixed maturity portfolio by the Company’s internal credit rating is summarized as follows:
Credit Rating | June 30, 2014 | December 31, 2013 | ||||
AAA | 18.1 | % | 28.4 | % | ||
AA | 17.4 | % | 15.3 | % | ||
A | 31.8 | % | 26.5 | % | ||
BBB | 31.5 | % | 28.6 | % | ||
BB and below (Non-investment grade) | 1.2 | % | 1.2 | % | ||
Total | 100.0 | % | 100.0 | % |
The June 30, 2014 AAA rating percentage decreased as compared to December 31, 2013 as the Company sold AAA rated government agency MBS pools to enter into forward settling TBA contracts which are treated as derivatives.
The following table contains the sector distribution of the Company’s corporate fixed maturity investment portfolio, calculated as a percentage of fixed maturities:
Sector | June 30, 2014 | December 31, 2013 | ||||
Utility | 20.9 | % | 18.5 | % | ||
Finance | 11.8 | % | 10.0 | % | ||
Consumer | 11.2 | % | 9.9 | % | ||
Natural resources | 5.9 | % | 5.2 | % | ||
Transportation | 3.6 | % | 3.0 | % | ||
Other | 12.8 | % | 11.1 | % |
Fair Value Measurement of Fixed Maturity Investments Classified as Available-for-Sale
Each fixed maturity investment is categorized in a hierarchy based on the observability of inputs into the valuation methodology with Level 3 being the least observable. Management uses some judgment in determining the observability of valuation inputs. Level 3 assets at June 30, 2014 were $227 million, or 1%, of total net assets and liabilities carried at fair value compared to Level 3 assets of $260 million, or 1%, at December 31, 2013. The decrease in Level 3 assets is primarily due to principal reductions.
Securities Lending, Reverse Repurchase Agreements and Cash Collateral Reinvestment Practices
Cash collateral related to the securities lending program and reverse repurchase agreements is invested in U.S. Government or U.S. Government Agency securities. In addition, the securities lending agent indemnifies the Company against borrower risk, meaning that the lending agent agrees contractually to replace securities not returned due to a borrower default. As of June 30, 2014 and December 31, 2013, the Company had $38 million and $27 million, respectively, of securities out on loan and $600 million and zero, respectively, in short-term reverse repurchase agreements, all of which are fully collateralized as described above. The Company does not enter into these types of transactions for liquidity purposes, but rather for yield enhancement on its investment portfolio.
Mortgage Loans on Real Estate
The Company’s mortgage loans on real estate are comprised exclusively of domestic commercial collateralized real estate loans. The mortgage loan portfolio is diversified with regard to geographical markets and commercial real estate property types within the United States. The Company originates, directly or through correspondents, real estate mortgages with the intent to hold to maturity. The Company’s portfolio includes loans which are fully amortizing, amortizing with a balloon balance at maturity, interest only to maturity and interest only for a number of years followed by an amortizing period.
Derivatives
The Company uses certain derivatives, such as futures, swaps and interest rate swaptions, for purposes of managing the interest rate, foreign currency exchange rate and equity market risks impacting the Company’s business. These derivatives, when taken alone, may subject the Company to varying degrees of market and credit risk; however, since used for hedging purposes, these instruments are intended to reduce risk. For derivative instruments where hedge accounting is not elected, changes in interest rates, foreign currencies or equity markets may generate derivative gains or losses which may cause the Company to experience
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volatility in net income. The Company also uses forward settling TBA securities to gain exposure to the investment risk and return of agency mortgage-backed securities (pass-throughs). These transactions enhance the return on the Company’s investment portfolio and provide a more liquid and cost effective method of achieving these goals than purchasing or selling individual agency mortgage-backed pools. The Company controls the credit risk of its over-the-counter derivative contracts through credit approvals, limits, monitoring procedures and in most cases, requiring collateral. Risk of loss is generally limited to the portion of the fair value of derivative instruments that exceeds the value of the collateral held and not to the notional or contractual amounts of the derivatives.
Summary of Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires the Company’s management to adopt accounting policies to enable them to make a significant variety of accounting and actuarial 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 information available at the time the estimates were made.
Critical accounting estimates are those that management believes are important to the portrayal of the Company’s results of operations and financial condition and which require them to make difficult, subjective and/or complex judgments. Critical accounting estimates cover accounting and actuarial matters that are inherently uncertain because the future resolution of such matters is unknown. Many of these policies, estimates and related judgments are common in the insurance and financial services industries. The Company believes that its most critical accounting estimates include the following:
• | Valuation of investments and derivatives in the absence of quoted market values; |
• | Impairment of investments; |
• | Accounting for derivative financial instruments; |
• | Valuation of policy benefit liabilities; and |
• | Valuation of DAC (deferred acquisition costs) |
A discussion of each of these critical accounting policies may be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Application of Recent Accounting Pronouncements
See Note 3 to the accompanying condensed consolidated financial statements for a discussion of the application of recent accounting pronouncements.
Liquidity and Capital Resources
Liquidity refers to a company’s ability to generate sufficient cash flows to meet the needs of its operations. The Company manages its operations to create stable, reliable and cost-effective sources of cash flows to meet all of its obligations.
The principal sources of the Company’s liquidity are premiums and contract deposits, fees, investment income and investment maturities and sales. Funds provided from these sources are reasonably predictable and normally exceed liquidity requirements for payment of policy benefits, payments to policy and contractholders in connection with surrenders and withdrawals and general 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. A primary liquidity concern regarding cash flows from operations is the risk of early policyholder and contractholder withdrawals. A primary liquidity concern regarding investment activity is the risk of defaults and market volatility. In addition, a demand for funds may arise as a result of the Company taking advantage of current investment opportunities. The sources of the funds that may be required in such situations include the issuance of commercial paper or other debt instruments. Management believes that the liquidity profile of its assets is sufficient to satisfy the liquidity requirements of reasonably foreseeable scenarios.
Generally, the Company has met its operating requirements by utilizing cash flows from operations and maintaining appropriate levels of liquidity in its investment portfolio. Liquidity for the Company has remained strong, as evidenced by the amounts of short-term investments and cash that totaled $434 million and $302 million as of June 30, 2014 and December 31, 2013, respectively. The June 30, 2014 short-term investments included above exclude amounts held to settle TBA forward
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contracts. In addition, 99% of the fixed maturity portfolio carried an investment grade rating at June 30, 2014 and December 31, 2013, thereby providing significant liquidity to the Company’s overall investment portfolio.
The Company continues to be well capitalized, with sufficient borrowing capacity. Additionally, the Company anticipates that cash on hand and expected net cash generated by operating activities will exceed the forecasted needs of the business over the next 12 months. 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 had $100 million and $99 million of commercial paper outstanding at June 30, 2014 and December 31, 2013, respectively. The commercial paper has been given a rating of A-1+ by Standard & Poor’s Ratings Services and a rating of P-1 by Moody’s Investors Service, each being the highest rating available. Through the recent financial market volatility, the Company continued to have the ability to access the capital markets for funds. The loss of this access in the future would not have a significant impact to the Company’s liquidity as commercial paper is not used to fund daily operations and is an insignificant amount in relation to total invested assets.
The Company also has available a revolving credit facility agreement, which expires on March 1, 2018, in the amount of $50 million for general corporate purposes. The Company had no borrowings under this credit facility as of or during the six months ended June 30, 2014. The Company does not anticipate the need for borrowings under this facility and the loss of its availability would not significantly impact its liquidity.
Capital resources provide protection for policyholders and 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.
Off-Balance Sheet Arrangements
The Company makes commitments to fund partnership interests, mortgage loans on real estate and other investments in the normal course of its business. The amounts of these unfunded commitments at June 30, 2014 and December 31, 2013 were $234 million and $197 million, respectively. The precise timing of the fulfillment of the commitment cannot be predicted; however, these amounts are due within one year of the dates indicated. There are no other obligations or liabilities arising from such arrangements that are reasonably likely to become material.
The Company participates in a short-term reverse repurchase program for the purpose of enhancing the total return on its investment portfolio. This type of transaction involves the purchase of securities with a simultaneous agreement to sell similar securities at a future date at an agreed-upon price. In exchange, the financial institutions put non-cash collateral on deposit with a third-party custodian on behalf of the Company. The amount of securities purchased in connection with these transactions was $600 million and zero at June 30, 2014 and December 31, 2013, respectively. Non-cash collateral on deposit with the third-party custodian on the Company’s behalf was $612 million and zero at June 30, 2014 and December 31, 2013, respectively, which cannot be sold or re-pledged and which has not been recorded on the condensed consolidated balance sheets.
The Company participates in a securities lending program in which the Company lends securities that are held as part of its general account investment portfolio to third parties for the purpose of enhancing the total return on its investment portfolio. The Company generally requires initial collateral in an amount greater than or equal to 102% of the fair value of domestic securities loaned and 105% of foreign securities loaned. The Company received securities with a fair value of $7 million and $9 million as collateral at June 30, 2014 and December 31, 2013, respectively, which have not been recorded on the condensed consolidated balance sheets.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company has established processes and procedures to effectively identify, monitor, measure and manage the risks associated with its invested assets and its interest rate sensitive insurance and annuity products. Management has identified investment portfolio management, including the use of derivative instruments, insurance and annuity product design and asset/liability management as three critical means to accomplish a successful risk management program.
The major risks to which the Company is exposed include the following:
• | Market risk - the potential of loss arising from adverse fluctuations in interest rates and equity market prices and the levels of their volatility. |
• | Insurance risk - the potential of loss resulting from claims, persistency and expense experience exceeding that assumed in the liabilities held. |
• | Credit risk - the potential of loss arising from an obligator’s inability or unwillingness to meet its obligations to the Company. |
• | Operational and corporate risk - the potential of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from other external events. |
A discussion of each of these risk factors may be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company’s management, with the participation of the President and Chief Executive Officer and the Principal Accounting Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”) as of June 30, 2014. Based upon that evaluation, the President and Chief Executive Officer and the Principal Accounting Officer concluded that due to the material weakness in our internal control over financial reporting as it relates to complex accounting matters as further described under Item 9A, “Controls and Procedures,” of our Annual Report on Form 10-K for the year ended December 31, 2013, our disclosure controls and procedures were not effective as of June 30, 2014.
Notwithstanding the material weakness that existed as of June 30, 2014, management has concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles.
Changes in Internal Control over Financial Reporting
Management is in the process of remediating the internal control deficiency. The remediation plan is being implemented by the Principal Accounting Officer.
Other than as described above, the President and Chief Executive Officer and the Principal Accounting Officer hereby confirm that there were no changes in the Company’s internal control over financial reporting during the six months ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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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 1A. Risk Factors
In the normal course of its business, the Company is exposed to certain operational, regulatory and financial risks and uncertainties. The most significant risks include the following:
• | Competition could negatively affect the ability of the Company to maintain or increase market share or profitability. |
• | The insurance and financial services industries are heavily regulated and changes in regulation may reduce profitability. |
• | A downgrade or potential downgrade in the Company’s financial strength or claims paying ratings could result in a loss of business and negatively affect results of operations and financial condition. |
• | Deviations from assumptions regarding future persistency, mortality and interest rates used in calculating liabilities for future policyholder benefits and claims could adversely affect the Company’s results of operations and financial condition. |
• | The Company may be required to accelerate the amortization of DAC or VOBA (value of business acquired), or recognize impairment in the value of goodwill, which could adversely affect its results of operations and financial condition. |
• | If the companies that provide reinsurance default or fail to perform or the Company is unable to obtain adequate reinsurance for some of the risks underwritten, the Company could incur significant losses adversely affecting results of operations and financial condition. |
• | Interest rate fluctuations could have a negative impact on results of operations and financial condition. |
• | Market fluctuations and general economic conditions may adversely affect results of operations and financial condition. |
• | Changes in U.S. federal income tax law could make some of the Company’s products less attractive to consumers and increase its tax costs. |
• | The Company may be subject to litigation resulting in substantial awards or settlements and this may adversely affect its reputation and results of operations. |
• | The Company’s risk management policies and procedures may leave it exposed to unidentified or unanticipated risk, which could adversely affect its business, results of operations and financial condition. |
• | The Company may experience difficulty in marketing and distributing products through its current and future distribution channels. |
• | A failure in cyber or information security systems could result in a loss or disclosure of confidential information, damage the Company’s reputation and could impair its ability to conduct business effectively. |
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Item 6. Exhibits
The documents identified below are filed as a part of this report:
Index to Exhibits
Exhibit Number | Title |
31.1 | Rule 13a-14(a)/15-d14(a) Certification |
31.2 | Rule 13a-14(a)/15-d14(a) Certification |
32 | 18 U.S.C. 1350 Certification |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Great-West Life & Annuity Insurance Company
By: | /s/ Rebecca M. Southall | Date: | August 13, 2014 | |
Rebecca M. Southall, Vice President and Principal Accounting Officer |
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