Table of Contents
Colorado | 6311 | 84-0467907 |
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code) | (I.R.S. Employer Identification Number) |
Robert L. Reynolds President and Chief Executive Officer Great-West Life & Annuity Insurance Company 8515 East Orchard Road Greenwood Village, CO 80111 (800) 537-2033 | Copy to: Stephen E. Roth, Esq Eversheds Sutherland (US) LLP 700 Sixth Street, N.W. Washington, DC 20001-3980 |
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) |
Large Accelerated Filer | Accelerated Filer |
Non-Accelerated Filer x | Smaller Reporting Company |
Emerging growth company | |
Title of Each Class of Securities to be Registered | Amount to be Registered | Proposed Maximum Offering Price Per Unit* | Proposed Maximum Aggregate Offering Price | Amount of Registration Fee** |
Interests in Single Premium Deferred Variable Annuity Contract | N/A | N/A | $300,000,000.00 | $37,350.00 |
* | The securities are not issued in predetermined amount or units. |
** | Previously paid. |
Table of Contents
Individual Single Premium Deferred
Index-Linked Annuity Contract
Tel. (866) 543-7899
• | Is NOT a bank deposit |
• | Is NOT FDIC insured |
• | Is NOT insured or endorsed by a bank or any government agency |
• | Is NOT available in every state |
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D-1 |
• | Sole Owner who is an individual or trust with a natural person as grantor. |
• | Sole Owner who is an individual and his or her spouse as the joint owner or trust with a natural person and his or her spouse as grantors (available for Non-Qualified Contracts only). |
Reference Indices |
S&P 500® Price Return Index (S&P 500 Index) |
MSCI EAFE Price Return Index (MSCI EAFE Index) |
Russell 2000® Price Return Index (Russell 2000 Index) |
NASDAQ-100® Price Return Index (NASDAQ Index) |
Crediting Factors available for each Reference Index |
Floor of 0% |
Floor of -2.5% |
Floor of -5.0% |
Floor of -7.5% |
Floor of -10.0% |
Buffer of -10.0% |
Annuity Administration
• | The Strategy Interest MVA Factor is subject to a six year term that begins on the Contract Effective Date and renews every six years for the life of your Contract through the Accumulation Period. The Strategy Interest MVA Factor may result in an adjustment to a Gross Withdrawal taken on any day, including a Strategy Term End Date, except a Strategy Interest Term End Date, which occurs once every six years. |
• | The Strategy Index MVA Factor may result in an adjustment to a Gross Withdrawal on any day, except a Strategy Term End Date. On any Strategy Term End Date the Strategy Term Index Factor will equal zero and will not result in any related adjustment to the Gross Withdrawal. |
• | Withdrawals each year up to a free annual withdrawal amount that is equal to 10% of your remaining Purchase Payment, beginning in Contract Year 2, which is your initial Purchase Payment reduced by the Gross Withdrawal of any partial withdrawal, including free annual withdrawal amounts and required minimum distributions (RMDs). |
• | Hardship Waiver, as applied to a surrender, due to a terminal illness or being confined to a nursing home or hospital for an extended period of time. |
• | Partial withdrawals taken as RMDs under the Code from a Qualified IRA annuity contract or from a Contract held in an IRA account. |
• | There is a sufficiently large market in exchange traded and/or over-the-counter options, futures and similar derivative instruments based on the index to allow the Company to hedge Strategy Credit Rates; |
• | The index is recognized as a broad-based index for the relevant market; and |
• | The publisher of the index allows the Company to use the index in the Contract and other materials for a reasonable fee. |
• | our investment portfolio could incur other than temporary impairments; |
• | due to potential downgrades in our investment portfolio, we could be required to raise additional capital to sustain our current business in force and new sales of our annuity products, which may be difficult in a distressed market. If capital would be available, it may be at terms that are not favorable to us; or |
• | our liquidity could be negatively affected and we could be forced to further limit our operations and our business could suffer, as we need liquidity to pay our policyholder benefits and operating expenses. |
Annuity Administration
• | such annuity is distributed in substantially equal installments over the life or life expectancy of the Beneficiary or over a period not extending beyond the life expectancy of the Beneficiary; and |
• | such distributions begin no later than one year after the Owner’s date of death. |
Reference Indices |
S&P 500® Price Return Index. The S&P 500® Price Return Index was established by Standard & Poor’s. The S&P 500® Price Return Index includes 500 leading companies in leading industries of the US economy, capturing 75% coverage of U.S. equities. The S&P 500® Price Return Index does not include dividends declared by any of the companies included in this Index. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”). This trademark has been licensed for use by S&P Dow Jones Indices LLC. S&P marks are trademarks of S&P. These trademarks have been sublicensed for certain purposes by the Company. The S&P® Price Return Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and have been licensed for use by the Company. The Company’s products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or any of their respective affiliates (collectively, the “S&P Dow Jones Indices”). S&P Dow Jones Indices make no representation or warranty, express or implied, to the Owners of the Company’s products or any member of the public regarding the advisability of investments generally or in the Company’s products particularly or the ability of the S&P 500® Price Return Index to track general market performance. S&P Dow Jones Indices’ only relationship to the Company with respect to the S&P 500® Price Return Index is the licensing of the S&P 500® Price Return Index and certain trademarks, service marks, and/or trade names of S&P Dow Jones Indices and/or its licensors. The S&P 500® Price Return Index is determined, composed, and calculated by S&P Dow Jones Indices without regard to the Company or its product(s). S&P Dow Jones Indices have no obligation to take the needs of the Company or the Owner(s) of its products into consideration in determining, composing, or calculating the S&P 500® Price Return Index. S&P Dow Jones Indices are not responsible for and have not participated in the determination of the prices, and amount of the Contract or the timing of the issuance or sale of such Contract or in the determination or calculation of the equation by which such Contract is to be converted into cash, surrendered, or redeemed, as the case may be. S&P Dow Jones Indices have no obligation or liability in connection with the administration, marketing or trading of the Company’s products. There is no assurance that investment products based on the S&P 500® Price Return Index will accurately track performance or provide positive investment returns. S&P Dow Jones Indices LLC is not an investment advisor. Inclusion of a security with an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such security, nor is it considered to be investment advice. S&P DOW JONES INDICES DOES NOT GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE INDEXES OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P DOW JONES INDICES SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES |
MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY THE COMPANY, OWNERS OF THE CONTRACT, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500® PRICE RETURN INDEX OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P DOW JONES INDICES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBLITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN S&P DOW JONES INDICES AND THE COMPANY, OTHER THAN THE LICENSORS OF S&P DOW JONES INDICES. The name “S&P 500® Price Return Index” is a trademark of Standard & Poor’s and has been licensed for use by the Company. |
MSCI EAFE Price Return Index. The MSCI EAFE Price Return Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US and Canada. As of the date of this prospectus, the MSCI EAFE consists of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. The MSCI EAFE Price Return Index does not include dividends declared by any of the companies included in this Index. Index Value and Index Performance will be calculated without any exchange rate adjustment. THIS PRODUCT IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY MSCI INC. (“MSCI”), ANY OF ITS AFFILIATES, ANY OF ITS INFORMATION PROVIDERS OR ANY OTHER THIRD PARTY INVOLVED IN, OR RELATED TO, COMPILING, COMPUTING OR CREATING ANY MSCI INDEX (COLLECTIVELY, THE “MSCI PARTIES”). THE MSCI INDEXES ARE THE EXCLUSIVE PROPERTY OF MSCI. MSCI AND THE MSCI INDEX NAMES ARE SERVICE MARK(S) OF MSCI OR ITS AFFILIATES AND HAVE BEEN LICENSED FOR USE FOR CERTAIN PURPOSES BY THE COMPANY. NONE OF THE MSCI PARTIES MAKES ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE ISSUER OR OWNERS OF THIS PRODUCT OR ANY OTHER PERSON OR ENTITY REGARDING THE ADVISABILITY OF INVESTING IN PRODUCTS GENERALLY OR IN THIS PRODUCT PARTICULARLY OR THE ABILITY OF ANY MSCI INDEX TO TRACK CORRESPONDING STOCK MARKET PERFORMANCE. MSCI OR ITS AFFILIATES ARE THE LICENSORS OF CERTAIN TRADEMARKS, SERVICE MARKS AND TRADE NAMES AND OF THE MSCI INDEXES WHICH ARE DETERMINED, COMPOSED AND CALCULATED BY MSCI WITHOUT REGARD TO THIS PRODUCT OR THE ISSUER OR OWNERS OF THIS PRODUCT OR ANY OTHER PERSON OR ENTITY. NONE OF THE MSCI PARTIES HAS ANY OBLIGATION TO TAKE THE NEEDS OF THE ISSUER OR OWNERS OF THIS PRODUCT OR ANY OTHER PERSON OR ENTITY INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE MSCI INDEXES. NONE OF THE MSCI PARTIES IS RESPONSIBLE FOR OR HAS PARTICIPATED IN THE DETERMINATION OF THE TIMING OF, PRICES AT, OR QUANTITIES OF THIS PRODUCT TO BE ISSUED OR IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY OR THE CONSIDERATION INTO WHICH THIS PRODUCT IS REDEEMABLE. FURTHER, NONE OF THE MSCI PARTIES HAS ANY OBLIGATION OR LIABILITY TO THE ISSUER OR OWNERS OF THIS PRODUCT OR ANY OTHER PERSON OR ENTITY IN CONNECTION WITH THE ADMINISTRATION, MARKETING OR OFFERING OF THIS PRODUCT. ALTHOUGH MSCI SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE CALCULATION OF THE MSCI INDEXES FROM SOURCES THAT MSCI CONSIDERS RELIABLE, NONE OF THE MSCI PARTIES WARRANTS OR GUARANTEES THE ORIGINALITY, ACCURACY AND/OR THE COMPLETENESS OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. |
NONE OF THE MSCI PARTIES MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER OF THE PRODUCT, OWNERS OF THE PRODUCT, OR ANY OTHER PERSON OR ENTITY, FROM THE USE OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. NONE OF THE MSCI PARTIES SHALL HAVE ANY LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS OF OR IN CONNECTION WITH ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. FURTHER, NONE OF THE MSCI PARTIES MAKES ANY EXPRESS OR IMPLIED WARRANTIES OF ANY KIND, AND THE MSCI PARTIES HEREBY EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO EACH MSCI INDEX AND ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL ANY OF THE MSCI PARTIES HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. No purchaser, seller or holder of this security, product or product, or any other person or entity, should use or refer to any MSCI trade name, trademark or service mark to sponsor, endorse, market or promote this security without first contacting MSCI to determine whether MSCI’s permission is required. Under no circumstances may any person or entity claim any affiliation with MSCI without the prior written permission of MSCI. |
Russell 2000® Price Return Index. The Russell 2000® Price Return Index was established by Russell Investments. The Russell 2000® Price Return Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000® Price Return Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000® Price Return Index does not include dividends declared by any of the companies included in this Index. The Russell 2000 Price Return Index® is a trademark of Frank Russell Company (“Russell”) and has been licensed for use by the Company. The Company’s products are not in any way sponsored, endorsed, sold or promoted by Russell or the London Stock Exchange Group companies (“LESG”) (together the “Licensor Parties”) and none of the Licensor Parties make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to (i) the results to be obtained from the use of the Russell 2000® Price Return Index (upon which the Company’s product is based), (ii) the figure at which the Index is said to stand at any particular time on any particular day or otherwise, or (iii) the suitability of the Russell 2000® Price Return Index for the purpose to which it is being put in connection the Company’s product. None of the Licensor Parties have provided or will provide any financial or investment advice or recommendation in relation to the Russell 2000® Price Return Index, to the Company, or to the Company’s clients. The Russell 2000® Price Return Index is calculated by Russell or its agent. None of the Licensor Parties shall be (a) liable (whether in negligence or otherwise) to any person for any error in the Russell 2000® Price Return Index or (b) under any obligation to advise any person of any error therein. |
NASDAQ-100® Price Return Index. The NASDAQ-100 Price Return Index® includes 100 of the largest domestic and international non-financial securities listed on The Nasdaq Stock Market based on market capitalization. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain securities of financial companies including investment companies. The NASDAQ-100 Price Return Index® does not include dividends declared by any of the companies included in this Index. The Product(s) is not sponsored, endorsed, sold or promoted by Nasdaq, Inc. or its affiliates (Nasdaq, with its affiliates, are referred to as the “Corporations”). The Corporations have not passed on the legality or suitability of, or the accuracy or adequacy of descriptions and disclosures relating to, the Product(s). The Corporations make no representation or warranty, express or implied to the owners of the Product(s) or any member of the public regarding the advisability of investing in securities generally or in the Product(s) |
particularly, or the ability of the index to track general stock market performance. The Corporations' only relationship to Great-West Life & Annuity Insurance Company (“Licensee”) is in the licensing of the Nasdaq®, and certain trade names of the Corporations and the use of the index which is determined, composed and calculated by Nasdaq without regard to Licensee or the Product(s). Nasdaq has no obligation to take the needs of the Licensee or the owners of the Product(s) into consideration in determining, composing or calculating the index. The Corporations are not responsible for and have not participated in the determination of the timing of, prices at, or quantities of the Product(s) to be issued or in the determination or calculation of the equation by which the Product(s) is to be converted into cash. The Corporations have no liability in connection with the administration, marketing or trading of the Product(s). The Corporations do not guarantee the accuracy and/or uninterrupted calculation of the NASDAQ-100 Price Return Index® or any data included therein. The Corporations make no warranty, express or implied, as to results to be obtained by Licensee, owners of the product(s), or any other person or entity from the use of the NASDAQ-100 Price Return Index® or any data included therein. The Corporations make no express or implied warranties, and expressly disclaim all warranties of merchantability or fitness for a particular purpose or use with respect to the NASDAQ-100 Price Return Index® or any data included therein. Without limiting any of the foregoing, in no event shall the Corporations have any liability for any lost profits or special, incidental, punitive, indirect, or consequential damages, even if notified of the possibility of such damages. |
• | There is a sufficiently large market in exchange traded and/or over-the-counter options, futures and similar derivative instruments based on the index to allow the company to hedge Strategy Credit Rates; |
• | The index is recognized as a broad-based index for the relevant market; and |
• | The publisher of the index allows the Company to use the index in the Contract and other materials for a reasonable fee. |
Crediting Factors available for all Strategies |
Floor of 0% |
Floor of -2.5% |
Floor of -5.0% |
Floor of -7.5% |
Floor of -10.0% |
Buffer of -10.0% |
• | changes in derivative, equity and/or fixed income instrument valuations; |
• | increases in hedging costs that have an impact on the Company’s ability to offer the Contract; |
• | derivative market changes that impact availability and structure of derivative instruments used to hedge market risk associated with the Reference Indices; |
• | negative fixed income instrument default experience realized by the Company; |
• | changes in Company and/or Contract cost structure due to regulatory or other business management concerns; and |
• | unanticipated Owner experience that varies from our actuarial assumptions. |
A = | Strategy Base, which equals: |
• | Purchase Payment allocated to the Strategy on the Effective Date; or |
• | Thereafter, the Strategy Value as of the current Strategy Term Start Date, less any subsequent Strategy Base Withdrawal. |
B = | the rate measuring the interim performance of the Reference Strategy since the Strategy Term Start Date, as determined by the Crediting Factor and the performance of the Reference elected Index (“Strategy Credit Rate”), as measured from the Strategy Term Start Date. |
C = | the Contract Fee percentage that is used to calculate the Contract Fee. |
D = | the number of years (whole and partial) that have elapsed since the Strategy Term Start Date. |
• | The Cap, prescribed by the Strategy, which is the maximum positive interest rate that we will use in the calculation of Strategy Credit; and |
• | Any Floor, prescribed by the Strategy, which is the maximum negative interest rate that we will use in the calculation of Strategy Credit, as applicable; or |
• | Any Buffer, prescribed by the Strategy, which is the maximum decline in Index Value that the Company will absorb before applying a negative interest rate to your Strategy Value. |
Strategy Credit Rate = 8%
Strategy Credit Rate= -10%
Strategy Credit Rate = -5%
Strategy Credit Rate = 0%
Strategy Credit Rate = 5%
Contract Information on Effective Date: | |
Effective Date: | 5/1/16 |
Contract Anniversary: | 5/1/17 |
Strategy Value (as of 5/1/16): | $100,000 |
Selected Reference Index: | S&P 500® Price Return Index |
Floor: | 0% |
Cap: | 3.50% |
Example 1A– Index Performance is less than the Floor: | |
Index Value (as of 5/1/16): | $2,100 |
Index Value (as of 5/1/17): | $2,000 |
Index Performance: | -4.76% |
Strategy Credit Rate: | 0.00% |
Strategy Credit | $0 |
Example 1B– Index Performance more than the Floor, but less than the Cap: | |
Index Value (as of 5/1/16): | $2,100 |
Index Value (as of 5/1/17): | $2,150 |
Index Performance: | 2.38% |
Strategy Credit Rate: | 2.38% |
Strategy Credit | $2,380 |
Example 1C– Index Performance more than the Cap: | |
Index Value (as of 5/1/16): | $2,100 |
Index Value (as of 5/1/17): | $2,200 |
Index Performance: | 4.76% |
Strategy Credit Rate: | 3.50% |
Strategy Credit | $3,500 |
Contract Information on Effective Date: | |
Effective Date: | 5/1/16 |
Contract Anniversary: | 5/1/17 |
Strategy Value (as of 5/1/16): | $100,000 |
Selected Reference Index: | S&P 500® Price Return Index |
Floor: | -10.00% |
Cap: | 13.50% |
Example 2A– Index Performance is less than the Floor: | |
Index Value (as of 5/1/16): | $2,100 |
Index Value (as of 5/1/17): | $1,800 |
Index Performance: | -14.29% |
Strategy Credit Rate: | -10.00% |
Strategy Credit | -$10,000 |
Example 2B– Index Performance more than the Floor, but less than the Cap: | |
Index Value (as of 5/1/16): | $2,100 |
Index Value (as of 5/1/17): | $2,300 |
Index Performance: | 9.52% |
Strategy Credit Rate: | 9.52% |
Strategy Credit | $9,520 |
Example 2C– Index Performance more than the Cap: | |
Index Value (as of 5/1/16): | $2,100 |
Index Value (as of 5/1/17): | $2,500 |
Index Performance: | 19.05% |
Strategy Credit Rate: | 13.50% |
Strategy Credit | $13,500 |
Contract Information on Effective Date: | |
Effective Date: | 5/1/16 |
Contract Anniversary: | 5/1/17 |
Strategy Value (as of 5/1/16): | $100,000 |
Selected Reference Index: | S&P 500® Price Return Index |
Buffer: | -10.00% |
Cap: | 13.50% |
Example 3A– Index Performance is less than the Buffer: | |
Index Value (as of 5/1/16): | $2,100 |
Index Value (as of 5/1/17): | $1,800 |
Index Performance: | -14.29% |
Strategy Credit Rate: | 0.00% |
Strategy Credit | -$4,290 |
Example 3B– Index Performance more than the Floor, but less than the Cap: | |
Index Value (as of 5/1/16): | $2,100 |
Index Value (as of 5/1/17): | $2,300 |
Index Performance: | 9.52% |
Strategy Credit Rate: | 9.52% |
Strategy Credit | $9,520 |
Example 3C– Index Performance more than the Cap: | |
Index Value (as of 5/1/16): | $2,100 |
Index Value (as of 5/1/17): | $2,500 |
Index Performance: | 19.05% |
Strategy Credit Rate: | 13.50% |
Strategy Credit | $13,500 |
• | free annual withdrawal amounts; |
• | a surrender that qualifies as Hardship Waiver such as the Nursing Home or Hospital waiver or terminal illness waiver, as described in this prospectus; |
• | partial withdrawals taken as RMDs under the Code, as permitted pursuant to a systematic withdrawal option we provide; and |
• | Income Payments during the Payment Period. |
A = | Strategy MVA Factor, |
B = | the amount of Strategy Base that is withdrawn as a result of the Request for a partial withdrawal (“Strategy Base Withdrawal”), |
C = | Free Annual Withdrawal Amount as of the date of the Request, prior to the Request, |
D = | Strategy Base as of the date of the Request, prior to the Request, and |
E = | Contract Base as of the date of the Request, prior to the Request. |
A = | Strategy Interest MVA Factor, and |
B = | Strategy Index MVA Factor. |
A = | Interest MVA Rate 1 as calculated on the Interest MVA Term Start Date using the Constant Maturity Treasury rate assuming a term-to-maturity equal to the Interest MVA Term, |
B = | Interest MVA Rate 2 as calculated on the Interest MVA Term Start Date using The ICE BofAML 5-7 Year US Corporate Index, |
C = | Interest MVA Rate 1 as calculated on the date of the Request using the Constant Maturity Treasury rate assuming a term-to-maturity equal to the number of years (whole and partial) from the date of the Request until the Interest MVA Term End Date, |
D = | Interest MVA Rate 2 as calculated on the date of the Request using The ICE BofAML 5-7 Year US Corporate Index, and |
E = | The number of years (whole and partial) from the date of the Request to the Interest MVA Term End Date. |
A = | the estimated market value, expressed as a percentage of the Strategy Base, of a set of put and call options as determined by an option pricing formula (“Strategy Option Value”), as of the date of the Request, |
B = | Strategy Credit Rate as of the date of the Request, |
C = | Strategy Option Value as calculated on the Strategy Term Start Date, |
D = | The number of years (whole and partial) from the date of the Request to the Strategy Term End Date, and |
E = | Strategy Term. |
• | Nursing Home or Hospital Waiver. We will not apply an MVA in the case of a full surrender where any Owner or Annuitant is confined to a licensed Nursing Home or Hospital, and has been confined to such Nursing Home or Hospital for at least 180 consecutive calendar days after the latter of the Effective Date or the date of change of Owner or Annuitant. We may require verification of confinement to the Nursing Home or Hospital. |
• | Terminal Illness Waiver.We will not apply an MVA in the case of a full surrender where any Owner or Annuitant is diagnosed with a terminal illness and has a life expectancy of 12 months or less from the date of the Request for a withdrawal. As proof, we may require a determination of the terminal illness. Such determination must be signed by a licensed physician making the determination after the latter of Effective Date or the date of change of the Owner or Annuitant. The licensed physician must not be the Owner or Annuitant or a member of either’s immediate family. |
A = Contract Value,
B = MVA, and
C = Premium Tax, if any.
A = Gross Withdrawal,
B = MVA, and
C = Premium Tax, if any.
A = | Gross Withdrawal, |
B = | Contract Base, and |
C = | Contract Value. |
A = | Remaining Purchase Payment as of the date the Request for payment is received, prior to the Request, and |
B = | Contract Base Withdrawal. |
A = | Guaranteed Minimum Death Benefit as of the date the Request for payment is received, prior to the Request, |
B = | Contract Base Withdrawal, and |
C = | Contract Base as of the date the Request for payment is received, prior to the partial withdrawal. |
A = | Contract Base Withdrawal, |
B = | Strategy Base as of the date the Request for payment is received, and |
C = | Contract Base as of the date the Request for payment is received. |
A = | Strategy Base as of the date the Request for payment is received, and |
B = | Strategy Base Withdrawal. |
A = | Strategy Base Withdrawal, |
B = | Strategy Credit Rate as of the date the Request for payment is received, |
C = | Contract Fee Percentage, and |
D = | the number of years (whole and partial) that have elapsed since the Strategy Term Start Date. |
• | the Surrender Value or Contract Value on the date we receive Due Proof of Death, as of the date the Request for payment of the Death Benefit is received, minus any Premium Tax; or |
• | the total Purchase Payment applied to the Contract, as of the date the Request for payment is received, less any surrenders, partial or periodic withdrawals and Premium Tax, if any. |
• | Due Proof of Death of the Owner while the Contract is in force; |
• | our claim form from each Beneficiary, properly completed; and |
• | any other documents we require. |
• | Spouses – If the sole Beneficiary is the surviving Spouse of the deceased Owner, then he or she may choose to continue the Contract and become the new Owner. At the death of the surviving Spouse, this provision may not be used again, even if that surviving Spouse remarries. In that case, the rules for non-Spouses will apply. A surviving Spouse may also elect to receive the Death Benefit in a lump sum, apply the proceeds to an Annuity Payment Option, or receive the Death Benefit within five years of the date of the Owner’s death. |
• | Non-Spouses – If the Beneficiary is not the surviving Spouse of the deceased Owner, then this Contract cannot be continued. Instead, upon the death of any Owner, the Beneficiary must choose one of the following: |
○ | Receive the Death Benefit in one lump sum following our receipt of Due Proof of Death; |
○ | Receive the Death Benefit (if the Beneficiary is a natural person) pursuant to one of the Annuity Payment Options. Payments under an Annuity Payment Option must begin within 1 year of the Owner’s death and must not extend beyond the Beneficiary’s life or a period certain equal to the Beneficiary’s life expectancy; or |
○ | Receive the Death Benefit within five (5) years of the date of the Owner’s death. |
• | made on or after the taxpayer reaches age 59 1⁄2; |
• | made on or after the death of an Owner; |
• | attributable to the taxpayer’s becoming disabled; or |
• | made as part of a series of substantially equal periodic payments for the life (or life expectancy) of the taxpayer. |
(In millions) | |||
Year Ended December 31, | General Account Annuity Benefits Liabilities | Empower Retirement Annuity Separate Accounts | Individual Markets Annuity Separate Accounts |
2018 | $12,948 | $14,763 | $3,009 |
2017 | $12,556 | $18,729 | $2,577 |
2016 | $12,279 | $19,157 | $1,957 |
2015 | $11,309 | $19,340 | $1,660 |
2014 | $10,890 | $20,220 | $1,581 |
(In millions) | |||
Year Ended December 31, | Individual Markets Life Insurance Future Policy Benefits Liabilities | Individual Markets Life Insurance Separate Accounts | Individual Markets Life Insurance In-force |
2018 | $14,554 | $6,304 | $98,202 |
2017 | $14,031 | $6,215 | $97,801 |
2016 | $13,397 | $5,771 | $96,711 |
2015 | $13,245 | $5,479 | $97,862 |
2014 | $12,712 | $5,308 | $97,170 |
Director | Age | From | Principal Occupation(s) for Last Five Years | |||
John L. Bernbach(5)(6) | 75 | 2006 | CEO of The Bernbach Group since July 2015; previously Vice Chairman, Engine | |||
Robin Bienfait(1)(2)(3)(7) | 59 | 2018 | CEO of Emnovate since 2016; previously Executive Vice President and Chief Enterprise Innovation Officer of Samsung Electronics | |||
Marcel Coutu(1)(2)(4)(6)(7) | 65 | 2014 | Corporate Director | |||
André Desmarais(1)(2)(4)(6)(7)(8) | 62 | 1997 | Deputy Chairman, President and Co-Chief Executive Officer, Power Corporation; Executive Co-Chairman, Power Financial Corporation | |||
Paul Desmarais, Jr.(1)(2)(4)(6)(7)(8) | 64 | 1991 | Chairman and Co-Chief Executive Officer, Power Corporation; Executive Co-Chairman, Power Financial Corporation | |||
Gary A. Doer(1)(2)(6)(7) | 70 | 2016 | Senior Business Advisor, Dentons Canada LLP since August 2016; previously Canada’s Ambassador to the United States | |||
Gregory J. Fleming(1)(2)(7) | 56 | 2016 | Chief Executive Officer, Rockefeller Capital Management since October 2017; previously Corporate Director since October 2015; previously President of Morgan Stanley Investment Management | |||
Claude Généreux(1)(2)(4)(7) | 56 | 2015 | Executive Vice President, Power Corporation and Power Financial Corporation | |||
Alain Louvel(3)(5) | 73 | 2006 | Corporate Director | |||
Paula B. Madoff(1)(2)(3)(7) | 51 | 2018 | Advisory Director, Goldman Sachs since August 2017; previously Partner and Head of Sales and Distribution for Interest Rate Products and Mortgage, Goldman Sachs | |||
Paul A. Mahon(1)(2)(4) | 55 | 2013 | President and Chief Executive Officer, Lifeco, Great-West Life, CLAC and London Life | |||
R. Jeffrey Orr(1)(2)(4)(6)(7) | 60 | 2005 | Chairman of the Board of the Company; Chairman of the Board of Lifeco, Great-West Life, CLAC and London Life; President and Chief Executive Officer, Power Financial Corporation | |||
Robert L. Reynolds(1) | 67 | 2014 | President and Chief Executive Officer since May 2014; President and Chief Executive Officer of Putnam Investments, LLC | |||
T. Timothy Ryan, Jr.(1)(2)(4)(6)(7) | 73 | 2009 | Corporate Director since May 2014; previously Vice Chairman of Regulatory Affairs at JP Morgan Chase | |||
Jerome J. Selitto(1)(2)(7) | 77 | 2012 | President, Avex Funding Corporation since April 2015; previously Chief Executive Officer of PHH Corporation | |||
Gregory D. Tretiak(1)(2)(3)(7) | 63 | 2012 | Executive Vice President and Chief Financial Officer, Power Corporation | |||
Brian E. Walsh(1)(2)(4)(6)(7) | 65 | 1995 | Partner and Chief Strategist, Titan Advisors, LLC since July, 2015; previously Chairman and Chief Investment Officer, Saguenay Strathmore Capital, LLC |
(1) | Member of the Executive Committee. |
(2) | Member of the Investment and Credit Committee. |
(3) | Member of the Audit Committee. |
(4) | Member of the Human Resources Committee. |
(5) | Member of the Conduct Review Committee. |
(6) | Member of the Governance and Nominating Committee. |
(7) | Member of the Risk Committee. |
(8) | Mr. André Desmarais and Mr. Paul Desmarais, Jr. are brothers. |
Director | Current Directorships | Former Directorships and Dates |
John L. Bernbach | Omnicare, Inc. March 2013– August 2015 | |
Robin Bienfait | Mitsubishi UFJ Financial Group | |
Marcel Coutu | Brookfield Asset Management Inc. Enbridge Inc. | Canadian Oil Sands Limited September 2001– December 2014 |
André Desmarais | CITIC Pacific Limited December 1997– May 2014 | |
Paul Desmarais, Jr. | Total S.A. May 2002- May 2017 Lafarge S.A. January 2008– July 2015 | |
Gary Doer | Barrick Gold | |
Alain Louvel | Worldpoint Terminals, LP May 2008– September 2017 | |
Paula Madoff | KKR Real Estate Finance Trust | |
R. Jeffrey Orr | PanAgora Asset Management, Inc. | |
Jerome Selitto | Better Mortgage | PHH Corporation October 2009– January 2012 |
T. Timothy Ryan, Jr. | Santander Holdings USA, Inc. | Markit June 2013– October 2014 |
Gregory D. Tretiak | PanAgora Asset Management, Inc. |
Name | Fees Earned or Paid in Cash ($)(3) | Stock Awards ($)(4) | All Other Compensation ($)(5) | Total ($) | ||||
J.L. Bernbach | 89,889 | 68,750 | 148 | 158,787 | ||||
R. Bienfait(1) | 64,634 | 44,437 | 70 | 109,177 | ||||
G.J. Fleming | 100,889 | 68,750 | 148 | 169,787 | ||||
A. Louvel | 103,639 | 68,750 | 148 | 172,537 | ||||
J.E.A. Nickerson(2) | 32,200 | 19,093 | 52 | 51,345 | ||||
R.L. Reynolds | 78,389 | 68,750 | 148 | 147,287 | ||||
R. Royer(2) | — | 58,970 | 13 | 58,983 |
(1) | Ms. Bienfait was elected to the Board of Directors effective June 26, 2018. |
(2) | Messrs. Nickerson and Royer retired from the Board of Directors effective May 18, 2018. |
(3) | Ms. Bienfait and Messrs. Bernbach, Fleming, Louvel, Nickerson and Reynolds elected to receive this portion of their compensation for serving as directors in cash. Amounts payable to Company Directors are paid in the currency of the country of residence. Amounts earned in Canadian dollars have been translated to U.S. dollars at the Conversion Rate. |
(4) | For Ms. Bienfait and Messrs. Bernbach, Fleming, Louvel, Nickerson and Reynolds, these amounts represent the value of Deferred Share Units granted under the mandatory component of the DSUP. For Mr. Royer, this amount represents the value of Deferred Share Units granted under the mandatory and the voluntary components of the DSUP. See the Narrative Description of Company Director Compensation below for additional information regarding the DSUP. The value of these Deferred Share Units is the aggregate grant date fair value. |
(5) | These amounts are life insurance premiums paid under the Great-West Life Director’s Group Life Insurance Plan. Payments are made in Canadian dollars and have been translated to U.S. dollars at the Conversion Rate. |
Audit | $20,000 |
Executive | $25,000 |
Human Resources | $20,000 |
Investment | $20,000 |
Risk | $20,000 |
Audit | $20,000 |
Conduct Review | $7,500 |
Executive | $7,500 |
Governance & Nominating | $7,500 |
Human Resources | $10,000 |
Investment | $15,000 |
Risk | $10,000 |
Equity Investment Sub | $7,500 |
Executive | Age | Officer from | Principal Occupation(s) for Last Five Years | |||
Edmund F. Murphy III President and Chief Executive Officer | 57 | 2014 | President and Chief Executive Officer of the Company since February 2019, previously President, Empower Retirement since September 2014;previously Head of Defined Contribution, Putnam Investments, LLC | |||
Scott C. Sipple President, Great-West Investments | 57 | 2017 | President, Great-West Investments of the Company since October 2017; previously Head of Global Investment Strategies, Putnam Investments, LLC | |||
Robert K. Shaw President, Individual Markets | 63 | 2008 | President, Individual Markets of the Company | |||
Andra S. Bolotin Executive Vice President and Chief Financial Officer | 56 | 2015 | Executive Vice President and Chief Financial Officer of the Company since July 2016; previously Senior Vice President and Chief Financial Officer of the Company since July 2015; previously Head of Corporate Finance and Controller, Putnam Investments, LLC | |||
Richard H. Linton Jr. Executive Vice President, Group Distribution & Operations | 51 | 2016 | Executive Vice President, Group Distribution & Operations of the Company; previously Executive Vice President, Empower Operations since May 2016; previously President Retail Wealth, Voya Financial | |||
Jack E. Brown Senior Vice President, US Chief Investment Officer | 46 | 2015 | Senior Vice President, US Chief Investment Officer of the Company; previously Senior Vice President, Separate Accounts since July 2017; previously Vice President, Investments, since October 2015; previously Vice President, Oppenheimer Funds Inc | |||
Jeffrey W. Knight Senior Vice President and Chief Technology Officer | 61 | 2014 | Senior Vice President and Chief Technology Officer of the Company | |||
Suzanne M. Sanchez Chief Human Resources Officer | 44 | 2011 | Chief Human Resources Officer of the Company | |||
Richard G. Schultz General Counsel and Chief Legal Officer | 58 | 2008 | General Counsel and Chief Legal Officer of the Company |
• | The executive compensation program adopted by the Company and applied to the Named Executive Officers has been designed to: |
• | support the Company’s objective of generating value for shareholders and policyholders over the long term; |
• | attract, retain and reward qualified and experienced executives who will contribute to the success of the Company; |
• | motivate executive officers to meet annual corporate, divisional, and individual performance goals; |
• | promote the achievement of goals in a manner consistent with the Company’s Code of Conduct; and |
• | align with regulatory requirements. |
• | excellence in developing and executing strategies that will produce significant value for shareholders and policyholders over the long term; |
• | management vision and an entrepreneurial approach; |
• | quality of decision-making; |
• | strength of leadership; |
• | record of performance over the long term; and |
• | initiating and implementing transactions and activities that create shareholder and policyholder value. |
• | base salary; |
• | annual incentive bonus; |
• | share units; |
• | options for Lifeco common shares; and |
• | retirement benefits. |
Base Salary | Reflect skills, competencies, experience and performance of the Named Executive Officers |
Annual Incentive Bonus | Reflect performance for the year |
Share Units | More closely align the medium term interests of the Named Executive Officers with the interests of the shareholders |
Stock Options | More closely align the long term interests of the Named Executive Officers with the interests of the shareholders |
Retirement Benefits | Provide for appropriate replacement income upon retirement based on years of service with the Company |
Name and Principal Position | Year | Salary ($) | Bonus ($)(3) | Stock Awards ($)(4) | Option Awards ($)(5) | Non-Equity Incentive Plan Compensation ($)(6) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)(7) | All Other Compensation ($)(8) | Total ($) | |||||||||
Robert L. Reynolds President and Chief Executive Officer | 2018 | 300,000 | — | — | — | 3,000,000 | — | 147,287 | 3,447,287 | |||||||||
2017 | 300,000 | — | — | — | 3,000,000 | — | 116,039 | 3,416,039 | ||||||||||
2016 | 300,000 | — | — | — | 3,000,000 | — | 120,039 | 3,420,039 | ||||||||||
Andra S. Bolotin(1) Executive Vice President and Chief Financial Officer | 2018 | 511,538 | — | 360,006 | 41,610 | 1,176,538 | — | 14,393 | 2,104,085 | |||||||||
2017 | 476,923 | — | 269,999 | 66,783 | 1,144,615 | — | 11,443 | 1,969,763 | ||||||||||
2016 | 423,077 | — | 249,998 | 134,808 | 900,000 | — | 25,994 | 1,733,877 | ||||||||||
Robert K. Shaw President, Individual Markets | 2018 | 543,000 | — | 256,557 | 29,640 | 936,675 | — | 14,393 | 1,780,265 | |||||||||
2017 | 543,000 | 588,667 | 218,983 | 54,175 | 855,225 | 1,820,465 | 7,393 | 4,087,908 | ||||||||||
2016 | 539,942 | — | 244,357 | 87,954 | 675,000 | 1,749,030 | 7,655 | 3,303,938 | ||||||||||
Edmund F. Murphy President, Empower Retirement | 2018 | 800,000 | — | 689,999 | 79,705 | 1,840,000 | — | 13,750 | 3,423,454 | |||||||||
2017 | 800,000 | 1,177,333 | 599,993 | 148,538 | 1,840,000 | — | 10,800 | 4,576,664 | ||||||||||
2016 | 761,538 | — | 499,995 | 269,616 | 1,444,000 | — | 10,268 | 2,985,417 | ||||||||||
Richard H. Linton Jr.(2) Executive Vice President, Empower Operations | 2018 | 500,000 | 300,000 | 329,993 | 38,095 | 880,000 | — | 15,856 | 2,063,945 | |||||||||
2017 | 500,000 | 450,000 | 300,014 | 74,269 | 950,000 | — | 263,158 | 2,537,441 |
(1) | For Ms. Bolotin, the Summary Compensation Table sets forth all compensation paid to Ms. Bolotin by the Company for her service as the Chief Financial Officer of both the Company and Putnam, a portion of which is reimbursed to the Company by Putnam. |
(2) | Mr. Linton joined the Company as Executive Vice President, Empower Operations in May of 2016. |
(3) | This column sets forth special bonuses for (a) Mr. Shaw and Mr. Murphy in relation to the integration of certain large case defined contribution business acquired from J.P. Morgan, and (b) Mr. Linton in connection with his joining the Company. |
(4) | This column sets forth the value of share units granted to each Named Executive Officer under the Executive Share Unit Plan. The amounts shown represent the aggregate grant date fair value of the awards. |
(5) | This column sets forth the value of Lifeco options granted to each Named Executive Officer under the Lifeco Option Plan. The amounts shown represent the aggregate grant date fair value of the awards. For further information, see Note 17 to the Company’s December 31, 2018 Financial Statements include in Appendix A to this prospectus. |
(6) | For Ms. Bolotin and Messrs. Murphy, Shaw and Linton, these amounts represent cash bonuses earned under the Company’s Annual Incentive Bonus Plan and paid in February of 2019. |
(7) | For 2018, Mr. Shaw had a decrease in actuarial present value of his Defined Benefit Plan of $196,906 and a decrease in actuarial present value of his SERP of $132,366, which offset above market earnings under the EDCP of $4,296. Above market earnings under the EDCP equaled the difference between the actual interest earned in 2018 and the amount of interest that would have been earned at a rate of 3.97% (3.97% being 120% of the applicable federal long-term rate at December 31, 2018). |
(8) | The components of 2018 other compensation reported for each of the Named Executive Officers are as follows: |
(a) | Mr. Reynolds received $147,287 in respect of directors’ fees. |
(b) | Ms. Bolotin received (i) a 401(k) Plan employer contribution of $13,750; and (ii) a cell phone stipend of $643. |
(c) | Mr. Murphy received a 401(k) Plan employer contribution of $13,750. |
(d) | Mr. Shaw received (i) a 401(k) Plan employer contribution of $13,750; and (ii) a cell phone stipend of $643. |
(e) | Mr. Linton received (i) a 401(k) plan employer contribution of $13,750; (ii) a relocation benefit payment of $1,859; and (iii) a cell phone stipend of $247. |
Name | Thresolds ($) | Target ($) | Maximum ($) | All Other Stock Awards: Number of Shares of Stock or Units (#)(1) | All Other Option Awards; Securities Underlying Options (#)(2) | Exercise or Base Price of Option Awards ($/Share)(3) | Grant Date Fair Value of Stack and Option awards ($) | |||||||
A.S. Bolotin | — | 1,023,077 | — | 10,280 | 43,800 | 26.42 | 401,616 | |||||||
R.K. Shaw | — | 814,500 | — | 7,326 | 31,200 | 26.42 | 286,197 | |||||||
E.F. Murphy | — | 1,600,000 | — | 19,703 | 83,900 | 26.42 | 769,704 | |||||||
R.H. Linton | — | 800,000 | — | 9,423 | 40,100 | 26.42 | 368,088 |
(1) | These are Executive Share Units granted under the Executive Share Unit Plan. The grant date was January 1, 2018. The Company’s Human Resources Committee approved the grants on February 6, 2018. |
(2) | These are Lifeco options granted under the Lifeco Option Plan. The grant date was March 1, 2018. The Lifeco Human Resources Committee approved the grants on February 6, 2018. |
(3) | Lifeco options are issued with an exercise price in Canadian dollars, which have been translated to U.S. dollars at 1.00/1.295 which was Lifeco’s average rate for 2018 (the “Conversion Rate”). |
(i) | Ms. Bolotin had an opportunity to earn up to 200% of base salary earned in 2018 based on the Company’s financial performance and individual objectives, and an additional amount on a discretionary basis based on individual performance; |
(ii) | Mr. Murphy had an opportunity to earn up to 200% of base salary earned in 2018 based on the Company’s financial performance and individual objectives, and an additional amount on a discretionary basis based on individual performance; |
(iii) | Mr. Shaw had an opportunity to earn up to 150% of base salary earned in 2018 based on the Company’s financial performance and individual objectives, and an additional amount on a discretionary basis based on individual performance; and |
(iv) | Mr. Linton had an opportunity to earn a target bonus of $800,000 in 2018 based on the Company’s financial performance and individual objectives, and an additional amount on a discretionary basis based on individual performance. |
Name | Option Awards | Stock awards | ||||||||||
Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($)(6) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($)(9) | |||||||
A.S. Bolotin | 19,680 | 29,520(3) | 26.78 | February 28, 2026 | 8,362(7) | 235,637 | ||||||
6,780 | 27,120(4) | 28.47 | February 28, 2027 | 10,799(8) | 304,306 | |||||||
— | 43,800(5) | 26.42 | February 28, 2028 | |||||||||
R.K. Shaw | 26,600 | — | 20.97 | February 28, 2021 | 6,782(7) | 191,114 | ||||||
37,600 | — | 17.89 | February 28, 2022 | 7,696(8) | 216,862 | |||||||
31,500 | — | 20.95 | February 28, 2023 | |||||||||
20,960 | 4,240(1) | 24.04 | February 29, 2024 | |||||||||
16,620 | 11,080(2) | 27.51 | February 28, 2025 | |||||||||
12,840 | 19,260(3) | 26.78 | February 28, 2026 | |||||||||
5,500 | 22,000(4) | 28.47 | February 28, 2027 | |||||||||
— | 31,200(5) | 26.42 | February 28, 2028 | |||||||||
E.F. Murphy | 52,440 | 34,960(2) | 27.51 | February 28, 2025 | 18,582(7) | 523,634 | ||||||
39,360 | 59,040(3) | 26.78 | February 28, 2026 | 20,697(8) | 583,243 | |||||||
15,080 | 60,320(4) | 28.47 | February 28, 2027 | |||||||||
— | 83,900(5) | 26.42 | February 28, 2028 | |||||||||
R.H. Linton | 7,540 | 30,160(4) | 28.47 | February 28, 2027 | 9,291(7) | 202,182 | ||||||
— | 40,100(5) | 26.42 | February 28, 2028 | 9,898(8) | 215,389 |
(1) | These options vest 20% of the total grant on March 1, 2019. |
(2) | These options vest 20% of the total grant on each of March 1, 2019 and 2020. |
(3) | These options vest 20% of the total grant on each of March 1, 2019, 2020 and 2021. |
(4) | These options vest 20% of the total grant on each of March 1, 2019, 2020, 2021 and 2022. |
(5) | These options vest 20% of the total grant on each of March 1, 2019, 2020, 2021, 2022 and 2023. |
(6) | Lifeco options are issued with an exercise price in Canadian dollars, which have been translated to U.S. dollars at the Conversion Rate. |
(7) | These Executive Share Unit grants vest on December 31, 2019. |
(8) | These Executive Share Unit grants vest on December 31, 2020. |
(9) | The market value of Executive Share Units held as of December 31, 2018 is based on the year-end closing price of Lifeco common shares on the Toronto Stock Exchange. |
Option Awards | Stock Awards | |||
Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) | |
A.S. Bolotin | — | — | 10,860 | 229,902 |
R.K. Shaw | — | — | 10,615 | 224,715 |
E.F. Murphy | — | — | 21,720 | 459,804 |
R.H. Linton | — | — | 15,433 | 326,701 |
Name | Plan Name | Number of Years of Credited Service | Present Value of Accumulated Benefit ($)(1) | Payments During Last Fiscal Year ($) | ||||
R.K. Shaw | Defined Benefit Plan | 35 | 2,061,094 | — | ||||
SERP | 30 | 8,171,163 | — |
(1) | The amounts shown in the table are calculated according to the terms of the plans as of December 31, 2018. Benefits under the Defined Benefit Plan were frozen as of December 31, 2017, and no additional benefits will accrue under that plan after that date. The Present Value of Accumulated Benefit under the Defined Benefit Plan equals the annuity earned as of December 31, 2017, payable at age 65 in the normal form of benefit. The Present Value of Accumulated Benefit under the SERP equals the termination benefit earned as of December 31, 2018, payable at age 62 in the normal form of benefit. Benefit amounts under each plan have been discounted to December 31, 2018 at the applicable discount rate for December 31, 2018. The amount payable to Mr. Shaw under the SERP is determined under the normal retirement benefit pay-out formula. |
1. | For participants who separate from service at or after age 62, the normal retirement benefit is equal to 60% of final average compensation if the participant has 30 years of service. The benefit is prorated for less than 30 years of service. Final average compensation is the average of the highest 60 consecutive months of compensation during the last 84 months of employment. Compensation includes salary, bonuses and commissions prior to any deferrals to other benefit plans. Benefits are offset by benefits under the Defined Benefit Plan and 50% of estimated social security benefits as of retirement. |
2. | For participants who separate from service between ages 57 and 62, the early retirement benefit is calculated by reducing the bonus used in determining final average compensation by 5/6% for each month prior to age 62 and by further reducing the early retirement benefit by 5/12% for each month prior to age 62. Benefits are offset by benefits under the Defined Benefit Plan and 50% of estimated social security benefits as of age 62. |
3. | For participants who separate from service prior to age 57, the termination benefit is equal to 60% of final average salary if the participant has 30 years of service. The benefit is prorated for less than 30 years of service. If the participant has less than 35 years of service, the termination benefit is also reduced by 5% for each of the first three years of service below 35. Final average salary is the average of the highest 60 consecutive months of salary during the last 84 months of employment. Salary includes deferrals of any salary to other benefit plans. Benefits are offset by benefits under the Defined Benefit Plan and 50% of estimated social security benefits payable as of age 62. |
Name | Plan Name | Executive Contributions in Last Fiscal Year ($)(1) | Aggregate Earnings in Last Fiscal Year ($) | Aggregate Withdrawals or Distributions ($) | Aggregate Balance at Last Fiscal Year End ($) | |||||
R.K. Shaw | NQDCP | — | (37,224) | 86,259 | 470,932 | |||||
EDCP | 155,434 | 26,389 | — | 602,987 |
(1) | Amounts contributed are included in the Salary column of the Summary Compensation Table. |
1. | 100% of the Company’s 7,320,176 outstanding common shares are owned by GWL&A Financial Inc., 8515 East Orchard Road, Greenwood Village, Colorado 80111. |
2. | 100% of the outstanding common shares of GWL&A Financial Inc. are owned by Great-West Lifeco U.S. LLC, 8515 East Orchard Road, Greenwood Village, Colorado 80111. |
3. | 100% of the outstanding common shares of Great-West Lifeco U.S. LLC are owned by Great-West Financial (Nova Scotia) Co., Suite 800, 1959 Upper Water Street, Halifax, Nova Scotia, Canada B3J 2X2. |
4. | 100% of the outstanding common shares of Great-West Financial (Nova Scotia) Co. are owned by Great-West Financial (Canada) Inc., 100 Osborne Street North, Winnipeg, Manitoba, Canada R3C 3A5. |
5. | 100% of the outstanding common shares of Great-West Financial (Canada) Inc. are owned by Great-West Lifeco Inc., 100 Osborne Street North, Winnipeg, Manitoba, Canada R3C 3A5. |
6. | 71.81% of the outstanding common shares of Great-West Lifeco Inc. are controlled, directly or indirectly, by Power Financial Corporation, 751 Victoria Square, Montréal, Québec, Canada H2Y 2J3, representing approximately 65% of the voting rights attached to all outstanding voting shares of Great-West Lifeco Inc. |
7. | 65.52% of the outstanding common shares of Power Financial Corporation are owned by 171263 Canada Inc., 751 Victoria Square, Montréal, Québec, Canada H2Y 2J3. |
8. | 100% of the outstanding common shares of 171263 Canada Inc. are owned by Power Corporation of Canada, 751 Victoria Square, Montréal, Québec, Canada H2Y 2J3. |
9. | The Desmarais Family Residuary Trust, c/o San Palo Investments Corporation, 759 Victoria Square, Suite 520, Montréal, Québec, Canada H2Y 2J7, directly and through a group of private holding companies which it controls, has voting control of Power Corporation of Canada. |
Directors | Great-West Lifeco Inc.(1) | Power Financial Corporation(2) | Power Corporation of Canada(3) |
J.L. Bernbach | - | - | - |
R. Bienfait | - | - | - |
M.R. Coutu | 10,000 | - | - |
A. Desmarais | 350,000 | 43,200 549,991 options | 15,118,416 3,884,000 options |
P. Desmarais, Jr. | 100,000 | - | 15,096,015 3,884,000 options |
G.A. Doer | - | - | - |
G.J. Fleming | - | - | - |
C. Généreux | - | - 205,629 options | 4,821 25,279 options |
A. Louvel | - | - | - |
P.B. Madoff | - | - | - |
P.A. Mahon | 151,566 | - | - |
R.J. Orr | 20,000 | 400,200 3,622,229 options | 20,000 |
R.L. Reynolds | - | - | - |
T. Timothy Ryan, Jr. | - | 16,400 | 18,572 |
J.J. Selitto | - | - | - |
G.D. Tretiak | - | - | |
145,971 options | 13,001 | ||
150,649 options | |||
B.E. Walsh | - | - | - |
Named Executive Officers | Great-West Lifeco Inc.(1) | Power Financial Corporation(2) | Power Corporation of Canada(3) |
R.L. Reynolds | - | - | - |
A.S. Bolotin | - 26,460 options | - | - |
R.H. Linton | - 7,540 options | - | - |
E.F. Murphy | - 106,880 options | - | - |
R.K. Shaw | 6,052 151,620 options | - | - |
Directors and Executive Officers as a Group | Great-West Lifeco Inc.(1) | Power Financial Corporation(2) | Power Corporation of Canada(3) |
637,618 372,406 options | 459,800 4,523,820 options | 30,270,825 7,943,928 options |
(1) | All holdings are common shares, or where indicated, exercisable options for common shares of Great-West Lifeco Inc. |
(2) | All holdings are common shares, or where indicated, exercisable options for common shares of Power Financial Corporation. |
(3) | All holdings are subordinate voting shares, or where indicated, exercisable options for subordinate voting shares of Power Corporation of Canada. |
(a) | There are no transactions to report. |
(b) | The Company’s Board of Directors has a Conduct Review Committee which acts pursuant to a written Charter and procedures (together, the “procedures”). Messrs. Bernbach and Louvel serve on the Conduct Review Committee. |
• | Changes in U.S. federal income tax law could make some of the Company’s products less attractive to consumers. For example, the following events could adversely affect the Company’s business: |
• | Changes in tax laws that would reduce or eliminate tax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance products; |
• | Reductions in the federal income tax that investors are required to pay on long-term capital gains and on some dividends paid on stock that may provide an incentive for some of the Company’s customers and potential customers to shift assets into mutual funds and away from products, including life insurance and annuities, designed to defer taxes payable on investment returns; |
• | Changes in applicable regulations that could restrict the ability of some companies to purchase certain executive benefits products; |
• | Changes in the availability of, or rules concerning the establishment, operation, and taxation of, Section 401, 403(b), 408, and 457 plans; and |
• | Repeal of the federal estate tax or changes in the tax treatment of life insurance death benefits. |
• | A lower effective tax rate, which would have a favorable impact on net income over the period that the lower rate remains in effect. |
• | A reduction in certain deferred tax liabilities, which would have an immediate favorable impact on net income in the period during which the lower rate came into effect. |
• | A reduction in certain deferred tax assets, which would have an immediate unfavorable impact on net income in the period during which the lower tax rate came into effect. |
• | A reduction in tax rates could affect the timing of recognizing tax benefits. |
• | Loss of key personnel or higher than expected employee attrition rates could adversely affect the performance of the acquired business and the Company’s ability to successfully integrate it. |
• | Integrating acquired operations with existing operations may require the Company to coordinate geographically separated organizations, address possible differences in culture and management philosophies, merge financial processes and risk and compliance procedures, combine separate information technology platforms, and integrate organizations that were previously closely tied to the former parent of the acquired business or other service provider. |
• | potential difficulties achieving projected financial results, including the costs and benefits of integration or deconsolidation, due to macroeconomic, business, demographic, actuarial, regulatory, or political factors; |
• | negative reactions to a transaction by policyholders and contract-holders, distributors, suppliers, plan sponsors and advisors and other clients and potential customers; |
• | ratings agency warnings or downgrades; |
• | unanticipated performance issues; |
• | unforeseen liabilities; |
• | transaction-related charges; |
• | diversion of management time and resources to disposition challenges; |
• | loss of key employees or customers, amortization of expenses related to intangibles; |
• | inefficiencies as we integrate operations and address differences in cultural, management, information, compliance and financial systems and procedures; and |
• | charges for impairment of long-term assets or goodwill and indemnifications. |
Strategy Interest MVA Factor | = | ( | 1+A+B | ) | E | - | 1 | = | ( | 1+1.95%+1.00% | ) | 3.50 | - | 1 | = | -6.5190% |
1+C+D | 1+2.95%+2.00% |
Strategy Interest MVA Factor | = | ( | 1+A+B | ) | E | - | 1 | = | ( | 1+1.95%+1.00% | ) | 3.50 | - | 1 | = | +5.2770% |
1+C+D | 1+0.95%+0.50% |
Sell ATM Put | Buy OTM Put | Buy ATM Call | Sell OTM Call | |||||
Index Value (at-the-money): | 100.00 | 100.00 | 100.00 | 100.00 | ||||
Strike price (out-of-the-money): | 100.00 | 90.00 | 100.00 | 112.00 | ||||
Swap rate: | 1.50% | 1.50% | 1.50% | 1.50% | ||||
Dividend yield: | 2.00% | 2.00% | 2.00% | 2.00% | ||||
Time Remaining: | 1.00 | 1.00 | 1.00 | 1.00 | ||||
Implied volatility: | 15.00% | 19.00% | 15.00% | 11.00% | ||||
Derivative Price using Black-Scholes: | 6.12% | 3.34% | 5.63% | 0.82% |
Strategy Option Value | = | ATM Call - OTM Call + OTM Put - ATM Put |
= | 5.63% - 0.82% + 3.34% - 6.12% | |
= | 2.03% |
Index Performance: +10%
Strategy Credit Rate: +10%
Sell ATM Put | Buy OTM Put | Buy ATM Call | Sell OTM Call | |||||
Index Value (at-the-money): | 110.00 | 110.00 | 110.00 | 110.00 | ||||
Strike price (out-of-the-money): | 100.00 | 90.00 | 100.00 | 112.00 | ||||
Swap rate: | 1.50% | 1.50% | 1.50% | 1.50% | ||||
Dividend yield: | 2.00% | 2.00% | 2.00% | 2.00% | ||||
Time Remaining: | 0.50 | 0.50 | 0.50 | 0.50 | ||||
Implied volatility: | 15.00% | 19.00% | 15.00% | 11.00% | ||||
Derivative Price using Black-Scholes: | 1.16% | 0.41% | 10.81% | 2.40% |
Strategy Option Value | = | ATM Call - OTM Call + OTM Put - ATM Put |
= | 10.81% - 2.40% + 0.41% - 1.16% | |
= | 7.66% |
Free Annual Withdrawal Amount = $10,000
Index Performance: -10%
Number of years (whole and partial) from the date of distribution to the Strategy Term End Date: 0.50
Sell ATM Put | Buy OTM Put | Buy ATM Call | Sell OTM Call | |||||
Index Value (at-the-money): | 90.00 | 90.00 | 90.00 | 90.00 | ||||
Strike price (out-of-the-money): | 100.00 | 90.00 | 100.00 | 112.00 | ||||
Swap rate: | 1.50% | 1.50% | 1.50% | 1.50% | ||||
Dividend yield: | 2.00% | 2.00% | 2.00% | 2.00% | ||||
Time Remaining: | 0.50 | 0.50 | 0.50 | 0.50 | ||||
Implied volatility: | 15.00% | 19.00% | 15.00% | 11.00% | ||||
Derivative Price using Black-Scholes: | 10.95% | 4.89% | 0.80% | 0.01% |
Strategy Option Value | = | ATM Call - OTM Call + OTM Put - ATM Put |
= | 0.80% - 0.01% + 4.89% - 10.95% | |
= | -5.26% |
Strategy MVA | = | -9.8738% x max(0, $100,000 - $10,000 x $100,000 / $100,000) |
= | -9.8738% x max(0, $90,000) | |
= | -9.8738% x $90,000 | |
= | -$8,886.39 |
Strategy MVA | = | -2.7969% x max(0, $100,000 - $10,000 x $100,000 / $100,000) |
= | -2.7969% x max(0, $90,000) | |
= | -2.7969% x $90,000 | |
= | -$2,517.19 |
Strategy MVA | = | 1.9222% x max(0, $100,000 - $10,000 x $100,000 / $100,000) |
= | 1.9222% x max(0, $90,000) | |
= | 1.9222% x $90,000 | |
= | +$1,730.01 |
Strategy MVA | = | 8.9991% x max(0, $100,000 - $10,000 x $100,000 / $100,000) |
= | 8.9991% x max(0, $90,000) | |
= | 8.9991% x $90,000 | |
= | +$8,099.60 |
Strategy Interest MVA Factor | = | ( | 1+A+B | ) | E | - | 1 | = | ( | 1+1.95%+1.00% | ) | 0.50 | - | 1 | = | -0.9574% |
1+C+D | 1+2.95%+2.00% |
Strategy Interest MVA Factor | = | ( | 1+A+B | ) | E | - | 1 | = | ( | 1+1.95%+1.00% | ) | 0.50 | - | 1 | = | +0.7366% |
1+C+D | 1+0.95%+0.50% |
Sell ATM Put | Buy OTM Put | Buy ATM Call | Sell OTM Call | |||||
Index Value (at-the-money): | 100.00 | 100.00 | 100.00 | 100.00 | ||||
Strike price (out-of-the-money): | 100.00 | 90.00 | 100.00 | 112.00 | ||||
Swap rate: | 1.50% | 1.50% | 1.50% | 1.50% | ||||
Dividend yield: | 2.00% | 2.00% | 2.00% | 2.00% | ||||
Time Remaining: | 1.00 | 1.00 | 1.00 | 1.00 | ||||
Implied volatility: | 15.00% | 19.00% | 15.00% | 11.00% | ||||
Derivative Price using Black-Scholes: | 6.12% | 3.34% | 5.63% | 0.82% |
Strategy Option Value | = | ATM Call - OTM Call + OTM Put - ATM Put |
= | 5.63% - 0.82% + 3.34% - 6.12% | |
= | 2.03% |
Free Annual Withdrawal Amount = $10,000
Index Performance: +10%
Strategy Credit Rate: +10%
Number of years (whole and partial) from the date of distribution to the Strategy Term End Date: 0.50
Sell ATM Put | Buy OTM Put | Buy ATM Call | Sell OTM Call | |||||
Index Value (at-the-money): | 110.00 | 110.00 | 110.00 | 110.00 | ||||
Strike price (out-of-the-money): | 100.00 | 90.00 | 100.00 | 112.00 | ||||
Swap rate: | 1.50% | 1.50% | 1.50% | 1.50% | ||||
Dividend yield: | 2.00% | 2.00% | 2.00% | 2.00% | ||||
Time Remaining: | 0.50 | 0.50 | 0.50 | 0.50 | ||||
Implied volatility: | 15.00% | 19.00% | 15.00% | 11.00% | ||||
Derivative Price using Black-Scholes: | 1.16% | 0.41% | 10.81% | 2.40% |
Strategy Option Value | = | ATM Call - OTM Call + OTM Put - ATM Put |
= | 10.81% - 2.40% + 0.41% - 1.16% | |
= | 7.66% |
Sell ATM Put | Buy OTM Put | Buy ATM Call | Sell OTM Call | |||||
Index Value (at-the-money): | 90.00 | 90.00 | 90.00 | 90.00 | ||||
Strike price (out-of-the-money): | 100.00 | 90.00 | 100.00 | 112.00 | ||||
Swap rate: | 1.50% | 1.50% | 1.50% | 1.50% | ||||
Dividend yield: | 2.00% | 2.00% | 2.00% | 2.00% | ||||
Time Remaining: | 0.50 | 0.50 | 0.50 | 0.50 | ||||
Implied volatility: | 15.00% | 19.00% | 15.00% | 11.00% | ||||
Derivative Price using Black-Scholes: | 10.95% | 4.89% | 0.80% | 0.01% |
Strategy Option Value | = | ATM Call - OTM Call + OTM Put - ATM Put |
= | 0.80% - 0.01% + 4.89% - 10.95% | |
= | -5.26% |
Strategy MVA | = | -4.3121% x max(0, $100,000 - $10,000 x $100,000 / $100,000) |
= | -4.3121% x max(0, $90,000) | |
= | -4.3121% x $90,000 | |
= | -$3,880.93 |
Strategy MVA | = | -2.7647% x max(0, $100,000 - $10,000 x $100,000 / $100,000) |
= | -2.7647% x max(0, $90,000) | |
= | -2.7647% x $90,000 | |
= | -$2,488.27 |
Strategy MVA | = | -2.6182% x max(0, $100,000 - $10,000 x $100,000 / $100,000) |
= | -2.6182% x max(0, $90,000) | |
= | -2.6182% x $90,000 | |
= | -$2,356.34 |
Strategy MVA | = | 4.4587% x max(0, $100,000 - $10,000 x $100,000 / $100,000) |
= | 4.4587% x max(0, $90,000) | |
= | 4.4587% x $90,000 | |
= | +$4,012.86 |
• | As interest rates increase the Strategy Interest MVA Factor will reduce the net amount received on a partial withdrawal or surrender; and |
• | As interest rates decrease the Strategy Interest MVA Factor will increase the net amount received on a partial withdrawal or surrender. |
Downside Protection | Derivative Strategy |
0.00% Floor | Buy ATM Call; Sell OTM Call Strategy Option Value = ATM Call– OTM Call |
-2.50% Floor -5.00% Floor -7.50% Floor -10.00% Floor | Sell ATM Put; Buy OTM Put; Buy ATM Call; Sell OTM Call Strategy Option Value = ATM Call– OTM Call + OTM Put– ATM Put |
-10.00% Buffer | Sell OTM Put; Buy ATM Call; Sell OTM Call Strategy Option Value = ATM Call– OTM Call– OTM Put |
• | If the Index Performance is greater than zero, the Strategy Index MVA Factor will likely be less than zero. |
○ | This means that if you take a partial withdrawal, surrender your Contract, or die prior to the Strategy Term End Date, the Strategy Index MVA Factor will differ from the Index Performance. |
• | If the Index Performance is less than zero, the Strategy Index MVA Factor will likely be greater than zero. |
○ | This means that if you take a partial withdrawal, surrender your Contract, or die prior to the Strategy Term End Date, the Strategy Index MVA Factor will differ from the Index Performance. |
• | Strategy Interest MVA Factor = ( |
○ | As of the Interest MVA Term Start Date: |
○ | As of the date of Request for partial withdrawal or surrender: |
• | Strategy Index MVA Factor = A– B– C x D / E where: |
A = | Strategy Option Value as of the date of Request; |
B = | Strategy Credit Rate as of the date of Request; |
C = | Strategy Option Value calculated on the Strategy Term Start Date; |
D = | The number of years (whole and partial) from the date of Request to the Strategy Term End Date; and |
E = | Strategy Term |
• | Implied volatility of the Selected Index– The implied volatility varies with the time remaining until the Strategy Term End Date and the relationship of the strike price of the option and the current Index Value as of the date of the Strategy Index MVA Factor calculation. The relationship between the strike price and the current price of the Selected Index is known as the moneyness of the option. Implied volatility inputs are provided by an independent third party for all available maturities. Linear interpolation is used to calculate implied volatility by strike price and maturity as needed. |
• | Swap rate– The swap rate applies to the time remaining until the Index Strategy End Date. Swap rate values are provided by an independent third party for all available maturities. Linear interpolation is used to calculate the exact time remaining as needed. |
STATE | GREAT-WEST CAPITAL CHOICE ADVISOR | Section of Contract where variation is found | IRA Endorsement | Roth Endorsement |
AL | ||||
AK | ||||
AZ | ||||
AR | ||||
CA | If you reside in California the Company will refund the Account Value plus any fees or charges deducted from the Purchase Price if the Contract is cancelled during the right to cancel period. If you are age 60 or older at the time the Contract is issued you may cancel the Contract and return it to us within 30 days and receive return of Account Value if you elected to have the Purchase Price invested in the Strategies. If you did not elect to invest in the Strategies immediately then you will receive return of the Purchase Price and any fees deducted. The definition of Spouse includes people who entered into a domestic partnerships as defined by California Family Code§ 297. | Front Cover.Right to Cancel provision. Section 1:Definitions. | ||
CT | No premium tax is charged in Connecticut for annuities and all reference to premium taxes in the Contracts have been removed. In the event of a misstatement of age or sex, annuity payments will be recalculated and coverage will be what the Purchase Price would have purchased had the | All applicable provisions Paragraph 9.05:Section 9 General Provisions. |
correct age or sex been given when the Contract was issued based on the Company’s published rates. | ||||
DC | ||||
DE | ||||
FL | If you reside in Florida you may cancel the Contract and return it to us within 21 days and receive return of the Purchase Price. All notices or actions required by the Company will be effective when such request or notice is “received” by the Company and not when the request or notice is “recorded” by the Company. There is no guarantee that a Reference/Selected Index will be available for the entire term of the Contract and may be substituted if an original Reference Index is discontinued or there is a material change in the calculation of the original Reference Index. Any payment made in accordance with the provisions of paragraph 10.03 will not incur MVA, Withdrawal Charges or Contract Fees. | Front Cover:Right to Cancel provision. Provisions inSection 1, 2 and 4. Paragraph 4.05 inSection 4: Contract Value and Strategy Value. Paragraph 10.01 inSection 10: Annuity Payment Options. | ||
GA | ||||
HI | ||||
ID | If you reside in Idaho you may cancel the Contract and return it to us within 20 days and receive return of the Purchase Price. In the event of a delay or postponement of payments when the | Front Cover:Right to Cancel provision. Paragraph 7.01 and 7.07 inSection 7:Surrenders and Withdrawals. |
Contract is Surrendered or a Withdrawal is taken beyond 30 days from the date of a Request, the Company will pay interest at the rate specified in Idaho Code Section 28-22-104(2) on any such delayed payments. | ||||
IL | The definition of Spouse includes people who have entered into a Civil Union as defined in Act 750 ILCS 75/1 | Section 1:Definitions. | ||
IN | ||||
IA | ||||
KS | ||||
KY | ||||
LA | ||||
ME | ||||
MD | An annual report will be mailed at least once in each Contract Year showing values as of a date not more than two months prior to the date of mailing. | Paragraph 9.11 inSection 9: General Provisions. | ||
MA | All reference to gender is removed. Annuity payments and rates have been calculated according to unisex tables. Waiver of MVA and Withdrawal Charge for Nursing Home and Hospital confinement is not applicable. | All applicable provisions of the Contract. Section 7.06 | ||
MI | ||||
MN | If you reside in Minnesota the Company will refund the Purchase Payment within 10 days of receipt of the notice of cancellation during the right to cancel period. | Front Cover:Right to Cancel provision. | ||
MS | ||||
MO | If there is a misstatement of age or sex then the | Paragraph 9.05:Section 9 General Provisions. |
annuity payments will be recalculated based on the amount of coverage that the Purchase Price would have bought at the date of issue of the Contract. | ||||
MT | All reference to gender is removed. Annuity payments and rates have been calculated according to unisex tables. No premium tax is charged in Montana and all reference to premium taxes in the Contracts have been removed. When a claim is made under the Death Benefit provisions, then settlement must be made by the Company within 60 days from date of receipt of Due Proof of Death. If settlement is made after 30 days then interest at a rate required by Montana law will be paid. | All applicable provisions of the Contract. All provisions where “premium tax” is referred to. Paragraph 6.01 inSection 6: Death Benefit. | ||
NE | ||||
NV | ||||
NH | The age of annuitization is 99 years of age and not 110 years of age. | Section 1:Definitions and Paragraph 10.01 and 10.02 inSection 10: Annuity Payment Options. | ||
NJ | If you reside in New Jersey and the Contract is cancelled during the Right to Cancel Period, the Company will refund the Cash Surrender Value plus any fees or charges deducted from the Purchase Price. The definition of Spouse includes people who entered into a civil union recognized under the New Jersey Civil Union Act P. L. 2006c. 103. | Front Cover:Right to Cancel provision. Section 1: Definitions. |
NM | ||||
NC | All reference to premium tax has been deleted. | All provisions where Premium Tax is mentioned. | ||
ND | If you reside in North Dakota you may cancel the Contract and return it to us within 20 days and receive return of the Purchase Price. | Front Cover:Right to Cancel provision. | ||
OH | We do not have to accept a Request for assignment of the Contract. All other conditions relating to assignment of the Contract remain applicable. | |||
OK | ||||
OR | Not filed | |||
PA | The right to cancel is extended from 30 days to 45 days if a replacing Contract is issued by an affiliate of the Company. Paragraph (e) has been removed from Section 7.04. If the Company makes any changes to the Contracts in terms of changes allowed to be made in Section 9.04 then the Owner has the right to reject any changes made in terms of this provision within 30 days of receiving notice of changes. The Company has the right to terminate the Contract in the event such changes are rejected. | Front Cover:Right to Cancel provision. Section 7: Surrenders and Withdrawals. Paragraph 9.04 inSection 9: General Provisions. | If the Company makes any changes to the Endorsement as allowed in Paragraph 11 of the Endorsement, then the Owner has the right to reject any changes made in terms of this provision within 30 days of receiving notice of such change. If the changes are rejected then the Company may terminate the Endorsement. This Endorsement will terminate if a Contract loan is taken out. | If the Company makes any changes to the Endorsement as allowed in Paragraph 11 of the Endorsement, then the Owner has the right to reject any changes made in terms of this provision within 30 days of receiving notice of such change. If the changes are rejected then the Company may terminate the Endorsement. This Endorsement will terminate if a Contract loan is taken out. |
RI | If you reside in Rhode Island you may cancel the Contract and return it to us within 20 days and receive return of the Purchase Price. | |||
SC | ||||
SD |
TN | ||||
TX | If you reside in Texas you may cancel the Contract and return it to us within 30 days and receive return of the Purchase Price. The Company will refund the Cash Surrender Value plus any fees or charges deducted from the Purchase Price if the Contract is cancelled during the right to cancel period. | Front Cover:Right to Cancel provision. | ||
UT | ||||
VT | ||||
VA | If there is a misstatement of age or sex then the annuity payments will be recalculated based on the amount of coverage that the Purchase Price would have bought at the date of issue of the Contract. | Paragraph 9.05 inSection 9: General Provisions | ||
WA | If you reside in Washington a Terminal Condition is a condition which will result in a life expectancy is 24 months or less. | Section 7.06 | ||
WV | ||||
WI | ||||
WY |
As of and for the Year Ended December 31, | |||||||||
(In millions) | 2018 | 2017 | 2016 | 2015 | 2014 | ||||
Total income | $7,365 | $6,481 | $6,801 | $7,065 | $6,868 | ||||
Total benefits and expenses | 7,047 | 6,222 | 6,692 | 6,821 | 6,598 | ||||
Income from continuing operations | 318 | 259 | 109 | 244 | 270 | ||||
Dividends to policyholders | 31 | 39 | 46 | 55 | 58 | ||||
Federal income tax (benefit) expense | (18) | 51 | (39) | (6) | 69 | ||||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 305 | 169 | 102 | 195 | 143 | ||||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 10 | 1 | (1) | (8) | (6) | ||||
Net income | $315 | $170 | $101 | $187 | $137 | ||||
Dividends declared | $152 | $145 | $126 | $140 | $316 | ||||
Invested assets | $30,035 | $28,849 | $27,871 | $26,399 | $25,444 | ||||
Separate account assets | 24,655 | 28,197 | 27,495 | 27,048 | 28,081 | ||||
Total assets | 55,786 | 58,010 | 56,436 | 54,461 | 54,523 | ||||
Total aggregate reserves | 27,778 | 26,860 | 25,945 | 24,805 | 23,848 | ||||
Separate account liabilities | 24,655 | 28,197 | 27,495 | 27,048 | 28,082 | ||||
Total liabilities | 54,459 | 56,881 | 55,383 | 53,346 | 53,523 | ||||
Total capital and surplus | 1,327 | 1,130 | 1,053 | 1,115 | 1,001 |
Year Ended December 31, | |||||||||
S&P 500 Index | 2018 | 2017 | 2016 | 2015 | 2014 | ||||
Index Close | 2,507 | 2,674 | 2,239 | 2,044 | 2,059 | ||||
Index Average | 2,744 | 2,448 | 2,094 | 2,061 | 1,931 |
Year Ended December 31, | |||||||||
10-Year Treasury Rate | 2018 | 2017 | 2016 | 2015 | 2014 | ||||
Close | 2.69% | 2.40% | 2.45% | 2.27% | 2.17% | ||||
Average | 2.91% | 2.33% | 1.83% | 2.14% | 2.54% |
• | Valuation of investments; |
• | Impairment of investments; |
• | Valuation of derivatives and related hedge accounting; |
• | Valuation of policy benefits and; |
• | Valuation of deferred taxes; |
Year Ended December 31, | Increase (decrease) | Percentage change | |||||
Statement of Operations data (In millions) | 2018 | 2017 | |||||
Premium income and annuity consideration | $7,593 | $5,271 | $2,322 | 44% | |||
Net investment income | 1,307 | 1,267 | 40 | 3% | |||
Fee and miscellaneous income | 411 | 380 | 31 | 8% | |||
Reserve adjustment on reinsurance ceded | (1,976) | (490) | (1,486) | (303)% | |||
Other | 30 | 53 | (23) | (43)% | |||
Total income | 7,365 | 6,481 | 884 | 14% | |||
Policyholder benefits | 6,587 | 5,566 | 1,021 | 18% | |||
Increase in aggregate reserves for life and accident health policies and contracts | 918 | 916 | 2 | —% | |||
Other insurance benefits, expenses and commissions | 686 | 724 | (38) | (5)% | |||
Net transfers from separate accounts | (1,112) | (945) | (167) | (18)% | |||
Total benefits and expenses | 7,079 | 6,261 | 818 | 13% | |||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 286 | 220 | 66 | 30% | |||
Federal income tax (benefit) expense | (18) | 51 | (69) | (135)% | |||
Net gain from operations before net realized capital gains | 304 | 169 | 135 | 80% | |||
Net realized capital gains less capital gains tax and transfers to interest maintenance reserve | 11 | 1 | 10 | 1,000% | |||
Statutory net income | $315 | $170 | $145 | 85% |
Year Ended December 31, | Increase (decrease) | Percentage change | |||||
Statement of Operations data (In millions) | 2017 | 2016 | |||||
Premium income and annuity consideration | $5,271 | $(398) | $5,669 | 1,424% | |||
Net investment income | 1,267 | 1,236 | 31 | 3% | |||
Fee and miscellaneous income | 380 | 306 | 74 | 24% | |||
Reserve adjustment on reinsurance ceded | (490) | 5,628 | (6,118) | (109)% | |||
Other | 53 | 29 | 24 | 83% | |||
Total income | 6,481 | 6,801 | (320) | (5)% | |||
Policyholder benefits | 5,566 | 4,971 | 595 | 12% | |||
Increase in aggregate reserves for life and accident health policies and contracts | 916 | 1,140 | (224) | (20)% | |||
Other insurance benefits, expenses and commissions | 724 | 727 | (3) | —% | |||
Net transfers from separate accounts | (945) | (101) | (844) | (836)% | |||
Total benefits and expenses | 6,261 | 6,737 | (476) | (7)% | |||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 220 | 64 | 156 | 244% | |||
Federal income tax expense (benefit) | 51 | (38) | 89 | 234% | |||
Net gain from operations before net realized capital gains | 169 | 102 | 67 | 66% | |||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 1 | (1) | 2 | 200% | |||
Statutory net income | $170 | $101 | $69 | 68% |
Year Ended December 31, | Increase (decrease) | Percentage change | |||||
Statement of Operations data (In millions) | 2018 | 2017 | |||||
Premium income and annuity consideration | $5,662 | $1,610 | $4,052 | 252% | |||
Net investment income | 754 | 749 | 5 | 1% | |||
Fee and miscellaneous income | 128 | 112 | 16 | 14% | |||
Reserve adjustment on reinsurance ceded | (3,987) | (340) | (3,647) | (1,073)% | |||
Other | 32 | 34 | (2) | (6)% | |||
Total income | 2,589 | 2,165 | 424 | 20% | |||
Policyholder benefits | 941 | 781 | 160 | 20% | |||
Increase in aggregate reserves for life and accident health policies and contracts | 484 | 582 | (98) | (17)% | |||
Other insurance benefits, expenses and commissions | 191 | 207 | (16) | (8)% | |||
Net transfers from separate accounts | 819 | 449 | 370 | 82% | |||
Total benefits and expenses | 2,435 | 2,019 | 416 | 21% | |||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 154 | 146 | 8 | 5% | |||
Federal income tax expense | — | 49 | (49) | (100)% | |||
Net gain from operations before net realized capital gains | 154 | 97 | 57 | 59% | |||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 6 | 1 | 5 | 500% | |||
Statutory net income | $160 | $98 | $62 | 63% |
Year Ended December 31, | Increase (decrease) | Percentage change | |||||
Statement of Operations data (In millions) | 2017 | 2016 | |||||
Premium income and annuity consideration | $1,610 | $(2,656) | $4,266 | 161% | |||
Net investment income | 749 | 732 | 17 | 2% | |||
Fee and miscellaneous income | 112 | 95 | 17 | 18% | |||
Reserve adjustment on reinsurance ceded | (340) | 3,380 | (3,720) | (110)% | |||
Other | 34 | 26 | 8 | 31% | |||
Total income | 2,165 | 1,577 | 588 | 37% | |||
Policyholder benefits | 781 | 831 | (50) | (6)% | |||
Increase in aggregate reserves for life and accident health policies and contracts | 582 | 117 | 465 | 397% | |||
Other insurance benefits, expenses and commissions | 207 | 175 | 32 | 18% | |||
Net transfers from separate accounts | 449 | 358 | 91 | 25% | |||
Total benefits and expenses | 2,019 | 1,481 | 538 | 36% | |||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 146 | 96 | 50 | 52% | |||
Federal income tax expense | 49 | 21 | 28 | 133% | |||
Net gain from operations before net realized capital gains | 97 | 75 | 22 | 29% | |||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 1 | (1) | 2 | 200% | |||
Statutory net income | $98 | $74 | $24 | 32% |
Year Ended December 31, | Increase (decrease) | Percentage change | |||||
Statement of Operations data (In millions) | 2018 | 2017 | |||||
Premium income and annuity consideration | 1,931 | $3,661 | $(1,730) | (47)% | |||
Net investment income | 537 | 513 | 24 | 5% | |||
Fee and miscellaneous income | 272 | 257 | 15 | 6% | |||
Reserve adjustment on reinsurance ceded | 2,011 | (150) | 2,161 | 1,441% | |||
Other | (2) | 19 | (21) | (111)% | |||
Total income | 4,749 | 4,300 | 449 | 10% | |||
Policyholder benefits | 5,646 | 4,785 | 861 | 18% | |||
Increase in aggregate reserves for life and accident health policies and contracts | 434 | 334 | 100 | 30% | |||
Other insurance benefits, expenses and commissions | 475 | 477 | (2) | —% | |||
Net transfers from separate accounts | (1,931) | (1,393) | (538) | (39)% | |||
Total benefits and expenses | 4,624 | 4,203 | 421 | 10% | |||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 125 | 97 | 28 | 29% | |||
Federal income tax expense | (23) | 14 | (37) | (264)% | |||
Net gain from operations before net realized capital gains | 148 | 83 | 65 | 78% | |||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 5 | — | 5 | 100% | |||
Statutory net income | 153 | $83 | $70 | 84% |
Year Ended December 31, | Increase (decrease) | Percentage change | |||||
Statement of Operations data (In millions) | 2017 | 2016 | |||||
Premium income and annuity consideration | $3,661 | $2,258 | $1,403 | 62% | |||
Net investment income | 513 | 509 | 4 | 1% | |||
Fee and miscellaneous income | 257 | 201 | 56 | 28% | |||
Reserve adjustment on reinsurance ceded | (150) | 2,248 | (2,398) | (107)% | |||
Other | 19 | 3 | 16 | 533% | |||
Total income | 4,300 | 5,219 | (919) | (18)% | |||
Policyholder benefits | 4,785 | 4,140 | 645 | 16% | |||
Increase in aggregate reserves for life and accident health policies and contracts | 334 | 1,023 | (689) | (67)% | |||
Other insurance benefits, expenses and commissions | 477 | 534 | (57) | (11)% | |||
Net transfers from separate accounts | (1,393) | (459) | (934) | (203)% | |||
Total benefits and expenses | 4,203 | 5,238 | (1,035) | (20)% | |||
Net gain (loss) from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 97 | (19) | 116 | 611% | |||
Federal income tax expense | 14 | (51) | 65 | 127% | |||
Statutory net income | $83 | $32 | $51 | 159% |
Year Ended December 31, | Increase (decrease) | Percentage change | |||||
Statement of Operations data (In millions) | 2018 | 2017 | |||||
Net investment income | $16 | $5 | $11 | 220% | |||
Fee and miscellaneous income | 11 | 11 | —% | ||||
Total income | 27 | 16 | 11 | 69% | |||
Other expenses and commissions | 20 | 39 | (19) | (49)% | |||
Total benefits and expenses | 20 | 39 | (19) | (49)% | |||
Net gain (loss) from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 7 | (23) | 30 | 130% | |||
Federal income tax expense (benefit) | 5 | (12) | 17 | 142% | |||
Statutory net income (loss) | $2 | $(11) | $13 | 118% |
Year Ended December 31, | Increase (decrease) | Percentage change | |||||
Statement of Operations data (In millions) | 2017 | 2016 | |||||
Net investment income (loss) | $5 | $(5) | $10 | 200% | |||
Fee and miscellaneous income | 11 | 10 | 1 | 10% | |||
Total income | 16 | 5 | 11 | 220% | |||
Other expenses and commissions | 39 | 18 | 21 | 117% | |||
Total benefits and expenses | 39 | 18 | 21 | 117% | |||
Net loss from operations after dividends to policyholders and before federal income taxes and net realized capital gains | (23) | (13) | (10) | (77)% | |||
Federal income tax benefit | (12) | (7) | (5) | (71)% | |||
Statutory net loss | $(11) | $(6) | $(5) | (83)% |
December 31, | |||||||
(In millions) | 2018 | 2017 | |||||
Bonds | $20,654 | 68.7% | $19,945 | 69.1% | |||
Common stock | 132 | 0.5% | 108 | 0.4% | |||
Mortgage loans | 4,207 | 14.0% | 3,871 | 13.4% | |||
Real estate | 38 | 0.1% | 38 | 0.2% | |||
Contract loans | 4,123 | 13.7% | 4,079 | 14.1% | |||
Cash, cash equivalents and short-term investments | 229 | 0.8% | 242 | 0.8% | |||
Securities lending collateral assets | 45 | 0.2% | — | —% | |||
Other invested assets | 607 | 2.0% | 566 | 2.0% | |||
Total cash and invested assets | $30,035 | 100.0% | $28,849 | 100.0% |
December 31, | |||
NAIC Designations | 2018 | 2017 | |
NAIC 1 | 65.4% | 68.0% | |
NAIC 2 | 33.4% | 30.5% | |
NAIC 3 through 6 | 1.2% | 1.5% | |
Total | 100.0% | 100.0% |
December 31, | |||
Sector | 2018 | 2017 | |
Finance | 18.5% | 17.1% | |
Utility | 15.1% | 17.1% | |
Consumer | 9.5% | 9.9% | |
Natural resources | 5.9% | 5.0% | |
Transportation | 3.0% | 2.8% | |
Other | 10.3% | 11.0% |
Year Ended December 31, | |||||
(In millions) | 2018 | 2017 | 2016 | ||
Net investment income | $1,307 | $1,267 | $1,236 | ||
Less: | |||||
Net investment income from derivative instruments | 16 | 16 | 10 | ||
Net investment income excluding derivative investments | $1,291 | $1,251 | $1,226 | ||
Average invested assets, at amortized cost | 29,252 | 28,433 | 27,432 | ||
Yield on average invested assets | 4.41% | 4.40% | 4.47% |
Payment due by period | |||||||||
(in thousands) | Less than one year | One to three years | Three to five years | More than five years | Total | ||||
Aggregate reserves(1) | $3,169,559 | $5,487,644 | $4,575,744 | $46,864,153 | $60,097,100 | ||||
Policy and contract claims(2) | 183,749 | 45,798 | 35,087 | 123,460 | 388,094 | ||||
Provision for policyholder dividends(3) | 31,184 | — | — | — | 31,184 | ||||
Related party long-term debt - principal(4) | — | — | — | 553,219 | 553,219 | ||||
Related party long-term debt - interest(5) | 30,335 | 60,670 | 60,670 | 557,094 | 708,769 | ||||
Commercial paper(6) | 98,859 | — | — | — | 98,859 | ||||
Payable under securities lending agreements(7) | 45,102 | — | — | — | 45,102 | ||||
Investment purchase obligations(8) | 136,396 | — | — | — | 136,396 | ||||
Operating leases(9) | 9,929 | 11,561 | 2,272 | 11,743 | 35,505 | ||||
Other liabilities(10) | 31,334 | 58,469 | 65,514 | 16,204 | 171,521 | ||||
Total | $3,736,447 | $5,664,142 | $4,739,287 | $48,125,873 | $62,265,749 |
• | Liabilities under reinsurance arrangements |
• | Liabilities related to securities purchased but not yet settled |
• | Liabilities related to derivative obligations |
• | Liabilities related to dollar repurchase agreements |
• | Statutory state escheat liabilities |
• | Expected contributions to the Company’s defined benefit pension plan, and benefit payments for the post-retirement medical plan and supplemental executive retirement plan through 2023 |
• | Unrecognized tax benefits |
• | Miscellaneous purchase obligations to acquire goods and services |
• | 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. |
• | Futures are commitments to either purchase or sell designated financial instruments at a future date for a specified price. |
• | Interest rate swaps involve the periodic exchange of cash flows with third parties at specified intervals calculated using agreed upon rates or other financial variables. |
• | Option contracts grant the purchaser, in consideration for the payment of a premium, the right to either purchase from or sell to the issuer a financial instrument at a specified price within a specified time period or on a stated date. Interest rate swaptions grant the purchaser the right to enter into a swap with predetermined fixed-rate payments over a predetermined time period on the exercise date. |
Projected cash flows by calendar years (In millions) | Benchmark | Interest rate increase one percent | |
2019 | $2,642 | $2,607 | |
2020 | 2,328 | 2,289 | |
2021 | 2,720 | 2,659 | |
2022 | 2,829 | 2,803 | |
2023 | 3,428 | 3,413 | |
Thereafter | 22,855 | 23,285 | |
Undiscounted total | $36,802 | $37,056 | |
Fair value | $28,825 | $27,146 |
Table of Contents
AUDITED FINANCIAL REPORT
Great-West Life & Annuity Insurance Company
(A wholly-owned subsidiary of GWL&A Financial Inc.) |
Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus as of December 31, 2018 and 2017 and
Related Statutory Statements of Operations,
Changes in Capital and Surplus and Cash Flows for Each of the Three Years in the Period Ended December 31, 2018 and Report of Independent Registered Public Accounting Firm
Table of Contents
Page
Number | ||||
Part I | ||||
Item 1 | Business | 3 | ||
Item 1A | Risk Factors | 12 | ||
Item 2 | Properties | 18 | ||
Item 3 | Legal Proceedings | 18 | ||
Part II | ||||
Item 5 | Market for Registrant’s Common Equity and Related Stockholder Matters | 18 | ||
Item 6 | Selected Financial Data | 20 | ||
Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 | ||
Item 7A | Quantitative and Qualitative Disclosure About Market Risk | 40 | ||
Item 8 | Financial Statements | 43 |
Table of Contents
Business
As used in this Document, 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. It is subject to regulation by the Colorado Division of Insurance (the “Division”).
This Document 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. This discussion should be read in conjunction with, and is qualified by reference to, the Company’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report as well as the financial statements and notes thereto in Item 8, “Financial Statements and Supplementary Data.”
The statutory financial statements have been prepared from the separate records maintained by the Company and may not necessarily be indicative of the conditions that would have existed or the results of operations if the Company had been operated as an unaffiliated company.
1.1 Organization and Corporate Structure
The Company is a direct wholly-owned subsidiary of GWL&A Financial Inc. (“GWL&A Financial”), a Delaware holding company. GWL&A Financial is a direct wholly-owned subsidiary of Great-West Lifeco U.S. LLC. (“Lifeco U.S.”) and an indirect wholly-owned subsidiary of Great-West Lifeco Inc. (“Lifeco”), a Canadian holding company. Lifeco operates in the United States primarily through the Company and through Putnam Investments, LLC (“Putnam”), and in Canada and Europe through The Great-West Life Assurance Company (“Great-West Life”) and its subsidiaries, London Life Insurance Company (“London Life”), The Canada Life Assurance Company (“CLAC”), and Irish Life Group Limited. Lifeco is a subsidiary of Power Financial Corporation (“Power Financial”), a Canadian holding company with substantial interests in the financial services industry. Power Corporation of Canada (“Power Corporation”), a Canadian holding and management company, has voting control of Power Financial. The Desmarais Family Residuary Trust, through a group of private holding companies that it controls, has voting control of Power Corporation. The shares of Lifeco, Power Financial, and Power Corporation are traded publicly in Canada on the Toronto Stock Exchange.
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1.2 Business of the Company
The Company offers a wide range of life insurance and retirement and investment products to individuals, businesses, and other private and public organizations throughout the United States. The Company is authorized to engage in the sale of life insurance, accident and health insurance and annuities. It is qualified to do business in all states in the United States, except New York, and in the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands. The Company is also a licensed reinsurer in New York.
The Chief Operating Decision Maker (“CODM”) of the Company is also the Chief Executive Officer (“CEO”) of the Company and Lifeco U.S. The CODM reviews the financial information for the purposes of assessing performance and allocating resources based upon the results of Lifeco U.S. and other U.S. affiliates prepared in accordance with International Financial Reporting Standards. The CODM, in his capacity as CEO of the Company, reviews the Company’s financial information only in connection with the periodic reports that are filed with the Securities and Exchange Commission (“SEC”). Consequently, the Company does not provide its discrete financial information to the CODM to be regularly reviewed to make decisions about resources to be allocated or to assess performance. For purposes of SEC reporting requirements under a statutory basis of accounting, the Company has chosen to present its financial information in three segments, notwithstanding the above. The three segments are: Individual Markets, Empower Retirement, and Other.
Through its Individual Markets segment, the Company offers various forms of life insurance, annuity, and retirement products. Through its Empower Retirement segment, the Company provides various retirement plan products and investment options as well as comprehensive administrative and recordkeeping 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. The Other segment consists of items not associated directly with Individual Markets or Empower Retirement, including the impact of certainnon-continuing items.
No customer accounted for 10% or more of the Company’s revenues during the years 2018, 2017, or 2016. In addition, no segment of the Company’s business is dependent upon a single customer or a few customers, the loss of which would have a significant effect on it or its business segments’ operations. The loss of business from any one, or a few, independent brokers or agents would not have a material adverse effect on the Company or its business segments.
Individual Markets Segment Principal Products
The Company’s Individual Markets segment distributes life insurance, annuity, and retirement products to both individuals and businesses through various distribution channels. Life insurance productsin-force include participating andnon-participating term life, whole life, universal life, and variable universal life.
Participating life insurance - Participating policyholders share in the financial results of the participating business in the form of policyholder dividends that reflect the difference between the assumptions used in the premium charged and the actual experience on those policies. The policyholder dividends can be distributed directly to the policyholders in the form of cash or through an increase in benefits such aspaid-up additions. The Company no longer actively markets participating products.
Term life - Term life insurance products provide coverage for a stated period and generally do not include the accumulation of cash values. Term life insurance products pay a guaranteed death benefit only if the insured dies within the coverage period. The Company’s term life insurance earnings come from the difference between cumulative premiums collected and actual death claims.
Whole life - Whole life insurance products provide guaranteed death benefits in exchange for level premium payments for the life of the insured. Whole life insurance products include the accumulation of cash values. The policyholder can receive the accumulated cash value as a payment by surrendering the insurance policy before the death of the insured. The Company’s whole life insurance earnings come from investment income earned on assets held as reserve in the General Account and the difference between premiums collected and actual death claims.
Universal life - Universal life insurance products include a cash value component that is credited with interest at regular intervals. The account balances for the universal life products are held in the Company’s general account. The Company’s universal life insurance earnings result from the difference between the investment income and interest credited on customer cash values and from differences between charges for mortality and actual death claims. Universal life cash values are charged for the cost of insurance coverage and for administrative expenses.
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Variable universal life - Variable universal life products provide insurance coverage on the same basis as universal life, except that the account balance is directed by the policyholder into either separate account investment options or into the Company’s general account as a fixed option within the variable product. In the separate account investment options, the policyholder bears the entire risk of the investment results. The Company’s variable universal life insurance earnings result from asset-based fees, as well as from the difference between fees collected for mortality as compared to actual death claims paid.
Variable annuity products - The Company’s variable annuity products provide the opportunity for clients to invest on a tax deferred basis with the ability to annuitize assets. Variable annuities can be made available with guaranteed minimum death benefit (“GMDB”) which guarantees the client’s beneficiaries will receive at least a return of premium (less the impact of withdrawals) upon death as well as a guaranteed lifetime withdrawal benefit (“GLWB”) which guarantees that the client is able to take contractually specified withdrawals from their assets that will continue for life regardless of market performance or longevity. The Company earns fees from the separate account for mortality and expense risks pertaining to the variable annuity contract and/or for providing administrative services. For variable annuity assets invested in mutual funds, the Company is reimbursed by the mutual funds for marketing, sales, and service costs under various revenue sharing agreements. There are additional fees charged for election of guaranteed minimum benefits. The guaranteed minimum benefits may be available in variable annuity products or as a stand-alone contract.
Retention is an important factor in profitability and is encouraged through product features. For example, the Company’s life insurance and annuity contracts may impose a surrender charge on policyholder balances withdrawn within the first 10 years of the contract’s inception. The period of time and level of the surrender charge vary by product.
One of the principal markets for the Individual Markets segment is the executive benefits market. The primary executive benefits products are single premium universal life insurance, registered variable universal life insurance, private placement variable universal life insurance (“PPVUL”), and PPVUL with a stable value guarantee feature. These executive benefits life insurance policies indirectly fund employee post-retirement benefits andnon-qualified benefit plans for executives.
Community and regional / national banks are the primary purchasers of single premium universal life insurance utilizing the general account and hybrid products. Regional / national banks sometimes buy PPVUL with a stable value guarantee. Corporations indirectly funding executive benefits purchase the registered variable universal life insurance and PPVUL product. The PPVUL products offer a wide array of equity and bond fund investment options.
Another principal market for the Individual Markets segment is the financial institutions market, which is a partnership between the Company and retail financial institutions to distribute individual life and annuity products. Through its institutional partners, the Company has in excess of 182,000 advisors who sell its products. During 2018 and 2017, the Company focused on the needs of the retiree marketplace by providing wealth transfer solutions to its bank partner’s customers via a single premium universal life product and meeting the retirement income needs via its variable annuity products including guaranteed benefits. Additionally, the Company continues its efforts to partner with large financial institutions to provide individual term life insurance.
Empower Retirement Segment Principal Products
Through its Empower Retirement segment, the Company provides various retirement plan products (including individual retirement accounts (“IRAs”)) and investment options, as well as comprehensive administrative and recordkeeping 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. Defined contribution plans provide for benefits based upon the value of contributions to, and investment returns on, an individual’s account. This has been a rapidly growing portion of the retirement marketplace in recent years.
The retirement plan products and investment options offered by the Company include mutual funds and collective trusts, guaranteed interest rate investment products, and variable annuity products designed to meet the specific needs of the customer. In addition, the Company offers both customized annuity andnon-annuity products.
IRAs - The Company offers an IRA product as a distribution option for employees terminated from employer-sponsored defined contribution plans. The Company earns asset-based fees and per account fees for providing administrative and recordkeeping services for IRA accounts. For those IRAs invested in mutual funds, the Company can be reimbursed by the mutual funds for marketing, sales, and service costs under various revenue sharing agreements.
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Mutual funds and collective trusts - The Company earns administration fees under various revenue sharing agreements from mutual funds and collective trusts for marketing, sales, and service costs incurred while providing services to individuals and institutional clients on behalf of the funds. On proprietary collective trusts, the Company, through its wholly-owned subsidiary Great-West Trust Company, LLC (“Great-West Trust Company”), earns an asset-based management fee.
Guaranteed interest rate investment products - On its guaranteed interest rate investment products, the Company earns investment margins on the difference between the income earned on investments in its general account and the interest credited to the participant’s account balance. The Company’s general account assets support the guaranteed investment products. The Company also manages fixed interest rate products known as stable value funds that may be structured as separate accounts, pooled collective trusts, and custom collective trusts for which it is paid a management fee that is earned by the Company either directly or through its wholly-owned subsidiaries Great-West Capital Management, LLC (“Great-West Capital Management”) or Great-West Trust Company.
Variable annuity products - The Company’s variable annuity products provide the opportunity for clients to invest on a tax deferred basis with the ability to annuitize assets. Variable annuities can be made available with GLWB which guarantees that the client is able to take contractually specified withdrawals from their assets that will continue for life regardless of market performance or longevity. In 2018, an indexed linked variable annuity was launched, a hybrid between a variable annuity and indexed annuity, where the investment performance is measured by the change in a reference index (i.e. S&P 500) and subject to a floor and cap. The Company earns fees from the separate account for mortality and expense risks pertaining to the variable annuity contract and/or for providing administrative services. For variable annuity assets invested in mutual funds, the Company is reimbursed by the mutual funds for marketing, sales, and service costs under various revenue sharing agreements. There are additional fees charged for election of guaranteed minimum benefits. The GLWB products may be available in variable annuity products or as a stand-alone contract.
Administrative and recordkeeping services - The Company receives asset-based and/or participant-based fees for providing third-party administrative and recordkeeping services to financial institutions and employer-sponsored retirement plans. The number of Empower Retirement participant accounts has grown to 8.8 million at December 31, 2018, from over 8.3 million at December 31, 2017.
The Company’s marketing focus is directed toward providing investment management, advisory services, and recordkeeping services under Internal Revenue Code Sections 401(a), 401(k), 403(b), 408, and 457 to private corporations, state and local governments, hospitals,non-profit organizations, and public school districts. Through the Company’s wholly-owned, registered subsidiaries, Great-West Capital Management, and Advised Assets Group, LLC (“Advised Assets Group”), the Company provides investment management and advisory services. Through the Company’s wholly-owned subsidiary FASCore, LLC, the Company targets and partners with other large financial institutions to provide third-party recordkeeping and administration services.
Certain revenues and expenses generated from the above products from the Empower Segment are represented in changes in value of investment in subsidiaries, as discussed further in the accompanying statutory financial statements.
Future Policy Benefit Liabilities and Life InsuranceIn-Force
The amount of fixed annuity productsin-force is measured by future policy benefits. The following table shows group and individual annuity policy benefits supported by the Company’s general account as well as the annuity balances in Empower Retirement and Individual Markets separate accounts for the years indicated:
(In millions) | ||||||||||||
Year Ended December 31, | General Account Annuity Benefits Liabilities | Empower Retirement Annuity Separate Accounts | Individual Markets Annuity Separate Accounts | |||||||||
2018 | $ | 12,948 | $ | 14,763 | $ | 3,009 | ||||||
2017 | 12,556 | 18,729 | 2,577 | |||||||||
2016 | 12,279 | 19,157 | 1,957 | |||||||||
2015 | 11,309 | 19,340 | 1,660 | |||||||||
2014 | 10,890 | 20,220 | 1,581 |
For Variable Annuities, the future policy benefit liabilities are computed on the basis of prescribed Statutory valuation interest rates and other assumptions as required by Statutory Valuation Law. For all other annuities policy benefit liabilities are
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established at the contract holder’s account value, which is equal to cumulative deposits and credited interest, less withdrawals, mortality and certain other charges.
The general account also has immediate annuities. The policy benefit liabilities for the immediate annuities are computed on the basis of prescribed Statutory valuation interest rates and mortality (where payouts are contingent on survivorship). These assumptions generally vary by plan, year of issue, and policy duration. Policy benefit liabilities for immediate annuities without life contingent payouts are computed on the basis prescribed Statutory valuation interest rates.
The following table summarizes Individual Markets life insurance future policy benefits liabilities, Individual Markets life insurance separate account balances, and Individual Markets life insurancein-force prior to reinsurance ceded for the years indicated:
(In millions) | ||||||||||||
Year Ended December 31, | Individual Markets Life Insurance Future Policy Benefits Liabilities | Individual Markets Life Insurance Separate Accounts | Individual Markets Life Insurance In-force | |||||||||
2018 | $ | 14,554 | $ | 6,304 | $ | 98,202 | ||||||
2017 | 14,031 | 6,215 | 97,801 | |||||||||
2016 | 13,397 | 5,771 | 96,711 | |||||||||
2015 | 13,245 | 5,479 | 97,862 | |||||||||
2014 | 12,712 | 5,308 | 97,170 |
For both the Individual Markets life insurance future policy benefits liabilities and life insurance separate accounts, the future policy benefits are computed on the basis of prescribed Statutory valuation interest rates and mortality. These future policy benefits liabilities are calculated as the present value of future benefits (including dividends) less the present value of future net premiums, subject to a cash surrender value floor. The assumptions used in calculating the future policy benefits liabilities generally vary by plan, year of issue, and policy duration.
Additionally, for both the Individual Markets life insurance future policy benefits liabilities and life insurance separate accounts, policy and contract claim liabilities are established for claims that have been incurred but not reported based on factors derived from past experience.
The aforementioned policy benefit liabilities are computed amounts that, with additions from premiums and deposits to be received and with interest on such liabilities, are expected to be sufficient to meet the Company’s policy obligations (such as paying expected death or retirement benefits or surrender requests) and to generate profits.
Other Segment
The Company’s Other reporting segment is substantially comprised of activity not directly allocated to the other operating segments and interest expense on long-term debt.
Reinsurance
The Company enters into reinsurance transactions as a purchaser of reinsurance for its various insurance products and as a provider of reinsurance for some insurance products. Reinsurance transactions are assumed from and ceded to affiliated entities and third parties. When purchasing reinsurance, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding risks to other insurance enterprises under excess coverage, quota share, yearly renewable term, coinsurance, and modified coinsurance contracts. Under the terms of these contracts, the reinsurer agrees to reimburse the Company for the ceded amount in the event a claim is paid. However, the Company remains liable to its policyholders with respect to the ceded insurance if a reinsurer fails to meet the obligations it assumed. Accordingly, the Company strives to cede risks to highly rated, well-capitalized companies. The Company retains an initial maximum of $3.5 million of coverage per individual life. This initial retention limit of $3.5 million may increase due to automatic policy increases in coverage at a maximum rate of $175 thousand per annum, with an overall maximum increase in coverage of $1.0 million. The Company assumes risk from approximately 40 insurers and reinsurers by participating in yearly renewable term and coinsurance pool agreements. When assuming risk, the Company seeks to generate revenue while maintaining reciprocal working relationships with these partners as they also seek to limit their exposure to loss on any single life. Maximum capacity to be accepted or retained by the Company is dictated at the treaty level and is monitored annually to ensure the total risk acquired or retained on any one life is limited to a maximum retention of $4.5 million.
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Method of Distribution of Products Within the Individual Markets and Empower Retirement Segments
The Individual Markets segment distributes individual life insurance through wholesale and retail sales force, banks, broker-dealers, and investment advisors. Executive benefits products are distributed through wholesalers and specialized consultants.
The Empower Retirement segment distributes products to plan sponsors through a subsidiary, GWFS Equities, Inc. (“GWFS Equities”), as well as through brokers, consultants, advisors, third-party administrators, and banks. It markets IRAs as a distribution option for employees terminated from employer-sponsored defined contribution plans through its Retirement Solutions Group, which includes a retail sales force. Recordkeeping and administrative services are distributed through institutional clients.
Competition Within the Individual Markets and Empower Retirement Segments
The life insurance, savings, and investment marketplaces are highly competitive. The Company’s competitors include insurance companies, banks, investment advisors, mutual fund companies, and certain service and professional organizations. No individual competitor or small group of competitors is dominant. Competition focuses on name recognition, service, technology, cost, variety of investment options, investment performance, product features, and price, in addition to financial strength as indicated by ratings issued by nationally recognized agencies.
Individual Markets Outlook
On January 24, 2019, the Company announced that it had entered into an agreement with Protective Life Insurance Company (“Protective”) to sell, via indemnity reinsurance, substantially all of itsnon-participating individual life insurance and annuity business and group life and health business. The transaction is in its initial stage, and is expected to close in the first half of 2019 subject to regulatory and customary closing conditions. On the closing date of the proposed transaction, the Company will transfer to Protective assets equal to the statutory liabilities being reinsured and will receive a ceding commission (subject to post-closing adjustments) from Protective in consideration of the transferred business. The Company will retain a small block of participating life insurance policies which will be administered by Protective Life following the close of the transaction. Post-transaction, the Company will focus on the defined contribution retirement and asset management markets in the U.S.
Empower Retirement Outlook
As the second largest recordkeeping provider in the U.S., Empower Retirement is positioned for significant growth opportunities with expertise and diversification across all plan types, company sizes and market segments. The Company continually examines opportunities to structure products and develop strategies to stimulate growth in assets under management.
In 2019, Empower Retirement’s strategies to drive sales growth will continue to include active marketing of the brand, investing in product differentiation and offering abest-in-class service model. In 2018, service enhancements were made to this model including standardizing and improving client-facing tools, optimizing advisor relationship management and client alignment as well as adopting best practices for participant communications. In 2019, investments will continue to be made to improve the customer web experiences. This includes Empower Retirement’s unique, interactiveweb-based experience which was launched to help participants understand their retirement income needs. These efforts are expected to increase customer retention and ultimately increase participant retirement savings.
The Company will continue to pursue operational efficiencies. Great West Global Business Services India Private Limited (“Great West Global”), an indirect wholly-owned subsidiary of Lifeco U.S. in India, which launched in 2015 and has over 1,000 professionals based in India, will continue to expand with a focus on driving lower unit costs.
1.3 Investment Operations
The Company’s investment division manages and administers the investments of its general and separate accounts in support of the cash and liquidity requirements of its insurance and investment products.
The Company’s principal general account investments are in bonds and mortgage loans, all of which are exposed to three primary sources of investment risk: credit, interest rate, and market valuation. Total investments at December 31, 2018, of $55 billion were comprised of general account investment assets of $30 billion and separate account assets of $25 billion. Total
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investments at December 31, 2017, of $57 billion were comprised of general account investment assets of $29 billion and separate account assets of $28 billion.
The Company’s general account investments are in a broad range of asset classes, but consist primarily of domestic bonds. Bonds include public and privately placed corporate bonds, government bonds, and mortgage-backed and asset-backed securities. The Company’s mortgage loans are comprised primarily of domestic commercial collateralized loans diversified with regard to geographical markets and commercial mortgage property types.
The Company manages the characteristics of its investment assets, such as liquidity, currency, yield, and duration, to reflect the underlying characteristics of related insurance and policyholder liabilities that vary among its principal product lines. The Company observes strict asset and liability matching guidelines designed to ensure that the investment portfolio will appropriately meet the cash flow requirements of its liabilities. The Company uses derivative financial instruments for risk management purposes associated with certain invested assets and policy liabilities, not for speculative purposes.
The Company routinely monitors and evaluates the status of its investments in light of current economic conditions, trends in capital markets, and other factors. These other factors include investment size, quality, concentration by issuer and industry, and other diversification considerations relevant to the Company’s bonds.
The Company reduces credit risk for the portfolio as a whole by investing primarily in investment grade bonds. At December 31, 2018, and 2017, 99% of the Company’s bond portfolio were designated as investment grade.
1.4 Regulation
The Company and its insurance subsidiaries are licensed in and regulated by all 50 states, the District of Columbia, Puerto Rico, Guam, and the United States Virgin Islands to transact life insurance business, accident and health insurance business, and annuity business. The extent of such regulation varies, but most jurisdictions have laws and regulations governing the business conduct of insurers as well as the financial aspects of insurers, including standards of solvency, statutory reserves, reinsurance, and capital adequacy. In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and certain other related materials, and, for certain lines of insurance, the approval of rates. Such statutes and regulations also prescribe the permitted types and concentration of investments.
The Company and certain of its subsidiaries are subject to, and comply with, insurance holding company regulations in applicable states. The Company’s insurance subsidiaries are each required to file reports, generally including detailed annual financial statements, with insurance regulatory authorities in each of the jurisdictions in which they do business, and their operations and accounts are subject to periodic examination by such authorities. These subsidiaries must also file, and in many jurisdictions and in some lines of insurance, obtain regulatory approval for rules, rates, and forms relating to the insurance written in the jurisdictions in which they operate.
The National Association of Insurance Commissioners (“NAIC”) has established a program of accrediting state insurance departments. NAIC accreditation permits accredited states to conduct periodic examinations of insurers domiciled in such states. NAIC-accredited states will not accept reports of examination of insurers from unaccredited states, except under limited circumstances. As a direct result, insurers domiciled in unaccredited states may be subject to financial examination by accredited states in which they are licensed, in addition to any examinations conducted by their domiciliary states. The Colorado Department of Insurance is the Company’s principal insurance regulator. Additionally, the State of New York Department of Financial Services (“NYDFS”) and the South Carolina Department of Insurance are the principal insurance regulators for the Company’s two wholly-owned subsidiaries, Great-West Life & Annuity Insurance Company of New York (“GWNY”) and Great-West Life & Annuity Insurance Company of South Carolina (“GWSC”), respectively. All three insurance regulators have received NAIC accreditation.
State and federal insurance and securities regulatory authorities, and other state law enforcement agencies and attorneys general, from time to time make inquiries regarding compliance by the Company and its insurance subsidiaries with insurance, securities, and other laws and regulations regarding the conduct of the Company’s insurance and securities business.
Following is a description of certain regulatory and legal frameworks to which the Company or its subsidiaries may be subject:
• | Insurance Company Regulation - The Company and its insurance subsidiaries are subject to regulation under the insurance company laws of various jurisdictions. The insurance company laws and regulations vary from jurisdiction to jurisdiction, but generally require an insurance company that is a member of an insurance holding company system (two or |
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more affiliated persons, one or more of which is an insurer) to register with state regulatory authorities and to file with those authorities certain reports, including information concerning their capital structure, ownership, financial condition, certain intercompany transactions, and general business operations. In addition, various state jurisdictions have broad administrative powers with respect to such matters as admittance of assets, premium rating methodology, policy forms, establishing reserve requirements and solvency standards, maximum interest rates on life insurance policy loans and minimum rates for accumulation of surrender values, the type and amounts and valuation of investments permitted. State insurance statutes also typically place restrictions and limitations on the amount of dividends or other distributions payable by insurance companies to their parent companies, as well as on transactions between an insurer and its affiliates. |
State insurance regulators, the NAIC, and other regulatory agencies are also investigating the use of affiliated captive reinsurers oroff-shore entities to reinsure insurance risks. In October 2011, the NAIC established a subgroup to study insurers’ use of captives and special purpose vehicles to transfer insurance risk in relation to existing state laws and regulations, and to establish appropriate regulatory requirements to address concerns identified in the study. This subgroup, which has been disbanded, prepared a white paper offering seven recommendations for consideration and a possible study. These recommendations addressed accounting considerations, confidentiality, access to alternative markets, International Association of Insurance Supervisors principles, standards and guidance; enhancements to credit for reinsurance models; disclosure and transparency, andFinancial Analysis Handbook guidance. Two task forces have been assigned to determine how to implement many of these recommendations. Additionally, in June 2013, the NYDFS released a report critical of certain captive reinsurance structures and calling, in part, for other state regulators to adopt a moratorium on approving such structures pending further review by state and federal regulators. Also, in December 2013, the United States Treasury Department’s Federal Insurance Office (“FIO”) issued a report on how to modernize and improve the system of insurance regulation in the United States, recommending, in part, that states develop a uniform and transparent solvency oversight regime for the transfer of risk to reinsurance captives and adopt a uniform capital requirement for reinsurance captives, including a prohibition on transactions that do not constitute legitimate risk transfer.
• | Guaranty Associations and Similar Arrangements - Most of the jurisdictions in which the Company and its insurance subsidiaries are permitted to transact business require life insurers doing business within their jurisdiction to participate in guaranty associations, which are organized to pay certain contractual insurance benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. The Company has historically recovered more than half of the guaranty assessments through these offsets. |
• | Statutory Insurance Examinations - As part of their regulatory oversight process, state insurance departments conduct periodic detailed examinations of the books, records, accounts, and business practices of insurers domiciled in their states. During the three-year period ended December 31, 2018, these examinations produced no significant adverse findings regarding the operations or accounts of the Company and its insurance subsidiaries. |
• | Policy and Contract Reserve Sufficiency Analysis - Annually, the Company and its insurance subsidiaries are required to conduct an analysis of the sufficiency of all statutory reserves. In each case, a qualified actuary must submit an opinion which states that the aggregate statutory reserves, when considered in light of the assets held with respect to such reserves, make good and sufficient provision for the associated contractual obligations and related expenses of the insurer. If such an opinion cannot be provided, the insurer must set up additional reserves by moving funds from available statutory surplus. Since inception of this requirement, the Company and its insurance subsidiaries, which are required by their states of domicile to provide these opinions, have provided such opinions without qualification. |
• | Surplus and Capital - The Company and its insurance subsidiaries are subject to the supervision of the regulators in each jurisdiction in which they are licensed to transact business. Regulators have discretionary authority, in connection with the continued licensing of these insurance subsidiaries, to limit or prohibit sales to policyholders if, in their judgment, the regulators determine that such insurer has not maintained the minimum surplus or capital or that the further transaction of business will be hazardous to policyholders. We do not believe that the current or anticipated levels of statutory surplus of the Company and its subsidiaries present a material risk that any such regulator would limit the amount of new policies that we issue. |
• | Risk-Based Capital (“RBC”) - The Company and its insurance subsidiaries are subject to certain RBC requirements and report their RBC based on a formula calculated by applying factors to various asset, premium, face amount, and statutory reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, |
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interest rate risk, and business risk. The formula is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action and not as a means to rank insurers generally. As of the date of the most recent statutory financial statements filed with insurance regulators, the total adjusted capital of the Company and its insurance subsidiaries was in excess of the minimum RBC that require regulatory action. |
• | Regulation of Investments - The Company and its insurance subsidiaries are subject to state laws and regulations that require diversification of its investment portfolios and limit the amount of investments in certain asset categories, such as below investment grade bonds, other equity investments, and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated asnon-admitted assets for purposes of measuring statutory surplus and, in some instances, would require divestiture of suchnon-qualifying investments. As of the date of the most recent statutory financial statements filed with insurance regulators, the Company did not have anynon-admitted assets as a result of investments exceeding regulatory limitations. |
• | Federal Initiatives - Although the federal government generally does not directly regulate the insurance business, federal initiatives often have an impact on the Company’s business in a variety of ways. From time to time, federal measures are proposed that may significantly affect the Company’s business. |
The Dodd-Frank Act mandates changes to the regulation of the financial services industry. Implementation of the Dodd-Frank Act is ongoing and may affect the Company’s operations and governance in ways that could adversely affect its financial condition and results of operations. The Dodd-Frank Act requires central clearing of, and imposes new margin requirements on, certain derivatives transactions, which increases the costs of the Company’s hedging program. The other provision in the Dodd-Frank Act that may impact the Company is the new FIO within the United States Treasury Department.
The Dodd-Frank Act provides the Financial Stability Oversight Council (“FSOC”) with the power to designate “systemically important” institutions, which will be subject to special regulatory supervision and other provisions intended to prevent, or mitigate the impact of, future disruptions in the U.S. financial system. Based on its most current financial data, the Company is below the quantitative thresholds used by the FSOC to determine which nonbank companies merit consideration. However, the FSOC has indicated it will review on a quarterly basis whether nonbank financial institutions meet the metrics for further review. If the Company were to be designated as a systemically important institution, it could be subject to heightened regulation under the Federal Reserve, which could impact requirements regarding its capital, liquidity, and leverage, as well as its business and investment conduct. In addition, the Company could be subject to assessments to pay for the orderly liquidation of other systemically important financial institutions that have become insolvent.
• | Broker-Dealer and Securities Regulation - One of the Company’s subsidiaries, GWFS Equities, is anon-clearing broker-dealer and subject to certain regulatory provisions by the SEC and the Financial Industry Regulatory Authority (“FINRA”). This subsidiary acts as the underwriter and distributor for variable annuity contracts and variable life insurance policies issued by the Company and for Great-West Funds, Inc., anopen-end management investment company, which is a related party of GWL&A. GWFS Equities also acts as an introducing brokerage firm in the offer and sale of debt and equity securities. GWFS Equities is subject to the requirements of the Securities Exchange Act of 1934 relating to broker-dealers, including, among other things, minimum net capital requirements under the SEC Uniform Net Capital Rules (Rule15c3-1) and segregation of client funds under the SEC Customer Protection Rule (Rule15c3-3). GWFS Equities’ net capital was in excess of the minimum requirements. |
• | Banking Regulation - One of the Company’s subsidiaries, Great-West Trust Company, is a Coloradonon-depository trust company that offers directed and discretionary trustee and custodial services to retirement plans, including 401(a), 401(k), 403(b), and 457 plans, IRAs, and Rabbi trusts fornon-qualified deferred compensation plans. Great-West Trust Company operates pursuant to the rules and regulations of the Colorado Division of Banking including various regulatory capital requirements. Great-West Trust Company’s capital was in excess of the minimum requirements. |
• | Registered Investment Advisor Regulation - Two of the Company’s subsidiaries, Great-West Capital Management and Advised Assets Group are registered as investment advisors with the SEC and are subject to examination by the SEC. The Investment Advisers Act of 1940, as amended, and the related regulations impose various obligations and restrictions on registered investment advisors including fiduciary duties, recordkeeping requirements, operational requirements, and marketing requirements. |
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ERISA and Other Considerations
The Company provides products and services to certain employee benefit plans that are subject to the Employee Retirement Income Security Act (“ERISA”), or the Internal Revenue Code of 1986, as amended (the “Code”). As such, the Company’s activities are subject to the restrictions imposed by ERISA and the Code, including the requirement under ERISA that fiduciaries must perform their duties solely in the interests of ERISA plan participants and beneficiaries, and the requirement under ERISA and the Code that fiduciaries may not cause a covered plan to engage in prohibited transactions with persons who have certain relationships with respect to such plans. The applicable provisions of ERISA and the Code are subject to enforcement by the Department of Labor, the Internal Revenue Service (“IRS”), and the Pension Benefit Guaranty Corporation.
1.5 Ratings
The Company is rated by a number of nationally recognized rating agencies. The ratings represent the opinion of the rating agencies regarding the financial strength of the Company and its ability to meet ongoing obligations to policyholders. The Company’s financial strength ratings as of the date of this filing are as follows:
Rating agency | Measurement | Current rating | ||
A.M. Best, Inc. | Financial strength, operating performance, and business profile | A+ (1) | ||
Fitch Ratings | Financial strength | AA (2) | ||
Moody’s Investor Service, Inc. | Financial strength | Aa3 (3) | ||
Standard & Poor’s Rating Services | Financial strength | AA (2) |
(1) Superior (highest category out of 10 categories).
(2) Very Strong (second highest category out of nine categories).
(3) Excellent (second highest category out of nine categories).
1.6 Employees
The Company and its affiliates had approximately 6,200 and 5,800 employees at December 31, 2018 and 2017, respectively.
1.7 Available Information
The Company files periodic reports and other information with the SEC. Such reports and other information may be obtained by visiting the Public Reference Room of the SEC at its Headquarters Office, 100 F Street, N.E., Room 1580, Washington D.C. 20549, or by calling the SEC at1-202-551-8090 (Public Reference Room) or1-800-SEC-0330 (Office of Investor Education and Advocacy). In addition, the SEC maintains an Internet website (www.sec.gov) that contains reports and other information regarding issuers that file electronically with the SEC, including the Company.
The Company makes available, free of charge, on its website (www.greatwest.com) through its Financial Information page, its annual reports, and amendments to all those reports, as soon as reasonably practicable. Other information found on the website is not part of this or any other report filed with or furnished to the SEC.
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 industry in which the Company operates is highly competitive. The Company’s competitors include insurance companies, mutual fund companies, banks, investment advisors, and certain service and professional organizations. Although there has been consolidation in some sectors, no one competitor is dominant. Customer retention is a key factor for continued profitability. Management cannot be certain that the Company will be able to maintain its current competitive position in the
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markets in which it operates, or that it will be able to expand its operations into new markets. If the Company fails to do so, its business, results of operations, and financial condition could be materially and adversely affected.
The insurance and financial services industries are heavily regulated and changes in regulation may reduce profitability.
Federal and state regulatory reform that increases the compliance requirements imposed on the Company or that changes the way that the Company is able to do business may significantly harm its business or adversely impact the results of operations in the future. It is not possible to predict whether future legislation or regulation adversely affecting the Company’s business will be enacted and, if enacted, the extent to which such legislation will have an effect on the Company or its competitors. Furthermore, there can be no assurance as to which of the Company’s specific products would be impacted by any such legislative or regulatory reform.
The Company’s operations and accounts are subject to examination by the Colorado Department of Insurance and other regulators at specified intervals. The NAIC has also prescribed RBC rules and other financial ratios for life insurance companies. The calculations set forth in these rules are used by regulators to assess the sufficiency of an insurer’s capital and measure the risk characteristics of an insurer’s assets, liabilities, and certainoff-balance sheet items. RBC is calculated by applying factors to various asset, premium, face amount, and liability items. Although the Company has RBC levels well in excess of those required by its regulators, there can be no assurances made that it will continue to maintain these levels.
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.
The Company is rated by a number of nationally recognized rating agencies. The ratings represent the opinion of the rating agencies regarding the Company’s financial strength and its ability to meet ongoing obligations to policyholders. Claims paying ability and financial strength ratings are factors in establishing the competitive position of insurers. A rating downgrade, or the potential for such a downgrade, of the Company or any of its rated insurance subsidiaries could, among other things, materially increase the number of policy surrenders and withdrawals by policyholders of cash values from their policies, adversely affecting relationships with broker-dealers, banks, agents, wholesalers, and other distributors of its products and services. This may result in cash payments requiring the Company to sell invested assets, including illiquid assets such as privately placed bonds and mortgage loans, at a price that may result in realized investment losses. These cash payments to policyholders result in a decrease in total invested assets and a decrease in net income. In addition, a significant downgrade may negatively impact new sales and adversely affect the Company’s ability to compete and thereby have a material effect on its business, results of operations, and financial condition. Negative changes in credit ratings may also increase the Company’s cost of funding.
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 establishes and carries, as a liability, reserves based on conservative, prescribed estimates of how much it will need to pay for future benefits and claims. Future policy benefits do not represent an exact calculation of liability. Rather, future policy benefits represent a conservative estimate prescribed by regulators to cover the ultimate settlement and administration of benefits. These estimates, which generally involve actuarial projections, are based upon prescribed persistency (how long a contract stays with the Company), mortality, interest rates, and other factors. These variables are prescribed and are subject to potential legislative changes. The Company’s life insurance products are exposed to the risk of catastrophic events, such as a pandemic, terrorism, or other such events that cause a large number of deaths. Additionally, there may be a significant reporting delay between the occurrence of an insured event and the date it is reported to the Company.
The inherent uncertainties of estimating policy and contract claim liabilities are greater for certain types of liabilities, particularly those in which the various considerations affecting the type of claim are subject to change and in which long periods of time may elapse before a definitive determination of liability is made. Liability estimates including estimated premiums the Company will receive over the assumed life of the policy are continually refined in a regular and ongoing process as experience develops and further claims are reported and settled. Adjustments to policy benefit liabilities are reflected in the Company’s Statement of Operations in the period in which adjustments are determined. Because setting policy benefit liabilities is inherently uncertain, there can be no assurance that current liabilities will prove to be adequate in light of subsequent events.
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.
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The Company purchases reinsurance by transferring, or ceding, part of the risk it assumes to a reinsurance company in exchange for part of the premium it receives in connection with the risk. The part of the risk the Company retains for its own account is known as the retention. The Company retains an initial maximum of $3.5 million of coverage per individual life. This initial retention limit of $3.5 million may increase due to automatic policy increases in coverage at a maximum rate of $175 thousand per annum, with an overall maximum increase in coverage of $4.5 million. Through reinsurance, the Company has the contractual right to collect the amount above its retention from its reinsurers. Although reinsurance makes the reinsurer liable to the Company to the extent the risk is transferred or ceded to the reinsurer, it does not relieve it of its liability to its policyholders. Accordingly, the Company bears credit risk with respect to its reinsurers. Management cannot make assurances that the Company’s reinsurers will pay all of their reinsurance claims, or that they will pay claims on a timely basis. If the Company’s reinsurers cease to meet their obligations, whether because they are in a weakened position as a result of incurred losses or otherwise, the Company’s results of operations, financial position, and cash flows could be materially adversely affected.
As related to the Company’s reinsurance facilities, there are no assurances that the Company can maintain its current reinsurance facilities or that it can obtain other reinsurance facilities in adequate amounts and at favorable rates. If the Company is unable to obtain new reinsurance facilities, either its net exposures would increase or, if it is unwilling to bear an increase in net exposures, it would have to reduce the level of its underwriting commitments. Either of these potential developments could have a material adverse effect on the Company’s business, results of operations, and financial position.
Interest rate fluctuations could have a negative impact on results of operations and financial condition.
In periods of rapidly increasing interest rates, policy surrenders and withdrawals may increase and premiums in flexible premium policies may decrease as policyholders seek investments with higher perceived returns. This activity may result in the Company’s making cash payments, requiring that it sell invested assets at a time when the prices of those assets are adversely affected by the increase in market interest rates.
During periods of sustained low interest rates, life insurance and annuity products may be affected by increased premium payments on products with flexible premium features and a higher percentage of insurance policies remainingin-force from year to year on products with minimum guarantees. During such a period, investment earnings may be lower because the interest earnings on new fixed income investments will likely have declined with the market interest rates. Also there may be increased early repayment on investments held such as mortgage-backed securities, asset-backed securities, and callable bonds. Although the Company invests in a broad range of asset classes, it is primarily invested in domestic fixed income securities. Accordingly, during periods of sustained low interest rates, an adverse effect on the results of operations and financial condition may result from a decrease in the spread between the earned rate on the Company’s assets and either the interest rates credited to policyholders or the rates assumed in reserve calculations. Several products have current credited interest rates that are at or approaching their minimum guaranteed credited rate, which could have an adverse effect on the results of operations and financial condition due to spread compression.
The Company has hedging and other risk mitigating strategies to reduce the risk of a volatile interest rate environment. However, there can be no assurance that it would be fully insulated from realizing any losses on sales of securities. In addition, regardless of whether the Company realized an investment loss, potential withdrawals would produce a decrease in invested assets, with a corresponding adverse effect on the results of operations and financial condition.
Market fluctuations and general economic conditions may adversely affect results of operations and financial condition.
The risk of fluctuations in market value of all of the separate account assets, proprietary mutual funds, proprietary collective trusts, and external mutual funds is borne by the policyholders. The Company’s fee income for administering and/or managing these assets, however, is generally set as a percentage of those assets. Accordingly, fluctuations in the market value of these assets may result in fluctuations in revenue. On certain products, the Company offers guarantees to policyholders to protect them against the risk of adverse market performance, including guaranteed minimum death benefits and guaranteed lifetime withdrawal benefits. When equity markets decline, the Company is at a greater risk of having to pay guaranteed benefits that exceed available policyholder account balances, and will therefore have to increase its reserves for these benefits, resulting in a financial loss. While the Company does have hedging programs in place to reduce the market risk associated with these guarantees, no assurance can be provided that these programs will generate the returns that will be needed to meet policyholder obligations relating to these guarantees.
The Company manages or administers its general and separate accounts in support of cash and liquidity requirements of its insurance and investment products. The Company’s general account investment portfolio is diversified over a broad range of
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asset classes but consists primarily of domestic fixed income investments. The fair value of these and other general account invested assets fluctuates depending upon, among other factors, general economic and market conditions. In general, the market value of the Company’s general account bond portfolio increases or decreases in inverse relationship with fluctuations in interest rates.
The occurrence of a major economic downturn, acts of corporate malfeasance, or other events that adversely affect the issuers of the Company’s investment securities could cause the value of these securities and net income to decline and the default rate of the bonds to increase. A ratings downgrade affecting particular issuers or securities could have a similar effect. Any event reducing the value of these securities other than on a temporary basis could have an adverse effect on the results of operations and financial condition. Ratings downgrades on general account assets may also result in a higher capital charge under RBC, resulting in lower RBC ratio.
Additionally, the Company may, from time to time, for business, regulatory, or other reasons, elect or be required to sell certain of its general account invested assets at a time when their fair values are less than their original cost, resulting in realized capital losses, which would have an adverse effect on the 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.
Changes in U.S. federal income tax law could make some of the Company’s products less attractive to consumers. For example, the following events could adversely affect the Company’s business:
• | Changes in tax laws that would reduce or eliminatetax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance products or change the tax treatment of life insurance death benefits; |
• | Reductions in the federal income tax that investors are required to pay on long-term capital gains and on some dividends paid on stock that may provide an incentive for some of the Company’s customers and potential customers to shift assets into mutual funds and away from products, including life insurance and annuities, designed to defer taxes payable on investment returns; |
• | Changes in applicable regulations that could restrict the ability of some companies to purchase certain executive benefits products; |
• | Changes in the availability of, or rules concerning the establishment, operation, and taxation of, Section 401, 403(b), 408, and 457 plans; and |
• | Repeal of the federal estate tax |
The Company cannot predict whether any legislation will be enacted, what the specific terms of any such legislation will be, or how, if at all, this legislation or any other legislation could have an adverse effect on the Company’s results of operations or financial condition.
Congress, as well as state and local governments, considers from time to time legislation that could change the Company’s tax costs and increase or decrease its ability to use existing tax credits. If such legislation is adopted, the results of operations could be impacted. Changes to the Company’s tax costs would include changes to tax rates, which could affect the financial statements in several ways. For example, an increase in the federal income tax rate could affect the financial statements as follows:
• | A higher current income tax rate, which would have an unfavorable impact on net income over the period that the higher rate remains in effect. |
• | An increase in certain deferred tax assets (“DTAs”) and certain deferred tax liabilities, which could have an immediate favorable impact on surplus in the period during which the higher tax rate came into effect. The favorable impact will depend on the admissibility limitations of DTAs prescribed by Statutory Accounting Principles, which include estimates of future tax events |
• | An increase in tax rates could affect the timing of recognizing tax benefits. |
The Company may be subject to litigation resulting in substantial awards or settlements and this may adversely affect its reputation and results of operations.
In recent years, life and accident insurance and financial service companies have been named as defendants in lawsuits, including class actions. A number of these lawsuits have resulted in substantial awards and settlements. There can be no
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assurance that any future litigation relating to matters such as the provision of insurance coverage or pricing and sales practices will not have a material adverse effect on the Company’s results of operations or financial position.
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.
Management of operational, legal, regulatory, and financial risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events. Management has devoted significant resources to develop the Company’s risk management and disaster recovery policies and procedures. However, policies and procedures may not be fully effective and may leave the Company exposed to unidentified and unanticipated risks. The Company may be subject to disruptions of its operating systems or its ability to conduct business from events that are wholly or partially beyond its control such as a natural catastrophe, act of terrorism, pandemic, or electrical/telecommunications outage.
The Company may experience difficulty in marketing and distributing products through its current and future distribution channels.
The Company distributes its life and savings products through a variety of distribution channels, including brokers, independent agents, consultants, retail financial institutions, and its own internal sales force. In some areas the Company generates a significant portion of its business through third-party arrangements. Management periodically negotiates provisions and renewals of these relationships and there can be no assurance that such terms will remain acceptable to either party. An interruption in the continuing relationship with a significant number of these third parties could materially affect the Company’s ability to market its products. The Company must attract and retain productive internal sales representatives to sell its products. If the Company is unsuccessful in attracting and retaining sales representatives with demonstrated abilities, its results of operations and financial condition could be adversely affected.
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.
The Company depends heavily upon computer systems to provide reliable service, as a significant portion of the Company’s operations relies on the secure processing, storage, and transmission of confidential or proprietary information and complex transactions. Despite the implementation of a variety of security measures, the Company’s computer systems could be subject to physical and electronicbreak-ins, cyber attacks, and similar disruptions from unauthorized tampering, including threats that may come from external factors, such as governments, organized crime, hackers and other third parties, or may originate internally from within the Company.
If one or more of these events occurs, it could potentially jeopardize the confidential or proprietary information, including personally identifiablenon-public information, processed and stored in, and transmitted through, the computer systems and networks. It could also potentially cause interruptions or malfunctions in the operations of the Company, its customers, or other third parties. This could result in damage to the Company’s reputation, financial losses, litigation, increased costs, regulatory penalties, and/or customer dissatisfaction or loss. Although steps have been taken to prevent and detect such attacks, it is possible that the Company may not become aware of a cyber incident for some time after it occurs, which could increase its exposure to these consequences.
The Company could face difficulties, unforeseen liabilities, or asset impairments arising from business acquisitions or integrations and managing growth of such businesses.
The Company has engaged in acquisitions of businesses in the past and may continue to do so in the future. Such activity exposes the Company to a number of risks. For example, there could be unforeseen liabilities or asset impairments, including goodwill impairments that arise in connection with the businesses that will be acquired in the future.
The Company’s ability to achieve certain benefits which are anticipated from acquisitions of businesses will depend in large part upon the Company’s ability to successfully integrate such businesses in an efficient and cost effective manner. The Company may not be able to integrate such businesses smoothly or successfully, and the process may take longer than expected. The integration of operations and differences in operational culture may require the dedication of significant management resources, which may result in greater expenditures than expected to integrate the acquired businesses. If the Company is unable to successfully integrate the operations of such acquired businesses, it may be unable to realize the benefits it expects to achieve as a result of such acquisitions.
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The success with which the Company is able to integrate acquired operations will depend on its ability to manage a variety of issues, including the following:
• | Loss of key personnel or higher than expected employee attrition rates could adversely affect the performance of the acquired business and the Company’s ability to successfully integrate it. |
• | Integrating acquired operations with existing operations may require the Company to coordinate geographically separated organizations, address possible differences in culture and management philosophies, merge financial processes and risk and compliance procedures, combine separate information technology platforms, and integrate organizations that were previously closely tied to the former parent of the acquired business or other service provider. |
Counterparties with whom the Company transfers risk may be unable or unwilling to do business with the Company.
The Company mitigates market risks through the use of derivative transactions with approved counterparties. Should some or all of these counterparties be unwilling or unable to continue to offer derivatives to the Company, the cost of purchasing these financial instruments may increase and/or the Company may not be able to continue to transfer certain risks, thereby increasing its exposure to a financial loss.
The Company may not be able to secure financing to meet the liquidity or capital needs of the Company.
While the Company monitors its liquidity and capital on a regular basis, it may need to seek external financing if available internal levels of liquidity or capital are insufficient. Liquidity demands include but are not limited to the payment of policyholder benefits, collateral posting as required under our agreements with counterparties, the payment of operating expenses, and the servicing of debt. Capital demands could result from the growth of new business, a change in investment strategy, an investment in systems or other infrastructure, or a deterioration of the Company’s capital arising from financial losses. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit in financial markets, the overall availability of credit to the financial services industry, the volume of trading activities in financial markets, the Company’s credit ratings and credit capacity, and the perception of customers or lenders of the Company’s long or short term financial strength. If the Company is unable to secure external financing to meet a liquidity or capital shortfall it may be required to curtail its operations, sell assets or reinsure liabilities, make changes to the investment strategy, or discontinue the use of certain derivatives, which could have a detrimental impact on the financial strength of the Company.
Acquisitions, dispositions and business reorganizations, including our announced transaction with Protective Life Corporation, may not produce anticipated benefits and could result in operating difficulties, unforeseen liabilities, asset impairments or rating agency actions, which may adversely affect our operating results and financial condition.
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Acquisitions, dispositions and other business reorganizations, such as the planned disposition of substantially all of our Individual Markets segment to Protective Life Corporation that was announced in January of 2019, could expose us to a number of risks. Once completed, acquisitions and dispositions may not perform as projected, expense synergies and savings may not materialize as expected and costs associated with the transaction or related transition services may be greater than anticipated. Our financial results could be adversely affected by:
• | potential difficulties achieving projected financial results, including the costs and benefits of integration or deconsolidation, due to macroeconomic, business, demographic, actuarial, regulatory, or political factors; |
• | negative reactions to a transaction by policyholders and contract-holders, distributors, suppliers, plan sponsors and advisors and other clients and potential customers; |
• | ratings agency warnings or downgrades; |
• | unanticipated performance issues; |
• | unforeseen liabilities; |
• | transaction-related charges; |
• | diversion of management time and resources to disposition challenges; |
• | loss of key employees or customers, amortization of expenses related to intangibles; |
• | inefficiencies as we integrate operations and address differences in cultural, management, information, compliance and financial systems and procedures; and |
• | charges for impairment of long-term assets or goodwill and indemnifications. |
In addition, factors such as receiving the required governmental or regulatory approvals to close the transaction, delays in implementation or completion of transition activities or a disruption to our ongoing business could negatively impact our results.
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Reorganizing or consolidating the legal entities through which we conduct our business may raise similar risks. The success with which we are able to realize benefits from legal entity reorganizations will also depend on our ability to manage a variety of issues, including regulatory approvals, modification of our operations and changes to our investment portfolios.
Any of these risks, if realized, could prevent us from achieving the benefits we expect or could otherwise have a material adverse effect on our business, results of operations or financial condition.
Properties
The Company’s corporate office facility is comprised of an 886,000 square foot complex located in Greenwood Village, Colorado. The Company owns its corporate office facilities which are occupied by all of the Company’s segments. The Company also leases approximately 432,000 square feet of sales and administrative offices throughout the United States. At December 31, 2018, the Company leased approximately 188,000 square feet of the complex to CIGNA for a lease period expiring on March 31, 2019. Management believes that the Company’s properties are suitable and adequate for its current and anticipated business operations.
Legal Proceedings
From time to time, the Company may be threatened with, or named as a defendant in, lawsuits, arbitrations, and administrative claims. Any such claims that are decided against the Company could harm the Company’s business. The Company is also subject to periodic regulatory audits and inspections which could result in fines or other disciplinary actions. Unfavorable outcomes in such matters may result in a material impact on the Company’s financial position, results of operations, or cash flows.
The Company is defending lawsuits relating to the costs and features of certain retirement or fund products. Management believes the claims are without merit and will defend these actions. Based on the information known, these actions will not have a material adverse effect on the financial position of the Company.
The Company is involved in other various legal proceedings that arise in the ordinary course of its business. In the opinion of management, after consultation with counsel, the likelihood of loss from the resolution of these proceedings is remote and/or the estimated loss is not expected to have a material effect on the Company’s financial position, results of its operations, or cash flows.
Market for Registrant’s Common Equity and Related Stockholder Matters
5.1 Equity Security Holders and Market Information
There is no established public trading market for the Company’s common equity. GWL&A Financial is the sole shareholder of the Company’s common equity securities.
5.2 Dividends
In the three most recent fiscal years, the Company has paid dividends on its common shares. Dividends paid on the Company’s common stock were $152 million, $145 million, and $126 million during the years ended December 31, 2018, 2017 and 2016, respectively.
Under Colorado law, the Company cannot, without the approval of the Colorado Commissioner of Insurance, pay a dividend if as a result of such payment, the total of that dividend and all dividends paid in the preceding twelve months, would exceed the greater of (i) 10% of the Company’s statutory surplus as regards policyholders as of the preceding year ended December 31; or
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(ii) the Company’s statutory net gain, not including realized capital gains, for the twelve-month period ending the preceding December 31 not including pro rata distributions of the Company’s own securities. Additionally, dividend payments generally will not be allowed if the statutory surplus remaining after the proposed dividend would fall below the minimum RBC that requires regulatory action.
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Selected Financial Data
The following is a summary of selected statutory financial information for the Company. The information should be read in conjunction with and is qualified in its entirety by the information contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the statutory financial statements and notes thereto appearing in Item 8, “Financial Statements and Supplementary Data.”
The selected statutory financial information for the years ended December 31, 2018, 2017 and 2016, and at December 31, 2018 and 2017, has been derived in part from the Company’s audited statutory financial statements included in Item 8. The selected Statement of Operations data for the years ended December 31, 2015, and 2014, and the selected Statutory Statement of Admitted Assets, Liabilities, Capital and Surplus data at December 31, 2016, 2015, and 2014, have been derived in part from the Company’s statutory financial statements not included elsewhere herein.
As of and for the Year Ended December 31, | ||||||||||||||||||||
(In millions) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
Total income | $ | 7,365 | $ | 6,481 | $ | 6,801 | $ | 7,065 | $ | 6,868 | ||||||||||
Total benefits and expenses | 7,047 | 6,222 | 6,692 | 6,821 | 6,598 | |||||||||||||||
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Income from continuing operations | 318 | 259 | 109 | 244 | 270 | |||||||||||||||
Dividends to policyholders | 31 | 39 | 46 | 55 | 58 | |||||||||||||||
Federal income tax (benefit) expense | (18 | ) | 51 | (39 | ) | (6 | ) | 69 | ||||||||||||
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Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 305 | 169 | 102 | 195 | 143 | |||||||||||||||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 10 | 1 | (1 | ) | (8 | ) | (6 | ) | ||||||||||||
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Net income | $ | 315 | $ | 170 | $ | 101 | $ | 187 | $ | 137 | ||||||||||
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Dividends declared | $ | 152 | $ | 145 | $ | 126 | $ | 140 | $ | 316 | ||||||||||
Invested assets | $ | 30,035 | $ | 28,849 | $ | 27,871 | $ | 26,399 | $ | 25,444 | ||||||||||
Separate account assets | 24,655 | 28,197 | 27,495 | 27,048 | 28,081 | |||||||||||||||
Total assets | 55,786 | 58,010 | 56,436 | 54,461 | 54,523 | |||||||||||||||
Total aggregate reserves | 27,778 | 26,860 | 25,945 | 24,805 | 23,848 | |||||||||||||||
Separate account liabilities | 24,655 | 28,197 | 27,495 | 27,048 | 28,082 | |||||||||||||||
Total liabilities | 54,459 | 56,881 | 55,383 | 53,346 | 53,523 | |||||||||||||||
Total capital and surplus | 1,327 | 1,130 | 1,053 | 1,115 | 1,001 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations of the Company for the three years ended December 31, 2018, 2017 and 2016, are as follows. This management discussion and analysis should be read in conjunction with the financial data contained in Item 6, “Selected Financial Data,” and in Item 8, “Financial Statements and Supplementary Data.”
Certain statements in this report constitute forward-looking statements. See “Business” in Item 1 of this report for additional factors relating to these statements, and see “Risk Factors” in Item 1A of this report for a discussion of certain risk factors applicable to the business and its financial condition and results of operations.
7.1 Executive Summary
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The Company and its subsidiaries are providers of insurance and other financial service products to individual, corporate, institutional, and government customers. Management considers the ability to continue to expand its presence in the United States defined contribution and institutional insurance markets to be its primary points of focus. The life insurance, savings, and investments marketplace is highly competitive. Competitors include insurance companies, banks, investment advisors, mutual fund companies, and certain service and professional organizations.
The Individual Markets segment distributes life insurance, annuity, and retirement products to both individuals and businesses through various distribution channels. Life insurance productsin-force include participating andnon-participating term life, whole life, universal life, and variable universal life. The Empower Retirement segment provides various retirement plan products (including IRAs) and investment options, as well as comprehensive administrative and recordkeeping services for financial institutions and employers, which include educational, advisory, enrollment, and communication services to employer-sponsored defined contribution plans and associated defined benefit plans. Defined contribution plans provide for benefits based upon the value of contributions to, and investment returns on, an individual’s account. The Company’s Other reporting segment is substantially comprised of corporate items not directly allocated to the other operating segments and interest expense on long-term debt.
Recent Events
On April 18, 2018, the Securities and Exchange Commission (“SEC”) released its proposal on the best interest standards applicable to brokers and advisors. The Company provided comments to the SEC in August 2018. The Company will monitor any developments or proposed revisions and is preparing to comply with the standards.
The Tax Reconciliation Act, which was signed in December 2017, among other changes, lowered the U.S. corporate federal income tax rate from 35% to 21% effective on January 1, 2018. As a result, net earnings in 2018 reflect net income, tax effected at the lower 21% rate. Other provisions of the tax bill did not have a material effect onyear-to-date taxable income in 2018.
During the second quarter of 2018, the Company issued a surplus note totaling $346 million and redeemed a surplus note totaling $333 million. The Company also recognized an increase in the capital and surplus account of $39 millionafter-tax on an interest rate swap that was hedging the surplus note that was redeemed.
The Company entered into a coinsurance with funds withheld / modified coinsurance agreement with London Life International Reinsurance Corporation (“LLIRC”), an affiliate, to cede portions of its group annuity, whole life, and universal life policies effective December 31, 2016. On January 1, 2018, the Company terminated this 2016 agreement. On December 31, 2018, the Company entered into a modified coinsurance agreement with LLIRC pursuant to which it ceded portions of its group annuity policies. These transactions had large impacts to financial statement lines, but no material impact to statutory net income.
On January 24, 2019, the Company announced that it had entered into an agreement with Protective Life Insurance Company (“Protective”) to sell, via indemnity reinsurance, substantially all of itsnon-participating individual life insurance and annuity business and group life and health business. The transaction is in its initial stage, and is expected to close in the first half of 2019 subject to regulatory and customary closing conditions. On the closing date of the proposed transaction, the Company will transfer to Protective assets equal to the statutory liabilities being reinsured and will receive a ceding commission (subject to post-closing adjustments) from Protective in consideration of the transferred business. The Company will retain a small block of participating life insurance policies which will be administered by Protective Life following the close of the transaction.
Market Conditions
The S&P 500 index ended 2018 down by 6% as compared to 2017, and 2017 was up by 19% when compared to 2016. The average of the S&P 500 index during the year ended December 31, 2018, was up by 12% when compared to the average for the year ended December 31, 2017, and the average was up by 17% for the year ended December 31, 2017, when compared to the average for the year ended December 31, 2016.
Year Ended December 31, | ||||||||||||||||||||
S&P 500 Index | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
Index Close | 2,507 | 2,674 | 2,239 | 2,044 |
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Index Average | 2,744 | 2,448 | 2,094 | 2,061 | 1,931 |
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Variable asset-based fees earned by the Company fluctuate with changes in participant account balances. Participant account balances change due to cash flow and market gains and losses, which are primarily associated with changes in the United States equities market. Fee income increased by $31 million, or 8%, to $411 million for the year ended December 31, 2018, when compared to 2017. The increase was primarily related to asset-based variable fee income resulting from increased average asset levels driven by sales and higher average equity market levels.
The10-year U.S. Treasury rate ended 2018 up by 29 basis points as compared to 2017, while 2017 was down by 5 basis points when compared to 2016. The average of the10-year U.S. Treasury rate during the year ended December 31, 2018 ended up by 58 basis points when compared to the average for the year ended December 31, 2017, and the average was up by 50 basis points for the year ended December 31, 2017, when compared to the average for the year ended December 31, 2016.
Year Ended December 31, | ||||||||||||||||||||
10-Year Treasury Rate | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
Close | 2.69% | 2.40% | 2.45% | 2.27% | 2.17% | |||||||||||||||
Average | 2.91% | 2.33% | 1.83% | 2.14% | 2.54% |
7.2 Summary of Critical Accounting Judgments and Estimates
The Company prepares its statutory financial statements in conformity with accounting practices prescribed or permitted by the Division. The Division requires that insurance companies domiciled in the State of Colorado prepare their statutory financial statements in accordance with the National Association of Insurance Commissioners Accounting Practices and Procedures Manual (“NAIC SAP”), subject to any deviations prescribed or permitted by the State of Colorado Insurance Commissioner.
The only permitted deviation that impacts the Company allows the Company to account for certain separate account products at book value instead of fair value. The Division has not permitted the Company to adopt any other accounting practices that have an impact on the Company’s statutory financial statements as compared to NAIC SAP or the Division’s prescribed accounting practices. There is no impact to either capital and surplus or net income as a result of the prescribed accounting practice.
The Company has identified the following accounting policies, judgments, and estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:
• | Valuation of investments; |
• | Impairment of investments; |
• | Valuation of derivatives and related hedge accounting; |
• | Valuation of policy benefits and; |
• | Valuation of deferred taxes; |
Valuation of investments
The Company’s investments are in bonds, mortgage loans, real estate, contract loans, and other investments. The Company’s investments are exposed to three primary sources of risk: credit, interest rate, and market valuation. The financial statement risks, stemming from such investment risks, are those associated with the determination of fair values.
The fair values for bonds are generally based upon evaluated prices from independent pricing services. In cases where these prices are not readily available, fair values are estimated by the Company. To determine estimated fair value for these instruments, the Company generally utilizes discounted cash flow models with market observable pricing inputs such as spreads, average life, and credit quality. 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. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts of the Company’s financial instruments.
Impairment of investments
The Company evaluates its general account investments on a quarterly basis to determine whether there has been an other-than-temporary decline in fair value below the amortized cost basis. Assumptions and estimates about the issuer’s operations and ability to generate future cash flows are inherent in management’s evaluation of investments for other- than-temporary impairments (“OTTI”). The assessment of whether an OTTI has occurred is based upon management’scase-by-case evaluation of the underlying reasons for the decline in fair value of each individual security. An OTTI is recorded (a) if it is probable that
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the Company will be unable to collect all amounts due according to the contractual terms in effect at the date of acquisition, (b) if the Company has the intent to sell the investment or (c) fornon-interest related declines in value and where the Company does not have the intent and ability at the reporting date, to hold the bond until its recovery. Management considers a wide range of factors regarding the security issuer and uses its best judgment in evaluating the cause of the decline in its estimated fair value and in assessing the prospects for near-term recovery. While all available information is taken into account, it is difficult to predict the ultimate recoverable amount from a distressed or impaired security. The evaluation of impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition or near term recovery prospects, the effects of changes in interest rates or credit spreads, and the recovery period.
If an OTTI has occurred on loan-backed and structured securities, the impairment amount is bifurcated into two components: the amount related to thenon-interest loss and the amount attributed to other factors. The calculation of expected cash flows utilized during the impairment evaluation and bifurcation process is determined using judgment and the best information available to the Company including default rates, credit ratings, collateral characteristics, and current levels of subordination.
The determination of the calculation and the adequacy of the mortgage allowance for credit loss and mortgage impairments (when management deems it probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement) involve judgments that incorporate qualitative and quantitative Company and industry mortgage performance data. Management’s periodic evaluation and assessment of the adequacy of the mortgage provision allowance and the need for mortgage impairments is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the fair value of the underlying collateral, composition of the loan portfolio, current economic conditions, loss experience, and other relevant factors.
Valuation of derivatives and related hedge accounting
Derivatives that qualify for hedge accounting treatment are valued using the valuation method (either amortized cost or fair value) consistent with the underlying hedged asset or liability. Derivatives where hedge accounting is either not elected or that are not eligible for hedge accounting are stated at fair value; changes in fair values are recognized in unassigned surplus in the period of change.
The fair value of derivatives is determined by quoted market prices or through the use of pricing models. The determination of fair value, when quoted market values are not available, is based on valuation methodologies and assumptions deemed appropriate under the circumstances. Values can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, market volatility, and liquidity. Judgment is applied in determining the availability and application of hedge accounting designations and the appropriate accounting treatment under accounting guidance. If it were determined that hedge accounting designations were not appropriately applied, reported capital and surplus could be materially affected. Differences in judgment as to the availability and application of hedge accounting designations and the appropriate accounting treatment may result in a differing impact on the financial statements of the Company from that previously reported. Assessments of hedge effectiveness and measurements of ineffectiveness of hedging relationships are also subject to interpretations and estimations and different interpretations or estimates may have a material effect on the amount reported in capital and surplus.
Policy reserves
Life insurance and annuity policy reserves with life contingencies are computed on the basis of statutory mortality and interest requirements and without consideration for withdrawals. Annuity contract reserves without life contingencies are computed on the basis of statutory interest requirements
Policy reserves for life insurance are valued in accordance with the provision of applicable statutory regulations. Life insurance reserves are determined principally using the Commissioner’s Reserve Valuation Method, using the statutory mortality and interest requirements, without consideration for withdrawals. Some policies contain a surrender value in excess of the reserve as legally computed. This excess is calculated and recorded on apolicy-by-policy basis.
Premium stabilization reserves are calculated for certain policies to reflect the Company’s estimate of experience refunds and interest accumulations on these policies. The reserves are invested by the Company. The income earned on these investments is accumulated in this reserve and is used to mitigate future premium rate increases for such policies.
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Policy reserves ceded to other insurance companies are recorded as a reduction of the reserve liabilities. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies.
Policy and contract claims include provisions for reported life and health claims in process of settlement, valued in accordance with the terms of the related policies and contracts, as well as provisions for claims incurred but not reported based primarily on prior experience of the Company. As such, amounts are estimates, and the ultimate liability may differ from the amount recorded. Any changes in estimates will be reflected in the results of operations when additional information becomes known.
The liabilities for health claim reserves are determined using historicalrun-out rates, expected loss ratios and statistical analysis. The Company provides for significant claim volatility in areas where experience has fluctuated. The liabilities represent estimates of the ultimate net cost of all reported and unreported claims which are unpaid atyear-end. Those estimates are subject to considerable variability in claim severity and frequency. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations.
Valuation of deferred taxes
A net deferred tax asset is included in the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus which is recorded using the asset and liability method in which deferred tax assets and liabilities are recorded for expected future tax consequences of events that have been recognized in either the Company’s statutory financial statements or tax returns. Deferred income tax assets are subject to admissibility limitations prescribed by statutory accounting principles which include estimates of future tax events. The change in deferred income taxes is treated as a component of the change in unassigned funds.
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7.3 Company Results of Operations
Year ended December 31, 2018, compared with the year ended December 31, 2017
The following is a summary of certain financial data of the Company:
Year Ended December 31, | Increase | Percentage | ||||||||||||||
Statement of Operations data (In millions) | 2018 | 2017 | (decrease) | change �� | ||||||||||||
Premium income and annuity consideration | $ | 7,593 | $ | 5,271 | $ | 2,322 | 44 % | |||||||||
Net investment income | 1,307 | 1,267 | 40 | 3 % | ||||||||||||
Fee and miscellaneous income | 411 | 380 | 31 | 8 % | ||||||||||||
Reserve adjustment on reinsurance ceded | (1,976 | ) | (490 | ) | (1,486 | ) | (303)% | |||||||||
Other | 30 | 53 | (23 | ) | (43)% | |||||||||||
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Total income | 7,365 | 6,481 | 884 | 14 % | ||||||||||||
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Policyholder benefits | 6,587 | 5,566 | 1,021 | 18 % | ||||||||||||
Increase in aggregate reserves for life and accident health policies and contracts | 918 | 916 | 2 | — % | ||||||||||||
Other insurance benefits, expenses and commissions | 686 | 724 | (38 | ) | (5)% | |||||||||||
Net transfers from separate accounts | (1,112 | ) | (945 | ) | (167 | ) | (18)% | |||||||||
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Total benefits and expenses | 7,079 | 6,261 | 818 | 13 % | ||||||||||||
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Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 286 | 220 | 66 | 30 % | ||||||||||||
Federal income tax (benefit) expense | (18 | ) | 51 | (69 | ) | (135)% | ||||||||||
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Net gain from operations before net realized capital gains | 304 | 169 | 135 | 80 % | ||||||||||||
Net realized capital gains less capital gains tax and transfers to interest maintenance reserve | 11 | 1 | 10 | 1,000 % | ||||||||||||
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Statutory net income | $ | 315 | $ | 170 | $ | 145 | 85 % | |||||||||
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The Company’s statutory net income increased by $145 million, or 85%, to $315 million. The increase was primarily due to higher net investment income, higher fee income, lower operating expenses and lower income taxes.
Premium income and annuity consideration increased by $2,322 million, or 44%, to $7,593 million due to the LLIRC reinsurance transactions previously discussed. Excluding the LLIRC reinsurance transactions, premiums increased $217 million, or 4%, due to increased sales.
Net investment income increased by $40 million, or 3%, to $1,307 million primarily as a result of higher dividends received from subsidiaries and higher average invested assets.
Fee income increased by $31 million, or 8%, to $411 million primarily related to an increase in asset-based variable fee income resulting from increased average asset levels, which were driven by sales and higher average equity market levels.
The reserve adjustment against income on reinsurance ceded increased by $1,486 million, or 303%, to $1,976 million primarily due to the LLIRC reinsurance transactions.
Policyholder benefits increased by $1,021 million, or 18%, to $6,587 million. Excluding the LLIRC reinsurance transactions, policyholder benefits increased $785 million, or 14%, primarily due to an increase in general account and separate account surrenders.
Other insurance benefits, expenses and commissions decreased by $38 million, or 5%, to $686 million. Excluding the LLIRC reinsurance transactions, other insurance benefits, expenses and commissions decreased by $20 million, or 3%, primarily due to expense management and the completion of integration activities in 2017.
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Net transfers from separate accounts changed by $167 million, or 18% to $1,112 million primarily due to higher separate account surrenders in 2018.
Federal tax expense changed to a benefit of $18 million in 2018 compared to an expense of $51 million in 2017 primarily due to the utilization of tax credits and a lower tax rate.
Year ended December 31, 2017, compared with the year ended December 31, 2016
The following is a summary of certain financial data of the Company:
Year Ended December 31, | Increase | Percentage | ||||||||||||||
Statement of Operations data (In millions) | 2017 | 2016 | (decrease) | change | ||||||||||||
Premium income and annuity consideration | $ | 5,271 | $ | (398 | ) | $ | 5,669 | 1,424 % | ||||||||
Net investment income | 1,267 | 1,236 | 31 | 3 % | ||||||||||||
Fee and miscellaneous income | 380 | 306 | 74 | 24 % | ||||||||||||
Reserve adjustment on reinsurance ceded | (490 | ) | 5,628 | (6,118 | ) | (109)% | ||||||||||
Other | 53 | 29 | 24 | 83 % | ||||||||||||
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Total income | 6,481 | 6,801 | (320 | ) | (5)% | |||||||||||
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Policyholder benefits | 5,566 | 4,971 | 595 | 12 % | ||||||||||||
Increase in aggregate reserves for life and accident health policies and contracts | 916 | 1,140 | (224 | ) | (20)% | |||||||||||
Other insurance benefits, expenses and commissions | 724 | 727 | (3 | ) | — % | |||||||||||
Net transfers from separate accounts | (945 | ) | (101 | ) | (844 | ) | (836)% | |||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total benefits and expenses | 6,261 | 6,737 | (476 | ) | (7)% | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 220 | 64 | 156 | 244 % | ||||||||||||
Federal income tax expense (benefit) | 51 | (38 | ) | 89 | 234 % | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain from operations before net realized capital gains | 169 | 102 | 67 | 66 % | ||||||||||||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 1 | (1 | ) | 2 | 200 % | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Statutory net income | $ | 170 | $ | 101 | $ | 69 | 68 % | |||||||||
|
|
|
|
|
|
|
|
|
The Company’s statutory net income increased by $69 million, or 68%, to $170 million. The increase was primarily due to higher net investment income, higher fee income, and lower operating expenses, partially offset by higher income taxes.
Premium income and annuity consideration increased by $5,669 million, or 1,424%, to $5,271 million primarily due to the LLIRC reinsurance transactions previously discussed. Excluding the LLIRC reinsurance transactions, premium incomes and annuity consideration decreased $772 million, or 13%, due to a decrease in general account and separate account premiums.
Net investment income increased $31 million, or 3%, to $1,267 million primarily as a result of higher average invested assets partially offset by lower yields.
Fee income increased $74 million, or 24%, to $380 million primarily related to an increase in asset-based variable fee income resulting from increased average asset levels, which were driven by sales and higher average equity market levels.
Reserve adjustment on reinsurance ceded decreased by $6,118 million, or 109%, to $(490) million primarily due to the LLIRC reinsurance transactions.
Policyholder benefits increased by $595 million, or 12%, to $5,566 million. Excluding the LLIRC reinsurance transactions, policyholder benefits increased $831 million, or 17%, primarily due to an increase in general account and separate account surrenders.
26
Table of Contents
Net transfers from separate accounts changed by $844 million, or 836%, to $945 million due to lower separate account sales in 2017.
Other insurance benefits, expenses and commissions decreased by $3 million to $724 million. Excluding the LLIRC reinsurance transactions, other insurance benefits, expenses and commissions decreased by $21 million, or 3%, primarily due to a $39 million decrease in operating expenses due to expense management and the completion of integration activities in 2017. This was partially offset by an $18 million increase in commissions due to higher commission-based sales.
Federal tax expense changed to an expense of $51 million in 2017 compared to a benefit of $38 million in 2016 primarily due to an increase in gain from operations before federal income tax.
27
Table of Contents
7.4 Individual Markets Segment Results of Operations
Year ended December 31, 2018, compared with the year ended December 31, 2017
The following is a summary of certain financial data of the Individual Markets segment:
Year Ended December 31, | Increase | Percentage | ||||||||||||||
Statement of Operations data (In millions) | 2018 | 2017 | (decrease) | change | ||||||||||||
Premium income and annuity consideration | $ | 5,662 | $ | 1,610 | $ | 4,052 | 252 % | |||||||||
Net investment income | 754 | 749 | 5 | 1 % | ||||||||||||
Fee and miscellaneous income | 128 | 112 | 16 | 14 % | ||||||||||||
Reserve adjustment on reinsurance ceded | (3,987 | ) | (340 | ) | (3,647 | ) | (1,073)% | |||||||||
Other | 32 | 34 | (2 | ) | (6)% | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total income | 2,589 | 2,165 | 424 | 20 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Policyholder benefits | 941 | 781 | 160 | 20 % | ||||||||||||
Increase in aggregate reserves for life and accident health policies and contracts | 484 | 582 | (98 | ) | (17)% | |||||||||||
Other insurance benefits, expenses and commissions | 191 | 207 | (16 | ) | (8)% | |||||||||||
Net transfers from separate accounts | 819 | 449 | 370 | 82 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total benefits and expenses | 2,435 | 2,019 | 416 | 21 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 154 | 146 | 8 | 5 % | ||||||||||||
Federal income tax expense | — | 49 | (49 | ) | (100)% | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain from operations before net realized capital gains | 154 | 97 | 57 | 59 % | ||||||||||||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 6 | 1 | 5 | 500 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Statutory net income | $ | 160 | $ | 98 | $ | 62 | 63 % | |||||||||
|
|
|
|
|
|
|
|
|
Statutory net income for the Individual Markets segment increased by $62 million, or 63%, to $160 million. The increase was primarily due to higher net investment income, higher fee income, lower operating expenses and lower income tax expenses, partially offset by higher policyholder benefits.
Premium income and annuity consideration increased by $4,052 million, or 252%, to $5,662 million primarily due to the LLIRC reinsurance transactions previously discussed. Excluding the LLIRC reinsurance transactions, premiums increased by $7 million.
Net investment income increased by $5 million, or 1%, to $754 million primarily as a result of higher average invested assets.
Fee income increased by $16 million, or 14%, to $128 million primarily related to an increase in asset-based variable fee income resulting from increased average asset levels, which were driven by sales and higher average equity market levels
The reserve adjustment on reinsurance ceded increased by $3,647 million, or 1,073%, to $3,987 million primarily due to the LLIRC reinsurance transactions.
Policyholder benefits increased by $160 million, or 20%, to $941 million. Excluding the LLIRC reinsurance transactions, policyholder benefits increased by $48 million, or 6% due to unfavorable mortality experience.
Net transfers from separate accounts increased by $370 million, or 82%, to $819 million primarily due to lower separate account surrenders in 2018.
Federal tax expense decreased by $49 million, or 100%, to $0 primarily due to the utilization of tax credits and a lower tax rate.
28
Table of Contents
Year ended December 31, 2017, compared with the year ended December 31, 2016
The following is a summary of certain financial data of the Individual Markets segment:
Year Ended December 31, | Increase | Percentage | ||||||||||||||
Statement of Operations data (In millions) | 2017 | 2016 | (decrease) | change | ||||||||||||
Premium income and annuity consideration | $ | 1,610 | $ | (2,656 | ) | $ | 4,266 | 161 % | ||||||||
Net investment income | 749 | 732 | 17 | 2 % | ||||||||||||
Fee and miscellaneous income | 112 | 95 | 17 | 18 % | ||||||||||||
Reserve adjustment on reinsurance ceded | (340 | ) | 3,380 | (3,720 | ) | (110)% | ||||||||||
Other | 34 | 26 | 8 | 31 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total income | 2,165 | 1,577 | 588 | 37 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Policyholder benefits | 781 | 831 | (50 | ) | (6)% | |||||||||||
Increase in aggregate reserves for life and accident health policies and contracts | 582 | 117 | 465 | 397 % | ||||||||||||
Other insurance benefits, expenses and commissions | 207 | 175 | 32 | 18 % | ||||||||||||
Net transfers from separate accounts | 449 | 358 | 91 | 25 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total benefits and expenses | 2,019 | 1,481 | 538 | 36 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 146 | 96 | 50 | 52 % | ||||||||||||
Federal income tax expense | 49 | 21 | 28 | 133 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain from operations before net realized capital gains | 97 | 75 | 22 | 29 % | ||||||||||||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 1 | (1 | ) | 2 | 200 % | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Statutory net income | $ | 98 | $ | 74 | $ | 24 | 32 % | |||||||||
|
|
|
|
|
|
|
|
|
Statutory net income for the Individual Markets segment increased by $24 million, or 32%, to $98 million. The increase was primarily due to higher premium income and annuity consideration, net investment income and fee income.
Premium income and annuity consideration increased by $4,266 million, or 161%, to $1,610 million primarily due to the LLIRC reinsurance transactions previously discussed. Excluding the LLIRC reinsurance transactions, premiums increased $154 million, or 11%, primarily due to increased annuity sales.
Net investment income increased $17 million, or 2%, to $749 million primarily as a result of higher average invested assets partially offset by lower yields.
Fee income increased $17 million, or 18%, to $112 million primarily related to an increase in asset-based variable fee income resulting from increased average asset levels, which were driven by sales and higher average equity market levels.
Reserve adjustment on reinsurance ceded decreased by $3,720 million, or 110%, to $(340) million primarily due to the LLIRC reinsurance transactions.
Increase in aggregate reserves for life and accident health policies and contracts changed by $465 million, or 397%, to $582 million primarily due to the LLIRC reinsurance transactions. Excluding the LLIRC reinsurance transactions, increase in aggregate reserves increased $106 million, or 22%, primarily due to increased premiums.
Other insurance benefits, expenses and commissions increased by $32 million, or 18%, to $207 million. Excluding the LLIRC reinsurance transactions, other insurance benefits, expenses and commissions increased by $16 million, or 9%, primarily due to an $11 million increase in commissions due to higher sales.
Net transfers from separate accounts increased by $91 million, or 25%, to $449 million primarily due to higher separate account premiums in 2017.
29
Table of Contents
7.5 Empower Retirement Segment Results of Operations
Year ended December 31, 2018, compared with the year ended December 31, 2017
The following is a summary of certain financial data of the Empower Retirement segment:
Year Ended December 31, | Increase | Percentage | ||||||||||||||
Statement of Operations data (In millions) | 2018 | 2017 | (decrease) | change | ||||||||||||
Premium income and annuity consideration | $ | 1,931 | $ | 3,661 | $ | (1,730 | ) | (47)% | ||||||||
Net investment income | 537 | 513 | 24 | 5 % | ||||||||||||
Fee and miscellaneous income | 272 | 257 | 15 | 6 % | ||||||||||||
Reserve adjustment on reinsurance ceded | 2,011 | (150 | ) | 2,161 | 1,441 % | |||||||||||
Other | (2 | ) | 19 | (21 | ) | (111)% | ||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total income | 4,749 | 4,300 | 449 | 10 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Policyholder benefits | 5,646 | 4,785 | 861 | 18 % | ||||||||||||
Increase in aggregate reserves for life and accident health policies and contracts | 434 | 334 | 100 | 30 % | ||||||||||||
Other insurance benefits, expenses and commissions | 475 | 477 | (2 | )�� | — % | |||||||||||
Net transfers from separate accounts | (1,931 | ) | (1,393 | ) | (538 | ) | (39)% | |||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total benefits and expenses | 4,624 | 4,203 | 421 | 10 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 125 | 97 | 28 | 29 % | ||||||||||||
Federal income tax (benefit) expense | (23 | ) | 14 | (37 | ) | (264)% | ||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain from operations before net realized capital gains | 148 | 83 | 65 | 78 % | ||||||||||||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 5 | — | 5 | 100 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Statutory net income | $ | 153 | $ | 83 | $ | 70 | 84 % | |||||||||
|
|
|
|
|
|
|
|
|
Statutory net income for the Empower Retirement segment increased by $70 million, or 84%, to $153 million. The increase was primarily due to higher fee income and lower income taxes.
Premium income and annuity consideration decreased by $1,730 million, or 47% to $1,931 million primarily due to the reinsurance with LLIRC previously mentioned. Excluding the LLIRC reinsurance transactions, premium income increased $219 million, or 6%, due to increased general account sales.
Net investment income increased $24 million, or 5%, to $537 million primarily as a result of higher dividends received from subsidiaries and higher average invested assets.
Fee income increased $15 million, or 6%, to $272 million primarily related to an increase in asset-based variable fee income resulting from increased average asset levels, which were driven by sales and higher average equity market levels
Reserve adjustment on reinsurance ceded increased by $2,161 million, or 1,441%, to $2,011 million primarily due to the LLIRC reinsurance transactions.
Policyholder benefits increased by $861 million, or 18%, to $5,646 million. Excluding the LLIRC reinsurance transactions, policyholder benefits increased $737 million, or 15%, primarily due to an increase in general account and separate account surrenders.
Net transfers from separate accounts changed by $538 million, or 39% to $1,931 million due to higher separate account surrenders.
30
Table of Contents
Federal tax expense changed to a benefit of $23 million in 2018 compared to an expense of $14 million in 2017 primarily due to the utilization of tax credits and a lower tax rate.
Year ended December 31, 2017, compared with the year ended December 31, 2016
The following is a summary of certain financial data of the Empower Retirement segment:
Year Ended December 31, | Increase | Percentage | ||||||||||||||
Statement of Operations data (In millions) | 2017 | 2016 | (decrease) | change | ||||||||||||
Premium income and annuity consideration | $ | 3,661 | $ | 2,258 | $ | 1,403 | 62 % | |||||||||
Net investment income | 513 | 509 | 4 | 1 % | ||||||||||||
Fee and miscellaneous income | 257 | 201 | 56 | 28 % | ||||||||||||
Reserve adjustment on reinsurance ceded | (150 | ) | 2,248 | (2,398 | ) | (107)% | ||||||||||
Other | 19 | 3 | 16 | 533 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total income | 4,300 | 5,219 | (919 | ) | (18)% | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Policyholder benefits | 4,785 | 4,140 | 645 | 16 % | ||||||||||||
Increase in aggregate reserves for life and accident health policies and contracts | 334 | 1,023 | (689 | ) | (67)% | |||||||||||
Other insurance benefits, expenses and commissions | 477 | 534 | (57 | ) | (11)% | |||||||||||
Net transfers from separate accounts | (1,393 | ) | (459 | ) | (934 | ) | (203)% | |||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total benefits and expenses | 4,203 | 5,238 | (1,035 | ) | (20)% | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain (loss) from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 97 | (19 | ) | 116 | 611 % | |||||||||||
Federal income tax expense (benefit) | 14 | (51 | ) | 65 | 127 % | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Statutory net income | $ | 83 | $ | 32 | $ | 51 | 159 % | |||||||||
|
|
|
|
|
|
|
|
|
Statutory net income for the Empower Retirement segment increased by $51 million, or 159%, to $83 million. The increase was primarily due to higher fee income and lower operating expenses, partially offset by higher income taxes.
Premium income and annuity consideration increased by $1,403 million, or 62%, to $3,661 million primarily due to the reinsurance with LLIRC previously mentioned. Excluding LLIRC reinsurance transactions, premium income and annuity consideration decreased $926 million, or 20%, due to a decrease in general account and separate account premiums.
Fee income increased $56 million, or 28%, to $257 million primarily related to an increase in asset-based variable fee income resulting from increased average asset levels, which were driven by sales and higher average equity market levels
Reserve adjustment on reinsurance ceded decreased by $2,398 million, or 107%, to $(150) million primarily due to the LLIRC reinsurance transactions.
Policyholder benefits increased by $645 million, or 16%, to $4,785 million. Excluding the LLIRC reinsurance transactions, policyholder benefits increased $769 million, or 19%, primarily due to an increase in general account and separate account surrender benefits.
Aggregate reserves for life and accident health policies and contracts decreased by $689 million, or 67%, to $334 million. Excluding the LLIRC reinsurance transactions, aggregate reserves decreased $761 million, or 69%, primarily due to lower premiums and higher policyholder benefits.
Other insurance benefits, expenses and commissions decreased by $57 million, 11%, to $477 million. Excluding the LLIRC reinsurance transactions, other insurance benefits, expenses and commissions decreased by $59 million, or 11%, primarily due to a decrease in operating expenses related to expense management and the completion of integration activities in 2017.
31
Table of Contents
Net transfers from separate accounts changed by $934 million, or 203%, to $1,393 million due to lower separate account premiums.
Federal tax expense changed to an expense of $14 million in 2017 compared to a benefit of $51 million in 2016 primarily due to an increase in gain from operations before federal income tax.
32
Table of Contents
7.6 Other Segment Results of Operations
Year ended December 31, 2018, compared with the year ended December 31, 2017
The following is a summary of certain financial data of the Other segment:
Year Ended December 31, | Increase | Percentage | ||||||||||||||
Statement of Operations data (In millions) | 2018 | 2017 | (decrease) | change | ||||||||||||
Net investment income | $ | 16 | $ | 5 | $ | 11 | 220 % | |||||||||
Fee and miscellaneous income | 11 | 11 | — | — % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total income | 27 | 16 | 11 | 69 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Other expenses and commissions | 20 | 39 | (19 | ) | (49)% | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total benefits and expenses | 20 | 39 | (19 | ) | (49)% | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain (loss) from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 7 | (23 | ) | 30 | 130 % | |||||||||||
Federal income tax expense (benefit) | 5 | (12 | ) | 17 | 142 % | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Statutory net income (loss) | $ | 2 | $ | (11 | ) | $ | 13 | 118 % | ||||||||
|
|
|
|
|
|
|
|
|
Statutory net income (loss) for the Other segment increased by $13 million, from a loss of $11 million to a gain of $2 million in 2018. The increase was primarily due to an increase in net investment income related to aone-time interest rate swap gain and a decrease in operating expense with the completion of integration activities in 2017. This was partially offset by an increase in federal income tax expenses primarily due to taxes on theone-time interest rate swap gain.
Year ended December 31, 2017, compared with the year ended December 31, 2016
The following is a summary of certain financial data of the Other segment:
Year Ended December 31, | Increase | Percentage | ||||||||||||||
Statement of Operations data (In millions) | 2017 | 2016 | (decrease) | change | ||||||||||||
Net investment income (loss) | $ | 5 | $ | (5 | ) | $ | 10 | 200 % | ||||||||
Fee and miscellaneous income | 11 | 10 | 1 | 10 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total income | 16 | 5 | 11 | 220 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Other expenses and commissions | 39 | 18 | 21 | 117 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total benefits and expenses | 39 | 18 | 21 | 117 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net loss from operations after dividends to policyholders and before federal income taxes and net realized capital gains | (23 | ) | (13 | ) | (10 | ) | (77)% | |||||||||
Federal income tax benefit | (12 | ) | (7 | ) | (5 | ) | (71)% | |||||||||
|
|
|
|
|
|
|
|
| ||||||||
Statutory net loss | $ | (11 | ) | $ | (6 | ) | $ | (5 | ) | (83)% | ||||||
|
|
|
|
|
|
|
|
|
Statutory net loss for the Other segment increased by $5 million from a loss of $6 million in 2016 to a loss of $11 million in 2017. The increase is primarily due to higher operating expenses with the integration activities in 2017.
33
Table of Contents
7.7�� 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.
The following table presents the percentage distribution of the carrying values of the Company’s general account investment portfolio.
December 31, | ||||||||||||||||
(In millions) | 2018 | 2017 | ||||||||||||||
Bonds | $ | 20,654 | 68.7% | $ | 19,945 | 69.1% | ||||||||||
Common stock | 132 | 0.5% | 108 | 0.4% | ||||||||||||
Mortgage loans | 4,207 | 14.0% | 3,871 | 13.4% | ||||||||||||
Real estate | 38 | 0.1% | 38 | 0.2% | ||||||||||||
Contract loans | 4,123 | 13.7% | 4,079 | 14.1% | ||||||||||||
Cash, cash equivalents and short-term investments | 229 | 0.8% | 242 | 0.8% | ||||||||||||
Securities lending collateral assets | 45 | 0.2% | — | —% | ||||||||||||
Other invested assets | 607 | 2.0% | 566 | 2.0% | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total cash and invested assets | $ | 30,035 | 100.0% | $ | 28,849 | 100.0% | ||||||||||
|
|
|
|
|
|
|
|
|
Bonds
Bonds include public and privately placed corporate bonds, government bonds, and mortgage-backed and asset-backed securities. Included in bonds 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 bond 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 independent external rating agencies.
The percentage distribution of the book adjusted carrying value of the Company’s short-term and long-term bond portfolios by NAIC designation is summarized as follows:
December 31, | ||||||||
NAIC Designations | 2018 | 2017 | ||||||
NAIC 1 | 65.4% | 68.0% | ||||||
NAIC 2 | 33.4% | 30.5% | ||||||
NAIC 3 through 6 | 1.2% | 1.5% | ||||||
|
|
|
| |||||
Total | 100.0% | 100.0% | ||||||
|
|
|
|
34
Table of Contents
The percentage distribution of the book adjusted carrying value of the industrial and miscellaneous category of short-term and long-term bond portfolios, calculated as a percentage of total bonds, is summarized as follows:
December 31, | ||||||||
Sector | 2018 | 2017 | ||||||
Finance | 18.5% | 17.1% | ||||||
Utility | 15.1% | 17.1% | ||||||
Consumer | 9.5% | 9.9% | ||||||
Natural resources | 5.9% | 5.0% | ||||||
Transportation | 3.0% | 2.8% | ||||||
Other | 10.3% | 11.0% |
Mortgage Loans
The Company’s mortgage loans are comprised primarily of domestic commercial collateralized loans. The mortgage loan portfolio is diversified with regard to geographical markets and commercial mortgage property types. The Company originates, directly or through correspondents, 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, forwards, 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. Derivatives that qualify for hedge accounting treatment are valued using the valuation method (either amortized cost or fair value) consistent with the underlying hedged asset or liability. At inception of a derivative transaction, the hedge relationship and risk management objective is documented and the designation of the derivative is determined based on specific criteria of the transaction. Derivatives where hedge accounting is either not elected or that are not eligible for hedge accounting are stated at fair value with changes in fair value recognized in unassigned surplus in the period of change. Investment gains and losses generally result from the termination of derivative contracts prior to expiration and are generally recognized in net income and may be subject to IMR. For derivative instruments where hedge accounting is either not elected or the transactions are not eligible for hedge accounting, changes in interest rates, foreign currencies, or equity markets may generate derivative gains or losses which may cause the Company to experience volatility in capital and surplus. The Company controls the credit risk of itsover-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.
Investment Yield
Net investment income includes interest income, dividends, the amortization of premiums, discounts and origination fees.
To analyze investment performance, the Company excludes net investment income related to derivative instruments in order to assess underlying profitability and results from ongoing operations. Net investment income performance is summarized as follows:
(In millions) | Year Ended December 31, | |||||||||||
2018 | 2017 | 2016 | ||||||||||
Net investment income | $ | 1,307 | $ | 1,267 | $ | 1,236 | ||||||
Less: | ||||||||||||
Net investment income from derivative instruments | 16 | 16 | 10 | |||||||||
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Net investment income excluding derivative investments | $ | 1,291 | $ | 1,251 | $ | 1,226 | ||||||
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Average invested assets, at amortized cost | 29,252 | 28,433 | 27,432 | |||||||||
Yield on average invested assets | 4.41 | % | 4.40 | % | 4.47 | % |
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The yield on average invested assets increased in 2018 when compared to 2017. The yield on average invested assets decreased in 2017 when compared to 2016.
7.8 Liquidity and Capital Resources
Liquidity refers to a company’s ability to generate sufficient cash flows to meet the short-term 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 short-term 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 and cash equivalents that totaled $229 million and $242 million as of December 31, 2018, and 2017, respectively. In addition, 99% of the bond portfolio carried an investment grade rating at December 31, 2018, and 2017, which provides 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 $99 million and $100 million of commercial paper outstanding as of December 31, 2018, and 2017, respectively. The commercial paper has been given a rating ofA-1+ by Standard & Poor’s Ratings Services and a rating ofP-1 by Moody’s Investors Service, each being the highest rating available. The Company’s issuance of commercial paper is not used to fund daily operations and does not have a significant impact on the Company’s liquidity.
The Company also has available a revolving credit facility agreement with U.S. Bank, which expires on March 1, 2023, in the amount of $50 million for general corporate purposes. The Company had no borrowings under this credit facility as of or during the year ended December 31, 2018. 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.
Risk-based capital (“RBC”) is a regulatory tool for measuring the minimum amount of capital appropriate for a life, accident and health organization to support its overall business operations in consideration of its size and risk profile. The Division requires the Company to maintain minimum capital and surplus equal to the company action level as calculated in the RBC model. The Company exceeds the required amount.
7.9 Off-Balance Sheet Arrangements
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The Company makes commitments to fund partnership interests, mortgage loans, and other investments in the normal course of its business. The amounts of these unfunded commitments at December 31, 2018 and 2017 were $136 million and $313 million, respectively. The precise timing of the fulfillment of the commitment cannot be predicted; however, all $136 million of the December 31, 2018 balance, and $312 million of the December 31, 2017 balance may be required to be paid within one year of the dates indicated. The remaining $1 million of the December 31, 2017 balance is due within one to three years. 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 counterparty financial institutions putnon-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 $11 million and $23 million at December 31, 2018 and 2017,respectively. Non-cash collateral on deposit with the third-party custodian on the Company’s behalf was $11 million and $24 million at December 31, 2018 and 2017, respectively, which cannot be sold orre-pledged and which has not been recorded on the Statement of Admitted Assets, Liabilities, Capital and Surplus. Collateral related to the reverse repurchase agreements generally consists of U.S. government or U.S. government agency securities.
The Company, as lessee, has entered into various lease and sublease agreements primarily for the rental of office space.
The Company maintains a corporate credit facility agreement in the amount of $50 million for general corporate purposes. The Company had no borrowings under the credit facility either at or during the years ended December 31, 2018 and 2017.
In addition, the Company has other letters of credit with a total amount of $9 million, renewable annually for an indefinite period of time.
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7.10 Contractual Obligations
The following table summarizes the Company’s major contractual obligations at December 31, 2018:
Payment due by period | ||||||||||||||||||||
Less than | One to | Three to | More than | |||||||||||||||||
(in thousands) | one year | three years | five years | five years | Total | |||||||||||||||
Aggregate reserves(1) | $ | 3,169,559 | $ | 5,487,644 | $ | 4,575,744 | $ | 46,864,153 | $ | 60,097,100 | ||||||||||
Policy and contract claims(2) | 183,749 | 45,798 | 35,087 | 123,460 | 388,094 | |||||||||||||||
Provision for policyholder dividends(3) | 31,184 | — | — | — | 31,184 | |||||||||||||||
Related party long-term debt - principal(4) | — | — | — | 553,219 | 553,219 | |||||||||||||||
Related party long-term debt - interest(5) | 30,335 | 60,670 | 60,670 | 557,094 | 708,769 | |||||||||||||||
Commercial paper(6) | 98,859 | — | — | — | 98,859 | |||||||||||||||
Payable under securities lending agreements(7) | 45,102 | — | — | — | 45,102 | |||||||||||||||
Investment purchase obligations(8) | 136,396 | — | — | — | 136,396 | |||||||||||||||
Operating leases(9) | 9,929 | 11,561 | 2,272 | 11,743 | 35,505 | |||||||||||||||
Other liabilities (10) | 31,334 | 58,469 | 65,514 | 16,204 | 171,521 | |||||||||||||||
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Total | $ | 3,736,447 | $ | 5,664,142 | $ | 4,739,287 | $ | 48,125,873 | $ | 62,265,749 | ||||||||||
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(1),(2) Aggregate reserves, and policy and contract claims - The Company has estimated payments to be made to policy and contract holders for future policy benefits. Insurance and investment contract liabilities include various investment-type products with contractually scheduled maturities, including periodic payments of a term certain nature. However, a significant portion of policy benefits and claims to be paid do not have stated contractual maturity dates and ultimately may not result in any payment obligation.
Estimated future policyholder obligations have been developed in accordance with industry accepted actuarial standards based upon the estimated timing of cash flows related to the policies or contracts, the Company’s historical experience and its expectation of future payment patterns. Management has incorporated significant assumptions in developing these estimates, many of which are outside of the Company’s control and include assumptions relating to mortality, morbidity, policy renewals and terminations, retirement, inflation, disability recovery rates, investment returns, future interest credited rate levels, policy loans, future premium receipts on current policiesin-force, and other contingent events as may be appropriate to the respective product type. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results.
The amounts presented in the table above are undiscounted as to interest. Accordingly, the sum of the estimated cash payment presented significantly exceeds the liability amount on the Company’s Statement of Admitted Assets, Liabilities, Capital and Surplus principally due to the time value of money.
Separate account liabilities have been excluded from the table above. Separate account obligations are legally insulated from general account assets. Separate account liabilities represent funds maintained by the Company to meet the specific investment objectives of the contract holders who bear the related investment risk. It is generally expected that the separate account liabilities will be fully funded by the separate account assets.
Policy and contract claims consist of liabilities associated with installment claims on certain long-term disability policies. Because the timing of the payment of these obligations is based upon assumptions of disability recovery rates, the amounts presented could differ from actual results.
(3) Provision for policyholders’ dividends - The provision for policyholders’ dividends payable represents the liabilities related to dividends payable in the following year on participating policies. As such, the obligations related to these liabilities are presented in the table above in the less than one year category in the amounts of the liabilities presented in the Company’s Statement of Admitted Assets, Liabilities, Capital and Surplus.
(4) Related party long-term debt principal - Represents contractual maturities of principal due to the Company’s parent, GWL&A Financial, under the terms of three long-term surplus notes. The amounts shown in this table differ from the amounts included in the Company’s Statement of Admitted Assets, Liabilities, Capital and Surplus because the amounts shown above do not consider the discount upon the issuance of one of the surplus notes.
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(5) Related party long-term debt interest - Two long-term surplus notes bear interest at a fixed rate through maturity. One surplus note bears a variable interest rate plus the then-current three-month London Interbank Offering Rate (“LIBOR”). The interest payments shown in this table are calculated based upon the contractual rates in effect on December 31, 2018, and do not consider the impact of future interest rate changes.
(6) Commercial paper - The Company’s obligations under its commercial paper program are short-term in nature. The amount presented represents the amount due upon maturity of the instrument. The obligation related to this liability is presented in the table above in the less than one year category as presented in the Company’s Statement of Admitted Assets, Liabilities, Capital and Surplus.
(7) Payable under securities lending agreements - The Company accepts cash collateral in connection with its securities lending program. Since the securities lending transactions generally terminate within one year or the timing of the return of the collateral is uncertain, the obligations related to these liabilities are presented in the table above in the less than one year category in the amounts of the liabilities as presented in the Company’s Statement of Admitted Assets, Liabilities, Capital and Surplus.
(8) Investment purchase obligations - The Company makes commitments to fund partnership interests, mortgage loans, and other investments in the normal course of its business. As the timing of the fulfillment of the commitment to fund partnership interests cannot be predicted, such obligations are presented in the less than one year category. The timing of the funding of mortgage loans is based on the expiration date of the commitment.
(9) Operating leases - The Company is obligated to make payments under variousnon-cancelable operating leases, primarily for office space. Contractual provisions exist that could increase the lease obligations presented, including operating expense escalation clauses. Management does not consider the impact of any such clauses to be material to the Company’s operating lease obligations. Rent expense for the years ended December 31, 2018, 2017 and 2016 were $27,768, $28,244 and $27,815 respectively.
From time to time, the Company enters into agreements or contracts, including capital leases, to purchase goods or services in the normal course of its business. However, these agreements and contracts are not material and are excluded from the table above.
(10) Other liabilities - Other liabilities include those other liabilities which represent contractual obligations not included elsewhere in the table above. If the timing of the payment of any other liabilities was sufficiently uncertain, the amounts were included in the less than one year category. Other liabilities presented in the table above include:
• | Liabilities under reinsurance arrangements |
• | Liabilities related to securities purchased but not yet settled |
• | Liabilities related to derivative obligations |
• | Liabilities related to dollar repurchase agreements |
• | Statutory state escheat liabilities |
• | Expected contributions to the Company’s defined benefit pension plan, and benefit payments for the post-retirement medical plan and supplemental executive retirement plan through 2023 |
• | Unrecognized tax benefits |
• | Miscellaneous purchase obligations to acquire goods and services |
7.11 Application of Recent Accounting Pronouncements
See Note 2 to the accompanying financial statements for a further discussion of the application of recent accounting pronouncements.
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Item 7A. 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. |
Market risk
The Company’s exposure to interest rate changes results from its significant holdings of floating rate debt, bonds, mortgage loans, and interest rate sensitive liabilities. The bonds primarily consist of direct obligations of the U.S. government and its agencies, direct obligations of U.S. states and their subdivisions, corporate debt securities, and asset-backed and mortgage-backed securities. All of these investments are exposed to changes in interest rates. Interest rate sensitive product liabilities, primarily those liabilities associated with universal life insurance contracts and annuity contracts, have the same type of interest rate risk exposure as bonds and mortgage loans.
To reduce interest rate risk, the Company performs periodic projections of asset and liability cash flows in order to evaluate the interest rate sensitivity of its bonds and its product liabilities to interest rate movements. For determinate liabilities, i.e. liabilities with stable, predictable cash flows on products that can’t be repriced (for example, certificate annuities and payout annuities), asset/liability cash flow mismatches are monitored and the asset portfolios are rebalanced as necessary to keep the mismatches within tolerance limits. For these determinate liabilities, the investment policy predominantly requires assets with stable, predictable cash flows so that changes in interest rates will not cause changes in the timing of asset cash flows resulting in mismatches. For indeterminate liabilities, i.e. liabilities that have less predictable cash flows but that can be repriced (for example, portfolio annuities and universal life insurance), the potential mismatch of assets and liabilities is tested under a wide variety of interest rate scenarios. The potential cost of this mismatch is calculated. If the potential cost is considered to be too high, actions considered would include rebalancing the asset portfolio and/or purchasing derivatives that reduce the risk as part of the hedging strategy program discussed below. For each major block of indeterminate liabilities, the asset and liability positions are reviewed in senior management meetings to proactively recommend changes in the current investment strategy and/or a rebalance of the asset portfolio.
The Company has strict operating policies which prohibit the use of derivative instruments for speculative purposes, permit derivative transactions only with approved counterparties, specify limits on concentration of risk, and provide requirements of reporting and monitoring systems. The Company supports a hedging strategy program that consists of the use of various derivative instruments including futures, interest rate swaps, and options such as interest rate swaptions. Derivative strategies include the following:
• | Futures are commitments to either purchase or sell designated financial instruments at a future date for a specified price. |
• | Interest rate swaps involve the periodic exchange of cash flows with third parties at specified intervals calculated using agreed upon rates or other financial variables. |
• | Option contracts grant the purchaser, in consideration for the payment of a premium, the right to either purchase from or sell to the issuer a financial instrument at a specified price within a specified time period or on a stated date. Interest rate swaptions grant the purchaser the right to enter into a swap with predetermined fixed-rate payments over a predetermined time period on the exercise date. |
The Company has estimated the possible effects of interest rate changes at December 31, 2018. If interest rates increased by 100 basis points (1.00%), the December 31, 2018 fair value of the fixed income assets in the general account would decrease by approximately $1.7 billion. This calculation uses projected asset cash flows, discounted back to December 31, 2018. The cash
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flow projections are shown in the table below. The table below shows cash flows rather than expected maturity dates because many of the Company’s assets have substantial expected principal payments prior to the final maturity date. The fair value shown in the table below was calculated using spot discount interest rates that varied by the year in which the cash flows are expected to be received. The spot rates in the benchmark calculation range from 2.647% to 4.237%.
Projected cash flows by calendar years (In millions) | Benchmark | Interest rate increase one percent | ||||||
2019 | $ | 2,642 | $ | 2,607 | ||||
2020 | 2,328 | 2,289 | ||||||
2021 | 2,720 | 2,659 | ||||||
2022 | 2,829 | 2,803 | ||||||
2023 | 3,428 | 3,413 | ||||||
Thereafter | 22,855 | 23,285 | ||||||
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Undiscounted total | $ | 36,802 | $ | 37,056 | ||||
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Fair value | $ | 28,825 | $ | 27,146 |
The Company administers separate account variable annuities and provides other investment and retirement services where fee income is earned based upon a percentage of account balances. Fluctuations in fund asset levels occur as a result of both changes in cash flow and general market conditions. There is a market risk of lower fee income if equity markets decline. If equity markets were to decline by 10% from benchmark levels at December 31, 2018, the Company’s associated net fee income after payment of subadvisor fees in 2018 would decline by approximately $28 million.
The Company’s surplus assets include equity investments, primarily partnership interests. There is a market risk of lower asset values if equity markets decline. If equity markets were to decline by 10%, the Company would have an additional unrealized loss of approximately $7.9 million on equity investments. This unrealized loss would not impact statutory net income but would reduce capital and surplus.
The Company has sold variable annuities with various forms of GMDB and GLWB. The Company is required to hold future policy benefit liabilities for these guaranteed benefits. If equity markets were to decline by 10%, the liability for GMDB and GLWB would increase by approximately $19.5 million. The Company’s dynamic hedging program for the GLWB product would be expected to offset $12.2 million of the $19.5 million change in the benefit liability related to capital markets. Therefore the net impact to variable annuities with various forms of guarantees for a 10% decline in the equity markets is estimated to be $7.3 million.
Insurance risk
The Company manages the risks associated with its insurance and other contractual liabilities through the use of actuarial modeling techniques. These techniques utilize significant assumptions including morbidity, mortality, persistency, expenses, and the cash flow stream of benefit payments. Through these techniques, the Company attempts to match the anticipated cash flow streams of its invested assets with the anticipated cash flow streams of its insurance and other contractual obligations. The cash flows associated with determinate policy liabilities are not interest rate sensitive but will vary based upon the timing and amount of benefit payments. The primary risks associated with these liabilities are that the benefits will exceed those anticipated in the actuarial modeling or that the actual timing of the payment of benefits will differ from what was anticipated.
The Company utilizes reinsurance programs to control its exposure to general insurance risks. Reinsurance agreements do not relieve the Company from its direct obligations to its insured. However, an effective reinsurance program limits the Company’s exposure to potentially large losses. The failure of reinsurers to honor their obligations could result in losses to the Company. To manage this risk, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk relative to the reinsurers in order to minimize its exposure to significant losses from reinsurer insolvencies. The Company retains an initial maximum of $3.5 million of coverage per individual life. This initial retention limit of $3.5 million may increase due to automatic policy increases in coverage at a maximum rate of $175 thousand per annum, with an overall maximum increase in coverage of $1.0 million. Maximum capacity to be accepted or retained by the Company is dictated at the treaty level and is monitored annually to ensure the total risk acquired or retained on any one life is limited to a maximum retention of $4.5 million.
Credit risk
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Credit risk is the risk the Company assumes if its debtors, customers, reinsurers, or other counterparties and intermediaries may be unable or unwilling to pay their contractual obligations when they come due and may manifest itself through the downgrading of credit ratings of counterparties. It is the Company’s policy to acquire only investment grade assets to enable it to provide for future policy obligations and to minimize undue concentrations of assets in any single geographic area, industry, or entity. To minimize this risk, management regularly reviews the credit ratings of the entities in which the Company invests. These credit ratings are internally derived by the Company, taking into consideration ratings from several external credit rating agencies.
Operational and corporate risk
The Company manages and mitigates internal operational risk through integrated and complementary policies, procedures, processes, and practices. Human Resources hiring practices, performance evaluations and promotion, and compensation practices are designed to attract, retain and develop the skilled personnel required. A comprehensive job evaluation process is in place and training and development programs are supported. Each business area provides training designed for its specific needs and has developed internal controls for significant processes. Processes and controls are monitored and redefined by the business areas and subject to review by the Company’s internal audit staff. The Company applies a robust project management discipline to all significant initiatives.
Appropriate security measures protect premises and information. The Company has emergency procedures in place for short-term incidents and is committed to maintaining business continuity and disaster recovery plans at every business location for the recovery of critical functions in the event of a disaster, including offsite data backup and work facilities. The Company maintains various corporate insurance coverages such as property, general liability, excess liability, automobile liability, workers’ compensation, financial institution bonds, other regulatory bonds, and professional liability insurance to protect its owned property assets and to insure against certain third-party liabilities.
The Company’s businesses are subject to various regulatory requirements imposed by regulation or legislation applicable to insurance companies and companies providing financial services. These regulations are primarily intended to protect policyholders and beneficiaries. Material changes in the regulatory framework or the failure to comply with legal and regulatory requirements could have a material adverse effect on the Company. The Company monitors compliance with legal and regulatory requirements in all jurisdictions in which it conducts business and assesses trends in legal and regulatory change to keep business areas current and responsive.
In the course of its business activities, the Company may be exposed to the risk that some actions may lead to damaging its reputation and hence damage its future business prospects. These actions may include unauthorized activities of employees or others associated with the Company, inadvertent actions of the Company that become publicized and damage its reputation, regular or past business activities of the Company that become the subject of regulatory or media scrutiny or litigation and, due to a change of public perception, cause damage to the Company. To manage or mitigate this risk, the Company has ongoing controls to limit the unauthorized activities of people associated with it. The Company has adopted a Code of Business Conduct and Ethics which sets out the standards of business conduct to be followed by all of its directors, officers, and employees.
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Index to Financial Statements, Notes, and Schedules
Page Number | ||
44 | ||
Statutory Financial Statements at December 31, 2018, and 2017 and for the Years Ended December 31, 2018, 2017, and 2016 | ||
Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus | 46 | |
48 | ||
49 | ||
50 | ||
52 | ||
52 | ||
61 | ||
62 | ||
64 | ||
73 | ||
77 | ||
77 | ||
77 | ||
78 | ||
78 | ||
Note 11 - Liability for Unpaid Claims and Claim Adjustment Expenses | 80 | |
81 | ||
81 | ||
Note 14 - Capital and Surplus, Dividend Restrictions, and Other Matters | 84 | |
85 | ||
91 | ||
95 | ||
99 | ||
99 | ||
99 | ||
100 |
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Deloitte & Touche LLP 1601 Wewatta Street Suite 400 Denver, CO 80202-3942 USA
Tel: 1 303 292 5400 Fax: 1 303 312 4000 www.deloitte.com |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Great-West Life & Annuity Insurance Company
Greenwood Village, Colorado
Opinion on the Statutory Financial Statements
We have audited the accompanying statutory statements of admitted assets, liabilities, and capital and surplus of Great-West Life & Annuity Insurance Company (the "Company") (a wholly-owned subsidiary of GWL&A Financial Inc.), as of December 31, 2018 and 2017, the related statutory statements of operations, changes in capital and surplus, and cash flows for the years then ended, and the related notes (collectively referred to as the "statutory financial statements"). In our opinion, because of the effects of the matters discussed in the following paragraph, the statutory financial statements do not present fairly, in conformity with accounting principles generally accepted in the United States of America, the financial position of the Company as of December 31, 2018 and 2017, or the results of its operations or its cash flows for the years then ended.
As described in Note 1 to the statutory financial statements, the statutory financial statements are prepared by the Company using the accounting practices prescribed or permitted by the Colorado Division of Insurance, which is a basis of accounting other than accounting principles generally accepted in the United States of America, to meet the requirements of the Colorado Division of Insurance. The effects on the statutory financial statements of the variances between the statutory-basis of accounting described in Note 1 to the statutory financial statements and accounting principles generally accepted in the United States of America, although not reasonably determinable, are presumed to be material.
In our opinion, the statutory financial statements present fairly, in all material respects, the admitted assets, liabilities, and capital and surplus of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in conformity with accounting practices prescribed or permitted by the Colorado Division of Insurance, as described in Note 1 to the statutory financial statements.
Basis for Opinion
These statutory financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's statutory financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statutory financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing
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an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the statutory financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the statutory financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the statutory financial statements. We believe that our audits provide a reasonable basis for our opinion.
Emphasis of Matter
As discussed in Note 1 to the statutory financial statements, the accompanying statutory financial statements have been prepared from separate records maintained by the Company and may not necessarily be indicative of conditions that would have existed or the results of operations if the Company had been operated as an unaffiliated company, as portions of certain expenses represent allocations made from affiliates.
Denver, Colorado
March 19, 2019
We have served as the Company’s auditor since 1981
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus
December 31, 2018 and 2017
(In Thousands, Except Share Amounts)
December 31, | ||||||||
2018 | 2017 | |||||||
Admitted assets: | ||||||||
Cash and invested assets: | ||||||||
Bonds | $ | 20,654,118 | $ | 19,944,862 | ||||
Common stock | 131,883 | 107,977 | ||||||
Mortgage loans (net of allowances of $746 and $746) | 4,206,865 | 3,871,338 | ||||||
Real estate occupied by the company | 37,555 | 36,302 | ||||||
Real estate held for the production of income | 1,407 | 1,466 | ||||||
Contract loans | 4,122,637 | 4,078,669 | ||||||
Cash, cash equivalents and short-term investments | 229,003 | 242,084 | ||||||
Securities lending collateral assets | 45,102 | — | ||||||
Other invested assets | 606,787 | 566,187 | ||||||
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Total cash and invested assets | 30,035,357 | 28,848,885 | ||||||
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|
| |||
Investment income due and accrued | 284,303 | 279,822 | ||||||
Premiums deferred and uncollected | 25,795 | 15,919 | ||||||
Reinsurance recoverable | 8,090 | 7,090 | ||||||
Current federal income taxes recoverable | 71,875 | 16,535 | ||||||
Deferred income taxes | 150,497 | 149,315 | ||||||
Due from parent, subsidiaries and affiliates | 50,107 | 67,355 | ||||||
Cash value of company owned life insurance | 272,606 | 264,798 | ||||||
Other assets | 231,965 | 163,388 | ||||||
Assets from separate accounts | 24,654,916 | 28,197,122 | ||||||
|
|
|
|
|
| |||
Total admitted assets | $ | 55,785,511 | $ | 58,010,229 | ||||
|
|
|
|
|
|
See notes to statutory financial statements. | Continued |
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus
December 31, 2018 and 2017
(In Thousands, Except Share Amounts)
December 31, | ||||||||
2018 | 2017 | |||||||
Liabilities, capital and surplus: | ||||||||
Liabilities: | ||||||||
Aggregate reserves for life policies and contracts | $ | 27,501,121 | $ | 26,587,834 | ||||
Aggregate reserves for accident and health policies | 276,762 | 272,539 | ||||||
Liability for deposit-type contracts | 189,895 | 206,134 | ||||||
Life and accident and health policy and contract claims | 123,705 | 120,537 | ||||||
Provision for policyholders’ dividends | 31,184 | 38,872 | ||||||
Liability for premiums received in advance | 13,926 | 12,768 | ||||||
Liability for contract deposit funds | 150,981 | 174,296 | ||||||
Unearned investment income | 622 | 4,483 | ||||||
Asset valuation reserve | 204,393 | 203,546 | ||||||
Interest maintenance reserve | 50,674 | 82,238 | ||||||
Due to parent, subsidiaries and affiliates | 41,735 | 52,081 | ||||||
Commercial paper | 98,859 | 99,886 | ||||||
Payable under securities lending agreements | 45,102 | — | ||||||
Repurchase agreements | 664,650 | — | ||||||
Other liabilities | 410,076 | 828,393 | ||||||
Liabilities from separate accounts | 24,654,907 | 28,197,113 | ||||||
|
|
|
|
|
| |||
Total liabilities | 54,458,592 | 56,880,720 | ||||||
|
|
|
|
|
| |||
Commitments and contingencies (see Note 20) | ||||||||
Capital and surplus: | ||||||||
Preferred stock, $1 par value, 50,000,000 shares authorized; none issued and outstanding | — | — | ||||||
Common stock, $1 par value; 50,000,000 shares authorized; 7,320,176 shares issued and outstanding | 7,320 | 7,320 | ||||||
Surplus notes | 591,699 | 539,930 | ||||||
Gross paid in and contributed surplus | 710,271 | 706,178 | ||||||
Unassigned funds | 17,629 | (123,919 | ) | |||||
|
|
|
|
|
| |||
Total capital and surplus | 1,326,919 | 1,129,509 | ||||||
|
|
|
|
|
| |||
Total liabilities, capital and surplus | $ | 55,785,511 | $ | 58,010,229 | ||||
|
|
|
|
|
|
See notes to statutory financial statements. | Concluded |
47
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Statutory Statements of Operations
Years Ended December 31, 2018, 2017 and 2016
(In Thousands)
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
|
|
|
|
| ||||||||
Income: | ||||||||||||
Premium income and annuity consideration | $ | 7,592,609 | $ | 5,270,518 | $ | (397,783 | ) | |||||
Net investment income | 1,307,387 | 1,266,963 | 1,235,841 | |||||||||
Amortization of interest maintenance reserve | 24,863 | 22,045 | 23,253 | |||||||||
Commission and expense allowances on reinsurance ceded | 5,211 | 31,582 | 5,785 | |||||||||
Fee income from separate accounts | 160,573 | 160,280 | 151,744 | |||||||||
Reserve adjustment on reinsurance ceded | (1,975,763 | ) | (490,424 | ) | 5,627,638 | |||||||
Miscellaneous income | 250,272 | 220,204 | 154,696 | |||||||||
|
|
|
|
| ||||||||
Total income | 7,365,152 | 6,481,168 | 6,801,174 | |||||||||
|
|
|
|
| ||||||||
Expenses: | ||||||||||||
Death benefits | 380,057 | 276,519 | 341,292 | |||||||||
Annuity benefits | 228,530 | 203,679 | 202,093 | |||||||||
Disability benefits and benefits under accident and health policies | 41,719 | 44,208 | 41,580 | |||||||||
Surrender benefits | 5,895,938 | 4,992,338 | 4,330,313 | |||||||||
Increase in aggregate reserves for life and accident and health policies and contracts | 917,510 | 915,763 | 1,139,669 | |||||||||
Other benefits | 10,528 | 12,032 | 11,991 | |||||||||
|
|
|
|
| ||||||||
Total benefits | 7,474,282 | 6,444,539 | 6,066,938 | |||||||||
|
|
|
|
| ||||||||
Commissions | 196,489 | 199,814 | 181,567 | |||||||||
Other insurance expenses | 488,250 | 522,610 | 544,488 | |||||||||
Net transfers from separate accounts | (1,112,465 | ) | (944,644 | ) | (101,482 | ) | ||||||
|
|
|
|
| ||||||||
Total benefit and expenses | 7,046,556 | 6,222,319 | 6,691,511 | |||||||||
|
|
|
|
| ||||||||
Net gain from operations before dividends to policyholders, federal income taxes and realized capital gains (losses) | 318,596 | 258,849 | 109,663 | |||||||||
Dividends to policyholders | 31,276 | 38,782 | 45,842 | |||||||||
|
|
|
|
| ||||||||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains (losses) | 287,320 | 220,067 | 63,821 | |||||||||
Federal income tax (benefit) expense | (17,604 | ) | 50,584 | (37,932 | ) | |||||||
|
|
|
|
| ||||||||
Net gain from operations before net realized capital gains (losses) | 304,924 | 169,483 | 101,753 | |||||||||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 10,576 | 535 | (1,096 | ) | ||||||||
|
|
|
|
| ||||||||
Statutory net income | $ | 315,500 | $ | 170,018 | $ | 100,657 | ||||||
|
|
|
|
|
See notes to statutory financial statements.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Statutory Statements of Changes in Capital and Surplus
Years Ended December 31, 2018, 2017 and 2016
(In Thousands)
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Capital and surplus, beginning of year | $ | 1,129,509 | $ | 1,053,333 | $ | 1,114,764 | ||||||
|
|
|
|
|
|
|
|
| ||||
Statutory net income | 315,500 | 170,018 | 100,657 | |||||||||
Dividends to stockholder | (152,295 | ) | (145,301 | ) | (125,691 | ) | ||||||
Change in net unrealized capital (losses) gains, net of income taxes | (11,491 | ) | (17,021 | ) | (32,223 | ) | ||||||
Change in minimum pension liability, net of income taxes | 3,824 | 2,459 | (1,863 | ) | ||||||||
Change in asset valuation reserve | (846 | ) | (18,503 | ) | 6,171 | |||||||
Change innon-admitted assets | 28,921 | 96,814 | (47,306 | ) | ||||||||
Change in net deferred income taxes | (40,732 | ) | (110,528 | ) | 16,605 | |||||||
Change in liability for reinsurance in unauthorized companies | — | 2 | — | |||||||||
Capitalpaid-in | — | 27 | 60 | |||||||||
Surpluspaid-in | 4,093 | 86,480 | 22,359 | |||||||||
Change in capital and surplus as a result of separate accounts | (208 | ) | (211 | ) | (150 | ) | ||||||
Change in unrealized foreign exchange capital (losses) gains | (1,125 | ) | (88 | ) | (78 | ) | ||||||
Change in surplus note | 51,769 | 12,028 | 28 | |||||||||
|
|
|
|
|
|
|
|
| ||||
Net change in capital and surplus for the year | 197,410 | 76,176 | (61,431 | ) | ||||||||
|
|
|
|
|
|
|
|
| ||||
Capital and surplus, end of year | $ | 1,326,919 | $ | 1,129,509 | $ | 1,053,333 | ||||||
|
|
|
|
|
|
|
|
|
See notes to statutory financial statements.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Statutory Statements of Cash Flows
Years Ended December 31, 2018, 2017 and 2016
(In Thousands)
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
|
|
|
|
|
| |||||||
Operating activities: | ||||||||||||
Premium income, net of reinsurance | $ | 5,352,630 | $ | 5,208,527 | $ | 5,910,875 | ||||||
Investment income received, net of investment expenses paid | 1,136,338 | 1,111,282 | 1,080,450 | |||||||||
Other miscellaneous expense received (paid) | 160,008 | (77,825 | ) | (23,874 | ) | |||||||
Benefit and loss related payments, net of reinsurance | (6,417,233 | ) | (5,393,966 | ) | (4,671,246 | ) | ||||||
Net transfers to separate accounts | 1,097,423 | 909,388 | 99,783 | |||||||||
Commissions, other expenses and taxes paid | (644,838 | ) | (669,995 | ) | (687,938 | ) | ||||||
Dividends paid to policyholders | (38,959 | ) | (46,583 | ) | (51,521 | ) | ||||||
Federal income taxes (paid) received, net | (38,241 | ) | (15,138 | ) | 15,711 | |||||||
|
|
|
|
|
| |||||||
Net cash provided by operating activities | 607,128 | 1,025,690 | 1,672,240 | |||||||||
|
|
|
|
|
| |||||||
Investing activities: | ||||||||||||
Proceeds from investments sold, matured or repaid: | ||||||||||||
Bonds | 3,351,579 | 5,719,282 | 7,202,702 | |||||||||
Stocks | 3,704 | 14,597 | 1,539 | |||||||||
Mortgage loans | 357,545 | 399,982 | 365,790 | |||||||||
Real estate | — | — | 1,457 | |||||||||
Other invested assets | 25,233 | 14,614 | 9,883 | |||||||||
Net gains on cash, cash equivalents and short-term investments | — | (1 | ) | 13 | ||||||||
Miscellaneous proceeds | 22,212 | — | 40,414 | |||||||||
Cost of investments acquired: | ||||||||||||
Bonds | (3,398,701 | ) | (6,023,940 | ) | (8,434,227 | ) | ||||||
Stocks | (38,742 | ) | (99 | ) | (19 | ) | ||||||
Mortgage loans | (697,245 | ) | (844,304 | ) | (688,991 | ) | ||||||
Real estate | (4,319 | ) | (2,980 | ) | (2,006 | ) | ||||||
Other invested assets | (36,870 | ) | (31,194 | ) | (3,985 | ) | ||||||
Miscellaneous applications | (39,654 | ) | (67,286 | ) | (4,708 | ) | ||||||
Net change in contract loans and premium notes | (1,355 | ) | (12,161 | ) | 6,809 | |||||||
|
|
|
|
|
| |||||||
Net cash used in investing activities | (456,613 | ) | (833,490 | ) | (1,505,329 | ) | ||||||
|
|
|
|
|
| |||||||
Financing and miscellaneous activities: | ||||||||||||
Surplus notes | 51,410 | 12,000 | — | |||||||||
Capital and paid in surplus | 3,325 | 84,944 | 20,306 | |||||||||
Deposit-type contract withdrawals, net of deposits | (18,908 | ) | (21,673 | ) | (22,342 | ) | ||||||
Dividends to stockholder | (152,295 | ) | (145,301 | ) | (125,691 | ) | ||||||
Funds (repaid) borrowed, net | (1,027 | ) | 2,348 | 4,167 | ||||||||
Change in due to/from parent, subsidiaries and affiliates | 6,013 | 1,485 | 5,987 | |||||||||
Employee taxes paid for withheld shares | (78 | ) | (818 | ) | (517 | ) | ||||||
Other | (51,605 | ) | (70,011 | ) | (38,528 | ) | ||||||
|
|
|
|
|
| |||||||
Net cash used in financing and miscellaneous activities | (163,165 | ) | (137,026 | ) | (156,618 | ) | ||||||
|
|
|
|
|
| |||||||
Net (decrease) increase in cash, cash equivalents and short-term investments and restricted cash | (12,650 | ) | 55,174 | 10,293 | ||||||||
Cash, cash equivalents and short-term investments and restricted cash: | ||||||||||||
Beginning of year | 242,084 | 186,910 | 176,617 | |||||||||
|
|
|
|
|
| |||||||
End of year | $ | 229,434 | $ | 242,084 | $ | 186,910 | ||||||
|
|
|
|
|
|
The cash, cash equivalents and short-term investments and restricted cash balance at December 31, 2018 includes $431 of restricted cash which isnon-admitted and not included in the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus.
See notes to statutory financial statements. | Continued |
50
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Statutory Statements of Cash Flows
Years Ended December 31, 2018, 2017 and 2016
(In Thousands)
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
|
|
|
|
|
| |||||||
Non-cash investing and financing transactions during the year: | ||||||||||||
Share-based compensation expense | $ | 768 | $ | 1,563 | $ | (2,113 | ) | |||||
Assets received from limited partnership investment distributions | — | — | (10 | ) | ||||||||
Fair value of assets acquired in settlement of bonds | 28,815 | 9,659 | — |
See notes to statutory financial statements. | Concluded |
51
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
1. Organization and Significant Accounting Policies
Great-West Life & Annuity Insurance Company (the “Company” or “GWL&A”) is a direct wholly-owned subsidiary of GWL&A Financial Inc. (“GWL&A Financial”), a holding company. GWL&A Financial is a direct wholly-owned subsidiary of Great-West Lifeco U.S. LLC (“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 (“Division”).
The Company is authorized to engage in the sale of life insurance, accident and health insurance and annuities. It is qualified to do business in all states in the United States, except New York, and in the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands. The Company is also a licensed reinsurer in New York.
The statutory financial statements have been prepared from the separate records maintained by the Company and may not necessarily be indicative of the conditions that would have existed or the results of operations if the Company had been operated as an unaffiliated company.
Accounting policies and use of estimates
The Company prepares its statutory financial statements in conformity with accounting practices prescribed or permitted by the Division. The Division requires that insurance companies domiciled in the State of Colorado prepare their statutory financial statements in accordance with the National Association of Insurance Commissioners Accounting Practices and Procedures Manual (“NAIC SAP”), subject to any deviations prescribed or permitted by the State of Colorado Insurance Commissioner.
The only prescribed deviation that impacts the Company allows the Company to account for certain separate account products at book value instead of fair value. The Division has not permitted the Company to adopt any accounting practices that have an impact on the Company’s statutory financial statements as compared to NAIC SAP or the Division’s prescribed accounting practices. There is no impact to either capital and surplus or net income as a result of the prescribed accounting practice.
Statutory accounting principles vary in some respects from accounting principles generally accepted in the United States of America (“GAAP”). The more significant of these differences are as follows:
• | Bonds, including loan-backed and structured securities (collectively referred to as “bonds”), are carried at statutory adjusted carrying value in accordance with the National Association of Insurance Commissioners (“NAIC”) designation of the security. Carrying value is amortized cost, unless the bond is either (a) designated as a six, in which case it is the lower of amortized cost or fair value or (b) required to be carried at fair value due to the structured securities ratings methodology. Under GAAP, bonds are carried at amortized cost for securities classified asheld-to-maturity and fair value for securities classified asavailable-for-sale andheld-for-trading. |
• | Short-term investments include all investments whose remaining maturities, at the time of acquisition, are three months to one year. Under GAAP, short-term investments include securities purchased with investment intent and with initial remaining maturities of one year or less. |
• | As prescribed by the NAIC, the asset valuation reserve (“AVR”) is computed in accordance with a prescribed formula and represents a provision for possiblenon-interest related fluctuations in the value of bonds equity securities, mortgage loans, real estate and other invested assets. Changes to the AVR are charged or credited directly to unassigned surplus. This type of reserve is not necessary or required under GAAP. |
• | As prescribed by the NAIC, the interest maintenance reserve (“IMR”) consists of net accumulated unamortized realized capital gains and losses, net of income taxes, on sales or interest related impairments of bonds and derivative investments attributable to changes in the general level of interest rates. Such gains or losses are initially deferred and then amortized into income over the remaining period to maturity, based on groupings of individual securities sold in five-year bands. An IMR asset is designated as anon-admitted asset and is recorded as a reduction to capital and surplus. Under GAAP, realized gains and losses are recognized in income in the period in which a security is sold. |
52
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
• | As prescribed by the NAIC, an other-than-temporary impairment (“OTTI”) is recorded (a) if it is probable that the Company will be unable to collect all amounts due according to the contractual terms in effect at the date of acquisition, (b) if the Company has the intent to sell the investment or (c) fornon-interest related declines in value and where the Company does not have the intent and ability at the reporting date, to hold the bond until its recovery. Under GAAP, if either (a) management has the intent to sell a bond investment or (b) it is more likely than not the Company will be required to sell a bond investment before its anticipated recovery, a charge is recorded in net realized investment losses equal to the difference between the fair value and cost or amortized cost basis of the security. If management does not intend to sell the security and it is not more likely than not the Company will be required to sell the bond investment before recovery of its amortized cost basis, but the present value of the cash flows expected to be collected (discounted at the effective interest rate implicit in the bond investment prior to impairment) is less than the amortized cost basis of the bond investment (referred to as the credit loss portion), an OTTI is considered to have occurred. |
Under GAAP, total OTTI is bifurcated into two components: the amount related to the credit loss, which is recognized in current period earnings through realized capital losses; and the amount attributed to other factors (referred to as thenon-credit portion), which is recognized as a separate component in accumulated other comprehensive income (loss). As prescribed by the NAIC,non-interest related OTTI is only bifurcated on loan-backed and structured securities. Factors related to interest and other components do not have a financial statement impact and are disclosed in “Unrealized losses and OTTI” in the notes to the statutory financial statements.
• | Derivatives that qualify for hedge accounting are carried at the same valuation method as the underlying hedged asset, while derivatives that do not qualify for hedge accounting are carried at fair value. Under GAAP, all derivatives, regardless of hedge accounting treatment, are recorded on the balance sheet in other assets or other liabilities at fair value. As prescribed by the NAIC, for those derivatives which qualify for hedge accounting, the change in the carrying value or cash flow of the derivative is recorded consistently with how the changes in the carrying value or cash flow of the hedged asset, liability, firm commitment or forecasted transaction are recorded. Under GAAP, if the derivative is designated as a cash flow hedge, the effective portions of the changes in the fair value of the derivative are recorded in accumulated other comprehensive income and are recognized in the income statements when the hedged item affects earnings. Changes in fair value resulting from foreign currency translations are recorded in either AOCI or net investment income, consistent with where they are recorded on the underlying hedged asset or liability. Changes in the fair value, including changes resulting from foreign currency translations, of derivatives not eligible for hedge accounting or where hedge accounting is not elected and the over effective portion of cash flow hedges are recognized in investment gains (losses) as a component of net income in the period of the change. Realized foreign currency transactional gains and losses on derivatives subject to hedge accounting are recorded in net investment income, whereas those on derivatives not subject to hedge accounting are recorded in investment gains (losses). As prescribed by the NAIC, upon termination of a derivative that qualifies for hedge accounting, the gain or loss is recognized in income in a manner that is consistent with the hedged item. Alternatively, if the item being hedged is subject to IMR, the gain or loss on the hedging derivative is realized and is subject to IMR upon termination. Under GAAP, gains or losses on terminated contracts that are effective hedges are recorded in earnings in net investment income or other comprehensive income. The gains or losses on terminated contracts where hedge accounting is not elected, or contracts that are not eligible for hedge accounting, are recorded in investment gains (losses). |
• | The Company enters into dollar repurchase agreements with third party broker-dealers. The Company does not enter into these types of transactions for liquidity purposes, but rather for yield enhancement on its investment portfolio. The dollar repurchase trading strategy involves the sale of securities, with a simultaneous agreement to repurchase similar securities at a future date at an agreed-upon price. Assets to be repurchased are the same, or substantially the same, as the assets transferred, and are accounted for as secured borrowings. Under GAAP, these transactions are recorded as forward settling to be announced (“TBA”) securities that are accounted for as derivative instruments, but hedge accounting is not elected as the Company does not regularly accept delivery of such securities when issued. |
• | Acquisition costs, such as commissions and other costs incurred in connection with acquiring new business, are charged to operations as incurred, rather than deferred and amortized over the lives of the related contracts as under GAAP. |
• | Deferred income taxes are recorded using the asset and liability method in which deferred tax assets and liabilities are recorded for expected future tax consequences of events that have been recognized in either the Company’s statutory financial statements or tax returns. Deferred income tax assets are subject to limitations prescribed by statutory accounting |
53
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
principles. The change in deferred income taxes is treated as a component of the change in unassigned funds, whereas under GAAP deferred taxes are included in the determination of net income. |
• | Certain assets, including various receivables, furniture and equipment and prepaid assets, are designated asnon-admitted assets and are recorded as a reduction to capital and surplus, whereas they are recorded as assets under GAAP. |
• | The excess of the cost of acquiring an entity over the Company’s share of the book value of the acquired entity is recorded as goodwill which is admissible subject to limitations and is amortized over the period in which the Company benefits economically, not to exceed ten years. Under GAAP, the excess of the cost of acquiring an entity over the acquisition-date fair value of identifiable assets acquired and liabilities assumed is allocated between goodwill, indefinite-lived intangible assets and definite-lived intangible assets. Goodwill and indefinite-lived intangible assets are not amortized and definite-lived intangible assets are amortized over their estimated useful lives under GAAP. |
• | Aggregate reserves for life policies and contracts are based on statutory mortality and interest requirements and without consideration of withdrawals, which differ from reserves established under GAAP that are based on assumptions using Company experience for mortality, interest, and withdrawals. |
• | As prescribed by the NAIC, ceded reserves are limited to the amount of direct reserves. Ceded aggregate reserves and policy and contract claim liabilities are netted against aggregate reserves for life policies and contracts for statutory accounting purposes. Under GAAP, these items are reported as reinsurance recoverable. |
• | Surplus notes are reflected as a component of capital and surplus, whereas under GAAP they are reflected as a liability. |
• | The policyholder’s share of net income on participating policies that has not been distributed to participating policyholders is included in capital and surplus in the statutory financial statements. For GAAP, these amounts are reported as a liability with a charge to net income. |
• | Changes in separate account values from cash transactions are recorded as premium income and benefit expenses whereas they do not impact the statement of operations under GAAP and are presented only as increases or decreases to account balances. |
• | Benefit payments and the related decrease in policy reserves are recorded as expenses for all contracts subjecting the Company to any mortality risk. Under GAAP, such benefit payments for life and annuity contracts without significant mortality risks are recorded as direct reductions to the policy reserve liability. |
• | Premium receipts and the related increase in policy reserves are recorded as revenues and expenses, respectively, for all contracts subjecting the Company to any mortality risk. Under GAAP, such premium receipts for life and annuity contracts without significant mortality risks are recorded as direct credits to the policy reserve liability. |
• | Comprehensive income and its components are not presented in the statutory financial statements. |
• | The Statutory Statement of Cash Flows is presented based on a prescribed format for statutory reporting. For purposes of presenting statutory cash flows, cash includes short-term investments. Under GAAP, the statement of cash flows is typically presented based on the indirect method and cash excludes short-term investments. |
The preparation of financial statements in conformity with statutory accounting principles requires the Company’s management to make a variety of estimates and assumptions. These estimates and assumptions affect, among other things, the reported amounts of admitted assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. Significant estimates are required to account for items and matters such as, but not limited to, the valuation of investments in the absence of quoted market values, impairment of investments, valuation of policy benefit liabilities and the valuation of deferred tax assets. Actual results could differ from those estimates.
54
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Significant statutory accounting policies
Investments
Investments are reported as follows:
• | In accordance with the NAIC SAP, the adjusted carrying value amounts of certain assets are gross ofnon-admitted assets. |
Bonds are carried at statutory adjusted carrying value in accordance with the NAIC designation of the security. Carrying value is amortized cost, unless the bond is either (a) designated as a six, in which case it is the lower of amortized cost or fair value or (b) required to be carried at fair value due to the structured securities ratings methodology. The Company recognizes the acquisition of its public bonds on a trade date basis and its private placement investments on a funding date basis. Bonds containing call provisions are amortized to the call or maturity value/date which produces the lowest asset value.
Premiums and discounts are recognized as a component of net investment income using the effective interest method. Realized gains and losses not subject to IMR, including those from foreign currency translations, are included in net realized capital gains (losses).
The recognition of income on certain investments (e.g. loan-backed securities, including mortgage-backed and asset-backed securities) is dependent upon market conditions, which may result in prepayments and changes in amounts to be earned. Prepayments on all mortgage-backed and asset-backed securities are monitored monthly, and amortization of the premium and/or the accretion of the discount associated with the purchase of such securities are adjusted by such prepayments. Prepayment assumptions are based on the average of recent historical prepayments and are obtained from broker/dealer survey values or internal estimates. These assumptions are consistent with the current interest rate and economic environment. Significant changes in estimated cash flows from the original purchase assumptions are accounted for using the retrospective method.
• | Mortgage loans consist primarily of domestic commercial collateralized loans and are carried at their unpaid principal balances adjusted for any unamortized premiums or discounts, allowances for credit losses, and foreign currency translations. Interest income is accrued on the unpaid principal balance for all loans, except for loans onnon-accrual status. Premiums and discounts are amortized to net investment income using the effective interest method. Prepayment penalty and origination fees are recognized in net investment income upon receipt. |
The Company actively manages its mortgage loan portfolio by completing ongoing comprehensive analysis of factors such as debt service coverage ratios,loan-to-value ratios, payment status, default or legal status, annual collateral property evaluations and general market conditions. On a quarterly basis, the Company reviews the above primary credit quality indicators in its internal risk assessment of loan impairment and credit loss. Management’s risk assessment process is subjective and includes the categorization of all loans, based on the above mentioned credit quality indicators, into one of the following categories:
• | Performing - generally indicates the loan has standard market risk and is within its original underwriting guidelines. |
• | Non-performing - generally indicates there is a potential for loss due to the deterioration of financial/monetary default indicators or potential foreclosure. Due to the potential for loss, these loans are evaluated for impairment. |
The adequacy of the Company’s allowance for credit loss is reviewed quarterly. The determination of the calculation and the adequacy of the mortgage allowance for credit loss and mortgage impairments involve judgments that incorporate qualitative and quantitative Company and industry mortgage performance data. Management’s periodic evaluation and assessment of the adequacy of the mortgage allowance for credit loss and the need for mortgage impairments is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the fair value of the underlying collateral, composition of the loan portfolio, current economic conditions, loss experience and other relevant factors. Loans included in thenon-performing category and other loans with certain substandard credit quality indicators are individually reviewed to determine if a specific impairment is required. Risk is mitigated primarily through first position collateralization, guarantees, loan covenants and borrower reporting requirements. Since the Company does not originate or hold uncollateralized mortgages, loans are generally not deemed fully uncollectable. Generally, unrecoverable amounts are written off during the final stage of the foreclosure process.
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Loan balances are considered past due when payment has not been received based on contractually agreed upon terms. The accrual of interest is discontinued when concerns exist regarding the realization of loan principal or interest. The Company resumes interest accrual on loans when a loan returns to current status or under new terms when loans are restructured or modified.
On a quarterly basis, any loans with terms that were modified during that period are reviewed to determine if the loan modifications constitute a troubled debt restructuring (“TDR”). In evaluating whether a loan modification constitutes a TDR, it must be determined that the modification is a significant concession and the debtor is experiencing financial difficulties.
• | Real estate properties held for the production of income are valued at depreciated cost less encumbrances. Properties held for sale are carried at the lower of depreciated cost or fair value less encumbrances and estimated costs to sell the property. Real estate is depreciated on a straight-line basis over the estimated life of the building or term of the lease for tenant improvements. |
• | Real estate properties occupied by the Company are carried at depreciated cost unless the carrying amount of the asset is deemed to be unrecoverable. The Company includes in both net investment income and other operating expenses an amount for rent relating to real estate properties occupied by the Company. Rent is derived from consideration of the repairs, expenses, taxes, interest and depreciation incurred. The reasonableness of the amount of rent recorded is verified by comparison to rent received from other like properties in the same area. |
• | Limited partnership interests are included in other invested assets and are accounted for using either net asset value per share (“NAV”) as a practical expedient to fair value or the equity method of accounting with changes in these values recognized in unassigned surplus in the period of change. The Company uses NAV as a practical expedient on partnership interests in investment companies where it has a minor equity interest and no significant influence over the entity’s operations. The Company uses the equity method when it has a partnership interest that is considered more than minor, although the Company has no significant influence over the entity’s operations. |
• | Common stocks, other than stocks of subsidiaries, are recorded at fair value based on the most recent closing price of the common stock as quoted on its exchange. Related party mutual funds, which are carried at fair value, are also included in common stocks. The net unrealized gain or loss on common stocks is reported as a component of surplus. |
• | Contract loans are carried at their unpaid balance. Contract loans are fully collateralized by the cash surrender value of the associated insurance policy. |
• | Short-term investments include all investments whose remaining maturities, at the time of acquisition, are three months to one year. Cash equivalent investments include all investments whose remaining maturities, at the time of acquisition, are three months or less. Both short-term and cash equivalent investments, excluding money market mutual funds, are stated at amortized cost, which approximates fair value. Cash equivalent investments also include highly liquid money market securities that are traded in an active market, and are carried at fair value. |
• | The Company enters into reverse repurchase agreements with third party broker-dealers for the purpose of enhancing the total return on its investment portfolio. The repurchase trading strategy involves the purchase of securities, with a simultaneous agreement to resell similar securities at a future date at an agreed-upon price. Securities purchased under these agreements are accounted for as secured borrowings, and are reported at amortized cost in cash, cash equivalents and short-term investments. Under thesetri-party repurchase agreements, the designated custodian takes possession of the underlying collateral on the Company’s behalf, which is required to be cash or government securities. The fair value of the securities is monitored and additional collateral is obtained, where appropriate, to protect against credit exposure. The collateral cannot be sold orre-pledged and has not been recorded on the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus. |
The Company enters into dollar repurchase agreements with third party broker-dealers. The Company does not enter into these types of transactions for liquidity purposes, but rather for yield enhancement on its investment portfolio. The dollar repurchase trading strategy involves the sale of securities, with a simultaneous agreement to repurchase similar securities at a future date at an agreed-upon price. Assets to be repurchased are the same, or substantially the same, as the assets transferred, and are accounted for as secured borrowings. Proceeds of the sale are reinvested in other securities and may
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
enhance the current yield and total return. The difference between the sales price and the future repurchase price is recorded as an adjustment to net investment income. During the period between the sale and repurchase, the Company will not be entitled to receive interest and principal payments on the securities sold. Losses may arise from changes in the value of the securities or if the counterparty enters bankruptcy proceedings or becomes insolvent. In such cases, the Company’s right to repurchase the security may be restricted. Amounts owed to brokers under these arrangements are included as a liability in repurchase agreements.
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. The Company does not enter into these types of transactions for liquidity purposes, but rather for yield enhancement on its investment portfolio. The borrower can return and the Company can request the loaned securities be returned at any time. The Company maintains ownership of the securities at all times and is entitled to receive from the borrower any payments for interest received on such securities during the loan term. Securities lending transactions are accounted for as secured borrowings. The securities on loan are included within bonds and short-term investments in the accompanying Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus. 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. The Company generally requires initial cash collateral in an amount greater than or equal to 102% of the fair value of domestic securities loaned and 105% of foreign securities loaned. Such collateral is used to replace the securities loaned in event of default by the borrower. Some cash collateral is reinvested in short-term repurchase agreements which are also collateralized by U.S. Government or U.S. Government Agency securities. Reinvested cash collateral is reported in securities lending reinvested collateral assets, with a corresponding liability in payable for securities lending. Collateral that cannot be sold or repledged is excluded from the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus.
• | The Company’s OTTI accounting policy requires that a decline in the value of a bond below its cost or amortized cost basis be assessed to determine if the decline is other-than-temporary. An OTTI is recorded (a) if it is probable that the Company will be unable to collect all amounts due according to the contractual terms in effect at the date of acquisition, (b) if the Company has the intent to sell the investment or (c) fornon-interest related declines in value and where the Company does not have the intent and ability at the reporting date, to hold the bond until its recovery. Management considers a wide range of factors, as described below, regarding the bond issuer and uses its best judgment in evaluating the cause of the decline in its estimated fair value and in assessing the prospects for near-term recovery. Inherent in management’s evaluation of the bond are assumptions and estimates about the operations and ability to generate future cash flows. While all available information is taken into account, it is difficult to predict the ultimate recoverable amount from a distressed or impaired bond. |
Considerations used by the Company in the impairment evaluation process include, but are not limited to, the following:
• | The extent to which estimated fair value is below cost; |
• | Whether the decline in fair value is attributable to specific adverse conditions affecting a particular instrument, its issuer, an industry or geographic area; |
• | The length of time for which the estimated fair value has been below cost; |
• | Downgrade of a bond investment by a credit rating agency; |
• | Deterioration of the financial condition of the issuer; |
• | The payment structure of the bond investment and the likelihood of the issuer being able to make payments in the future; and |
• | Whether dividends have been reduced or eliminated or scheduled interest payments have not been made. |
For loan-backed and structured securities, if management does not intend to sell the bond and has the intent and ability to hold the bond until recovery of its amortized cost basis, but the present value of the cash flows expected to be collected (discounted at the effective interest rate implicit in the bond prior to impairment) is less than the amortized cost basis of the bond (referred to as thenon-interest loss portion), an OTTI is considered to have occurred. In this instance, total OTTI is bifurcated into two components: the amount related to thenon-interest loss is recognized in current period earnings through realized capital gains (losses); and the amount attributed to other factors does not have any financial impact and is disclosed only in the notes to the statutory financial statements. The calculation of expected cash flows utilized during the impairment evaluation process are determined using judgment and the best information available to the Company including default rates, credit ratings, collateral characteristics and current levels of subordination.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
For bonds not backed by other loans or assets, if management does not intend to sell the bond and has the intent and ability to hold, but does not expect to recover the entire cost basis, an OTTI is considered to have occurred. A charge is recorded in net realized capital gains (losses) equal to the difference between the fair value and cost or amortized cost basis of the bond. After the recognition of an OTTI, the bond is accounted for as if it had been purchased on the measurement date of the OTTI, with an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in net income. The difference between the new amortized cost basis and the expected future cash flows is accreted into net investment income. The Company continues to estimate the present value of cash flows expected to be collected over the life of the bond.
Fair value
Certain assets and liabilities are recorded at fair value on the Company’s Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus. The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company categorizes its assets and liabilities measured at fair value into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The Company’s assets and liabilities have been categorized based upon the following fair value hierarchy:
• | Level 1 inputs which are utilized for separate account assets and liabilities, utilize observable, quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Financial assets utilizing Level 1 inputs include certain mutual funds. |
• | Level 2 inputs utilize other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs, which are utilized for general and separate account assets and liabilities, include quoted prices for similar assets and liabilities in active markets and inputs, other than quoted prices, that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. The fair values for some Level 2 securities are obtained from pricing services. The inputs used by the pricing services are reviewed at least quarterly or when the pricing vendor issues updates to its pricing methodology. For bond and separate account assets and liabilities, inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads,two-sided markets, benchmark securities, bids, evaluated bids, offers and reference data including market research publications. Additional inputs utilized for assets and liabilities classified as Level 2 are: |
○ | Derivative instruments - trading activity, swap curves, credit spreads, currency volatility, net present value of cash flows and news sources. |
○ | Separate account assets and liabilities - various index data and news sources, amortized cost (which approximates fair value), trading activity, swap curves, credit spreads, recovery rates, restructuring, net present value of cash flows and quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. |
• | Level 3 inputs are unobservable and include situations where there is little, if any, market activity for the asset or liability. In general, the prices of Level 3 securities are obtained from single broker quotes and internal pricing models. If the broker’s inputs are largely unobservable, the valuation is classified as a Level 3. Broker quotes are validated through an internal analyst review process, which includes validation through known market conditions and other relevant data, as noted below. Internal models are usually cash flow based utilizing characteristics of the underlying collateral of the security such as default rate and other relevant data. Inputs utilized for securities classified as Level 3 are as follows: |
○ | Corporate debt securities - unadjusted single broker quotes which may be in an illiquid market or otherwise deemed unobservable. |
The fair value of certain investments in the separate accounts and limited partnerships are estimated using net asset value per share as a practical expedient, and are excluded from the fair value hierarchy levels in Note 5. These net asset values are based on the fair value of the underlying investments, less liabilities.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability
Overall, transfers between levels are attributable to a change in the observability of inputs. Assets are transferred to a lower level in the hierarchy when a significant input cannot be corroborated with market observable data. This may occur when market activity decreases and underlying inputs cannot be observed, current prices are not available, and/or when there are significant variances in quoted prices, thereby affecting transparency. Assets are transferred to a higher level in the hierarchy when circumstances change such that a significant input can be corroborated with market observable data. This may be due to a significant increase in market activity including recent trades, a specific event, or one or more significant input(s) becoming observable. All transfers between levels are recognized at the beginning of the reporting period in which the transfer occurred. There were no transfers during the year.
The policies and procedures utilized to review, account for, and report on the value and level of the Company’s securities were determined and implemented by the Finance division. The Investments division is responsible for the processes related to security purchases and sales and provides valuation and leveling input to the Finance division when necessary. Both divisions within the Company have worked in conjunction to establish thorough pricing, review, approval, accounting, and reporting policies and procedures around the securities valuation process.
In some instances, securities are priced using external broker quotes. In most cases, when broker quotes are used as pricing inputs, more than one broker quote is obtained. External broker quotes are reviewed internally by comparing the quotes to similar securities in the public market and/or to vendor pricing, if available. Additionally, external broker quotes are compared to market reported trade activity to ascertain whether the price is reasonable, reflective of the current market prices, and takes into account the characteristics of the Company’s securities.
Derivative financial instruments
The Company enters into derivative transactions which include the use of interest rate swaps, interest rate swaptions, cross-currency swaps, foreign currency forwards, U.S. government treasury futures contracts, Eurodollar futures contracts, futures on equity indices and interest rate swap futures. The Company uses these derivative instruments to manage various risks, including interest rate and foreign currency exchange rate risk associated with its invested assets and liabilities. Derivative instruments are not used for speculative reasons. Certain of the Company’sover-the-counter (“OTC”) derivatives are cleared and settled through a central clearing counterparty while others are bilateral contracts between the Company and a counterparty.
Derivatives are reported as other invested assets or other liabilities. Although some derivatives are executed under a master netting arrangement, the Company does not offset in the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus the carrying value of those derivative instruments and the related cash collateral or net derivative receivables and payables executed with the same counterparty under the same master netting arrangement. Derivatives that qualify for hedge accounting treatment are valued using the valuation method (either amortized cost or fair value) consistent with the underlying hedged asset or liability. At inception of a derivative transaction, the hedge relationship and risk management objective is documented and the designation of the derivative is determined based on specific criteria of the transaction. Derivatives where hedge accounting is either not elected, or that are not eligible for hedge accounting, are stated at fair value with changes in fair value recognized in unassigned surplus in the period of change. Investment gains and losses generally result from the termination of derivative contracts prior to expiration and are generally recognized in net income and may be subject to IMR.
The Company uses derivative financial instruments for risk management purposes associated with certain invested assets and policy liabilities. Derivatives are used to (a) hedge the economic effects of interest rate and stock market movements on the Company’s guaranteed lifetime withdrawal benefit (“GLWB”) liability, (b) hedge the economic effect of a large increase in interest rates on the Company’s general account life insurance, group pension liabilities and certain separate account life insurance liabilities, (c) hedge the economic risks of other transactions such as future asset acquisitions or dispositions, the timing of liability pricing, currency risks onnon-U.S. dollar denominated assets, and (d) convert floating rate assets or debt obligations to fixed rate assets or debt obligations for asset/liability management purposes.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The Company controls the credit risk of its derivative contracts through credit approvals, limits, monitoring procedures and in many cases, requiring collateral. The Company’s exposure is 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.
Derivatives in a net asset position may have cash or securities pledged as collateral to the Company in accordance with the collateral support agreements with the counterparty. This collateral is held in a custodial account for the benefit of the Company. Unrestricted cash collateral is included in other assets and the obligation to return it is included in other liabilities. The cash collateral is reinvested in a government money market fund. Cash collateral pledged by the Company is included in other assets.
The Company may purchase a financial instrument that contains a derivative embedded in the financial instrument. Contracts that do not in their entirety meet the definition of a derivative instrument, may contain “embedded” derivative instruments implicit or explicit terms that affect some or all of the cash flows or the value of other exchanges required by the contract in a manner similar to a derivative instrument. An embedded derivative instrument shall not be separated from the host contract and accounted for separately as a derivative instrument.
Goodwill
Goodwill, resulting from acquisitions of subsidiaries that are reported in common stock and other invested assets, is amortized to unrealized capital gains/(losses) over the period in which the Company benefits economically, not to exceed ten years. Goodwill resulting from assumption reinsurance is reported in goodwill and is amortized to other insurance expenses over the period in which the Company benefits economically, not to exceed ten years. Admissible goodwill is limited in the aggregate to 10% of the Company’s adjusted capital and surplus. The Company tests goodwill for impairment annually or more frequently if events or circumstances indicate that there may be justification for conducting an interim test. If the carrying value of goodwill exceeds its fair value, the excess is recognized as impairment and recorded as a realized loss in the period in which the impairment is identified. There were no impairments of goodwill recognized during the years ended December 31, 2018 and 2017.
Cash value of company owned life insurance
The Company is the owner and beneficiary of life insurance policies which are included in Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus at their cash surrender values. At December 31, 2018, the investments underlying variable life insurance policies utilize various fund structures, with underlying investment characteristics of 8% equity and 92% fixed income.
Net investment income
Interest income from bonds is recognized when earned. Interest income on contract loans is recognized in net investment income at the contract interest rate when earned. All investment income due and accrued with amounts that are deemed uncollectible or that are over 90 days past due, including mortgage loans in default (“in process of foreclosure”), is not included in investment income. Amounts over 90 days past due arenon-admitted assets and are recorded as a reduction to unassigned surplus. Real estate due and accrued income is excluded from net investment income if its collection is uncertain.
Net realized capital gains (losses)
Realized capital gains and losses are reported as a component of net income and are determined on a specific identification basis. Interest-related gains and losses are primarily subject to IMR, whilenon-interest related gains and losses are primarily subject to AVR. Realized capital gains and losses also result from the termination of derivative contracts prior to expiration and may be subject to IMR.
Policy reserves
Life insurance and annuity policy reserves with life contingencies are computed on the basis of statutory mortality and interest requirements and without consideration for withdrawals. Annuity contract reserves without life contingencies are computed on the basis of statutory interest requirements.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Policy reserves for life insurance are valued in accordance with the provision of applicable statutory regulations. Life insurance reserves are determined principally using the Commissioner’s Reserve Valuation Method, using the statutory mortality and interest requirements, without consideration for withdrawals. Some policies contain a surrender value in excess of the reserve as legally computed. This excess is calculated and recorded on apolicy-by-policy basis.
Premium stabilization reserves are calculated for certain policies to reflect the Company’s estimate of experience refunds and interest accumulations on these policies. The reserves are invested by the Company. The income earned on these investments is accumulated in this reserve and is used to mitigate future premium rate increases for such policies.
Policy reserves ceded to other insurance companies are recorded as a reduction of the reserve liabilities. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies.
Policy and contract claims include provisions for reported life and health claims in process of settlement, valued in accordance with the terms of the related policies and contracts, as well as provisions for claims incurred but not reported based primarily on prior experience of the Company. As such, amounts are estimates, and the ultimate liability may differ from the amount recorded. Any changes in estimates will be reflected in the results of operations when additional information becomes known.
The liabilities for health claim reserves are determined using historicalrun-out rates, expected loss ratios and statistical analysis. The Company provides for significant claim volatility in areas where experience has fluctuated. The liabilities represent estimates of the ultimate net cost of all reported and unreported claims which are unpaid atyear-end. Those estimates are subject to considerable variability in claim severity and frequency. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations.
Premium, fee income and expenses
Life insurance premiums are recognized when due. Annuity considerations are recognized as revenue when received. Accident and health premiums are earned ratably over the terms of the related insurance and reinsurance contracts or policies. Life and accident and health insurance premiums received in advance are recorded as a liability and recognized as income when the premiums become earned. Fees from assets under management, assets under administration, shareholder servicing, mortality and expense risk charges, administration and record-keeping services and investment advisory services are recognized when earned in fee income or other income. Expenses incurred in connection with acquiring new insurance business, including acquisition costs such as sales commissions, are charged to operations as incurred.
Income taxes
The Company is included in the consolidated federal income tax return of Lifeco U.S. The federal income tax expense reported in the Statutory Statements of Operations represent income taxes provided on income that is currently taxable, excluding tax on net realized capital gains and losses. A net deferred tax asset is included in the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus which is recorded using the asset and liability method in which deferred tax assets and liabilities are recorded for expected future tax consequences of events that have been recognized in either the Company’s statutory financial statements or tax returns. Deferred income tax assets are subject to limitations prescribed by statutory accounting principles. The change in deferred income taxes is treated as a component of the change in unassigned funds.
Changes in Accounting Principles
In 2009, the NAIC introduced Principle-Based Reserving (“PBR”) as a new method for calculating life insurance policy reserves. In cases where the PBR reserve is higher, it will replace the historic formulaic measure with one that more accurately reflects the risks of highly complex products. PBR is effective for 2017; however, companies are permitted to delay implementation until January 1, 2020. The Company will defer implementation for life and fixed annuity contracts until January 1, 2020 and is currently evaluating impact of adoption of PBR on its statutory financial statements.
In 2018, the Statutory Accounting Principles Working Group adopted, as final, a new SSAP No. 108,Derivatives Hedging Variable Annuity Guarantees, and a corresponding Issue Paper No. 159,Special Accounting for Limited Derivatives. The new
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
SSAP, which prescribes guidance for derivatives that hedge interest rate risk of variable annuity guarantees, was adopted with an effective date of January 1, 2020, with early adoption permitted as of January 1, 2019. The Company is currently evaluating impact of adoption of this elective guidance on its statutory financial statements.
In the normal course of business the Company enters into agreements with related parties whereby it provides and/or receives record-keeping services, investment advisory services, andtax-related services, as well as corporate support services which include general and administrative services, information technology services, sales and service support and marketing services. The following table presents revenue earned, expenses incurred and expense reimbursement from insurance andnon-insurance related parties for services provided and/or received pursuant to the service agreements. These amounts, in accordance with the terms of the contracts, are based upon market price, estimated costs incurred or resources expended as determined by number of policies, certificatesin-force, administered assets or other similar drivers.
Year Ended December 31, | Financial | |||||||||||||||||
Description | Related party | 2018 | 2017 | 2016 | statement line | |||||||||||||
Provides corporate support service | Insurance affiliates: Great-West Life & Annuity Insurance Company of New York (“GWL&A NY”)(1), Great-West Life & Annuity Insurance Company of South Carolina (“GWSC”)(1),The Canada Life Assurance Company (“CLAC”)(2) and Great-West Life Assurance Company (“Great-West Life”)(2) | $ | (15,522 | ) | $ | (14,610 | ) | $ | (14,895 | ) | | Other insurance benefits and expenses | | |||||
Non-insurance affiliates: FASCore, LLC (“FASCore”)(1), Advised Assets Group, LLC (“AAG”)(1), Great-West Capital Management, LLC (“GWCM”)(1), Great-West Trust Company, LLC (“GWTC”)(1), GWFS Equities, Inc. (“GWFS”)(1), Great-West Financial Retirement Plan Services (“Great-West RPS”)(1), Emjay, Inc.(1), MAM Holding Inc.(2) and Putnam(3) | (142,424 | ) | (113,504 | ) | (102,698 | ) | ||||||||||||
Total | (157,946 | ) | (128,114 | ) | (117,593 | ) | ||||||||||||
Receives corporate support services | Insurance affiliates: CLAC( 1) and Great-West Life(1) | 1,711 | 1,966 | 1,999 | | Other insurance | | |||||||||||
Non-insurance affiliates: Putnam(2) and Great West Global(2) | 3,381 | 3,128 | 5,922 | | benefits and expenses | | ||||||||||||
Total | 5,092 | 5,094 | 7,921 | |||||||||||||||
Provides marketing, distribution and administrative services to certain underlying funds and/or mutual funds | Non-insurance affiliate: GWFS(1) | 198,976 | 202,880 | 203,288 | | Other income | | |||||||||||
Provides record-keeping services | Non-insurance affiliates: GWTC(1) | 38,200 | 30,517 | 21,110 | | Other income | | |||||||||||
Non-insurance related party: Great-West Funds(4) | 65,281 | 65,743 | 57,867 | |||||||||||||||
Total | 103,481 | 96,260 | 78,977 | |||||||||||||||
Receives record-keeping services | Insurance affiliate: GWL&A NY(1) | (2,551 | ) | (2,423 | ) | (2,096 | ) | | Other income | | ||||||||
Non-insurance affiliates: FASCore(1)and GWTC(1) | (342,803 | ) | (316,923 | ) | (291,945 | ) | ||||||||||||
Total | (345,354 | ) | (319,346 | ) | (294,041 | ) | ||||||||||||
Receives custodial services | Non-insurance affiliate: GWTC(1) | (12,410 | ) | (11,854 | ) | (11,125 | ) | | Other income | | ||||||||
Receives reimbursement from tax sharing indemnification related to state and local tax liabilities | Non-insurance affiliate: Putnam(3) | 9,140 | 9,611 | 12,261 | | Other income | |
(1) A wholly-owned subsidiary of GWL&A
(2) An indirect wholly-owned subsidiary of Lifeco
(3) A wholly-owned subsidiary of Lifeco U.S.
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
(4) Anopen-end management investment company, a related party of GWL&A
The Company’s separate accounts invest in shares of Great-West Funds, Inc. and Putnam Funds, which are affiliates of the Company and shares of othernon-affiliated mutual funds and government and corporate bonds. The Company’s separate accounts include mutual funds or other investment options that purchase guaranteed interest annuity contracts issued by the Company. During the years ended December 31, 2018, 2017 and 2016, these purchases totaled $169,857, $292,774 and $183,365 respectively. As the general account investment contracts are also included in the separate account balances in the accompanying statutory statements of admitted assets, liabilities, capital and surplus, the Company has included the separate account assets and liabilities of $284,278 and $335,311 at December 31, 2018 and 2017, respectively, which is also included in the assets and liabilities of the general account at those dates.
The following table summarizes amounts due from parent and affiliates:
December 31, | ||||||||||||
Related party | Indebtedness | Due date | 2018 | 2017 | ||||||||
GWFS(1) | On account | On demand | $ | 34,394 | $ | 37,770 | ||||||
CLAC(2) | On account | On demand | — | 20,063 | ||||||||
GWTC(1) | On account | On demand | 5,489 | 4,008 | ||||||||
GWCM(1) | On account | On demand | 1,367 | 2,179 | ||||||||
AAG(1) | On account | On demand | 3,088 | 994 | ||||||||
GWSC(1) | On account | On demand | 1,418 | 878 | ||||||||
Putnam(3) | On account | On demand | 4,027 | — | ||||||||
Great-West RPS(1) | On account | On demand | 324 | 595 | ||||||||
Other related party receivables | On account | On demand | — | 868 | ||||||||
|
|
|
|
|
| |||||||
Total | $ | 50,107 | $ | 67,355 | ||||||||
|
|
|
|
|
| |||||||
(1) A wholly-owned subsidiary of GWL&A (2) An indirect wholly-owned subsidiary of Lifeco (3) A wholly-owned subsidiary of Lifeco U.S.
The following table summarizes amounts due to parent and affiliates: | ||||||||||||
December 31, | ||||||||||||
Related party | Indebtedness | Due date | 2018 | 2017 | ||||||||
FASCore(1) | On account | On demand | $ | 35,385 | $ | 46,371 | ||||||
Putnam(3) | On account | On demand | 770 | 3,432 | ||||||||
CLAC(2) | On account | On demand | 4,032 | — | ||||||||
Other related party payables | On account | On demand | 1,548 | 2,278 | ||||||||
|
|
|
|
|
| |||||||
Total | $ | 41,735 | $ | 52,081 | ||||||||
|
|
|
|
|
|
(1) A wholly-owned subsidiary of GWL&A
(2) An indirect wholly-owned subsidiary of Lifeco
(3) A wholly-owned subsidiary of Lifeco U.S.
Included in current federal income taxes recoverable at December 31, 2018 and 2017 is $72,188 and $17,456, respectively, of income tax receivable from Lifeco U.S. related to the consolidated income tax return filed by Lifeco U.S.
The Company (paid) received cash payments of $(42,577) and $171 from its subsidiary, GWSC, in 2018 and 2017, respectively, for the utilization of GWSC’s operating loss carryforward amounts under the terms of its tax sharing agreement. Additionally, during the years ended December 31, 2018, 2017 and 2016, the Company received interest income of $2,527, $3,044 and $2,733, respectively, from GWSC relating to the tax sharing agreement.
During the year ended December 31, 2018, the Company received dividends and return of capital of $106,000 and $680, respectively, from its subsidiaries, the largest being $42,000 from AAG. During the year ended December 31, 2017, the Company received dividends and return of capital of $82,500 and $1,150, respectively, from its subsidiaries, the largest being $35,000 from FASCore.
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Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
During the years ended December 31, 2018 and 2017, the Company paid cash dividends to GWL&A Financial in the amounts of $152,295 and $145,301, respectively.
The Company and GWL&A NY have an agreement whereby the Company has committed to provide GWL&A NY financial support related to the maintenance of adequate regulatory surplus and liquidity.
Investments in bonds consist of the following:
December 31, 2018 | ||||||||||||||||
Book/adjusted carrying value | Gross unrealized gains | Gross unrealized losses | Fair value | |||||||||||||
U.S. government | $ | 6,306 | $ | 926 | $ | 22 | $ | 7,210 | ||||||||
U.S. states, territories and possessions | 1,025,470 | 91,508 | 672 | 1,116,306 | ||||||||||||
Political subdivisions of states and territories | 842,211 | 63,945 | 2,034 | 904,122 | ||||||||||||
Special revenue and special assessments | 687 | 4 | — | 691 | ||||||||||||
Industrial and miscellaneous | 12,849,382 | 237,900 | 321,254 | 12,766,028 | ||||||||||||
Parent, subsidiaries and affiliates | 15,102 | — | — | 15,102 | ||||||||||||
Hybrid securities | 234,411 | 77 | 31,209 | 203,279 | ||||||||||||
Loan-backed and structured securities | 5,680,549 | 91,517 | 96,761 | 5,675,305 | ||||||||||||
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|
|
|
|
|
|
|
|
|
|
| |||||
Total bonds | $ | 20,654,118 | $ | 485,877 | $ | 451,952 | $ | 20,688,043 | ||||||||
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|
|
|
|
|
|
|
|
|
| |||||
December 31, 2017 | ||||||||||||||||
Book/adjusted carrying value | Gross unrealized gains | Gross unrealized losses | Fair value | |||||||||||||
U.S. government | $ | 11,547 | $ | 1,603 | $ | 12 | $ | 13,138 | ||||||||
U.S. states, territories and possessions | 1,054,936 | 130,027 | 123 | 1,184,840 | ||||||||||||
Political subdivisions of states and territories | 949,988 | 89,898 | 1,486 | 1,038,400 | ||||||||||||
Special revenue and special assessments | 1,993 | 62 | — | 2,055 | ||||||||||||
Industrial and miscellaneous | 12,536,852 | 537,262 | 60,617 | 13,013,497 | ||||||||||||
Parent, subsidiaries and affiliates | 19,912 | — | — | 19,912 | ||||||||||||
Hybrid securities | 236,060 | 6,354 | 8,213 | 234,201 | ||||||||||||
Loan-backed and structured securities | 5,133,574 | 168,214 | 30,288 | 5,271,500 | ||||||||||||
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|
|
|
|
|
|
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|
|
| |||||
Total bonds | $ | 19,944,862 | $ | 933,420 | $ | 100,739 | $ | 20,777,543 | ||||||||
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|
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|
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|
|
The book/adjusted carrying value and estimated fair value of bonds and assets receiving bond treatment, 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.
December 31, 2018 | ||||||||
Book/adjusted carrying value | Fair value | |||||||
Due in one year or less | $ | 767,254 | $ | 777,131 | ||||
Due after one year through five years | 3,834,629 | 3,863,897 | ||||||
Due after five years through ten years | 6,883,504 | 6,803,249 | ||||||
Due after ten years | 3,527,628 | 3,607,680 | ||||||
Loan-backed and structured securities | 5,670,623 | 5,665,599 | ||||||
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|
|
|
| |||
Total bonds | $ | 20,683,638 | $ | 20,717,556 | ||||
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|
|
Loan-backed and structured securities include those issued by U.S. government and U.S. agencies.
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Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The following table summarizes information regarding the sales of securities:
Years ended December 31, | ||||||||||||
2018 | 2017 2016 | |||||||||||
Proceeds from sales | $ | 12,788,008 | $ | 17,492,392 | $ | 23,931,241 | ||||||
Gross realized gains from sales | 32,672 | 34,506 | 80,975 | |||||||||
Gross realized losses from sales | 30,960 | 56,354 | 34,646 |
Unrealized losses on bonds
The following tables summarize gross unrealized investment losses including thenon-credit-related portion of OTTI losses, by class of investment:
December 31, 2018 | ||||||||||||||||||||||||
Less than twelve months | Twelve months or longer | Total | ||||||||||||||||||||||
Bonds: | Fair value | Unrealized loss and OTTI | Fair value | Unrealized loss and OTTI | Fair value | Unrealized loss and OTTI | ||||||||||||||||||
U.S. government | $ | 116 | $ | 4 | $ | 818 | $ | 19 | $ | 934 | $ | 23 | ||||||||||||
U.S. states, territories and possessions | 42,429 | 360 | 11,365 | 312 | 53,794 | 672 | ||||||||||||||||||
Political subdivisions of states and territories | 103,774 | 1,115 | 28,604 | 919 | 132,378 | 2,034 | ||||||||||||||||||
Industrial and miscellaneous | 6,334,837 | 235,993 | 2,763,614 | 201,312 | 9,098,451 | 437,305 | ||||||||||||||||||
Hybrid securities | 104,167 | 13,710 | 88,517 | 17,498 | 192,684 | 31,208 | ||||||||||||||||||
Loan-backed and structured securities | 2,462,938 | 46,794 | 1,568,844 | 53,417 | 4,031,782 | 100,211 | ||||||||||||||||||
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|
|
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|
|
|
|
|
|
| |||||||
Total bonds | $ | 9,048,261 | $ | 297,976 | $ | 4,461,762 | $ | 273,477 | $ | 13,510,023 | $ | 571,453 | ||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total number of securities in an unrealized loss position | 815 | 475 | 1,290 | |||||||||||||||||||||
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|
|
|
|
|
|
|
| ||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Less than twelve months | Twelve months or longer | Total | ||||||||||||||||||||||
Bonds: | Fair value | Unrealized loss and OTTI | Fair value | Unrealized loss and OTTI | Fair value | Unrealized loss and OTTI | ||||||||||||||||||
U.S. government | $ | 860 | $ | 12 | $ | — | $ | — | $ | 860 | $ | 12 | ||||||||||||
U.S. states, territories and possessions | 11,794 | 125 | — | — | 11,794 | 125 | ||||||||||||||||||
Political subdivisions of states and territories | 13,114 | 56 | 43,949 | 1,430 | 57,063 | 1,486 | ||||||||||||||||||
Industrial and miscellaneous | 1,911,630 | 17,016 | 1,708,202 | 74,659 | 3,619,832 | 91,675 | ||||||||||||||||||
Hybrid securities | — | — | 106,351 | 8,214 | 106,351 | 8,214 | ||||||||||||||||||
Loan-backed and structured securities | 1,530,747 | 12,379 | 694,016 | 19,586 | 2,224,763 | 31,965 | ||||||||||||||||||
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|
|
|
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|
|
|
|
|
|
| |||||||
Total bonds | $ | 3,468,145 | $ | 29,588 | $ | 2,552,518 | $ | 103,889 | $ | 6,020,663 | $ | 133,477 | ||||||||||||
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|
|
|
|
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|
| |||||||
Total number of securities in an unrealized loss position | 328 | 257 | 585 | |||||||||||||||||||||
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|
|
|
|
|
Bonds -Total unrealized losses and OTTI increased by $437,983, or 328%, from December 31, 2017 to December 31, 2018. The increase in unrealized losses was across all asset classes and reflects higher interest rates at December 31, 2018 compared to December 31, 2017, resulting in lower valuations of these bonds.
Total unrealized losses greater than twelve months increased by $169,588 from December 31, 2017 to December 31, 2018. Industrial and miscellaneous account for 74%, or $201,312, of the unrealized losses and OTTI greater than twelve months at December 31, 2018. The majority of these bonds continue to be designated as investment grade. Management does not have the intent to sell these assets; therefore, an OTTI was not recognized in net income.
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Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Loan-backed and structured securities account for 20%, or $53,417, of the unrealized losses and OTTI greater than twelve months at December 31, 2018. Of the $53,417 of unrealized losses and OTTI over twelve months on loan-backed and structured securities, 99% or $52,708 are on securities which continue to be designated as investment grade. The present value of 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 net income.
Loan-backed and structured securities
The Company had a concentration in loan-backed and structured securities of 19% and 18% of total invested assets at December 31, 2018 and 2017, respectively.
Derivative financial instruments
Derivative transactions are generally entered into pursuant to International Swaps and Derivatives Association (“ISDA”) Master Agreements 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 aggregate fair value, inclusive of accrued income and expense, of derivative instruments with credit-risk-related contingent features that were in a net liability position was $36,177 and $106,038 as of December 31, 2018 and 2017, respectively. The Company had pledged collateral related to these derivatives of $0 and $42,750 as of December 31, 2018 and 2017, respectively, in the normal course of business. If the credit-risk-related contingent features were triggered on December 31, 2018 the fair value of assets that could be required to settle the derivatives in a net liability position was $36,177.
At December 31, 2018 and 2017, the Company had pledged $30,220 and $42,750, respectively, of unrestricted cash collateral to counterparties in the normal course of business, while other counterparties had pledged $71,280 and $14,332 of unrestricted cash collateral to the Company to satisfy collateral netting arrangements, respectively.
At December 31, 2018 and 2017, the Company had pledged U.S. Treasury bills in the amount of $8,197 and $3,215, respectively, with a broker as collateral for futures contracts.
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 and debt obligations from a floating rate to a fixed rate.
Not designated as hedging instruments
The Company enters into certain transactions in which derivatives are hedging an economic risk but hedge accounting is either not elected or the transactions are not eligible for hedge accounting. These derivative instruments include: exchange-traded interest rate swap futures, 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 bonds and forecasted liability pricing.
66
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Foreign currency contracts
Cross-currency swaps and foreign currency forwards 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, some are not eligible for hedge accounting. The Company uses foreign currency forwards to reduce the risk of foreign currency exchange rate changes on proceeds received on sales of foreign denominated debt instruments; however, hedge accounting is not elected.
Equity contracts
The Company uses futures on equity indices to offset changes in GLWB liabilities; however, they are not eligible for hedge accounting.
The following tables summarize derivative financial instruments:
December 31, 2018 | ||||||||||||
Notional amount | Net book/adjusted carrying value (1) | Fair value (2) | ||||||||||
Hedge designation/derivative type: | ||||||||||||
Derivatives designated as hedges: | ||||||||||||
Cash flow hedges: | ||||||||||||
Interest rate swaps | $ | 22,300 | $ | — | $ | 6,248 | ||||||
Cross-currency swaps | 886,018 | 55,808 | 39,109 | |||||||||
|
|
|
|
|
|
|
|
| ||||
Total derivatives designated as hedges | 908,318 | 55,808 | 45,357 | |||||||||
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|
|
|
|
|
|
|
| ||||
Derivatives not designated as hedges: | ||||||||||||
Interest rate swaps | 636,500 | (13,645 | ) | (12,775 | ) | |||||||
Futures on equity indices | 137,829 | 5,920 | (786 | ) | ||||||||
Interest rate futures | 53,000 | 2,276 | 37 | |||||||||
Interest rate swaptions | 194,330 | 173 | 173 | |||||||||
Cross-currency swaps | 573,703 | 26,208 | 24,945 | |||||||||
|
|
|
|
|
|
|
|
| ||||
Total derivatives not designated as hedges | 1,595,362 | 20,932 | 11,594 | |||||||||
|
|
|
|
|
|
|
|
| ||||
Total cash flow hedges, and derivatives not designated as hedges | $ | 2,503,680 | $ | 76,740 | $ | 56,951 | ||||||
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|
|
|
|
|
|
|
|
(1) The book/adjusted carrying value excludes accrued income and expense. The book/adjusted carrying value of all derivatives in an asset position is reported within other invested assets and the book/adjusted carrying value of all derivatives in a liability position is reported within other liabilities in the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus.
(2) The fair value includes accrued income and expense.
67
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
December 31, 2017 | ||||||||||||
Notional amount | Net book/adjusted carrying value | Fair value | ||||||||||
Hedge designation/derivative type: | ||||||||||||
Derivatives designated as hedges: | ||||||||||||
Cash flow hedges: | ||||||||||||
Interest rate swaps | $ | 388,800 | $ | — | $ | 28,725 | ||||||
Cross-currency swaps | 800,060 | 4,710 | (31,358) | |||||||||
|
|
|
|
|
|
|
|
| ||||
Total cash flow hedges | 1,188,860 | 4,710 | (2,633) | |||||||||
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|
|
|
|
|
|
|
| ||||
Derivatives not designated as hedges: | ||||||||||||
Interest rate swaps | 519,100 | (3,911) | (3,911) | |||||||||
Futures on equity indices | 22,074 | 857 | 77 | |||||||||
Interest rate futures | 60,700 | 2,358 | (5) | |||||||||
Interest rate swaptions | 164,522 | 75 | 75 | |||||||||
Cross-currency swaps | 612,733 | (21,279) | (21,279) | |||||||||
|
|
|
|
|
|
|
|
| ||||
Total derivatives not designated as hedges | 1,379,129 | (21,900) | (25,043) | |||||||||
|
|
|
|
|
|
|
|
| ||||
Total cash flow hedges and derivatives not designated as hedges | $ | 2,567,989 | $ | (17,190) | $ | (27,676) | ||||||
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|
|
|
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|
|
The following table presents net unrealized gains/(losses) on derivatives not designated as hedging instruments as reported in the Statutory Statements of Changes in Capital and Surplus:
Net unrealized gain (loss) on derivatives recognized in surplus | ||||||||||||
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||
Interest rate swaps | $ | (8,039) | $ | 130 | $ | (4,901) | ||||||
Interest rate swaptions | 198 | (54) | 196 | |||||||||
Futures on equity indices | 297 | (363) | 531 | |||||||||
Interest rate futures | 159 | 48 | (37) | |||||||||
Cross-currency swaps | 32,525 | (39,021) | 44,541 | |||||||||
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|
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|
|
| ||||||
Total | $ | 25,140 | $ | (39,260) | $ | 40,330 | ||||||
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|
Securities Lending
Securities classified as industrial and miscellaneous with a cost or amortized cost of $47,218 and estimated fair values of $43,425 were on loan under the program at December 31, 2018. There were no securities on loan at December 31, 2017. The Company received cash of $45,102 as collateral at December 31, 2018.
The Company’s securities lending agreements are open agreements meaning the borrower can return and the Company can recall the loaned securities at any time.
The cash collateral received of $45,102 was reinvested into short-term repurchase agreements which are collateralized by U.S. government or U.S. government agency securities and mature in under 30 days.
68
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Dollar Repurchase Agreements
Dollar repurchase agreements with a book/adjusted carrying value of $688,765 at December 31, 2018, was included with bonds in the Statutory Statement of Admitted Assets, Liabilities, Capital and Surplus. At December 31, 2018, the obligation of $664,650 to repurchase the agreements at a later date was recorded in repurchase agreements liabilities. The following table summarizes the securities underlying the dollar repurchase agreements at December 31, 2018:
December 31, 2018 | ||||||||||||
Issuer | Book/adjusted carrying value | Fair value | Maturity | |||||||||
FHLMC | $ | 66,283 | $ | 64,754 | 1/1/2034 | |||||||
FHLMC | 482,628 | 471,162 | 1/1/2049 | |||||||||
FNMA | 35,506 | 34,925 | 1/1/2034 | |||||||||
FNMA | 104,348 | 101,971 | 1/1/2049 | |||||||||
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| |||||||
Total | $ | 688,765 | $ | 672,812 | ||||||||
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|
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|
|
There were no dollar repurchase agreements open at December 31, 2017.
The cash collateral of $664,791 related to the dollar repurchase agreement program at December 31, 2018 was primarily reinvested into investment grade corporate securities with a book/adjusted carrying value of $664,791 and fair value of $657,553, with maturities greater than 3 years.
Reverse Repurchase Agreements
The Company had short-term reverse repurchase agreements with book/adjusted carrying values of $11,200 and $23,200 at December 31, 2018 and December 31, 2017, respectively, with maturities of 2 days to 1 week. The fair value of securities acquired under thetri-party agreement and held on the Company’s behalf was $11,424 and $23,664 at December 31, 2018 and December 31, 2017, respectively.
69
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Restricted Assets
The following tables summarize collateral pledged by the Company and investments on deposit or in trust accounts controlled by various state insurance departments in accordance with statutory requirements:
December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||
Gross (Admitted & Non-admitted) Restricted | Percentage | |||||||||||||||||||||||||||||||||||||||||||
Total General Account (G/A) | G/A Supporting S/A Activity | Total Separate Account (S/A) Restricted Assets | S/A Assets Supporting G/A Activity | Total | Total From Prior Year | Increase/ (Decrease) | Total Non- admitted Restricted | Total Admitted Restricted | Gross (Admitted & Non- admitted) Restricted to Total Assets | Admitted Restricted to Total Admitted Assets | ||||||||||||||||||||||||||||||||||
Restricted Asset Category: | ||||||||||||||||||||||||||||||||||||||||||||
Collateral held under security lending arrangements | $ | 45,102 | $ | — | $ | — | $ | — | $ | 45,102 | $ | — | $ | 45,102 | $ | — | $ | 45,102 | 0.08% | 0.08% | ||||||||||||||||||||||||
Subject to repurchase agreements | — | — | — | — | — | — | — | — | — | 0.00% | 0.00% | |||||||||||||||||||||||||||||||||
Subject to reverse repurchase agreements | 11,200 | — | — | — | 11,200 | 23,200 | (12,000 | ) | — | 11,200 | 0.02% | 0.02% | ||||||||||||||||||||||||||||||||
Subject to dollar repurchase agreements | 688,765 | — | — | — | 688,765 | — | 688,765 | — | 688,765 | 1.23% | 1.23% | |||||||||||||||||||||||||||||||||
On deposit with states | 4,443 | — | — | — | 4,443 | 4,351 | 92 | — | 4,443 | 0.01% | 0.01% | |||||||||||||||||||||||||||||||||
On deposit with other regulatory bodies | 603 | — | — | — | 603 | 627 | (24 | ) | — | 603 | 0.00% | 0.00% | ||||||||||||||||||||||||||||||||
Pledged as collateral not captured in other categories: | ||||||||||||||||||||||||||||||||||||||||||||
Futures margin deposits | 8,197 | — | — | — | 8,197 | 3,388 | 4,809 | — | 8,197 | 0.02% | 0.02% | |||||||||||||||||||||||||||||||||
Other collateral | 5,320 | — | — | — | 5,320 | — | 5,320 | — | 5,320 | 0.01% | 0.01% | |||||||||||||||||||||||||||||||||
Derivative cash collateral | 30,220 | — | — | — | 30,220 | 42,751 | (12,531 | ) | — | 30,220 | 0.05% | 0.05% | ||||||||||||||||||||||||||||||||
Other restricted assets | 1,259 | — | — | — | 1,259 | 228 | 1,031 | — | 1,259 | 0.00% | 0.00% | |||||||||||||||||||||||||||||||||
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| |||||||||||||
Total Restricted Assets | $ | 795,109 | $ | — | $ | — | $ | — | $ | 795,109 | $ | 74,545 | $ | 720,564 | $ | — | $ | 795,109 | 1.42% | 1.43% | ||||||||||||||||||||||||
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December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||
Gross (Admitted & Non-admitted) Restricted | Percentage | |||||||||||||||||||||||||||||||||||||||||||
Total General Account (G/A) | G/A Supporting S/A Activity | Total Separate Account (S/A) Restricted Assets | S/A Assets Supporting G/A Activity | Total | Total From Prior Year | Increase/ (Decrease) | Total Non- admitted Restricted | Total Admitted Restricted | Gross (Admitted & Non- admitted) Restricted to Total Assets | Admitted Restricted to Total Admitted Assets | ||||||||||||||||||||||||||||||||||
Restricted Asset Category: | ||||||||||||||||||||||||||||||||||||||||||||
Subject to reverse repurchase agreements | $ | 23,200 | $ | — | $ | — | $ | — | $ | 23,200 | $ | — | $ | 23,200 | $ | — | $ | 23,200 | 0.000% | 0.000% | ||||||||||||||||||||||||
On deposit with states | 4,351 | — | — | — | 4,351 | 4,350 | 1 | — | 4,351 | 0.000% | 0.000% | |||||||||||||||||||||||||||||||||
On deposit with other regulatory bodies | 627 | — | — | — | 627 | 513 | 114 | — | 627 | 0.000% | 0.000% | |||||||||||||||||||||||||||||||||
Other restricted assets | 228 | — | — | — | 228 | 581 | (353 | ) | — | 228 | 0.000% | 0.000% | ||||||||||||||||||||||||||||||||
Pledged as collateral not captured in other categories: | ||||||||||||||||||||||||||||||||||||||||||||
Futures margin deposits | 3,215 | — | 173 | — | 3,388 | 3,570 | (182 | ) | — | 3,388 | 0.000% | 0.000% | ||||||||||||||||||||||||||||||||
Derivative cash collateral | 42,750 | — | 1 | — | 42,751 | — | 42,751 | — | 42,751 | 0.000% | 0.000% | |||||||||||||||||||||||||||||||||
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Total Restricted Assets | $ | 74,371 | $ | — | $ | 174 | $ | — | $ | 74,545 | $ | 9,014 | $ | 65,531 | $ | — | $ | 74,545 | 0.000% | 0.000% | ||||||||||||||||||||||||
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70
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Net Investment Income
The following table summarizes net investment income:
Years Ended December 31, | ||||||||||||
2018 | 2017 2016 | |||||||||||
Bonds | $ | 822,645 | $ | 817,282 | $ | 787,272 | ||||||
Common stock | 221 | 425 | 633 | |||||||||
Mortgage loans | 169,415 | 164,055 | 151,505 | |||||||||
Real estate | 26,557 | 25,979 | 25,401 | |||||||||
Contract loans | 199,507 | 198,672 | 198,846 | |||||||||
Cash, cash equivalents and short-term investments | 4,749 | 6,556 | 7,030 | |||||||||
Derivative instruments | 16,308 | 16,216 | 10,029 | |||||||||
Other invested assets | 125,821 | 100,134 | 116,701 | |||||||||
Miscellaneous | 1,896 | 4,552 | 1,761 | |||||||||
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| ||||
Gross investment income | 1,367,119 | 1,333,871 | 1,299,178 | |||||||||
Expenses | (59,732 | ) | (66,908 | ) | (63,337 | ) | ||||||
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Net investment income | $ | 1,307,387 | $ | 1,266,963 | $ | 1,235,841 | ||||||
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The amount of interest incurred and charged to investment expense during the years ended December 31, 2018, 2017 and 2016 was $22,070, $29,278 and $31,042, respectively.
The following table summarizes net realized capital gains (losses) on investments net of federal income tax and interest maintenance reserve transfer:
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Net realized capital gains (losses), before federal income tax | $ | 4,905 | $ | (19,270) | $ | 46,048 | ||||||
Less: Federal income tax | 1,030 | (6,745) | 16,117 | |||||||||
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Net realized capital gains (losses), before IMR transfer | 3,875 | (12,525) | 29,931 | |||||||||
Net realized capital gains (losses) transferred to IMR, net of federal income tax of ($1,781), ($7,032) and $16,707, respectively | (6,701) | (13,060) | 31,027 | |||||||||
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Net realized capital gains (losses), net of federal income tax expense (benefit) of $2,811, $287 and ($590), respectively, and IMR transfer | $ | 10,576 | $ | 535 | $ | (1,096) | ||||||
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Concentrations
The Company had the following bond concentrations based on total invested assets:
Concentration by type | ||||
December 31, | ||||
2018 | 2017 | |||
Industrial and miscellaneous | 56% | 56% | ||
Concentration by industry | ||||
December 31, | ||||
2018 | 2017 | |||
Financial services | 14% | 13% | ||
Utilities | 8% | 10% |
71
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Mortgage Loans
The recorded investment of the commercial mortgage loan portfolio categorized as performing was $4,207,611 and $3,872,084 as of December 31, 2018 and 2017, respectively. These mortgages were current as of December 31, 2018 and 2017.
The maximum lending rates for commercial mortgage loans originated during the years ended December 31, 2018 and 2017 were 4.61% and 4.23%, respectively. The minimum lending rates for commercial mortgage loans originated during the years ended December 31, 2018 and 2017 were 3.51% and 3.17%, respectively.
During 2018 and 2017, the maximum percentage of any one loan to the value of security at the time of the loan, exclusive of insured or guaranteed or purchase money mortgages, was 69% and 69%, respectively.
The following table summarizes activity in the commercial mortgage provision allowance for the years ended December 31, 2018 and 2017:
Year ended December 31, | ||||||||
2018 | 2017 | |||||||
Beginning balance | $ | 745 | $ | 2,713 | ||||
Additions charged to operations | — | 157 | ||||||
Direct write-downs charged against the allowances | — | (600 | ) | |||||
Recoveries of amounts previously charged off | — | (1,525 | ) | |||||
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Ending balance | $ | 745 | $ | 745 | ||||
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The following tables present concentrations of the total commercial mortgage portfolio:
Concentration by type | ||||
December 31, | ||||
2018 | 2017 | |||
Multi-family | 37% | 39% | ||
Industrial | 29% | 25% | ||
Office | 17% | 17% | ||
Retail | 10% | 11% | ||
Other | 7% | 8% | ||
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100% | 100% | |||
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Concentration by geographic area | ||||
December 31, | ||||
2018 | 2017 | |||
Pacific | 35% | 36% | ||
East North Central | 18% | 16% | ||
South Atlantic | 14% | 13% | ||
Middle Atlantic | 10% | 11% | ||
Mountain | 9% | 10% | ||
Other | 8% | 8% | ||
West South Central | 6% | 6% | ||
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100% | 100% | |||
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72
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Troubled Debt Restructuring
After being impaired in 2016, a security classified as industrial and miscellaneous was subject to a troubled debt restructuring in August 2017, under which the original security with a recorded investment, after impairments, of $11,710 was extinguished in exchange for new assets. Cash, equities, receivable and debt in the amounts of $1,887, $6,591, $164 and $3,068, respectively, were acquired in full satisfaction of the original debt. The new debt has extended the maturity date from December 30, 2017 to August 1, 2022 and the interest rate increased from 7% to 8%. Upon consummation of the troubled debt restructuring, a total realized capital loss of $7,789 was recorded in the “Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve” line on the Statutory Statements of Operations. There were no payment defaults recognized on previously restructured investments.
The following tables summarize the fair value hierarchy for all financial instruments and invested assets:
Fair Value Measurements at Reporting Date | ||||||||||||||||||||||||||||
Type of financial instrument | December 31, 2018 | |||||||||||||||||||||||||||
Assets: | Aggregate fair value | Admitted assets and liabilities | (Level 1) | (Level 2) | (Level 3) | Net Asset Value (NAV) | Total (All Levels) | |||||||||||||||||||||
Bonds | $ | 20,688,043 | $ | 20,654,118 | $ | — | $ | 20,666,851 | $ | 21,192 | $ | — | $ | 20,688,043 | ||||||||||||||
Common stock | 35,635 | 35,635 | 35,635 | — | — | — | 35,635 | |||||||||||||||||||||
Mortgage loans | 4,176,880 | 4,206,865 | — | 4,176,880 | — | — | 4,176,880 | |||||||||||||||||||||
Real estate | 137,700 | 38,962 | — | — | 137,700 | — | 137,700 | |||||||||||||||||||||
Cash, cash equivalents and short-term investments | 228,997 | 229,003 | 188,283 | 40,714 | — | — | 228,997 | |||||||||||||||||||||
Contract loans | 4,122,637 | 4,122,637 | — | 4,122,637 | — | — | 4,122,637 | |||||||||||||||||||||
Other long-term invested assets | 392,232 | 338,837 | — | 319,299 | 31 | 72,902 | 392,232 | |||||||||||||||||||||
Securities lending collateral assets | 45,102 | 45,102 | — | 45,102 | — | — | 45,102 | |||||||||||||||||||||
Collateral under derivative counterparty collateral agreements | 101,561 | 101,561 | 101,561 | — | — | — | 101,561 | |||||||||||||||||||||
Other collateral | 9,315 | 9,315 | 9,315 | — | — | — | 9,315 | |||||||||||||||||||||
Receivable for securities | 9,654 | 9,654 | — | 9,654 | — | — | 9,654 | |||||||||||||||||||||
Derivative instruments | 114,612 | 115,922 | 66 | 114,546 | — | — | 114,612 | |||||||||||||||||||||
Separate account assets | 24,639,265 | 24,654,916 | 13,236,266 | 10,975,973 | — | 427,026 | 24,639,265 | |||||||||||||||||||||
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| ||||||||
Total assets | $ | 54,701,633 | $ | 54,562,527 | $ | 13,571,126 | $ | 40,471,656 | $ | 158,923 | $ | 499,928 | $ | 54,701,633 | ||||||||||||||
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Liabilities: | ||||||||||||||||||||||||||||
Deposit-type contracts | $ | 196,778 | $ | 189,895 | $ | — | $ | 196,778 | $ | — | $ | — | $ | 196,778 | ||||||||||||||
Commercial paper | 98,859 | 98,859 | — | 98,859 | — | — | 98,859 | |||||||||||||||||||||
Payable under securities lending agreements | 45,102 | 45,102 | — | 45,102 | — | — | 45,102 | |||||||||||||||||||||
Collateral under derivative counterparty collateral agreements | 71,280 | 71,280 | 71,280 | — | — | — | 71,280 | |||||||||||||||||||||
Other collateral | 3,995 | 3,995 | 3,995 | — | — | — | 3,995 | |||||||||||||||||||||
Payable for securities | 11,096 | 11,096 | — | 11,096 | — | — | 11,096 | |||||||||||||||||||||
Derivative instruments | 57,660 | 47,378 | 814 | 56,846 | — | — | 57,660 | |||||||||||||||||||||
Dollar repurchase agreements | 664,650 | 664,650 | — | 664,650 | — | — | 664,650 | |||||||||||||||||||||
Separate account liabilities | 251,806 | 251,806 | 44 | 251,762 | — | — | 251,806 | |||||||||||||||||||||
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Total liabilities | $ | 1,401,226 | $ | 1,384,061 | $ | 76,133 | $ | 1,325,093 | $ | — | $ | — | $ | 1,401,226 | ||||||||||||||
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73
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Fair Value Measurements at Reporting Date | ||||||||||||||||||||||||
Type of financial instrument | December 31, 2017 | |||||||||||||||||||||||
Assets: | Aggregate fair value | Admitted assets and liabilities | (Level 1) | (Level 2) | (Level 3) | Total (All Levels) | ||||||||||||||||||
Bonds | $ | 20,777,543 | $ | 19,944,862 | $ | — | $ | 20,750,605 | $ | 26,938 | $ | 20,777,543 | ||||||||||||
Mortgage loans | 3,858,883 | 3,871,338 | — | 3,858,883 | — | 3,858,883 | ||||||||||||||||||
Real estate | 137,526 | 37,768 | — | — | 137,526 | 137,526 | ||||||||||||||||||
Cash, cash equivalents and short-term investments | 242,084 | 242,084 | 198,869 | 43,215 | — | 242,084 | ||||||||||||||||||
Contract loans | 4,078,669 | 4,078,669 | — | 4,078,669 | — | 4,078,669 | ||||||||||||||||||
Other long-term invested assets | 412,019 | 325,181 | — | 363,198 | 48,821 | 412,019 | ||||||||||||||||||
Collateral under derivative counterparty collateral agreements | 57,420 | 57,420 | 57,420 | — | — | 57,420 | ||||||||||||||||||
Receivable for securities | 23,760 | 23,135 | — | 23,760 | — | 23,760 | ||||||||||||||||||
Derivative instruments | 78,431 | 68,439 | 98 | 78,333 | — | 78,431 | ||||||||||||||||||
Separate account assets | 28,222,102 | 28,197,126 | 16,058,519 | 12,163,583 | — | 28,222,102 | ||||||||||||||||||
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Total assets | $ | 57,888,437 | $ | 56,846,022 | $ | 16,314,906 | $ | 41,360,246 | $ | 213,285 | $ | 57,888,437 | ||||||||||||
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Liabilities: | ||||||||||||||||||||||||
Deposit-type contracts | $ | 219,909 | $ | 206,134 | $ | — | $ | 219,909 | $ | — | $ | 219,909 | ||||||||||||
Commercial paper | 99,886 | �� | 99,886 | — | 99,886 | — | 99,886 | |||||||||||||||||
Collateral under derivative counterparty collateral agreements | 14,332 | 14,332 | 14,332 | — | — | 14,332 | ||||||||||||||||||
Payable for securities | 2,364 | 2,364 | — | 2,364 | — | 2,364 | ||||||||||||||||||
Derivative instruments | 106,106 | 88,843 | 26 | 106,080 | — | 106,106 | ||||||||||||||||||
Separate account liabilities | 409,275 | 409,275 | 9 | 409,266 | — | 409,275 | ||||||||||||||||||
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Total liabilities | $ | 851,872 | $ | 820,834 | $ | 14,367 | $ | 837,505 | $ | — | $ | 851,872 | ||||||||||||
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Bonds and common stock
The fair values for bonds and common stock are generally based upon evaluated prices from independent pricing services. In cases where these prices are not readily available, fair values are estimated by the Company. To determine estimated fair value for these instruments, the Company generally utilizes discounted cash flow models with market observable pricing inputs such as spreads, average life, and credit quality. 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.
Mortgage loans
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.
Real estate
The estimated fair value for real estate is based on the unadjusted appraised value which includes factors such as comparable property sales, property income analysis, and capitalization rates.
74
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Cash, cash equivalents, short-term investments, collateral receivable and payable under securities lending agreements, receivable and payable for securities, dollar repurchase agreements and commercial paper
The amortized cost of cash, cash equivalents, short-term investments, collateral receivable and payable under securities lending agreements, receivable and payable for securities, dollar repurchase agreements and commercial paper is a reasonable estimate of fair value due to their short-term nature and the high credit quality of the issuers, counterparties and obligor. Cash equivalent investments also include money market funds that are valued using unadjusted quoted prices in active markets.
Contract loans
The Company believes the fair value of contract loans approximates book value. Contract loans are funds provided to contract holders in return for a claim on the contract. The funds provided are limited to the cash surrender value of the underlying contract. The nature of contract loans is to have a negligible default risk as the loans are fully collateralized by the value of the contract. Contract loans do not have a stated maturity and the balances and accrued interest are repaid either by the contractholder or with proceeds from the contract. Due to the collateralized nature of contract loans and unpredictable timing of repayments, the Company believes the fair value of contract loans approximates carrying value.
Other long-term invested assets
The fair values of other long-term invested assets are based on the specific asset type. Other invested assets that are held as bonds, such as surplus notes, are primarily valued the same as bonds. Forlow-income housing tax credits, amortized cost approximates fair value.
Limited partnership interests represent the Company’s minority ownership interests in pooled investment funds. These funds employ varying investment strategies that primarily make private equity investments across diverse industries and geographical focuses. The net asset value, determined using the partnership financial statement reported capital account adjusted for other relevant information, which may impact the exit value of the investments, is used as a practical expedient to estimate fair value. 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. In the absence of permitted sales of its ownership interest, the Company will be redeemed out of the partnership interests through distributions.
Collateral under derivative counterparty collateral agreements and other collateral
Included in other assets is cash collateral received from or pledged to 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
The estimated fair values of OTC derivatives, primarily consisting of cross-currency swaps, interest rate swaps and interest rate swaptions, are the estimated amount 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
Separate account assets and liabilities primarily include investments in mutual funds, unregistered funds, most of which are not subject to redemption restrictions, bonds, and short-term securities. Mutual funds and unregistered funds are recorded at net asset value, which approximates fair value, on a daily basis. The bond and short-term investments are valued in the same manner, and using the same pricing sources and inputs as the bond and short-term investments of the Company.
Deposit-type contracts
Fair values for liabilities under deposit-type insurance contracts are estimated using discounted liability calculations, adjusted to approximate the effect of current market interest rates for the assets supporting the liabilities.
75
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Fair value hierarchy
The following tables present information about the Company’s financial assets and liabilities carried at fair value and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
Fair Value Measurements at Reporting Date | ||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||
Net Asset Value | Total | |||||||||||||||||||
Assets: | (Level 1) | (Level 2) | (Level 3) | (NAV) | (All Levels) | |||||||||||||||
Bonds | ||||||||||||||||||||
Industrial and miscellaneous | $ | — | $ | — | $ | 1,275 | $ | — | $ | 1,275 | ||||||||||
Common stock | ||||||||||||||||||||
Mutual funds | 30,969 | — | — | — | 30,969 | |||||||||||||||
Industrial and miscellaneous | 4,666 | — | — | — | 4,666 | |||||||||||||||
Other invested assets | ||||||||||||||||||||
Limited partnerships | — | — | — | 72,902 | 72,902 | |||||||||||||||
Derivatives | ||||||||||||||||||||
Interest rate swaps | — | 8,964 | — | — | 8,964 | |||||||||||||||
Cross-currency swaps | — | 39,705 | — | — | 39,705 | |||||||||||||||
Interest rate swaptions | — | 173 | — | — | 173 | |||||||||||||||
Separate account assets(1) | 13,212,700 | 9,887,836 | — | 427,026 | 23,527,562 | |||||||||||||||
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Total assets | $ | 13,248,335 | $ | 9,936,678 | $ | 1,275 | $ | 499,928 | $ | 23,686,216 | ||||||||||
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Liabilities: | ||||||||||||||||||||
Derivatives | ||||||||||||||||||||
Interest rate swaps | $ | — | 21,740 | $ | — | $ | — | $ | 21,740 | |||||||||||
Cross-currency swaps | — | 14,760 | — | — | 14,760 | |||||||||||||||
Separate account liabilities(1) | 44 | 251,762 | — | — | 251,806 | |||||||||||||||
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| ||||||
Total liabilities | $ | 44 | $ | 288,262 | $ | — | $ | — | $ | 288,306 | ||||||||||
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(1)Includes only separate account investments which are carried at the fair value of the underlying invested assets or liabilities owned by the separate accounts.
Fair Value Measurements at Reporting Date | ||||||||||||||||
December 31, 2017 | ||||||||||||||||
Total | ||||||||||||||||
Assets: | (Level 1) | (Level 2) | (Level 3) | (All Levels) | ||||||||||||
Bonds | ||||||||||||||||
Industrial and miscellaneous | $ | — | $ | — | $ | 1,297 | $ | 1,297 | ||||||||
States | — | 228 | — | 228 | ||||||||||||
Derivatives | ||||||||||||||||
Interest rate swaps | — | 9,732 | — | 9,732 | ||||||||||||
Cross-currency swaps | — | 20,320 | — | 20,320 | ||||||||||||
Interest rate swaptions | — | 75 | — | 75 | ||||||||||||
Separate account assets (1) | 16,057,788 | 11,172,811 | — | 27,230,599 | ||||||||||||
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| |||||
Total assets | $ | 16,057,788 | $ | 11,203,166 | $ | 1,297 | $ | 27,262,251 | ||||||||
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Liabilities: | ||||||||||||||||
Derivatives | ||||||||||||||||
Interest rate swaps | $ | — | $ | 13,643 | $ | — | $ | 13,643 | ||||||||
Cross-currency swaps | — | 41,599 | — | 41,599 | ||||||||||||
Separate account liabilities(1) | 9 | 409,266 | — | 409,275 | ||||||||||||
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| |||||
Total liabilities | $ | 9 | $ | 464,508 | $ | — | $ | 464,517 | ||||||||
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(1) Include only separate account investments which are carried at the fair value of the underlying invested assets or liabilities owned by the separate accounts.
76
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The following table summarizes the Company’snon-admitted assets:
December 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
Type | Asset | Non- admitted asset | Admitted asset | Asset | Non- admitted asset | Admitted asset | ||||||||||||||||||
Common stock | $ | 131,883 | $ | — | $ | 131,883 | $ | 109,948 | $ | 1,971 | $ | 107,977 | ||||||||||||
Cash, cash equivalents and short-term investments | 229,434 | 431 | 229,003 | 242,084 | — | 242,084 | ||||||||||||||||||
Other invested assets | 607,793 | 1,006 | 606,787 | 569,702 | 3,515 | 566,187 | ||||||||||||||||||
Premiums deferred and uncollected | 25,904 | 109 | 25,795 | 16,232 | 313 | 15,919 | ||||||||||||||||||
Deferred income taxes | 340,645 | 190,148 | 150,497 | 382,188 | 232,873 | 149,315 | ||||||||||||||||||
Due from parent, subsidiaries and affiliate | 94,542 | 44,435 | 50,107 | 110,901 | 43,546 | 67,355 | ||||||||||||||||||
Other prepaid assets | 28,150 | 28,150 | — | 16,478 | 16,478 | — | ||||||||||||||||||
Capitalized internal use software | 58,658 | 58,658 | — | 55,279 | 55,279 | — | ||||||||||||||||||
Furniture, fixtures and equipment | 4,949 | 4,949 | — | 16,182 | 5,196 | 10,986 | ||||||||||||||||||
Reinsurance recoverable | 8,468 | 378 | 8,090 | 7,090 | — | 7,090 | ||||||||||||||||||
Other assets | 234,504 | 2,539 | 231,965 | 152,955 | 553 | 152,402 | ||||||||||||||||||
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| |||||||
Total | $ | 1,764,930 | $ | 330,803 | $ | 1,434,127 | $ | 1,679,039 | $ | 359,724 | $ | 1,319,315 | ||||||||||||
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The following table summarizes the Company’s aggregate Statement of Admitted Assets, Liabilities, Capital and Surplus values of all subsidiary, controlled and affiliated entities (“SCA”), except insurance SCA entities as follows:
December 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
Type | Asset | Non- admitted asset | Admitted asset | Asset | Non- admitted asset | Admitted asset | ||||||||||||||||||
Common stock | $ | 13,544 | $ | — | $ | 13,544 | $ | 15,636 | $ | 1,971 | $ | 13,665 | ||||||||||||
Other invested assets | 143,533 | 975 | 142,558 | 151,318 | 1,610 | 149,708 | ||||||||||||||||||
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Total | $ | 157,077 | $ | 975 | $ | 156,102 | $ | 166,954 | $ | 3,581 | $ | 163,373 | ||||||||||||
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7. Premiums Deferred and Uncollected
The following table summarizes the Company’s ordinary and group life insurance premiums and annuity considerations deferred and uncollected, both gross and net of loading:
December 31, 2018 | December 31, 2017 | |||||||||||||||
Type | Gross | Net of loading | Gross | Net of loading | ||||||||||||
Ordinary new business | $ | 427 | $ | 221 | $ | 226 | $ | 64 | ||||||||
Ordinary renewal business | 31,069 | 25,544 | 20,681 | 16,095 | ||||||||||||
Group life | 32 | 30 | (260 | ) | (240 | ) | ||||||||||
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Total | $ | 31,528 | $ | 25,795 | $ | 20,647 | $ | 15,919 | ||||||||
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8. Business Combination and Goodwill
The Company’s goodwill is the result of two types of transactions.
Goodwill that arises as a result of the acquisition of subsidiary limited liability companies is included in other invested assets in the accompanying Statutory Statement of Admitted Assets, Liabilities and Capital. On August 29, 2014, the Company completed the acquisition of all of the voting equity interests in the J.P. Morgan Retirement Plan Services (“RPS”) large-market
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
recordkeeping business. This transaction was accounted for as a statutory purchase. Goodwill of $51,098 was recorded in other invested assets, which will be amortized over 10 years. At December 31, 2018 and 2017, the Company has $28,955 and $34,065, respectively, of admitted goodwill related to this acquisition. Goodwill amortization of $5,110 was recorded for the years ended December 31, 2018, 2017 and 2016.
Acquisition date | Cost of acquired entity | Original amount of admitted goodwill | Admitted goodwill as of December 31, 2018 | Amount of goodwill amortized for the year ended December 31, 2018 | Admitted goodwill as a book/adjusted carrying | |||||||||||||||
August 29, 2014 | $ | 64,169 | $ | 51,098 | $ | 28,955 | $ | 5,110 | 104.4% |
In addition, goodwill that arises as a result of the acquisition of various assumption reinsurance agreements is included in goodwill in the accompanying Statutory Statement of Admitted Assets, Liabilities and Capital. At December 31, 2018 and 2017, this goodwill was fully amortized. During each of the years ended December 31, 2018, 2017 and 2016, the Company recorded $0, $977 and $12,929, respectively, of goodwill amortization related to these acquisitions.
In the normal course of its business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding risks to other insurance enterprises under excess coverage and coinsurance contracts. The Company retains an initial maximum of $3,500 of coverage per individual life. This initial retention limit of $3,500 may increase due to automatic policy increases in coverage at a maximum rate of $175 per annum, with an overall maximum increase in coverage of $1,000.
Ceded reinsurance contracts do not relieve the Company from its obligations to policyholders. The failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.
The Company assumes risk from approximately 40 insurers and reinsurers by participating in yearly renewable term and coinsurance pool agreements. When assuming risk, the Company seeks to generate revenue while maintaining reciprocal working relationships with these partners as they also seek to limit their exposure to loss on any single life.
Maximum capacity to be retained by the Company is dictated at the treaty level and is monitored annually to ensure the total risk retained on any one life is limited to a maximum retention of $4,500.
The Company did not have any write-offs for uncollectible reinsurance receivables during the years ended December 31, 2018 and 2017 for losses incurred, loss adjustment expenses incurred or premiums earned.
The Company does not have any uncollectible reinsurance, commutation of ceded reinsurance, or certified reinsurer downgraded of status subject to revocation.
Aggregate reserves are computed in accordance with the Commissioner’s Annuity Reserve Valuation Method (“CARVM”) and the Commissioner’s Reserve Valuation Method (“CRVM”), the standard statutory reserving methodologies.
The significant assumptions used to determine the liability for future life insurance benefits are as follows:
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Interest | - Life Insurance | 2.25% to 6.00% | ||
- Annuity Funds | 3.00% to 11.25% | |||
- Disability | 2.50% to 6.00% | |||
Mortality | - Life Insurance | Various valuation tables, primarily including 1941, 1958, 1980 and 2001 Commissioners Standard Ordinary (“CSO”) tables, and American Experience | ||
- Annuity Funds | Various annuity valuation tables, primarily including the GA 1951, 71, 83a and 2012 Individual Annuitant Mortality (“IAM”), Group Annuity Reserve (“GAR”) 94, 1971 and 1983 Group Annuity Mortality (“GAM”), and Annuity 2000 | |||
Morbidity | - Disability | 1970 Intercompany DISA Group Disability Tables |
The Company waives deduction of deferred fractional premiums upon the death of the insured. When surrender values exceed aggregate reserves, excess cash value reserves are held.
Policies issued at premium corresponding to ages higher than the true ages are valued at therated-up ages. Policies providing for payment at death during certain periods of an amount less than the full amount of insurance, being policies subject to liens, are valued as if the full amount is payable without any deduction.
For policies issued with, or subsequently subject to, an extra premium payable annually, an extra reserve is held. The extra premium reserve is the unearned gross extra premium payable during the year if the policies are rated for reasons other than medical impairments. For medical impairments, the extra premium reserve is calculated as the excess of the reserve based on rated mortality over that based on standard mortality. All substandard annuities are valued at their true ages.
At December 31, 2018 and 2017, the Company had $3,904,519 and $4,354,703, respectively of insurance in force for which the gross premiums are less than the net premiums according to the standard valuation set by the Division.
Tabular interest, tabular interest on funds not involving life contingencies and tabular cost have been determined from the basic data for the calculation of aggregate reserves. Tabular less actual reserves released has been determined from basic data for the calculation of aggregate reserves and the actual reserves released.
The withdrawal characteristics of annuity reserves and deposit liabilities are as follows:
December 31, 2018 | ||||||||||||||||||||
General Account | Separate Account with Guarantees | Separate Account Non- guaranteed | Total | Percent of total gross | ||||||||||||||||
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Subject to discretionary withdrawal: | ||||||||||||||||||||
With market value adjustment | $ | 850,240 | $ | — | $ | — | $ | 850,240 | 2.8 | % | ||||||||||
At book value less current surrender charges of 5% or more | 779,760 | — | — | 779,760 | 2.5 | % | ||||||||||||||
At fair value | — | 6,460,894 | 11,311,267 | 17,772,161 | 57.5 | % | ||||||||||||||
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Total with adjustment or at market value | 1,630,000 | 6,460,894 | 11,311,267 | 19,402,161 | 62.8 | % | ||||||||||||||
At book value without adjustment (minimal or no charge adjustment) | 155,150 | — | — | 155,150 | 0.5 | % | ||||||||||||||
Not subject to discretionary withdrawal | 11,355,177 | — | — | 11,355,177 | 36.7 | % | ||||||||||||||
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Total gross | 13,140,327 | 6,460,894 | 11,311,267 | 30,912,488 | 100.0 | % | ||||||||||||||
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Reinsurance ceded | 1,479 | — | — | 1,479 | ||||||||||||||||
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Total, net | $ | 13,138,848 | $ | 6,460,894 | $ | 11,311,267 | $ | 30,911,009 | ||||||||||||
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
December 31, 2017 | ||||||||||||||||||||
General Account | Separate Account with Guarantees | Separate guaranteed | Total | Percent of total gross | ||||||||||||||||
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Subject to discretionary withdrawal: | ||||||||||||||||||||
With market value adjustment | $ | 780,008 | $ | — | $ | — | $ | 780,008 | 2.3% | |||||||||||
At book value less current surrender charges of 5% or more | 716,402 | — | — | 716,402 | 2.1% | |||||||||||||||
At fair value | — | 6,914,918 | 14,390,470 | 21,305,388 | 62.4% | |||||||||||||||
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| |||||||||
Total with adjustment or at market value | 1,496,410 | 6,914,918 | 14,390,470 | 22,801,798 | 66.8% | |||||||||||||||
At book value without adjustment (minimal or no charge adjustment) | 159,104 | — | — | 159,104 | 0.5% | |||||||||||||||
Not subject to discretionary withdrawal | 11,181,649 | — | — | 11,181,649 | 32.7% | |||||||||||||||
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Total gross | 12,837,163 | 6,914,918 | 14,390,470 | 34,142,551 | 100.0% | |||||||||||||||
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Reinsurance ceded | 73,007 | — | — | 73,007 | ||||||||||||||||
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Total, net | $ | 12,764,156 | $ | 6,914,918 | $ | 14,390,470 | $ | 34,069,544 | ||||||||||||
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The following information is obtained from the applicable exhibit in the Company’s December 31, 2018 and 2017 annual statements and related separate account annual statement, both of which are filed with the Division and is provided to reconcile annuity reserves and deposit funds to amounts reported in the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus:
December 31, | ||||||||
2018 | 2017 | |||||||
Life and Accident and Health Annual Statement (net of reinsurance): | ||||||||
Annuities included in aggregate reserve for life policies and contracts | $ | 12,936,341 | $ | 12,544,414 | ||||
Supplementary contracts with life contingencies and other contracts included in aggregate reserve for life policies and contracts | 12,611 | 13,608 | ||||||
Liability for deposit-type contracts | 189,896 | 206,134 | ||||||
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Subtotal - general account | 13,138,848 | 12,764,156 | ||||||
Separate Accounts Annual Statement: | ||||||||
Annuities included in aggregate reserve for life policies and contracts | 17,772,161 | 21,305,388 | ||||||
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Total | $ | 30,911,009 | $ | 34,069,544 | ||||
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11. Liability for Unpaid Claims and Claim Adjustment Expenses
Activity in the accident and health liability for unpaid claims and for claim adjustment expenses included in aggregate reserve for life policies and contracts and accident and health policies, excluding unearned premium reserves, is summarized as follows:
2018 | 2017 | |||||||
Balance, January 1, net of reinsurance of $25,283 and $28,843 | $ | 243,517 | $ | 240,280 | ||||
Incurred related to: | ||||||||
Current year | 38,844 | 53,969 | ||||||
Prior year | 6,634 | (6,728 | ) | |||||
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Total incurred | 45,478 | 47,241 | ||||||
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Paid related to: | ||||||||
Current year | (10,375 | ) | (6,896 | ) | ||||
Prior year | (31,091 | ) | (37,108 | ) | ||||
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Total paid | (41,466 | ) | (44,004 | ) | ||||
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Balance, December 31, net of reinsurance of $19,082 and $25,283 | $ | 247,529 | $ | 243,517 | ||||
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Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Reserves for incurred claims and claim adjustment expenses attributable to insured events of prior years has increased (decreased) by $6,634 and $(6,728) during the years ended December 31, 2018 and 2017, respectively. The change in both years is the result of ongoing analysis of recent claim development trends.
The Company has a commercial paper program that is partially supported by a $50,000 credit facility agreement. The commercial paper has been given a rating ofA-1+ by Standard & Poor’s Ratings Services and a rating ofP-1 by Moody’s Investors Service, each being the highest rating available. The Company’s issuance of commercial paper is not used to fund daily operations and does not have a significant impact on the Company’s liquidity.
The following table provides information regarding the Company’s commercial paper program:
December 31, | ||||||||
2018 | 2017 | |||||||
Face value | $ | 98,859 | $ | 99,886 | ||||
Carrying value | $ | 98,859 | $ | 99,886 | ||||
Interest expense paid | $ | 1,746 | $ | 974 | ||||
Effective interest rate | 2.5% - 2.7% | 1.4% - 1.7% | ||||||
Maturity range (days) | 16 - 25 | 19 - 67 |
The Company utilizes separate accounts to record and account for assets and liabilities for particular lines of business and/or transactions. The Company reported assets and liabilities from the following product lines into a separate account:
• | Individual Annuity Product |
• | Group Annuity Product |
• | Variable Life Insurance Product |
• | Hybrid Ordinary Life Insurance Product |
• | Individual Indexed-Linked Annuity Product |
In accordance with the domiciliary state procedures for approving items within the separate account, the separate account classification of the following items are supported by Colorado Insurance CodeSection 10-7-402:
• | Individual Annuity |
• | Group Annuity |
• | Variable Life Insurance Product |
The following items are supported by direct approval by the Commissioner:
• | Hybrid Ordinary Life Insurance Product |
• | Group Annuity - Custom Stable Value Asset Funds |
• | Variable Life Insurance Product |
• | Individual Indexed-Linked Annuity Product |
The Company’s separate accounts invest in shares of Great-West Funds, Inc. and Putnam Funds,open-end management investment companies, which are related parties of the Company, and shares of othernon-affiliated mutual funds. and government and corporate bonds.
Some assets within each of the Company’s separate accounts are considered legally insulated whereas others are not legally insulated from the general account. The legal insulation of the separate accounts prevents such assets from being generally available to satisfy claims resulting from the general account.
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Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
At December 31, 2018 and 2017, the Company’s separate account assets that are legally insulated from the general account claims are $24,652,973 and $28,192,883, respectively.
Some separate account liabilities are guaranteed by the general account. In accordance with the guarantees provided, if the investment proceeds are insufficient to cover the rate of return guaranteed for the product, the policyholder proceeds will be remitted by the general account. To compensate the general account for the risk taken, the separate account has paid risk charges of $11,608, $12,581, $12,961, $12,542 and $12,171 for the years ended December 31, 2018, 2017, 2016, 2015 and 2014, respectively. No separate account guarantees were paid by the general account for the years ending December 31, 2018, 2017, 2016, 2015 and 2014, respectively.
Separate accounts with guarantees
The Government Guaranteed Funds are separate accounts investing in fixed income securities backed by the credit of the U.S. Government, its agencies or its instrumentalities.
The Stable Asset Funds invest in investment-grade corporate bonds in addition to the above mentioned securities.
The Company also has separate accounts comprised of assets underlying variable universal life policies issued privately to accredited investors. The accounts invest in investment grade fixed income securities.
The Individual Indexed-Linked Annuity Product provides returns based on the performance of one or more indices and invests in fixed income securities. The returns from these securities are invested in derivative instruments which mimic the returns of select indices. There is also a return of premium death benefit guarantee to policyholders.
The Government Guaranteed Funds and Stable Asset Funds have a guaranteed minimum crediting rate of at least 0%. All of the above separate accounts provide a book value guarantee. Some of them also provide a death benefit of the greater of account balance or premium paid.
Distributions to a participant are based on the participant’s account balance and are permitted for the purpose of paying a benefit to a participant. Distributions for purposes other than paying a benefit to a participant may be restricted. Participants’ distributions are based on the amount of their account balance, whereas, distributions as a result of termination of the group annuity contract are based on net assets attributable to the contract and can be made to the group through (1) transfer of the underlying securities and any remaining cash balance, or (2) transfer of the cash balance after sale of the Fund’s securities.
Most guaranteed separate account assets and related liabilities are carried at fair value. Certain separate account assets are carried at book value based on the prescribed deviation from the Division.
Non-guaranteed separate accounts
Thenon-guaranteed separate accounts include unit investment trusts or series accounts that invest in diversifiedopen-end management investment companies. These separate account assets and related liabilities are carried at fair value.
The investments in shares are valued at the closing net asset value as determined by the appropriate fund/portfolio at the end of each day. The net investment experience of the separate account is credited directly to the policyholder and can be positive or negative. Some of the separate accounts provide an incidental death benefit of the greater of the policyholder’s account balance or premium paid and some provide an incidental annual withdrawal benefit for the life of the policyholder. Certain contracts contain provisions relating to a contingent deferred sales charge. In such contracts, charges will be made for total or partial surrender of a participant annuity account in excess of the “free amount” before the retirement date by a deduction from a participant’s account. The “free amount” is an amount equal to 10% of the participant account value at December 31 of the calendar year prior to the partial or total surrender.
The following tables provide information regarding the Company’s separate accounts:
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Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Year Ended December 31, 2018 | ||||||||||||
Non-indexed guaranteed less than/equal to 4% | Non-guaranteed separate account | Total | ||||||||||
Premiums, considerations or deposits | $ | 721,339 | $ | 1,900,171 | $ | 2,621,510 | ||||||
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Reserves | ||||||||||||
For accounts with assets at: | ||||||||||||
Fair value | $ | 7,286,636 | $ | 15,682,027 | $ | 22,968,663 | ||||||
Amortized cost | 1,107,812 | — | 1,107,812 | |||||||||
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Total reserves | $ | 8,394,448 | $ | 15,682,027 | $ | 24,076,475 | ||||||
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By withdrawal characteristics: | ||||||||||||
At fair value | $ | 7,286,636 | $ | 15,682,027 | $ | 22,968,663 | ||||||
At book value without fair value adjustment and with current surrender charge less than 5% | 1,107,812 | — | 1,107,812 | |||||||||
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Total subject to discretionary withdrawals | $ | 8,394,448 | $ | 15,682,027 | $ | 24,076,475 | ||||||
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Year Ended December 31, 2017 | ||||||||||||
Non-indexed guaranteed less than/equal to 4% | Non-guaranteed separate account | Total | ||||||||||
Premiums, considerations or deposits | $ | 560,537 | $ | 1,888,820 | $ | 2,449,357 | ||||||
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Reserves | ||||||||||||
For accounts with assets at: | ||||||||||||
Fair value | $ | 7,918,332 | $ | 18,643,242 | $ | 26,561,574 | ||||||
Amortized cost | 958,780 | — | 958,780 | |||||||||
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Total reserves | $ | 8,877,112 | $ | 18,643,242 | $ | 27,520,354 | ||||||
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By withdrawal characteristics: | ||||||||||||
At fair value | $ | 7,918,332 | $ | 18,643,242 | $ | 26,561,574 | ||||||
At book value without fair value adjustment and with current surrender charge less than 5% | 958,780 | — | 958,780 | |||||||||
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Total subject to discretionary withdrawals | $ | 8,877,112 | $ | 18,643,242 | $ | 27,520,354 | ||||||
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A reconciliation of the amounts transferred to and from the separate accounts is presented below:
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Transfers as reported in the Summary of Operations of the separate account statement: | ||||||||||||
Transfers to separate accounts | $ | 2,621,510 | $ | 2,449,357 | $ | 2,686,225 | ||||||
Transfers from separate accounts | (5,198,817 | ) | (4,417,525 | ) | (3,561,699 | ) | ||||||
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Net transfers from separate accounts | (2,577,307 | ) | (1,968,168 | ) | (875,474 | ) | ||||||
Reconciling adjustments: | ||||||||||||
Net transfer of reserves to separate accounts | 1,464,314 | 1,023,384 | 773,253 | |||||||||
Miscellaneous other | 528 | 140 | 739 | |||||||||
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Net transfers as reported in the Statements of Operations | $ | (1,112,465 | ) | $ | (944,644 | ) | $ | (101,482 | ) | |||
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Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
14. Capital and Surplus, Dividend Restrictions, and Other Matters
On November 15, 2004, the Company issued a surplus note in the face amount of $195,000 to GWL&A Financial. The proceeds were used to redeem a $175,000 surplus note issued May 4, 1999 and for general corporate purposes. The new surplus note bears interest at the rate of 6.675% and is due November 14, 2034. The carrying amount of the surplus note was $194,558 and $194,530 at December 31, 2018 and 2017, respectively. Payments of principal and interest under this surplus note can be made only with prior written approval of the Commissioner of Insurance of the State of Colorado. Such payments are payable only out of surplus funds of the Company and only if at the time of such payment, and after giving effect to the making thereof, the financial condition of the Company is such that its surplus would not fall below two andone-half times the authorized control level as required by the most recent risk-based capital calculations. Subject to the foregoing restrictions on payment of principal and interest, (a) interest is payable on the principal sum of the surplus note semi-annually, in arrears, on May 14 and November 14 of each year, and (b) the surplus note may only be redeemed prior to its stated maturity in connection with (i) a mandatory redemption by the Company in the event of a redemption or acceleration by GWL&A Financial Inc., of its 6.675% junior subordinated deferrable debentures due November 14, 2034, or (ii) an optional redemption by the Company at any time on or after November 15, 2024. Interest paid on the note was $13,016 for all the years ended December 31, 2018, 2017 and 2016, respectively, bringing total interest paid from inception to December 31, 2018 to $182,227. The amount of unapproved principal and interest was $0 at December 31, 2018 and 2017.
On May 19, 2006, the Company issued a surplus note in the face amount and carrying amount of $333,400 to GWL&A Financial Inc. The proceeds were used for general corporate purposes. Initially, the surplus note bore interest at the rate of 7.203% per annum, and was payable on each May 16 and November 16 until May 16, 2016. After May 16, 2016, the surplus note bears an interest rate of 2.588% plus the then current three-month London Interbank Offering Rate. The carrying amount of the surplus note was $0 and $333,400 at December 31, 2018 and 2017. The surplus note became redeemable by the company at the principal amount plus any accrued and unpaid interest after May 16, 2016. On June 15, 2018, this surplus note was redeemed in full. Payments of principal and interest under the surplus note can be made only with prior written approval of the Commissioner of Insurance of the State of Colorado. Such payments are payable out of surplus funds of the Company and only if at the time of such payment, and after giving effect to the making thereof, the financial condition of the Company is such that its surplus would not fall below two andone-half times the authorized control level as required by the most recent risk-based capital calculations. Interest paid on the note was $6,868, $12,721 and $16,137 for the year ended December 31, 2018, 2017 and 2016, respectively, bringing total interest paid from inception to December 31, 2018 to $262,875. The amount of unapproved principal and interest was $0 at December 31, 2018 and 2017.
On December 29, 2017, the Company issued a surplus note in the face amount and carrying amount of $12,000 to GWL&A Financial Inc. The proceeds were used for general corporate purposes. The surplus note bears an interest rate of 3.5% per annum. The note matures of December 29, 2027. Payments of principal and interest under the surplus note can be made only with prior written approval of the Commissioner of Insurance of the State of Colorado. Such payments are payable out of surplus funds of the Company and only if at the time of such payment, and after giving effect to the making thereof, the financial condition of the Company is such that its surplus would not fall below two andone-half times the authorized control level as required by the most recent risk-based capital calculations. Interest paid on the note during 2018, 2017 and 2016 amounted to $420, $2 and $0, respectively, bringing total interest paid from inception to December 31, 2018 to $422. The amount of unapproved principal and interest was $0 at December 31, 2018.
On May 17, 2018, the Company issued a surplus note in the face amount and carrying amount of $346,218 to GWL&A Financial Inc. The proceeds were used to redeem the $333,400 surplus note issued in 2006 and for general corporate purposes. The surplus note bears an interest rate of 4.881% per annum. The note matures on May 17, 2048. Payments of principal and interest under the surplus note can be made only with prior written approval of the Commissioner of Insurance of the State of Colorado. Such payments are payable out of surplus funds of the Company and only if at the time of such payment, and after giving effect to the making thereof, the financial condition of the Company is such that its surplus would not fall below two andone-half times the authorized control level as required by the most recent risk-based capital calculations. Interest paid on the note during 2018 and 2017 amounted to $10,515 and $0, respectively, bringing total interest paid from inception to December 31, 2018 to $10,515 The amount of unapproved principal and interest was $0 at December 31, 2018.
In the first quarter of 2018, the Company realized a $39,921 after tax gain on an interest rate swap that hedged the existing $333,400 surplus note. The Company adjusted the basis of the hedged item, in this case the surplus note, for the amount of the after tax gain. Further, the Company accounted for the redemption of the $333,400 surplus note and the issuance of the $346,218 surplus note in the second quarter as debt modification instead of debt extinguishment. Therefore, the after tax swap
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
gain will be amortized into income over the 30 year life of the new surplus note. Amortization of the gain during 2018, 2017 and 2016 amounted to $998, $0 and $0, respectively bringing the total amortization from inception to December 31, 2018 amounted to $998, leaving an unamortized balance of $38,923 in surplus as part of the surplus note amounts.
Interest paid to GWL&A Financial attributable to these surplus notes, was $30,819, $25,739 and $29,153 for the years ended December 31, 2018, 2017 and 2016, respectively.
As an insurance company domiciled in the State of Colorado, the Company is required to maintain a minimum of $2,000 of capital and surplus. In addition, the maximum amount of dividends which can be paid to stockholders by insurance companies domiciled in the State of Colorado, without prior approval of the Insurance Commissioner, is subject to restrictions relating to statutory capital and surplus and statutory net gain from operations. The Company may pay an amount less than $132,692 of dividends during the year ended December 31, 2019, without the prior approval of the Colorado Insurance Commissioner. Prior to any payment of dividends, the Company provides notice to the Colorado Insurance Commissioner. Dividends arenon-cumulative.
The Company paid cash dividends on common stock during 2018 as follows: $24,000 on March 30, 2018 (ordinary); $20,000 on May 1, 2018 (extraordinary); $55,895 on May 17, 2018 (extraordinary); $30,000 on September 28, 2018 (extraordinary) and $22,400 on September 29, 2018 (extraordinary). Dividends during 2017 were paid as follows: $77,000 on March 15, 2017 (extraordinary); $60,301 on June 15, 2017 (ordinary); and $8,000 on September 29, 2017 (ordinary). Dividends are paid as determined by the Board of Directors, subject to the limitations described above.
The portion of unassigned funds (surplus) represented or (reduced) by each of the following items is:
December 31, | ||||||||
2018 | 2017 | |||||||
Unrealized gains (losses) | $ | 152,801 | $ | 165,416 | ||||
Non-admitted assets | (330,803 | ) | (359,724 | ) | ||||
Asset valuation reserve | (204,393 | ) | (203,546 | ) | ||||
Provision for reinsurance | (17 | ) | (17 | ) | ||||
Separate account business | (1,076 | ) | (868 | ) |
Risk-based capital (“RBC”) is a regulatory tool for measuring the minimum amount of capital appropriate for a life, accident and health organization to support its overall business operations in consideration of its size and risk profile. The Division requires the Company to maintain minimum capital and surplus equal to the company action level as calculated in the RBC model. The Company exceeds the required amount.
The following table presents the components of the net admitted deferred tax asset (liability):
December 31, 2018 | December 31, 2017 | Change | ||||||||||||||||||||||||||||||||||
Ordinary | Capital | Total | Ordinary | Capital | Total | Ordinary | Capital | Total | ||||||||||||||||||||||||||||
Gross deferred tax assets | $ | 368,917 | $ | 2,793 | $ | 371,710 | $ | 388,131 | $ | 16,580 | $ | 404,711 | $ | (19,214 | ) | $ | (13,787 | ) | $ | (33,001 | ) | |||||||||||||||
Valuation allowance adjustment | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
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Adjusted gross deferred tax asset | 368,917 | 2,793 | 371,710 | 388,131 | 16,580 | 404,711 | (19,214 | ) | (13,787 | ) | (33,001 | ) | ||||||||||||||||||||||||
Deferred tax assets non-admitted | (189,578 | ) | (570 | ) | (190,148 | ) | (228,728 | ) | (4,145 | ) | (232,873 | ) | 39,150 | 3,575 | 42,725 | |||||||||||||||||||||
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Net admitted deferred tax asset | 179,339 | 2,223 | 181,562 | 159,403 | 12,435 | 171,838 | 19,936 | (10,212 | ) | 9,724 | ||||||||||||||||||||||||||
Gross deferred tax liabilities | (31,065 | ) | — | (31,065 | ) | (22,523 | ) | — | (22,523 | ) | (8,542 | ) | — | (8,542 | ) | |||||||||||||||||||||
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Net admitted deferred tax asset | $ | 148,274 | $ | 2,223 | $ | 150,497 | $ | 136,880 | $ | 12,435 | $ | 149,315 | $ | 11,394 | $ | (10,212 | ) | $ | 1,182 | |||||||||||||||||
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The Company admits deferred tax assets pursuant to paragraphs 11.a, 11.b.i, 11.b.ii, and 11.c, in SSAP No. 101. The following table presents the amount of deferred tax asset admitted under each component of SSAP No. 101:
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
December 31, 2018 | December 31, 2017 | Change | ||||||||||||||||||||||||||||||||||
Ordinary | Capital | Total | Ordinary | Capital | Total | Ordinary | Capital | Total | ||||||||||||||||||||||||||||
(a) Federal income taxes paid in prior years recoverable through loss carrybacks | $ | — | $ | 2,224 | $ | 2,224 | $ | — | $ | 3,884 | $ | 3,884 | $ | — | �� | $ | (1,660 | ) | $ | (1,660 | ) | |||||||||||||||
(b) Adjusted gross deferred tax assets expected to be realized (excluding the amount of deferred tax assets from (a) above) after application of the threshold limitation (lesser of (i) and (ii) below) | 148,274 | 148,274 | 136,880 | 8,551 | 145,431 | 11,394 | (8,551 | ) | 2,843 | |||||||||||||||||||||||||||
(i) Adjusted gross deferred tax assets expected to be realized following the balance sheet date | 148,274 | 148,274 | 136,880 | 8,551 | 145,431 | 11,394 | (8,551 | ) | 2,843 | |||||||||||||||||||||||||||
(ii) Adjusted gross deferred tax assets expected allowed per limitation threshold | 175,682 | 145,431 | — | — | 30,251 | |||||||||||||||||||||||||||||||
(c) Adjusted gross deferred tax assets (excluding the amount of deferred tax assets from (a) and (b) above) offset by gross deferred tax liabilities | 31,065 | — | 31,065 | 22,523 | — | 22,523 | 8,542 | — | 8,542 | |||||||||||||||||||||||||||
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Total deferred tax assets admitted as a result of the application of SSAP No. 101 | $ | 179,339 | $ | 2,224 | $ | 181,563 | $ | 159,403 | $ | 12,435 | $ | 171,838 | $ | 19,936 | $ | (10,211 | ) | $ | 9,725 | |||||||||||||||||
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The following table presents the threshold limitations utilized in the admissibility of deferred tax assets under paragraph 11.b of SSAP No. 101:
2018 | 2017 | |||||||
Ratio percentage used to determine recovery period and threshold limitation amount | 867.76% | 894.97% | ||||||
Amount of adjusted capital and surplus used to determine recovery period and threshold limitation | $ | 1,171,212 | $ | 969,537 |
The following table presents the impact of tax planning strategies:
December 31, 2018 December 31, 2017 | Change | |||||||||||||||||||||||
Ordinary | Capital | Ordinary | Capital | Ordinary | Capital | |||||||||||||||||||
Adjusted gross deferred tax asset | $ | 368,917 | $ | 2,793 | $ | 388,131 | $ | 16,580 | $ | (19,214 | ) | $ | (13,787 | ) | ||||||||||
% of adjusted gross deferred tax asset by character attributable to tax planning strategies | — | % | — | % | — | % | — | % | — | % | — | % | ||||||||||||
Net admitted adjusted gross deferred tax assets | $ | 179,339 | $ | 2,224 | $ | 159,403 | $ | 12,435 | $ | 19,936 | $ | (10,211 | ) | |||||||||||
% of net admitted adjusted gross deferred tax asset by character attributable to tax planning strategies | — | % | — | % | — | % | — | % | — | % | — | % |
The Company’s tax planning strategies do not include the use of reinsurance.
There are no temporary differences for which deferred tax liabilities are not recognized.
The components of current income taxes incurred include the following:
Year Ended December 31, | ||||||||||||
2018 | 2017 | Change | ||||||||||
Current income tax | $ | (17,604 | ) | $ | 50,584 | $ | (68,188 | ) | ||||
Federal income tax on net capital gains | 1,030 | (6,744 | ) | 7,774 | ||||||||
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Total | $ | (16,574 | ) | $ | 43,840 | $ | (60,414 | ) | ||||
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Year Ended December 31, | ||||||||||||
2017 | 2016 | Change | ||||||||||
Current income tax | $ | 50,584 | $ | (37,932 | ) | $ | 88,516 | |||||
Federal income tax on net capital gains | (6,744 | ) | 16,117 | (22,861 | ) | |||||||
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Total | $ | 43,840 | $ | (21,815 | ) | $ | 65,655 | |||||
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The tax effects of temporary differences, which give rise to the deferred income tax assets and liabilities are as follows:
December 31, | ||||||||||||
Deferred income tax assets: | 2018 | 2017 | Change | |||||||||
Ordinary: | ||||||||||||
Reserves | $ | 80,303 | $ | 65,831 | $ | 14,472 | ||||||
Investments | 4,374 | 1,263 | 3,111 | |||||||||
Deferred acquisition costs | 76,759 | 77,369 | (610 | ) | ||||||||
Provision for dividends | 3,399 | 4,593 | (1,194 | ) | ||||||||
Fixed assets | 3,264 | 2,761 | 503 | |||||||||
Compensation and benefit accrual | 20,890 | 22,065 | (1,175 | ) | ||||||||
Receivables -non-admitted | 13,991 | 12,737 | 1,254 | |||||||||
Tax credit carryforward | 131,409 | 168,567 | (37,158 | ) | ||||||||
Other | 34,527 | 32,945 | 1,582 | |||||||||
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Total ordinary gross deferred tax assets | 368,916 | 388,131 | (19,215 | ) | ||||||||
Valuation allowance adjustment | — | — | — | |||||||||
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Total adjusted ordinary gross deferred tax assets | 368,916 | 388,131 | (19,215 | ) | ||||||||
Non-admitted ordinary deferred tax assets | (189,578 | ) | (228,728 | ) | 39,150 | |||||||
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Admitted ordinary deferred tax assets | 179,338 | 159,403 | 19,935 | |||||||||
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Capital: | — | |||||||||||
Investments | 2,793 | 16,580 | (13,787 | ) | ||||||||
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Total capital gross deferred tax assets | 2,793 | 16,580 | (13,787 | ) | ||||||||
Valuation allowance adjustment | — | — | — | |||||||||
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Total adjusted gross capital deferred tax assets | 2,793 | 16,580 | (13,787 | ) | ||||||||
Non-admitted capital deferred tax assets | (569 | ) | (4,145 | ) | 3,576 | |||||||
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Admitted capital deferred tax assets | 2,224 | 12,435 | (10,211 | ) | ||||||||
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Total admitted deferred tax assets | $ | 181,562 | $ | 171,838 | $ | 9,724 | ||||||
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Deferred income tax liabilities: | ||||||||||||
Ordinary: | ||||||||||||
Investments | $ | — | $ | (4,501 | ) | $ | 4,501 | |||||
Premium receivable | (5,417 | ) | (3,343 | ) | (2,074 | ) | ||||||
Policyholder Reserves | (17,644 | ) | (10,033 | ) | (7,611 | ) | ||||||
Experience Refunds | (5,079 | ) | — | (5,079 | ) | |||||||
Other | (2,925 | ) | (4,646 | ) | 1,721 | |||||||
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Total ordinary deferred tax liabilities | (31,065 | ) | (22,523 | ) | (8,542 | ) | ||||||
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Net admitted deferred income tax asset | $ | 150,497 | $ | 149,315 | $ | 1,182 | ||||||
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The change in deferred income taxes reported in surplus before consideration ofnon-admitted assets is comprised of the following components:
December 31, |
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| 2018 | 2017 | Change | |||||||||
Total deferred income tax assets | $ | 371,710 | $ | 404,711 | $ | (33,001 | ) | |||||
Total deferred income tax liabilities | (31,065 | ) | (22,523 | ) | (8,542 | ) | ||||||
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Net deferred income tax asset | $ | 340,645 | $ | 382,188 | (41,543 | ) | ||||||
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Tax effect of unrealized capital gains (losses) | (260 | ) | ||||||||||
Other surplus | 1,071 | |||||||||||
Change in net deferred income tax | $ | (40,732 | ) | |||||||||
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December 31, |
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Total deferred income tax assets | $ | 404,711 | $ | 521,431 | $ | (116,720 | ) | |||||
Total deferred income tax liabilities | (22,523 | ) | (20,681 | ) | (1,842 | ) | ||||||
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Net deferred income tax asset | $ | 382,188 | $ | 500,750 | (118,562 | ) | ||||||
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Tax effect of unrealized capital gains (losses) | 6,427 | |||||||||||
Other surplus | 1,607 | |||||||||||
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Change in net deferred income tax | $ | (110,528 | ) | |||||||||
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The provision for federal income taxes and change in deferred income taxes differ from that which would be obtained by applying the statutory federal income tax rate of 21% and 35% to income before income taxes. The significant items causing this difference are as follows:
December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Income tax expense at statutory rate | $ | 60,337 | $ | 77,023 | $ | 22,425 | ||||||
Federal tax rate change | — | 132,029 | — | |||||||||
Earnings from subsidiaries | (22,003 | ) | (28,875 | ) | (35,175 | ) | ||||||
Swap gain on debt refinancing | 8,175 | — | — | |||||||||
Dividend received deduction | (6,657 | ) | (7,992 | ) | (7,302 | ) | ||||||
Tax adjustment for interest maintenance reserve | (5,221 | ) | (7,716 | ) | (8,138 | ) | ||||||
Prior year adjustment | (4,124 | ) | (1,881 | ) | (2,032 | ) | ||||||
Tax effect onnon-admitted assets | (3,476 | ) | 2,291 | (1,111 | ) | |||||||
Tax credits | (2,901 | ) | (908 | ) | (21,212 | ) | ||||||
Income tax (benefit) on realized capital gain (loss) | 1,030 | (6,744 | ) | 16,117 | ||||||||
Tax contingency | (607 | ) | 359 | (99 | ) | |||||||
Other | (395 | ) | (3,219 | ) | (1,893 | ) | ||||||
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Total | $ | 24,158 | $ | 154,367 | $ | (38,420 | ) | |||||
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2018 | 2017 | 2016 | ||||||||||
Federal income taxes incurred | $ | (16,574 | ) | $ | 43,839 | $ | (21,815 | ) | ||||
Change in net deferred income taxes | 40,732 | 110,528 | (16,605 | ) | ||||||||
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Total income taxes | $ | 24,158 | $ | 154,367 | $ | (38,420 | ) | |||||
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On December 22, 2017, H.R. 1, the Tax Cuts and Jobs Act (the “Act”), was enacted. The legislation, which is generally effective for tax years beginning on January 1, 2018, represented significant U.S. tax reform and revised the Internal Revenue Code by, among other items, lowering the federal corporate income tax rate from 35% to 21% and modifying how the U.S.
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
taxes multinational entities. Further, the Act changed how tax basis policy reserves, capitalized specified policy acquisition expenses, and the company’s share of the dividends received deduction and tax exempt interest are to be calculated.
Shortly after enactment, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provided US GAAP guidance on the accounting for the Act’s impact at December 31, 2017. A reporting entity could recognize provisional amounts, where the necessary information was not available, prepared or analyzed (including computations) in reasonable detail or where additional guidance was needed from the taxing authority to determine the appropriate application of the Act. A reporting entity’s provisional impact analysis was to be adjusted within the 12 month measurement period provided for under SAB 118. The Statutory Accounting Working Group subsequently provided informal interpretative guidance allowing for statutory accounting conformity with the SAB 118 US GAAP guidance.
The Company’s accounting for the income tax effects of the Act is complete as of the period ended December 31, 2018, and no material measurement period adjustments were recognized during the 2018 reporting period.
As of December 31, 2018, the Company had no operating loss carryforwards.
As of December 31, 2018, the Company has Guaranteed Federal Low Income Housing tax credit carryforwards of $111,328. These credits will begin to expire in 2030.
As of December 31, 2018, the Company has foreign tax credit carryforwards of $20,082. These credits will begin to expire in 2020.
The following are income taxes incurred in prior years that will be available for recoupment in the event of future net losses:
Year Ended December 31, 2018 | $ | 4,146 | ||
Year Ended December 31, 2017 | 13,328 |
The Company has no deposits admitted under Section 6603 of the Internal Revenue Code.
The Company’s federal income tax return is consolidated with the following entities (the “U.S. Consolidated Group”):
Great-West Lifeco U.S. LLC
Emjay Corporation
GWFS Equities, Inc.
GWL&A Financial Inc.
Great-West Life & Annuity Insurance Company of South Carolina
Great-West Life & Annuity Insurance Company of New York
Putnam Investments, LLC
Putnam Acquisition Financing, Inc.
Putnam Retail Management, LP
Putnam Retail Management GP, Inc.
Putnam Advisory Company, LLC
Putnam Advisory Holdings, LLC
Putnam Fiduciary Trust Company
Putnam Investor Services, Inc.
PanAgora Holdings, Inc
PanAgora Asset Management, Inc.
Putnam Advisory Holdings II, LLC
FASCore, LLC
Advised Assets Group, LLC
Great-West Trust Company, LLC
Great-West Capital Management, LLC
The Company, GWL&A NY and GWSC (“GWLA Subgroup”) are life insurance companies who form a life subgroup under the consolidated return regulations. These regulations determine whether the taxable income or losses of this subgroup may offset or be offset with the taxable income or losses of othernon-life entities.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The GWLA Subgroup accounts for income taxes on the modified separate return method on each of their separate company, statutory financial statements. Under this method, current and deferred tax expense or benefit is determined on a standalone basis; however the Company also considers taxable income or losses from other members of the GWLA Subgroup when determining its deferred tax assets and liabilities, and in evaluating the realizability of its deferred tax assets.
The method of settling income tax payables and receivables (“Tax Sharing Agreement”) among the U.S. consolidated group is subject to a written agreement approved by the Board of Directors, whereby settlement is made on a separate return basis (i.e., the amount that would be due to or from a jurisdiction had an actual separate return been filed) except for the current utilization of any net operating losses and other tax attributes by members of the U.S. Consolidated Group, which can lead to receiving a payment when none would be received from the jurisdiction had a real separate tax return been required. The GWLA Subgroup has a policy of settling intercompany balances as soon as practical after the filing of the federal consolidated return or receipt of the income tax refund from the Internal Revenue Service (“I.R.S.”).
The Company determines income tax contingencies in accordance with Statement of Statutory Accounting Principles No. 5R,Liabilities, Contingencies and Impairments of Assets(“SSAP No. 5R”) as modified by SSAP 101. As of December 31, 2018 the amount of tax contingencies computed in accordance with SSAP No. 5R is $0, with the exception of interest and penalties. The Company does not expect a significant increase in tax contingencies within the 12 month period following the balance sheet date.
The Company recognizes accrued interest and penalties related to tax contingencies in current income tax expense. During the years ended December 31, 2018 and 2017, the Company recognized approximately $607 and $359 of benefit and expense, respectively, from interest and penalties related to the uncertain tax positions. The Company had $314 and $921 accrued for the payment of interest and penalties at December 31, 2018 and 2017, respectively.
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 the I.R.S. for years 2014 and prior. Tax years 2015 through 2017 are open to federal examination by the I.R.S. The Company does not expect significant increases or decreases to tax contingencies relating to federal, state or local audits.
The Company does not have any outstanding AMT credits as of the filing of the 2017 tax return.
The Company does not have any foreign operations as of the periods ended December 31, 2017 and December 31, 2018 and therefore is not subject to the Repatriation Transition Tax or the tax on Global IntangibleLow-Taxed Income.
Post-Retirement Medical and Supplemental Executive Retirement Plans
The Company sponsors an unfunded Post-Retirement Medical Plan (the “Medical Plan”) that provides health benefits to retired employees who are not Medicare eligible. The Medical Plan is contributory and contains other cost sharing features which may be adjusted annually for the expected general inflation rate. The Company’s policy is to fund the cost of the Medical Plan benefits in amounts determined at the discretion of management.
The Company also provides Supplemental Executive Retirement Plans to certain key executives. These plans provide key executives with certain benefits upon retirement, disability or death based upon total compensation. The Company has purchased individual life insurance policies with respect to employees covered by these plans. The Company is the owner and beneficiary of the insurance contracts.
A December 31 measurement date is used for the employee benefit plans.
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The following tables provide a reconciliation of the changes in the benefit obligations, fair value of plan assets and the underfunded status for the Company’s Post-Retirement Medical and Supplemental Executive Retirement plans:
Post-Retirement Medical Plan | Supplemental Executive Retirement Plan | Total | ||||||||||||||||||||||
Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Change in projected benefit obligation: | ||||||||||||||||||||||||
Benefit obligation, January 1 | $ | 19,329 | $ | 19,031 | $ | 40,921 | $ | 44,501 | $ | 60,250 | $ | 63,532 | ||||||||||||
Service cost | 1,425 | 1,457 | — | (16 | ) | 1,425 | 1,441 | |||||||||||||||||
Interest cost | 703 | 758 | 1,357 | 1,620 | 2,060 | 2,378 | ||||||||||||||||||
Actuarial (gain) loss | (1,511 | ) | (1,216 | ) | (2,316 | ) | (1,872 | ) | (3,827 | ) | (3,088 | ) | ||||||||||||
Regular benefits paid | (407 | ) | (701 | ) | (2,400 | ) | (3,336 | ) | (2,807 | ) | (4,037 | ) | ||||||||||||
Amendment | — | — | — | 24 | — | 24 | ||||||||||||||||||
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Benefit obligation and under funded status, December 31 | $ | 19,539 | $ | 19,329 | $ | 37,562 | $ | 40,921 | $ | 57,101 | $ | 60,250 | ||||||||||||
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Accumulated benefit obligation | $ | 19,539 | $ | 19,329 | $ | 37,562 | $ | 40,921 | $ | 57,101 | $ | 60,250 | ||||||||||||
Post-Retirement Medical Plan | Supplemental Executive Retirement Plan | Total | ||||||||||||||||||||||
Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Change in plan assets: | ||||||||||||||||||||||||
Value of plan assets, January 1 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Employer contributions | 407 | 701 | 2,400 | 3,337 | 2,807 | 4,038 | ||||||||||||||||||
Regular benefits paid | (407 | ) | (701 | ) | (2,400 | ) | (3,337 | ) | (2,807 | ) | (4,038 | ) | ||||||||||||
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Value of plan assets, December 31 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
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The following table presents amounts recognized in the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus for the Company’s Post-Retirement Medical and Supplemental Executive Retirement plans:
Post-Retirement Medical Plan | Supplemental Executive Retirement Plan | Total | ||||||||||||||||||||||
December 31, | December 31, | December 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Amounts recognized in the statutory statements of admitted assets, liabilities, capital and surplus: | ||||||||||||||||||||||||
Accrued benefit liability | $ | (20,534 | ) | $ | (18,078 | ) | $ | (40,091 | ) | $ | (40,855 | ) | $ | (60,625 | ) | $ | (58,933 | ) | ||||||
Liability for pension benefits | 995 | (1,251 | ) | 2,529 | (66 | ) | 3,524 | (1,317 | ) | |||||||||||||||
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Total other liabilities | $ | (19,539 | ) | $ | (19,329 | ) | $ | (37,562 | ) | $ | (40,921 | ) | $ | (57,101 | ) | $ | (60,250 | ) | ||||||
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Unassigned surplus (deficit) | $ | 995 | $ | (1,251 | ) | $ | 2,529 | $ | (66 | ) | $ | 3,524 | $ | (1,317 | ) |
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The following table presents amounts not yet recognized in the statements of financial position for the Company’s Post-Retirement Medical and Supplemental Executive Retirement plans:
Post-Retirement Medical Plan | Supplemental Executive Retirement Plan | Total | ||||||||||||||||||||||
December 31, | December 31, | December 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Unrecognized net actuarial gain (loss) | $ | 5,152 | $ | 3,723 | $ | 3,428 | $ | 1,157 | $ | 8,580 | $ | 4,880 | ||||||||||||
Unrecognized prior service cost | (4,157 | ) | (4,974 | ) | (899 | ) | (1,223 | ) | (5,056 | ) | (6,197 | ) |
The following table presents amounts in unassigned funds recognized as components of net periodic benefit cost for the Company’s Post-Retirement Medical and Supplemental Executive Retirement plans:
Post-Retirement Medical Plan | Supplemental Executive Retirement Plan | Total | ||||||||||||||||||||||
Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Items not yet recognized as component of net periodic cost on January 1, | $ | (1,251 | ) | $ | (3,021 | ) | $ | (66 | ) | $ | (2,360 | ) | $ | (1,317 | ) | $ | (5,381 | ) | ||||||
Prior service cost recognized in net periodic cost | 817 | 587 | 324 | 501 | 1,141 | 1,088 | ||||||||||||||||||
(Gain) loss recognized in net periodic cost | (82 | ) | (33 | ) | (45 | ) | (54 | ) | (127 | ) | (87 | ) | ||||||||||||
Gain (loss) arising during the year | 1,511 | 1,216 | 2,316 | 1,847 | 3,827 | 3,063 | ||||||||||||||||||
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Items not yet recognized as component of net periodic cost on December 31 | $ | 995 | $ | (1,251 | ) | $ | 2,529 | $ | (66 | ) | $ | 3,524 | $ | (1,317 | ) | |||||||||
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The following table provides information regarding amounts in unassigned funds that are expected to be recognized as components of net periodic benefit costs during the year ended December 31, 2019:
Post-Retirement Medical Plan | Supplemental Executive Retirement Plan | Total | ||||||||||
Net actuarial gain | $ | 217 | $ | 50 | $ | 267 | ||||||
Prior service cost | (817 | ) | (300 | ) | (1,117 | ) |
The expected benefit payments for the Company’s Post-Retirement Medical and Supplemental Executive Retirement plans for the years indicated are as follows:
2019 | 2020 | 2021 | 2022 | 2023 | 2024 through 2028 | |||||||||||||||||||
Post-retirement medical plan | $ | 961 | $ | 959 | $ | 1,054 | $ | 1,123 | $ | 1,234 | $ | 7,119 | ||||||||||||
Supplemental executive retirement plan | 2,347 | 2,530 | 2,473 | 10,206 | 5,701 | 9,085 |
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The following table presents the components of net periodic cost (benefit):
Post-Retirement Medical Plan | Supplemental Executive Retirement Plan | Total | ||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2016 | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||||
Components of net periodic cost (benefit): | ||||||||||||||||||||||||||||||||||||||||||||||
Service cost | $ | 1,425 | $ | 1,457 | $ | 1,246 | $ | — | $ | (16 | ) | $ | 294 | $ | 1,425 | $ | 1,441 | $ | 1,540 | |||||||||||||||||||||||||||
Interest cost | 703 | 758 | 713 | 1,356 | 1,620 | 1,775 | 2,059 | 2,378 | 2,488 | |||||||||||||||||||||||||||||||||||||
Amortization of unrecognized prior service cost | 817 | 587 | 150 | 324 | 501 | 501 | 1,141 | 1,088 | 651 | |||||||||||||||||||||||||||||||||||||
Amortization of gain from prior periods | (82 | ) | (33 | ) | (137 | ) | (45 | ) | (54 | ) | (61 | ) | (127 | ) | (87 | ) | (198 | ) | ||||||||||||||||||||||||||||
Net periodic cost | $ | 2,863 | $ | 2,769 | $ | 1,972 | $ | 1,635 | $ | 2,051 | $ | 2,509 | $ | 4,498 | $ | 4,820 | $ | 4,481 | ||||||||||||||||||||||||||||
The following tables present the assumptions used in determining benefit obligations of the Post-Retirement Medical and the Supplemental Executive Retirement plans at December 31, 2018 and 2017:
Post-Retirement Medical Plan | ||||||
December 31, | ||||||
2018 | 2017 | |||||
Discount rate | 4.34% | 3.63% | ||||
Initial health care cost trend | 6.25% | 6.50% | ||||
Ultimate health care cost trend | 5.00% | 5.00% | ||||
Year ultimate trend is reached | 2024 | 2024 | ||||
Supplemental Executive Retirement Plan | ||||||
December 31, | ||||||
2018 | 2017 | |||||
Discount rate | 4.16% | 3.43% | ||||
Rate of compensation increase | N/A | 4.00% |
During 2018, the Company adopted the Society of Actuaries Morality Improvement Scale(MP-2018).
During 2017, the Company adopted the Society of Actuaries Morality Improvement Scale(MP-2017).
The following tables present the weighted average interest rate assumptions used in determining the net periodic benefit/cost of the Post-Retirement Medical and the Supplemental Executive Retirement plans:
Post-Retirement Medical Plan | ||||||
Year Ended December 31, | ||||||
2018 | 2017 | |||||
Discount rate | 3.63% | 4.05% | ||||
Initial health care cost trend | 6.50% | 6.75% | ||||
Ultimate health care cost trend | 5.00% | 5.00% | ||||
Year ultimate trend is reached | 2024 | 2024 |
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Supplemental Executive Retirement Plan | ||||||
Year Ended December 31, | ||||||
2018 | 2017 | |||||
Discount rate | 3.43% | 3.80% | ||||
Rate of compensation increase | 4.00% | 4.00% |
The discount rate has been set based on the rates of return on high-quality fixed-income investments currently available and expected to be available during the period the benefits will be paid. In particular, the yields on bonds rated AA or better on the measurement date have been used to set the discount rate.
The following table presents the impact on the Post-Retirement Medical Plan thatone-percentage-point change in assumed health care cost trend rates would have on the following:
One percentage point increase | One percentage point decrease | |||||||
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Increase (decrease) on total service and interest cost on components | $ | 357 | $ | (297) | ||||
Increase (decrease) on post-retirement benefit obligations | 2,417 | (2,075) |
Beginning December 31, 2012, the Company began participation in the pension plan sponsored by GWL&A Financial. During 2017, that plan froze all future benefit accruals for pension-eligible participants as of December 31, 2017. The Company’s share of net expense for the pension plan was $3,057, $0 and $0 during the years ended December 31, 2018, 2017 and 2016.
In August 2017, the Company filed an application for a compliance statement from the IRS under their Voluntary Correction Program with respect to operational matters under the pension plan. The IRS issued a compliance statement approving the Company’s request in November 2018. The corrective measure will result in a payment of approximately $7 million to the plan in 2019.
The Company offers unfunded,non-qualified deferred compensation plans to a select group of executives, management and highly compensated individuals. Participants defer a portion of their compensation and realize potential market gains / losses or interest on the amount deferred. The programs are not qualified under Section 401 of the Internal Revenue Code. Participant balances, which are included in Amounts withheld or retained by company as agent or trustee in the accompanying statutory financial statements, are $35,588 and $33,454 at December 31, 2018 and 2017, respectively.
The Company sponsors a qualified defined contribution benefit plan covering all employees. Under this plan, employees may contribute a percentage of their annual compensation to the plan up to certain maximums, as defined by the plan and by the Internal Revenue Service (“IRS”). Currently, the Company matches a percentage of employee contributions in cash. The Company recognized $11,935, $8,713 and $7,275 in expense related to this plan for the years ended December 31, 2018, 2017 and 2016, respectively.
Equity Awards
Lifeco, of which the Company is an indirect wholly-owned subsidiary, maintains the Great-West Lifeco Inc. Stock Option Plan (the “Lifeco plan”) that provides for the granting of options on its common shares to certain of its officers and employees and those of its subsidiaries, including the Company. Options are granted with exercise prices not less than the average market price of the shares on the five days preceding the date of the grant. The Lifeco plan provides for the granting of options with varying terms and vesting requirements with vesting commencing on the first anniversary of the grant, exercisable within 10 years from the date of grant. Compensation expense is recognized in the Company’s financial statements over the vesting period of these stock options using the accelerated method of recognition.
Termination of employment prior to the vesting of the options results in the forfeiture of the unvested options, unless otherwise determined by the Human Resources Committee. At its discretion, the Human Resources Committee may vest the unvested options of retiring option holders, with the options exercisable within five years from the date of retirement. In such event, the Company
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
accelerates the recognition period to the date of retirement for any unrecognized share-based compensation cost related thereto and recognizes it in its earnings at that time.
Liability Awards
The Company maintains a Performance Share Unit Plan (“PSU plan”) for officers and employees of the Company. Under the PSU plan, “performance share units” are granted to certain of its officers and employees of the Company. Each performance unit has a value equal to one share of Lifeco common stock and is subject to adjustment for cash dividends paid to Lifeco stockholders, Company earnings results as well as stock dividends and splits, consolidations and the like that affect shares of Lifeco common stock outstanding.
If the performance share units vest, they are payable in cash equal to the average closing price of Lifeco common stock for the 20 trading days prior to the date following the last day of the three-year performance period. The estimated fair value of the performance unit is based on the average closing price of Lifeco common stock for the 20 trading days prior to the grant. The performance share units generally vest in their entirety at the end of the three years performance period based on continued service. The PSU plan contains a provision that permits all unvested performance share units to become vested upon death or retirement. Changes in the fair value of the performance share units that occur during the vesting period is recognized as compensation cost over that period.
Performance share units are settled in cash and are recorded as liabilities until payout is made. Unlike share-settled awards, which have a fixed grant-date fair value, the fair value of unsettled or unvested liabilities awards is remeasured at the end of each reporting period based on the change in fair value of one share of Lifeco common stock. The liability and corresponding expense are adjusted accordingly until the award is settled.
Compensation Expense Related to Share-Based Compensation
The compensation expense related to share-based compensation was as follows:
Year Ended December 31, | ||||||||||||
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2018 | 2017 | 2016 | ||||||||||
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Lifeco Stock Plan | $ | 768 | $ | 1,451 | $ | 2,113 | ||||||
Performance Share Unit Plan | 5,388 | 7,207 | 5,318 | |||||||||
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Total compensation expense | $ | 6,156 | $ | 8,658 | $ | 7,431 | ||||||
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Income tax benefits | $ | 1,243 | $ | 2,831 | $ | 2,445 |
During the year ended December 31, 2018, 2017 and 2016, the Company had $26, $769 and $555 respectively, income tax benefits realized from stock options exercised.
The following table presents the total unrecognized compensation expense related to share-based compensation at December 31, 2018 and the expected weighted average period over which these expenses will be recognized:
Expense | Weighted average period (years) | |||||||
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Lifeco Stock Plan | $ | 819 | 1.6 | |||||
Performance Share Unit Plan | 8,403 | 1.4 |
Equity Award Activity
During the year ended December 31, 2018, Lifeco granted 473,400 stock options to employees of the Company. These stock options vest over five-year periods ending in 2023. Compensation expense of $448 will be recognized in the Company’s financial statements over the vesting period of these stock options using the accelerated method of recognition.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The following table summarizes the status of, and changes in, the Lifeco plan options granted to Company employees which are outstanding. The options granted relate to underlying stock traded in Canadian dollars on the Toronto Stock Exchange; therefore, the amounts, which are presented in United States dollars, will fluctuate as a result of exchange rate fluctuations.
Weighted average | ||||||||||||||
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Shares under option | Exercise price (Whole dollars) | Remaining contractual term (Years) | Aggregate intrinsic value (1) | |||||||||||
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Outstanding, January 1, 2018 | 3,446,975 | $ | 24.88 | |||||||||||
Granted | 473,400 | 25.15 | ||||||||||||
Exercised | (114,589 | ) | 21.06 | |||||||||||
Cancelled and expired | (156,000 | ) | 24.54 | |||||||||||
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Outstanding, December 31, 2018 | 3,649,786 | 23.32 | 5.9 | $ | 2,339 | |||||||||
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Vested and expected to vest, December 31, 2018 | 3,649,786 | 23.32 | 5.9 | 2,144 | ||||||||||
Exercisable, December 31, 2018 | 2,323,353 | 21.95 | 4.7 | 2,144 |
(1) The aggregate intrinsic value is calculated as the difference between the market price of Lifeco common shares on December 31, 2018 and the exercise price of the option (only if the result is positive) multiplied by the number of options.
The following table presents additional information regarding stock options under the Lifeco plan:
Year Ended December 31, | ||||||||||||
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Weighted average fair value of options granted | $ | 0.95 | $ | 2.75 | $ | 2.74 | ||||||
Intrinsic value of options exercised (1) | 345 | 2,869 | 2,102 | |||||||||
Fair value of options vested | 1,115 | 2,203 | 1,605 |
(1)The intrinsic value of options exercised is calculated as the difference between the market price of Lifeco common shares on the date of exercise and the exercise price of the option multiplied by the number of options exercised.
The fair value of the options granted during the years ended December 31, 2018, 2017 and 2016 was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
Year Ended December 31, | ||||||||||||
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Dividend yield | 4.55 | % | 3.98 | % | 3.99 | % | ||||||
Expected volatility | 9.01 | % | 13.99 | % | 19.03 | % | ||||||
Risk free interest rate | 2.03 | % | 1.25 | % | 0.80 | % | ||||||
Expected duration (years) | 6.0 | 6.0 | 6.0 |
Liability Award Activity
The following table summarizes the status of, and changes in, the Performance Share Unit Plan units granted to Company employees which are outstanding:
Performance Units | ||||
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Outstanding, January 1, 2018 | 681,510 | |||
Granted | 405,464 | |||
Forfeited | (18,397 | ) | ||
Paid | (157,510 | ) | ||
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Outstanding, December 31, 2018 | 911,067 | |||
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Vested and expected to vest, December 31, 2018 | 911,067 |
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The cash payment in settlement of the Performance Share Unit Plan units was $4,104, $3,398 and $3,988 for the years ended December 31, 2018, 2017 and 2016, respectively.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Individual life insurance premiums paid, net of reinsurance, under individual life insurance participating policies were 1%, 6%, and (2)% of total individual life insurance premiums earned during the years ended December 31, 2018, 2017 and 2016 respectively. The Company accounts for its policyholder dividends based upon the three-factor formula. The Company paid dividends in the amount of $31,276, $38,782 and $45,842 to its policyholders during the years ended December 31, 2018, 2017 and 2016, respectively.
No customer accounted for 10% or more of the Company’s revenues during the year ended December 31, 2018. In addition, neither Individual Markets nor Empower Retirement is dependent upon a single customer or a few customers. The loss of business from any one, or a few, independent brokers or agents would not have a material adverse effect on the Company or any of its business agents.
20. Commitments and Contingencies
Future Contractual Obligations
The following table summarizes the Company’s estimated future contractual obligations:
Payment due by period | ||||||||||||||||||||||||||||
| 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | |||||||||||||||||||||
Surplus notes - principal(1) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 553,219 | $ | 553,219 | ||||||||||||||
Surplus notes - interest(2) | 30,335 | 30,335 | 30,335 | 30,335 | 30,335 | 557,094 | 708,769 | |||||||||||||||||||||
Investment purchase obligations(3) | 136,396 | — | — | — | — | — | 136,396 | |||||||||||||||||||||
Operating leases(4) | 9,929 | 7,844 | 3,717 | 1,235 | 1,037 | 11,743 | 35,505 | |||||||||||||||||||||
Other liabilities(5) | 23,334 | 26,774 | 12,695 | 19,579 | 6,935 | 16,204 | 105,521 | |||||||||||||||||||||
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Total | $ | 199,994 | $ | 64,953 | $ | 46,747 | $ | 51,149 | $ | 38,307 | $ | 1,138,260 | $ | 1,539,410 | ||||||||||||||
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(1)Surplus notes principal - Represents contractual maturities of principal due to the Company’s parent, GWL&A Financial, under the terms of three long-term surplus notes. The amounts shown in this table differ from the amounts included in the Company’s Statement of Admitted Assets, Liabilities, Capital and Surplus because the amounts shown above do not consider the discount upon the issuance of one of the surplus notes.
(2)Surplus notes interest - One long-term surplus note bears interest at a fixed rate through maturity. The second surplus note bore interest initially at a fixed rate but changed during 2016 to be based upon the current three-month London Interbank Offering Rate in addition to a spread. The third long-term surplus note bears interest at a fixed rate through maturity. The interest payments shown in this table are calculated based upon the contractual rates in effect on December 31, 2018 and do not consider the impact of future interest rate changes.
(3)Investment purchase obligations -The Company makes commitments to fund partnership interests, mortgage loans, and other investments in the normal course of its business. As the timing of the fulfillment of the commitment to fund partnership interests cannot be predicted, such obligations are presented in the less than one year category. The timing of the funding of mortgage loans is based on the expiration date of the commitment. The amounts of these unfunded commitments at December 31, 2018 and 2017 were $136,396 and $313,242, of which $104,286 and $114,726 were related to cost basis limited partnership interests, respectively. All unfunded commitments at December 31, 2018 were due within one year. At December 31, 2017, $312,152 is due within one year, and $1,090 is due within one to three years.
(4) Operating leases - The Company is obligated to make payments under variousnon-cancelable operating leases, primarily for office space. Contractual provisions exist that could increase the lease obligations presented, including operating expense escalation clauses. Management does not consider the impact of any such clauses to be material to the Company’s operating lease obligations. Rent expense for the years ended December 31, 2018, 2017 and 2016 were $27,768, $28,244 and $27,815 respectively.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
From time to time, the Company enters into agreements or contracts, including capital leases, to purchase goods or services in the normal course of its business. However, these agreements and contracts are not material and are excluded from the table above.
(5) Other liabilities - Other liabilities include those other liabilities which represent contractual obligations not included elsewhere in the table above. If the timing of the payment of any other liabilities was sufficiently uncertain, the amounts were included in the less than one year category. Other liabilities presented in the table above include:
• | Expected benefit payments for the Company’s post-retirement medical plan and supplemental executive retirement plan through 2027 |
• | Unrecognized tax benefits |
• | Miscellaneous purchase obligations to acquire goods and services |
The Company has a revolving credit facility agreement in the amount of $50,000 for general corporate purposes. The credit facility expired on March 1, 2018 and was replaced with a revolving credit facility agreement in the amount of $50,000 with an expiration date of March 1, 2023. 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, of $1,022,680, as defined in the credit facility agreement (compiled on the unconsolidated statutory accounting basis prescribed by the NAIC), at any time. The Company was in compliance with all covenants at December 31, 2018 and 2017. At December 31, 2018 and 2017 there were no outstanding amounts related to the current and prior credit facilities.
In addition, the Company has other letters of credit with a total amount of $9,095, renewable annually for an indefinite period of time. At December 31, 2018 and 2017, there were no outstanding amounts related to those letters of credit.
Contingencies
From time to time, the Company may be threatened with, or named as a defendant in, lawsuits, arbitrations, and administrative claims. Any such claims that are decided against the Company could harm the Company’s business. The Company is also subject to periodic regulatory audits and inspections which could result in fines or other disciplinary actions. Unfavorable outcomes in such matters may result in a material impact on the Company’s financial position, results of operations, or cash flows.
The Company is defending lawsuits relating to the costs and features of certain of its retirement or fund products. Management believes the claims are without merit and will defend these actions. Based on the information known, these actions will not have a material adverse effect on the financial position of the Company.
The Company is involved in other various legal proceedings that arise in the ordinary course of its business. In the opinion of management, after consultation with counsel, the likelihood of loss from the resolution of these proceedings is remote and/or the estimated loss is not expected to have a material effect on the Company’s financial position, results of its operations, or cash flows.
The Company and GWL&A NY have an agreement whereby the Company has committed to provide financial support to GWL&A NY related to the maintenance of adequate regulatory surplus and liquidity. The Company is obligated to invest in shares of GWL&A NY in order for GWL&A NY to maintain the capital and surplus at the greater of 1) $6,000, 2) 200% of GWL&A NY RBC minimum capital requirements if GWL&A NY total assets are less than $3,000,000 or 3) 175% of GWL&A NY RBC minimum capital requirements if GWL&A NY total assets are $3,000,000 or more. There is no limitation on the maximum potential future payments under the guarantee. The Company has no liability at December 31, 2018 and 2017 for obligations under the guarantee.
Management has evaluated subsequent events for potential recognition or disclosure in the Company’s statutory financial statements through March 12, 2019, the date on which they were issued.
On January 24, 2019, the Company announced that it had entered into an agreement with Protective Life Insurance Company (“Protective”) to sell, via indemnity reinsurance, substantially all of its non-participating individual life insurance and annuity
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
business and group life and health business. The transaction is in its initial stage, and is expected to close in the first half of 2019 subject to regulatory and customary closing conditions. On the closing date of the proposed transaction, the Company will transfer to Protective assets equal to the statutory liabilities being reinsured and will receive a ceding commission (subject to post-closing adjustments) from Protective in consideration of the transferred business.
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Individual Single Premium Deferred
Index-Linked Annuity Contract
Tel. (866) 543-7899
• | Is NOT a bank deposit |
• | Is NOT FDIC insured |
• | Is NOT insured or endorsed by a bank or any government agency |
• | Is NOT available in every state |
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D-1 |
• | Sole Owner who is an individual or trust with a natural person as grantor. |
• | Sole Owner who is an individual and his or her spouse as the joint owner or trust with a natural person and his or her spouse as grantors (available for Non-Qualified Contracts only). |
Reference Indices |
S&P 500® Price Return Index (S&P 500 Index) |
MSCI EAFE Price Return Index (MSCI EAFE Index) |
Russell 2000® Price Return Index (Russell 2000 Index) |
NASDAQ-100® Price Return Index (NASDAQ Index) |
Crediting Factors available for each Reference Index |
Floor of 0% |
Floor of -10.0% |
Buffer of -10.0% |
Annuity Administration
• | The Strategy Interest MVA Factor is subject to a six year term that begins on the Contract Effective Date and renews every six years for the life of your Contract through the Accumulation Period. The Strategy Interest MVA Factor may result in an adjustment to a Gross Withdrawal taken on any day, including a Strategy Term End Date, except a Strategy Interest Term End Date, which occurs once every six years. |
• | The Strategy Index MVA Factor may result in an adjustment to a Gross Withdrawal on any day, except a Strategy Term End Date. On any Strategy Term End Date the Strategy Term Index Factor will equal zero and will not result in any related adjustment to the Gross Withdrawal. |
• | Withdrawals each year up to a free annual withdrawal amount that is equal to 10% of your remaining Purchase Payment, beginning in Contract Year 2, which is your initial Purchase Payment reduced by the Gross Withdrawal of any partial withdrawal, including free annual withdrawal amounts and required minimum distributions (RMDs). |
• | Hardship Waiver, as applied to a surrender, due to a terminal illness or being confined to a nursing home or hospital for an extended period of time. |
• | Partial withdrawals taken as RMDs under the Code from a Qualified IRA annuity contract or from a Contract held in an IRA account. |
• | There is a sufficiently large market in exchange traded and/or over-the-counter options, futures and similar derivative instruments based on the index to allow the Company to hedge Strategy Credit Rates; |
• | The index is recognized as a broad-based index for the relevant market; and |
• | The publisher of the index allows the Company to use the index in the Contract and other materials for a reasonable fee. |
• | our investment portfolio could incur other than temporary impairments; |
• | due to potential downgrades in our investment portfolio, we could be required to raise additional capital to sustain our current business in force and new sales of our annuity products, which may be difficult in a distressed market. If capital would be available, it may be at terms that are not favorable to us; or |
• | our liquidity could be negatively affected and we could be forced to further limit our operations and our business could suffer, as we need liquidity to pay our policyholder benefits and operating expenses. |
Annuity Administration
• | such annuity is distributed in substantially equal installments over the life or life expectancy of the Beneficiary or over a period not extending beyond the life expectancy of the Beneficiary; and |
• | such distributions begin no later than one year after the Owner’s date of death. |
Reference Indices |
S&P 500® Price Return Index. The S&P 500® Price Return Index was established by Standard & Poor’s. The S&P 500® Price Return Index includes 500 leading companies in leading industries of the US economy, capturing 75% coverage of U.S. equities. The S&P 500® Price Return Index does not include dividends declared by any of the companies included in this Index. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”). This trademark has been licensed for use by S&P Dow Jones Indices LLC. S&P marks are trademarks of S&P. These trademarks have been sublicensed for certain purposes by the Company. The S&P® Price Return Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and have been licensed for use by the Company. The Company’s products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or any of their respective affiliates (collectively, the “S&P Dow Jones Indices”). S&P Dow Jones Indices make no representation or warranty, express or implied, to the Owners of the Company’s products or any member of the public regarding the advisability of investments generally or in the Company’s products particularly or the ability of the S&P 500® Price Return Index to track general market performance. S&P Dow Jones Indices’ only relationship to the Company with respect to the S&P 500® Price Return Index is the licensing of the S&P 500® Price Return Index and certain trademarks, service marks, and/or trade names of S&P Dow Jones Indices and/or its licensors. The S&P 500® Price Return Index is determined, composed, and calculated by S&P Dow Jones Indices without regard to the Company or its product(s). S&P Dow Jones Indices have no obligation to take the needs of the Company or the Owner(s) of its products into consideration in determining, composing, or calculating the S&P 500® Price Return Index. S&P Dow Jones Indices are not responsible for and have not participated in the determination of the prices, and amount of the Contract or the timing of the issuance or sale of such Contract or in the determination or calculation of the equation by which such Contract is to be converted into cash, surrendered, or redeemed, as the case may be. S&P Dow Jones Indices have no obligation or liability in connection with the administration, marketing or trading of the Company’s products. There is no assurance that investment products based on the S&P 500® Price Return Index will accurately track performance or provide positive investment returns. S&P Dow Jones Indices LLC is not an investment advisor. Inclusion of a security with an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such security, nor is it considered to be investment advice. S&P DOW JONES INDICES DOES NOT GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE INDEXES OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P DOW JONES INDICES SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY THE COMPANY, OWNERS OF THE CONTRACT, OR |
ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500® PRICE RETURN INDEX OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P DOW JONES INDICES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBLITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN S&P DOW JONES INDICES AND THE COMPANY, OTHER THAN THE LICENSORS OF S&P DOW JONES INDICES. The name “S&P 500® Price Return Index” is a trademark of Standard & Poor’s and has been licensed for use by the Company. |
MSCI EAFE Price Return Index. The MSCI EAFE Price Return Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US and Canada. As of the date of this prospectus, the MSCI EAFE consists of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. The MSCI EAFE Price Return Index does not include dividends declared by any of the companies included in this Index. Index Value and Index Performance will be calculated without any exchange rate adjustment. THIS PRODUCT IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY MSCI INC. (“MSCI”), ANY OF ITS AFFILIATES, ANY OF ITS INFORMATION PROVIDERS OR ANY OTHER THIRD PARTY INVOLVED IN, OR RELATED TO, COMPILING, COMPUTING OR CREATING ANY MSCI INDEX (COLLECTIVELY, THE “MSCI PARTIES”). THE MSCI INDEXES ARE THE EXCLUSIVE PROPERTY OF MSCI. MSCI AND THE MSCI INDEX NAMES ARE SERVICE MARK(S) OF MSCI OR ITS AFFILIATES AND HAVE BEEN LICENSED FOR USE FOR CERTAIN PURPOSES BY THE COMPANY. NONE OF THE MSCI PARTIES MAKES ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE ISSUER OR OWNERS OF THIS PRODUCT OR ANY OTHER PERSON OR ENTITY REGARDING THE ADVISABILITY OF INVESTING IN PRODUCTS GENERALLY OR IN THIS PRODUCT PARTICULARLY OR THE ABILITY OF ANY MSCI INDEX TO TRACK CORRESPONDING STOCK MARKET PERFORMANCE. MSCI OR ITS AFFILIATES ARE THE LICENSORS OF CERTAIN TRADEMARKS, SERVICE MARKS AND TRADE NAMES AND OF THE MSCI INDEXES WHICH ARE DETERMINED, COMPOSED AND CALCULATED BY MSCI WITHOUT REGARD TO THIS PRODUCT OR THE ISSUER OR OWNERS OF THIS PRODUCT OR ANY OTHER PERSON OR ENTITY. NONE OF THE MSCI PARTIES HAS ANY OBLIGATION TO TAKE THE NEEDS OF THE ISSUER OR OWNERS OF THIS PRODUCT OR ANY OTHER PERSON OR ENTITY INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE MSCI INDEXES. NONE OF THE MSCI PARTIES IS RESPONSIBLE FOR OR HAS PARTICIPATED IN THE DETERMINATION OF THE TIMING OF, PRICES AT, OR QUANTITIES OF THIS PRODUCT TO BE ISSUED OR IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY OR THE CONSIDERATION INTO WHICH THIS PRODUCT IS REDEEMABLE. FURTHER, NONE OF THE MSCI PARTIES HAS ANY OBLIGATION OR LIABILITY TO THE ISSUER OR OWNERS OF THIS PRODUCT OR ANY OTHER PERSON OR ENTITY IN CONNECTION WITH THE ADMINISTRATION, MARKETING OR OFFERING OF THIS PRODUCT. ALTHOUGH MSCI SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE CALCULATION OF THE MSCI INDEXES FROM SOURCES THAT MSCI CONSIDERS RELIABLE, NONE OF THE MSCI PARTIES WARRANTS OR GUARANTEES THE ORIGINALITY, ACCURACY AND/OR THE COMPLETENESS OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. NONE OF THE MSCI PARTIES MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER OF THE PRODUCT, OWNERS OF THE PRODUCT, OR ANY OTHER PERSON OR ENTITY, FROM THE USE OF ANY MSCI INDEX OR ANY DATA |
INCLUDED THEREIN. NONE OF THE MSCI PARTIES SHALL HAVE ANY LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS OF OR IN CONNECTION WITH ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. FURTHER, NONE OF THE MSCI PARTIES MAKES ANY EXPRESS OR IMPLIED WARRANTIES OF ANY KIND, AND THE MSCI PARTIES HEREBY EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO EACH MSCI INDEX AND ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL ANY OF THE MSCI PARTIES HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. No purchaser, seller or holder of this security, product or product, or any other person or entity, should use or refer to any MSCI trade name, trademark or service mark to sponsor, endorse, market or promote this security without first contacting MSCI to determine whether MSCI’s permission is required. Under no circumstances may any person or entity claim any affiliation with MSCI without the prior written permission of MSCI. |
Russell 2000® Price Return Index. The Russell 2000® Price Return Index was established by Russell Investments. The Russell 2000® Price Return Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000® Price Return Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000® Price Return Index does not include dividends declared by any of the companies included in this Index. The Russell 2000 Price Return Index® is a trademark of Frank Russell Company (“Russell”) and has been licensed for use by the Company. The Company’s products are not in any way sponsored, endorsed, sold or promoted by Russell or the London Stock Exchange Group companies (“LESG”) (together the “Licensor Parties”) and none of the Licensor Parties make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to (i) the results to be obtained from the use of the Russell 2000® Price Return Index (upon which the Company’s product is based), (ii) the figure at which the Index is said to stand at any particular time on any particular day or otherwise, or (iii) the suitability of the Russell 2000® Price Return Index for the purpose to which it is being put in connection the Company’s product. None of the Licensor Parties have provided or will provide any financial or investment advice or recommendation in relation to the Russell 2000® Price Return Index, to the Company, or to the Company’s clients. The Russell 2000® Price Return Index is calculated by Russell or its agent. None of the Licensor Parties shall be (a) liable (whether in negligence or otherwise) to any person for any error in the Russell 2000® Price Return Index or (b) under any obligation to advise any person of any error therein. |
NASDAQ-100® Price Return Index. The NASDAQ-100 Price Return Index® includes 100 of the largest domestic and international non-financial securities listed on The Nasdaq Stock Market based on market capitalization. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain securities of financial companies including investment companies. The NASDAQ-100 Price Return Index® does not include dividends declared by any of the companies included in this Index. The Product(s) is not sponsored, endorsed, sold or promoted by Nasdaq, Inc. or its affiliates (Nasdaq, with its affiliates, are referred to as the “Corporations”). The Corporations have not passed on the legality or suitability of, or the accuracy or adequacy of descriptions and disclosures relating to, the Product(s). The Corporations make no representation or warranty, express or implied to the owners of the Product(s) or any member of the public regarding the advisability of investing in securities generally or in the Product(s) particularly, or the ability of the index to track general stock market performance. The Corporations' only relationship to Great-West Life & Annuity Insurance Company (“Licensee”) is in the licensing of the Nasdaq®, and certain trade names of the Corporations and the use of the index which is determined, |
composed and calculated by Nasdaq without regard to Licensee or the Product(s). Nasdaq has no obligation to take the needs of the Licensee or the owners of the Product(s) into consideration in determining, composing or calculating the index. The Corporations are not responsible for and have not participated in the determination of the timing of, prices at, or quantities of the Product(s) to be issued or in the determination or calculation of the equation by which the Product(s) is to be converted into cash. The Corporations have no liability in connection with the administration, marketing or trading of the Product(s). The Corporations do not guarantee the accuracy and/or uninterrupted calculation of the NASDAQ-100 Price Return Index® or any data included therein. The Corporations make no warranty, express or implied, as to results to be obtained by Licensee, owners of the product(s), or any other person or entity from the use of the NASDAQ-100 Price Return Index® or any data included therein. The Corporations make no express or implied warranties, and expressly disclaim all warranties of merchantability or fitness for a particular purpose or use with respect to the NASDAQ-100 Price Return Index® or any data included therein. Without limiting any of the foregoing, in no event shall the Corporations have any liability for any lost profits or special, incidental, punitive, indirect, or consequential damages, even if notified of the possibility of such damages. |
• | There is a sufficiently large market in exchange traded and/or over-the-counter options, futures and similar derivative instruments based on the index to allow the company to hedge Strategy Credit Rates; |
• | The index is recognized as a broad-based index for the relevant market; and |
• | The publisher of the index allows the Company to use the index in the Contract and other materials for a reasonable fee. |
Crediting Factors available for all Strategies |
Floor of 0% |
Floor of -10.0% |
Buffer of -10.0% |
• | changes in derivative, equity and/or fixed income instrument valuations; |
• | increases in hedging costs that have an impact on the Company’s ability to offer the Contract; |
• | derivative market changes that impact availability and structure of derivative instruments used to hedge market risk associated with the Reference Indices; |
• | negative fixed income instrument default experience realized by the Company; |
• | changes in Company and/or Contract cost structure due to regulatory or other business management concerns; and |
• | unanticipated Owner experience that varies from our actuarial assumptions. |
A = | Strategy Base, which equals: |
• | Purchase Payment allocated to the Strategy on the Effective Date; or |
• | Thereafter, the Strategy Value as of the current Strategy Term Start Date, less any subsequent Strategy Base Withdrawal. |
B = | the rate measuring the interim performance of the Reference Strategy since the Strategy Term Start Date, as determined by the Crediting Factor and the performance of the Reference elected Index (“Strategy Credit Rate”), as measured from the Strategy Term Start Date. |
C = | the Contract Fee percentage that is used to calculate the Contract Fee. |
D = | the number of years (whole and partial) that have elapsed since the Strategy Term Start Date. |
• | The Cap, prescribed by the Strategy, which is the maximum positive interest rate that we will use in the calculation of Strategy Credit; and |
• | Any Floor, prescribed by the Strategy, which is the maximum negative interest rate that we will use in the calculation of Strategy Credit, as applicable; or |
• | Any Buffer, prescribed by the Strategy, which is the maximum decline in Index Value that the Company will absorb before applying a negative interest rate to your Strategy Value. |
Strategy Credit Rate = 8%
Strategy Credit Rate= -10%
Strategy Credit Rate = -5%
Strategy Credit Rate = 0%
Strategy Credit Rate = 5%
Contract Information on Effective Date: | |
Effective Date: | 5/1/16 |
Contract Anniversary: | 5/1/17 |
Strategy Value (as of 5/1/16): | $100,000 |
Selected Reference Index: | S&P 500® Price Return Index |
Floor: | 0% |
Cap: | 3.50% |
Example 1A– Index Performance is less than the Floor: | |
Index Value (as of 5/1/16): | $2,100 |
Index Value (as of 5/1/17): | $2,000 |
Index Performance: | -4.76% |
Strategy Credit Rate: | 0.00% |
Strategy Credit | $0 |
Example 1B– Index Performance more than the Floor, but less than the Cap: | |
Index Value (as of 5/1/16): | $2,100 |
Index Value (as of 5/1/17): | $2,150 |
Index Performance: | 2.38% |
Strategy Credit Rate: | 2.38% |
Strategy Credit | $2,380 |
Example 1C– Index Performance more than the Cap: | |
Index Value (as of 5/1/16): | $2,100 |
Index Value (as of 5/1/17): | $2,200 |
Index Performance: | 4.76% |
Strategy Credit Rate: | 3.50% |
Strategy Credit | $3,500 |
Contract Information on Effective Date: | |
Effective Date: | 5/1/16 |
Contract Anniversary: | 5/1/17 |
Strategy Value (as of 5/1/16): | $100,000 |
Selected Reference Index: | S&P 500® Price Return Index |
Floor: | -10.00% |
Cap: | 13.50% |
Example 2A– Index Performance is less than the Floor: | |
Index Value (as of 5/1/16): | $2,100 |
Index Value (as of 5/1/17): | $1,800 |
Index Performance: | -14.29% |
Strategy Credit Rate: | -10.00% |
Strategy Credit | -$10,000 |
Example 2B– Index Performance more than the Floor, but less than the Cap: | |
Index Value (as of 5/1/16): | $2,100 |
Index Value (as of 5/1/17): | $2,300 |
Index Performance: | 9.52% |
Strategy Credit Rate: | 9.52% |
Strategy Credit | $9,520 |
Example 2C– Index Performance more than the Cap: | |
Index Value (as of 5/1/16): | $2,100 |
Index Value (as of 5/1/17): | $2,500 |
Index Performance: | 19.05% |
Strategy Credit Rate: | 13.50% |
Strategy Credit | $13,500 |
Contract Information on Effective Date: | |
Effective Date: | 5/1/16 |
Contract Anniversary: | 5/1/17 |
Strategy Value (as of 5/1/16): | $100,000 |
Selected Reference Index: | S&P 500® Price Return Index |
Buffer: | -10.00% |
Cap: | 13.50% |
Example 3A– Index Performance is less than the Buffer: | |
Index Value (as of 5/1/16): | $2,100 |
Index Value (as of 5/1/17): | $1,800 |
Index Performance: | -14.29% |
Strategy Credit Rate: | 0.00% |
Strategy Credit | -$4,290 |
Example 3B– Index Performance more than the Floor, but less than the Cap: | |
Index Value (as of 5/1/16): | $2,100 |
Index Value (as of 5/1/17): | $2,300 |
Index Performance: | 9.52% |
Strategy Credit Rate: | 9.52% |
Strategy Credit | $9,520 |
Example 3C– Index Performance more than the Cap: | |
Index Value (as of 5/1/16): | $2,100 |
Index Value (as of 5/1/17): | $2,500 |
Index Performance: | 19.05% |
Strategy Credit Rate: | 13.50% |
Strategy Credit | $13,500 |
• | free annual withdrawal amounts; |
• | a surrender that qualifies as Hardship Waiver such as the Nursing Home or Hospital waiver or terminal illness waiver, as described in this prospectus; |
• | partial withdrawals taken as RMDs under the Code, as permitted pursuant to a systematic withdrawal option we provide; and |
• | Income Payments during the Payment Period. |
A = | Strategy MVA Factor, |
B = | the amount of Strategy Base that is withdrawn as a result of the Request for a partial withdrawal (“Strategy Base Withdrawal”), |
C = | Free Annual Withdrawal Amount as of the date of the Request, prior to the Request, |
D = | Strategy Base as of the date of the Request, prior to the Request, and |
E = | Contract Base as of the date of the Request, prior to the Request. |
A = | Strategy Interest MVA Factor, and |
B = | Strategy Index MVA Factor. |
A = | Interest MVA Rate 1 as calculated on the Interest MVA Term Start Date using the Constant Maturity Treasury rate assuming a term-to-maturity equal to the Interest MVA Term, |
B = | Interest MVA Rate 2 as calculated on the Interest MVA Term Start Date using The ICE BofAML 5-7 Year US Corporate Index, |
C = | Interest MVA Rate 1 as calculated on the date of the Request using the Constant Maturity Treasury rate assuming a term-to-maturity equal to the number of years (whole and partial) from the date of the Request until the Interest MVA Term End Date, |
D = | Interest MVA Rate 2 as calculated on the date of the Request using The ICE BofAML 5-7 Year US Corporate Index, and |
E = | The number of years (whole and partial) from the date of the Request to the Interest MVA Term End Date. |
A = | the estimated market value, expressed as a percentage of the Strategy Base, of a set of put and call options as determined by an option pricing formula (“Strategy Option Value”), as of the date of the Request, |
B = | Strategy Credit Rate as of the date of the Request, |
C = | Strategy Option Value as calculated on the Strategy Term Start Date, |
D = | The number of years (whole and partial) from the date of the Request to the Strategy Term End Date, and |
E = | Strategy Term. |
• | Nursing Home or Hospital Waiver. We will not apply an MVA in the case of a full surrender where any Owner or Annuitant is confined to a licensed Nursing Home or Hospital, and has been confined to such Nursing Home or Hospital for at least 180 consecutive calendar days after the latter of the Effective Date or the date of change of Owner or Annuitant. We may require verification of confinement to the Nursing Home or Hospital. |
• | Terminal Illness Waiver.We will not apply an MVA in the case of a full surrender where any Owner or Annuitant is diagnosed with a terminal illness and has a life expectancy of 12 months or less from the date of the Request for a withdrawal. As proof, we may require a determination of the terminal illness. Such determination must be signed by a |
licensed physician making the determination after the latter of Effective Date or the date of change of the Owner or Annuitant. The licensed physician must not be the Owner or Annuitant or a member of either’s immediate family. |
A = Contract Value,
B = MVA, and
C = Premium Tax, if any.
A = Gross Withdrawal,
B = MVA, and
C = Premium Tax, if any.
A = | Gross Withdrawal, |
B = | Contract Base, and |
C = | Contract Value. |
A = | Remaining Purchase Payment as of the date the Request for payment is received, prior to the Request, and |
B = | Contract Base Withdrawal. |
A = | Guaranteed Minimum Death Benefit as of the date the Request for payment is received, prior to the Request, |
B = | Contract Base Withdrawal, and |
C = | Contract Base as of the date the Request for payment is received, prior to the partial withdrawal. |
A = | Contract Base Withdrawal, |
B = | Strategy Base as of the date the Request for payment is received, and |
C = | Contract Base as of the date the Request for payment is received. |
A = | Strategy Base as of the date the Request for payment is received, and |
B = | Strategy Base Withdrawal. |
A = | Strategy Base Withdrawal, |
B = | Strategy Credit Rate as of the date the Request for payment is received, |
C = | Contract Fee Percentage, and |
D = | the number of years (whole and partial) that have elapsed since the Strategy Term Start Date. |
• | the Surrender Value or Contract Value on the date we receive Due Proof of Death, as of the date the Request for payment of the Death Benefit is received, minus any Premium Tax; or |
• | the total Purchase Payment applied to the Contract, as of the date the Request for payment is received, less any surrenders, partial or periodic withdrawals and Premium Tax, if any. |
• | Due Proof of Death of the Owner while the Contract is in force; |
• | our claim form from each Beneficiary, properly completed; and |
• | any other documents we require. |
• | Spouses – If the sole Beneficiary is the surviving Spouse of the deceased Owner, then he or she may choose to continue the Contract and become the new Owner. At the death of the surviving Spouse, this provision may not be used again, even if that surviving Spouse remarries. In that case, the rules for non-Spouses will apply. A surviving Spouse may also elect to receive the Death Benefit in a lump sum, apply the proceeds to an Annuity Payment Option, or receive the Death Benefit within five years of the date of the Owner’s death. |
• | Non-Spouses – If the Beneficiary is not the surviving Spouse of the deceased Owner, then this Contract cannot be continued. Instead, upon the death of any Owner, the Beneficiary must choose one of the following: |
○ | Receive the Death Benefit in one lump sum following our receipt of Due Proof of Death; |
○ | Receive the Death Benefit (if the Beneficiary is a natural person) pursuant to one of the Annuity Payment Options. Payments under an Annuity Payment Option must begin within 1 year of the Owner’s death and must not extend beyond the Beneficiary’s life or a period certain equal to the Beneficiary’s life expectancy; or |
○ | Receive the Death Benefit within five (5) years of the date of the Owner’s death. |
• | made on or after the taxpayer reaches age 59 1⁄2; |
• | made on or after the death of an Owner; |
• | attributable to the taxpayer’s becoming disabled; or |
• | made as part of a series of substantially equal periodic payments for the life (or life expectancy) of the taxpayer. |
(In millions) | |||
Year Ended December 31, | General Account Annuity Benefits Liabilities | Empower Retirement Annuity Separate Accounts | Individual Markets Annuity Separate Accounts |
2018 | $12,948 | $14,763 | $3,009 |
2017 | $12,556 | $18,729 | $2,577 |
2016 | $12,279 | $19,157 | $1,957 |
2015 | $11,309 | $19,340 | $1,660 |
2014 | $10,890 | $20,220 | $1,581 |
(In millions) | |||
Year Ended December 31, | Individual Markets Life Insurance Future Policy Benefits Liabilities | Individual Markets Life Insurance Separate Accounts | Individual Markets Life Insurance In-force |
2018 | $14,554 | $6,304 | $98,202 |
2017 | $14,031 | $6,215 | $97,801 |
2016 | $13,397 | $5,771 | $96,711 |
2015 | $13,245 | $5,479 | $97,862 |
2014 | $12,712 | $5,308 | $97,170 |
Director | Age | From | Principal Occupation(s) for Last Five Years | |||
John L. Bernbach(5)(6) | 75 | 2006 | CEO of The Bernbach Group since July 2015; previously Vice Chairman, Engine | |||
Robin Bienfait(1)(2)(3)(7) | 59 | 2018 | CEO of Emnovate since 2016; previously Executive Vice President and Chief Enterprise Innovation Officer of Samsung Electronics | |||
Marcel Coutu(1)(2)(4)(6)(7) | 65 | 2014 | Corporate Director | |||
André Desmarais(1)(2)(4)(6)(7)(8) | 62 | 1997 | Deputy Chairman, President and Co-Chief Executive Officer, Power Corporation; Executive Co-Chairman, Power Financial Corporation | |||
Paul Desmarais, Jr.(1)(2)(4)(6)(7)(8) | 64 | 1991 | Chairman and Co-Chief Executive Officer, Power Corporation; Executive Co-Chairman, Power Financial Corporation | |||
Gary A. Doer(1)(2)(6)(7) | 70 | 2016 | Senior Business Advisor, Dentons Canada LLP since August 2016; previously Canada’s Ambassador to the United States | |||
Gregory J. Fleming(1)(2)(7) | 56 | 2016 | Chief Executive Officer, Rockefeller Capital Management since October 2017; previously Corporate Director since October 2015; previously President of Morgan Stanley Investment Management | |||
Claude Généreux(1)(2)(4)(7) | 56 | 2015 | Executive Vice President, Power Corporation and Power Financial Corporation | |||
Alain Louvel(3)(5) | 73 | 2006 | Corporate Director | |||
Paula B. Madoff(1)(2)(3)(7) | 51 | 2018 | Advisory Director, Goldman Sachs since August 2017; previously Partner and Head of Sales and Distribution for Interest Rate Products and Mortgage, Goldman Sachs | |||
Paul A. Mahon(1)(2)(4) | 55 | 2013 | President and Chief Executive Officer, Lifeco, Great-West Life, CLAC and London Life | |||
R. Jeffrey Orr(1)(2)(4)(6)(7) | 60 | 2005 | Chairman of the Board of the Company; Chairman of the Board of Lifeco, Great-West Life, CLAC and London Life; President and Chief Executive Officer, Power Financial Corporation | |||
Robert L. Reynolds(1) | 67 | 2014 | President and Chief Executive Officer since May 2014; President and Chief Executive Officer of Putnam Investments, LLC | |||
T. Timothy Ryan, Jr.(1)(2)(4)(6)(7) | 73 | 2009 | Corporate Director since May 2014; previously Vice Chairman of Regulatory Affairs at JP Morgan Chase | |||
Jerome J. Selitto(1)(2)(7) | 77 | 2012 | President, Avex Funding Corporation since April 2015; previously Chief Executive Officer of PHH Corporation | |||
Gregory D. Tretiak(1)(2)(3)(7) | 63 | 2012 | Executive Vice President and Chief Financial Officer, Power Corporation | |||
Brian E. Walsh(1)(2)(4)(6)(7) | 65 | 1995 | Partner and Chief Strategist, Titan Advisors, LLC since July, 2015; previously Chairman and Chief Investment Officer, Saguenay Strathmore Capital, LLC |
(1) | Member of the Executive Committee. |
(2) | Member of the Investment and Credit Committee. |
(3) | Member of the Audit Committee. |
(4) | Member of the Human Resources Committee. |
(5) | Member of the Conduct Review Committee. |
(6) | Member of the Governance and Nominating Committee. |
(7) | Member of the Risk Committee. |
(8) | Mr. André Desmarais and Mr. Paul Desmarais, Jr. are brothers. |
Director | Current Directorships | Former Directorships and Dates |
John L. Bernbach | Omnicare, Inc. March 2013– August 2015 | |
Robin Bienfait | Mitsubishi UFJ Financial Group | |
Marcel Coutu | Brookfield Asset Management Inc. Enbridge Inc. | Canadian Oil Sands Limited September 2001– December 2014 |
André Desmarais | CITIC Pacific Limited December 1997– May 2014 | |
Paul Desmarais, Jr. | Total S.A. May 2002- May 2017 Lafarge S.A. January 2008– July 2015 | |
Gary Doer | Barrick Gold | |
Alain Louvel | Worldpoint Terminals, LP May 2008– September 2017 | |
Paula Madoff | KKR Real Estate Finance Trust | |
R. Jeffrey Orr | PanAgora Asset Management, Inc. | |
Jerome Selitto | Better Mortgage | PHH Corporation October 2009– January 2012 |
T. Timothy Ryan, Jr. | Santander Holdings USA, Inc. | Markit June 2013– October 2014 |
Gregory D. Tretiak | PanAgora Asset Management, Inc. |
Name | Fees Earned or Paid in Cash ($)(3) | Stock Awards ($)(4) | All Other Compensation ($)(5) | Total ($) | ||||
J.L. Bernbach | 89,889 | 68,750 | 148 | 158,787 | ||||
R. Bienfait(1) | 64,634 | 44,437 | 70 | 109,177 | ||||
G.J. Fleming | 100,889 | 68,750 | 148 | 169,787 | ||||
A. Louvel | 103,639 | 68,750 | 148 | 172,537 | ||||
J.E.A. Nickerson(2) | 32,200 | 19,093 | 52 | 51,345 | ||||
R.L. Reynolds | 78,389 | 68,750 | 148 | 147,287 | ||||
R. Royer(2) | — | 58,970 | 13 | 58,983 |
(1) | Ms. Bienfait was elected to the Board of Directors effective June 26, 2018. |
(2) | Messrs. Nickerson and Royer retired from the Board of Directors effective May 18, 2018. |
(3) | Ms. Bienfait and Messrs. Bernbach, Fleming, Louvel, Nickerson and Reynolds elected to receive this portion of their compensation for serving as directors in cash. Amounts payable to Company Directors are paid in the currency of the country of residence. Amounts earned in Canadian dollars have been translated to U.S. dollars at the Conversion Rate. |
(4) | For Ms. Bienfait and Messrs. Bernbach, Fleming, Louvel, Nickerson and Reynolds, these amounts represent the value of Deferred Share Units granted under the mandatory component of the DSUP. For Mr. Royer, this amount represents the value of Deferred Share Units granted under the mandatory and the voluntary components of the DSUP. See the Narrative Description of Company Director Compensation below for additional information regarding the DSUP. The value of these Deferred Share Units is the aggregate grant date fair value. |
(5) | These amounts are life insurance premiums paid under the Great-West Life Director’s Group Life Insurance Plan. Payments are made in Canadian dollars and have been translated to U.S. dollars at the Conversion Rate. |
Audit | $20,000 |
Executive | $25,000 |
Human Resources | $20,000 |
Investment | $20,000 |
Risk | $20,000 |
Audit | $20,000 |
Conduct Review | $7,500 |
Executive | $7,500 |
Governance & Nominating | $7,500 |
Human Resources | $10,000 |
Investment | $15,000 |
Risk | $10,000 |
Equity Investment Sub | $7,500 |
Executive | Age | Officer from | Principal Occupation(s) for Last Five Years | |||
Edmund F. Murphy III President and Chief Executive Officer | 57 | 2014 | President and Chief Executive Officer of the Company since February 2019, previously President, Empower Retirement since September 2014;previously Head of Defined Contribution, Putnam Investments, LLC | |||
Scott C. Sipple President, Great-West Investments | 57 | 2017 | President, Great-West Investments of the Company since October 2017; previously Head of Global Investment Strategies, Putnam Investments, LLC | |||
Robert K. Shaw President, Individual Markets | 63 | 2008 | President, Individual Markets of the Company | |||
Andra S. Bolotin Executive Vice President and Chief Financial Officer | 56 | 2015 | Executive Vice President and Chief Financial Officer of the Company since July 2016; previously Senior Vice President and Chief Financial Officer of the Company since July 2015; previously Head of Corporate Finance and Controller, Putnam Investments, LLC | |||
Richard H. Linton Jr. Executive Vice President, Group Distribution & Operations | 51 | 2016 | Executive Vice President, Group Distribution & Operations of the Company; previously Executive Vice President, Empower Operations since May 2016; previously President Retail Wealth, Voya Financial | |||
Jack E. Brown Senior Vice President, US Chief Investment Officer | 46 | 2015 | Senior Vice President, US Chief Investment Officer of the Company; previously Senior Vice President, Separate Accounts since July 2017; previously Vice President, Investments, since October 2015; previously Vice President, Oppenheimer Funds Inc | |||
Jeffrey W. Knight Senior Vice President and Chief Technology Officer | 61 | 2014 | Senior Vice President and Chief Technology Officer of the Company | |||
Suzanne M. Sanchez Chief Human Resources Officer | 44 | 2011 | Chief Human Resources Officer of the Company | |||
Richard G. Schultz General Counsel and Chief Legal Officer | 58 | 2008 | General Counsel and Chief Legal Officer of the Company |
• | The executive compensation program adopted by the Company and applied to the Named Executive Officers has been designed to: |
• | support the Company’s objective of generating value for shareholders and policyholders over the long term; |
• | attract, retain and reward qualified and experienced executives who will contribute to the success of the Company; |
• | motivate executive officers to meet annual corporate, divisional, and individual performance goals; |
• | promote the achievement of goals in a manner consistent with the Company’s Code of Conduct; and |
• | align with regulatory requirements. |
• | excellence in developing and executing strategies that will produce significant value for shareholders and policyholders over the long term; |
• | management vision and an entrepreneurial approach; |
• | quality of decision-making; |
• | strength of leadership; |
• | record of performance over the long term; and |
• | initiating and implementing transactions and activities that create shareholder and policyholder value. |
• | base salary; |
• | annual incentive bonus; |
• | share units; |
• | options for Lifeco common shares; and |
• | retirement benefits. |
Base Salary | Reflect skills, competencies, experience and performance of the Named Executive Officers |
Annual Incentive Bonus | Reflect performance for the year |
Share Units | More closely align the medium term interests of the Named Executive Officers with the interests of the shareholders |
Stock Options | More closely align the long term interests of the Named Executive Officers with the interests of the shareholders |
Retirement Benefits | Provide for appropriate replacement income upon retirement based on years of service with the Company |
Name and Principal Position | Year | Salary ($) | Bonus ($)(3) | Stock Awards ($)(4) | Option Awards ($)(5) | Non-Equity Incentive Plan Compensation ($)(6) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)(7) | All Other Compensation ($)(8) | Total ($) | |||||||||
Robert L. Reynolds President and Chief Executive Officer | 2018 | 300,000 | — | — | — | 3,000,000 | — | 147,287 | 3,447,287 | |||||||||
2017 | 300,000 | — | — | — | 3,000,000 | — | 116,039 | 3,416,039 | ||||||||||
2016 | 300,000 | — | — | — | 3,000,000 | — | 120,039 | 3,420,039 | ||||||||||
Andra S. Bolotin(1) Executive Vice President and Chief Financial Officer | 2018 | 511,538 | — | 360,006 | 41,610 | 1,176,538 | — | 14,393 | 2,104,085 | |||||||||
2017 | 476,923 | — | 269,999 | 66,783 | 1,144,615 | — | 11,443 | 1,969,763 | ||||||||||
2016 | 423,077 | — | 249,998 | 134,808 | 900,000 | — | 25,994 | 1,733,877 | ||||||||||
Robert K. Shaw President, Individual Markets | 2018 | 543,000 | — | 256,557 | 29,640 | 936,675 | — | 14,393 | 1,780,265 | |||||||||
2017 | 543,000 | 588,667 | 218,983 | 54,175 | 855,225 | 1,820,465 | 7,393 | 4,087,908 | ||||||||||
2016 | 539,942 | — | 244,357 | 87,954 | 675,000 | 1,749,030 | 7,655 | 3,303,938 | ||||||||||
Edmund F. Murphy President, Empower Retirement | 2018 | 800,000 | — | 689,999 | 79,705 | 1,840,000 | — | 13,750 | 3,423,454 | |||||||||
2017 | 800,000 | 1,177,333 | 599,993 | 148,538 | 1,840,000 | — | 10,800 | 4,576,664 | ||||||||||
2016 | 761,538 | — | 499,995 | 269,616 | 1,444,000 | — | 10,268 | 2,985,417 | ||||||||||
Richard H. Linton Jr.(2) Executive Vice President, Empower Operations | 2018 | 500,000 | 300,000 | 329,993 | 38,095 | 880,000 | — | 15,856 | 2,063,945 | |||||||||
2017 | 500,000 | 450,000 | 300,014 | 74,269 | 950,000 | — | 263,158 | 2,537,441 |
(1) | For Ms. Bolotin, the Summary Compensation Table sets forth all compensation paid to Ms. Bolotin by the Company for her service as the Chief Financial Officer of both the Company and Putnam, a portion of which is reimbursed to the Company by Putnam. |
(2) | Mr. Linton joined the Company as Executive Vice President, Empower Operations in May of 2016. |
(3) | This column sets forth special bonuses for (a) Mr. Shaw and Mr. Murphy in relation to the integration of certain large case defined contribution business acquired from J.P. Morgan, and (b) Mr. Linton in connection with his joining the Company. |
(4) | This column sets forth the value of share units granted to each Named Executive Officer under the Executive Share Unit Plan. The amounts shown represent the aggregate grant date fair value of the awards. |
(5) | This column sets forth the value of Lifeco options granted to each Named Executive Officer under the Lifeco Option Plan. The amounts shown represent the aggregate grant date fair value of the awards. For further information, see Note 17 to the Company’s December 31, 2018 Financial Statements include in Appendix A to this prospectus. |
(6) | For Ms. Bolotin and Messrs. Murphy, Shaw and Linton, these amounts represent cash bonuses earned under the Company’s Annual Incentive Bonus Plan and paid in February of 2019. |
(7) | For 2018, Mr. Shaw had a decrease in actuarial present value of his Defined Benefit Plan of $196,906 and a decrease in actuarial present value of his SERP of $132,366, which offset above market earnings under the EDCP of $4,296. Above market earnings under the EDCP equaled the difference between the actual interest earned in 2018 and the amount of interest that would have been earned at a rate of 3.97% (3.97% being 120% of the applicable federal long-term rate at December 31, 2018). |
(8) | The components of 2018 other compensation reported for each of the Named Executive Officers are as follows: |
(a) | Mr. Reynolds received $147,287 in respect of directors’ fees. |
(b) | Ms. Bolotin received (i) a 401(k) Plan employer contribution of $13,750; and (ii) a cell phone stipend of $643. |
(c) | Mr. Murphy received a 401(k) Plan employer contribution of $13,750. |
(d) | Mr. Shaw received (i) a 401(k) Plan employer contribution of $13,750; and (ii) a cell phone stipend of $643. |
(e) | Mr. Linton received (i) a 401(k) plan employer contribution of $13,750; (ii) a relocation benefit payment of $1,859; and (iii) a cell phone stipend of $247. |
Name | Thresolds ($) | Target ($) | Maximum ($) | All Other Stock Awards: Number of Shares of Stock or Units (#)(1) | All Other Option Awards; Securities Underlying Options (#)(2) | Exercise or Base Price of Option Awards ($/Share)(3) | Grant Date Fair Value of Stack and Option awards ($) | |||||||
A.S. Bolotin | — | 1,023,077 | — | 10,280 | 43,800 | 26.42 | 401,616 | |||||||
R.K. Shaw | — | 814,500 | — | 7,326 | 31,200 | 26.42 | 286,197 | |||||||
E.F. Murphy | — | 1,600,000 | — | 19,703 | 83,900 | 26.42 | 769,704 | |||||||
R.H. Linton | — | 800,000 | — | 9,423 | 40,100 | 26.42 | 368,088 |
(1) | These are Executive Share Units granted under the Executive Share Unit Plan. The grant date was January 1, 2018. The Company’s Human Resources Committee approved the grants on February 6, 2018. |
(2) | These are Lifeco options granted under the Lifeco Option Plan. The grant date was March 1, 2018. The Lifeco Human Resources Committee approved the grants on February 6, 2018. |
(3) | Lifeco options are issued with an exercise price in Canadian dollars, which have been translated to U.S. dollars at 1.00/1.295 which was Lifeco’s average rate for 2018 (the “Conversion Rate”). |
(i) | Ms. Bolotin had an opportunity to earn up to 200% of base salary earned in 2018 based on the Company’s financial performance and individual objectives, and an additional amount on a discretionary basis based on individual performance; |
(ii) | Mr. Murphy had an opportunity to earn up to 200% of base salary earned in 2018 based on the Company’s financial performance and individual objectives, and an additional amount on a discretionary basis based on individual performance; |
(iii) | Mr. Shaw had an opportunity to earn up to 150% of base salary earned in 2018 based on the Company’s financial performance and individual objectives, and an additional amount on a discretionary basis based on individual performance; and |
(iv) | Mr. Linton had an opportunity to earn a target bonus of $800,000 in 2018 based on the Company’s financial performance and individual objectives, and an additional amount on a discretionary basis based on individual performance. |
Name | Option Awards | Stock awards | ||||||||||
Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($)(6) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($)(9) | |||||||
A.S. Bolotin | 19,680 | 29,520(3) | 26.78 | February 28, 2026 | 8,362(7) | 235,637 | ||||||
6,780 | 27,120(4) | 28.47 | February 28, 2027 | 10,799(8) | 304,306 | |||||||
— | 43,800(5) | 26.42 | February 28, 2028 | |||||||||
R.K. Shaw | 26,600 | — | 20.97 | February 28, 2021 | 6,782(7) | 191,114 | ||||||
37,600 | — | 17.89 | February 28, 2022 | 7,696(8) | 216,862 | |||||||
31,500 | — | 20.95 | February 28, 2023 | |||||||||
20,960 | 4,240(1) | 24.04 | February 29, 2024 | |||||||||
16,620 | 11,080(2) | 27.51 | February 28, 2025 | |||||||||
12,840 | 19,260(3) | 26.78 | February 28, 2026 | |||||||||
5,500 | 22,000(4) | 28.47 | February 28, 2027 | |||||||||
— | 31,200(5) | 26.42 | February 28, 2028 | |||||||||
E.F. Murphy | 52,440 | 34,960(2) | 27.51 | February 28, 2025 | 18,582(7) | 523,634 | ||||||
39,360 | 59,040(3) | 26.78 | February 28, 2026 | 20,697(8) | 583,243 | |||||||
15,080 | 60,320(4) | 28.47 | February 28, 2027 | |||||||||
— | 83,900(5) | 26.42 | February 28, 2028 | |||||||||
R.H. Linton | 7,540 | 30,160(4) | 28.47 | February 28, 2027 | 9,291(7) | 202,182 | ||||||
— | 40,100(5) | 26.42 | February 28, 2028 | 9,898(8) | 215,389 |
(1) | These options vest 20% of the total grant on March 1, 2019. |
(2) | These options vest 20% of the total grant on each of March 1, 2019 and 2020. |
(3) | These options vest 20% of the total grant on each of March 1, 2019, 2020 and 2021. |
(4) | These options vest 20% of the total grant on each of March 1, 2019, 2020, 2021 and 2022. |
(5) | These options vest 20% of the total grant on each of March 1, 2019, 2020, 2021, 2022 and 2023. |
(6) | Lifeco options are issued with an exercise price in Canadian dollars, which have been translated to U.S. dollars at the Conversion Rate. |
(7) | These Executive Share Unit grants vest on December 31, 2019. |
(8) | These Executive Share Unit grants vest on December 31, 2020. |
(9) | The market value of Executive Share Units held as of December 31, 2018 is based on the year-end closing price of Lifeco common shares on the Toronto Stock Exchange. |
Option Awards | Stock Awards | |||
Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) | |
A.S. Bolotin | — | — | 10,860 | 229,902 |
R.K. Shaw | — | — | 10,615 | 224,715 |
E.F. Murphy | — | — | 21,720 | 459,804 |
R.H. Linton | — | — | 15,433 | 326,701 |
Name | Plan Name | Number of Years of Credited Service | Present Value of Accumulated Benefit ($)(1) | Payments During Last Fiscal Year ($) | ||||
R.K. Shaw | Defined Benefit Plan | 35 | 2,061,094 | — | ||||
SERP | 30 | 8,171,163 | — |
(1) | The amounts shown in the table are calculated according to the terms of the plans as of December 31, 2018. Benefits under the Defined Benefit Plan were frozen as of December 31, 2017, and no additional benefits will accrue under that plan after that date. The Present Value of Accumulated Benefit under the Defined Benefit Plan equals the annuity earned as of December 31, 2017, payable at age 65 in the normal form of benefit. The Present Value of Accumulated Benefit under the SERP equals the termination benefit earned as of December 31, 2018, payable at age 62 in the normal form of benefit. Benefit amounts under each plan have been discounted to December 31, 2018 at the applicable discount rate for December 31, 2018. The amount payable to Mr. Shaw under the SERP is determined under the normal retirement benefit pay-out formula. |
1. | For participants who separate from service at or after age 62, the normal retirement benefit is equal to 60% of final average compensation if the participant has 30 years of service. The benefit is prorated for less than 30 years of service. Final average compensation is the average of the highest 60 consecutive months of compensation during the last 84 months of employment. Compensation includes salary, bonuses and commissions prior to any deferrals to other benefit plans. Benefits are offset by benefits under the Defined Benefit Plan and 50% of estimated social security benefits as of retirement. |
2. | For participants who separate from service between ages 57 and 62, the early retirement benefit is calculated by reducing the bonus used in determining final average compensation by 5/6% for each month prior to age 62 and by further reducing the early retirement benefit by 5/12% for each month prior to age 62. Benefits are offset by benefits under the Defined Benefit Plan and 50% of estimated social security benefits as of age 62. |
3. | For participants who separate from service prior to age 57, the termination benefit is equal to 60% of final average salary if the participant has 30 years of service. The benefit is prorated for less than 30 years of service. If the participant has less than 35 years of service, the termination benefit is also reduced by 5% for each of the first three years of service below 35. Final average salary is the average of the highest 60 consecutive months of salary during the last 84 months of employment. Salary includes deferrals of any salary to other benefit plans. Benefits are offset by benefits under the Defined Benefit Plan and 50% of estimated social security benefits payable as of age 62. |
Name | Plan Name | Executive Contributions in Last Fiscal Year ($)(1) | Aggregate Earnings in Last Fiscal Year ($) | Aggregate Withdrawals or Distributions ($) | Aggregate Balance at Last Fiscal Year End ($) | |||||
R.K. Shaw | NQDCP | — | (37,224) | 86,259 | 470,932 | |||||
EDCP | 155,434 | 26,389 | — | 602,987 |
(1) | Amounts contributed are included in the Salary column of the Summary Compensation Table. |
1. | 100% of the Company’s 7,320,176 outstanding common shares are owned by GWL&A Financial Inc., 8515 East Orchard Road, Greenwood Village, Colorado 80111. |
2. | 100% of the outstanding common shares of GWL&A Financial Inc. are owned by Great-West Lifeco U.S. LLC, 8515 East Orchard Road, Greenwood Village, Colorado 80111. |
3. | 100% of the outstanding common shares of Great-West Lifeco U.S. LLC are owned by Great-West Financial (Nova Scotia) Co., Suite 800, 1959 Upper Water Street, Halifax, Nova Scotia, Canada B3J 2X2. |
4. | 100% of the outstanding common shares of Great-West Financial (Nova Scotia) Co. are owned by Great-West Financial (Canada) Inc., 100 Osborne Street North, Winnipeg, Manitoba, Canada R3C 3A5. |
5. | 100% of the outstanding common shares of Great-West Financial (Canada) Inc. are owned by Great-West Lifeco Inc., 100 Osborne Street North, Winnipeg, Manitoba, Canada R3C 3A5. |
6. | 71.81% of the outstanding common shares of Great-West Lifeco Inc. are controlled, directly or indirectly, by Power Financial Corporation, 751 Victoria Square, Montréal, Québec, Canada H2Y 2J3, representing approximately 65% of the voting rights attached to all outstanding voting shares of Great-West Lifeco Inc. |
7. | 65.52% of the outstanding common shares of Power Financial Corporation are owned by 171263 Canada Inc., 751 Victoria Square, Montréal, Québec, Canada H2Y 2J3. |
8. | 100% of the outstanding common shares of 171263 Canada Inc. are owned by Power Corporation of Canada, 751 Victoria Square, Montréal, Québec, Canada H2Y 2J3. |
9. | The Desmarais Family Residuary Trust, c/o San Palo Investments Corporation, 759 Victoria Square, Suite 520, Montréal, Québec, Canada H2Y 2J7, directly and through a group of private holding companies which it controls, has voting control of Power Corporation of Canada. |
Directors | Great-West Lifeco Inc.(1) | Power Financial Corporation(2) | Power Corporation of Canada(3) |
J.L. Bernbach | - | - | - |
R. Bienfait | - | - | - |
M.R. Coutu | 10,000 | - | - |
A. Desmarais | 350,000 | 43,200 549,991 options | 15,118,416 3,884,000 options |
P. Desmarais, Jr. | 100,000 | - | 15,096,015 3,884,000 options |
G.A. Doer | - | - | - |
G.J. Fleming | - | - | - |
C. Généreux | - | - 205,629 options | 4,821 25,279 options |
A. Louvel | - | - | - |
P.B. Madoff | - | - | - |
P.A. Mahon | 151,566 | - | - |
R.J. Orr | 20,000 | 400,200 3,622,229 options | 20,000 |
R.L. Reynolds | - | - | - |
T. Timothy Ryan, Jr. | - | 16,400 | 18,572 |
J.J. Selitto | - | - | - |
G.D. Tretiak | - | - | |
145,971 options | 13,001 | ||
150,649 options | |||
B.E. Walsh | - | - | - |
Named Executive Officers | Great-West Lifeco Inc.(1) | Power Financial Corporation(2) | Power Corporation of Canada(3) |
R.L. Reynolds | - | - | - |
A.S. Bolotin | - 26,460 options | - | - |
R.H. Linton | - 7,540 options | - | - |
E.F. Murphy | - 106,880 options | - | - |
R.K. Shaw | 6,052 151,620 options | - | - |
Directors and Executive Officers as a Group | Great-West Lifeco Inc.(1) | Power Financial Corporation(2) | Power Corporation of Canada(3) |
637,618 372,406 options | 459,800 4,523,820 options | 30,270,825 7,943,928 options |
(1) | All holdings are common shares, or where indicated, exercisable options for common shares of Great-West Lifeco Inc. |
(2) | All holdings are common shares, or where indicated, exercisable options for common shares of Power Financial Corporation. |
(3) | All holdings are subordinate voting shares, or where indicated, exercisable options for subordinate voting shares of Power Corporation of Canada. |
(a) | There are no transactions to report. |
(b) | The Company’s Board of Directors has a Conduct Review Committee which acts pursuant to a written Charter and procedures (together, the “procedures”). Messrs. Bernbach and Louvel serve on the Conduct Review Committee. |
• | Changes in U.S. federal income tax law could make some of the Company’s products less attractive to consumers. For example, the following events could adversely affect the Company’s business: |
• | Changes in tax laws that would reduce or eliminate tax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance products; |
• | Reductions in the federal income tax that investors are required to pay on long-term capital gains and on some dividends paid on stock that may provide an incentive for some of the Company’s customers and potential customers to shift assets into mutual funds and away from products, including life insurance and annuities, designed to defer taxes payable on investment returns; |
• | Changes in applicable regulations that could restrict the ability of some companies to purchase certain executive benefits products; |
• | Changes in the availability of, or rules concerning the establishment, operation, and taxation of, Section 401, 403(b), 408, and 457 plans; and |
• | Repeal of the federal estate tax or changes in the tax treatment of life insurance death benefits. |
• | A lower effective tax rate, which would have a favorable impact on net income over the period that the lower rate remains in effect. |
• | A reduction in certain deferred tax liabilities, which would have an immediate favorable impact on net income in the period during which the lower rate came into effect. |
• | A reduction in certain deferred tax assets, which would have an immediate unfavorable impact on net income in the period during which the lower tax rate came into effect. |
• | A reduction in tax rates could affect the timing of recognizing tax benefits. |
• | Loss of key personnel or higher than expected employee attrition rates could adversely affect the performance of the acquired business and the Company’s ability to successfully integrate it. |
• | Integrating acquired operations with existing operations may require the Company to coordinate geographically separated organizations, address possible differences in culture and management philosophies, merge financial processes and risk and compliance procedures, combine separate information technology platforms, and integrate organizations that were previously closely tied to the former parent of the acquired business or other service provider. |
• | potential difficulties achieving projected financial results, including the costs and benefits of integration or deconsolidation, due to macroeconomic, business, demographic, actuarial, regulatory, or political factors; |
• | negative reactions to a transaction by policyholders and contract-holders, distributors, suppliers, plan sponsors and advisors and other clients and potential customers; |
• | ratings agency warnings or downgrades; |
• | unanticipated performance issues; |
• | unforeseen liabilities; |
• | transaction-related charges; |
• | diversion of management time and resources to disposition challenges; |
• | loss of key employees or customers, amortization of expenses related to intangibles; |
• | inefficiencies as we integrate operations and address differences in cultural, management, information, compliance and financial systems and procedures; and |
• | charges for impairment of long-term assets or goodwill and indemnifications. |
Strategy Interest MVA Factor | = | ( | 1+A+B | ) | E | - | 1 | = | ( | 1+1.95%+1.00% | ) | 3.50 | - | 1 | = | -6.5190% |
1+C+D | 1+2.95%+2.00% |
Strategy Interest MVA Factor | = | ( | 1+A+B | ) | E | - | 1 | = | ( | 1+1.95%+1.00% | ) | 3.50 | - | 1 | = | +5.2770% |
1+C+D | 1+0.95%+0.50% |
Sell ATM Put | Buy OTM Put | Buy ATM Call | Sell OTM Call | |||||
Index Value (at-the-money): | 100.00 | 100.00 | 100.00 | 100.00 | ||||
Strike price (out-of-the-money): | 100.00 | 90.00 | 100.00 | 112.00 | ||||
Swap rate: | 1.50% | 1.50% | 1.50% | 1.50% | ||||
Dividend yield: | 2.00% | 2.00% | 2.00% | 2.00% | ||||
Time Remaining: | 1.00 | 1.00 | 1.00 | 1.00 | ||||
Implied volatility: | 15.00% | 19.00% | 15.00% | 11.00% | ||||
Derivative Price using Black-Scholes: | 6.12% | 3.34% | 5.63% | 0.82% |
Strategy Option Value | = | ATM Call - OTM Call + OTM Put - ATM Put |
= | 5.63% - 0.82% + 3.34% - 6.12% | |
= | 2.03% |
Index Performance: +10%
Strategy Credit Rate: +10%
Sell ATM Put | Buy OTM Put | Buy ATM Call | Sell OTM Call | |||||
Index Value (at-the-money): | 110.00 | 110.00 | 110.00 | 110.00 | ||||
Strike price (out-of-the-money): | 100.00 | 90.00 | 100.00 | 112.00 | ||||
Swap rate: | 1.50% | 1.50% | 1.50% | 1.50% | ||||
Dividend yield: | 2.00% | 2.00% | 2.00% | 2.00% | ||||
Time Remaining: | 0.50 | 0.50 | 0.50 | 0.50 | ||||
Implied volatility: | 15.00% | 19.00% | 15.00% | 11.00% | ||||
Derivative Price using Black-Scholes: | 1.16% | 0.41% | 10.81% | 2.40% |
Strategy Option Value | = | ATM Call - OTM Call + OTM Put - ATM Put |
= | 10.81% - 2.40% + 0.41% - 1.16% | |
= | 7.66% |
Free Annual Withdrawal Amount = $10,000
Index Performance: -10%
Number of years (whole and partial) from the date of distribution to the Strategy Term End Date: 0.50
Sell ATM Put | Buy OTM Put | Buy ATM Call | Sell OTM Call | |||||
Index Value (at-the-money): | 90.00 | 90.00 | 90.00 | 90.00 | ||||
Strike price (out-of-the-money): | 100.00 | 90.00 | 100.00 | 112.00 | ||||
Swap rate: | 1.50% | 1.50% | 1.50% | 1.50% | ||||
Dividend yield: | 2.00% | 2.00% | 2.00% | 2.00% | ||||
Time Remaining: | 0.50 | 0.50 | 0.50 | 0.50 | ||||
Implied volatility: | 15.00% | 19.00% | 15.00% | 11.00% | ||||
Derivative Price using Black-Scholes: | 10.95% | 4.89% | 0.80% | 0.01% |
Strategy Option Value | = | ATM Call - OTM Call + OTM Put - ATM Put |
= | 0.80% - 0.01% + 4.89% - 10.95% | |
= | -5.26% |
Strategy MVA | = | -9.8738% x max(0, $100,000 - $10,000 x $100,000 / $100,000) |
= | -9.8738% x max(0, $90,000) | |
= | -9.8738% x $90,000 | |
= | -$8,886.39 |
Strategy MVA | = | -2.7969% x max(0, $100,000 - $10,000 x $100,000 / $100,000) |
= | -2.7969% x max(0, $90,000) | |
= | -2.7969% x $90,000 | |
= | -$2,517.19 |
Strategy MVA | = | 1.9222% x max(0, $100,000 - $10,000 x $100,000 / $100,000) |
= | 1.9222% x max(0, $90,000) | |
= | 1.9222% x $90,000 | |
= | +$1,730.01 |
Strategy MVA | = | 8.9991% x max(0, $100,000 - $10,000 x $100,000 / $100,000) |
= | 8.9991% x max(0, $90,000) | |
= | 8.9991% x $90,000 | |
= | +$8,099.60 |
Strategy Interest MVA Factor | = | ( | 1+A+B | ) | E | - | 1 | = | ( | 1+1.95%+1.00% | ) | 0.50 | - | 1 | = | -0.9574% |
1+C+D | 1+2.95%+2.00% |
Strategy Interest MVA Factor | = | ( | 1+A+B | ) | E | - | 1 | = | ( | 1+1.95%+1.00% | ) | 0.50 | - | 1 | = | +0.7366% |
1+C+D | 1+0.95%+0.50% |
Sell ATM Put | Buy OTM Put | Buy ATM Call | Sell OTM Call | |||||
Index Value (at-the-money): | 100.00 | 100.00 | 100.00 | 100.00 | ||||
Strike price (out-of-the-money): | 100.00 | 90.00 | 100.00 | 112.00 | ||||
Swap rate: | 1.50% | 1.50% | 1.50% | 1.50% | ||||
Dividend yield: | 2.00% | 2.00% | 2.00% | 2.00% | ||||
Time Remaining: | 1.00 | 1.00 | 1.00 | 1.00 | ||||
Implied volatility: | 15.00% | 19.00% | 15.00% | 11.00% | ||||
Derivative Price using Black-Scholes: | 6.12% | 3.34% | 5.63% | 0.82% |
Strategy Option Value | = | ATM Call - OTM Call + OTM Put - ATM Put |
= | 5.63% - 0.82% + 3.34% - 6.12% | |
= | 2.03% |
Free Annual Withdrawal Amount = $10,000
Index Performance: +10%
Strategy Credit Rate: +10%
Number of years (whole and partial) from the date of distribution to the Strategy Term End Date: 0.50
Sell ATM Put | Buy OTM Put | Buy ATM Call | Sell OTM Call | |||||
Index Value (at-the-money): | 110.00 | 110.00 | 110.00 | 110.00 | ||||
Strike price (out-of-the-money): | 100.00 | 90.00 | 100.00 | 112.00 | ||||
Swap rate: | 1.50% | 1.50% | 1.50% | 1.50% | ||||
Dividend yield: | 2.00% | 2.00% | 2.00% | 2.00% | ||||
Time Remaining: | 0.50 | 0.50 | 0.50 | 0.50 | ||||
Implied volatility: | 15.00% | 19.00% | 15.00% | 11.00% | ||||
Derivative Price using Black-Scholes: | 1.16% | 0.41% | 10.81% | 2.40% |
Strategy Option Value | = | ATM Call - OTM Call + OTM Put - ATM Put |
= | 10.81% - 2.40% + 0.41% - 1.16% | |
= | 7.66% |
Sell ATM Put | Buy OTM Put | Buy ATM Call | Sell OTM Call | |||||
Index Value (at-the-money): | 90.00 | 90.00 | 90.00 | 90.00 | ||||
Strike price (out-of-the-money): | 100.00 | 90.00 | 100.00 | 112.00 | ||||
Swap rate: | 1.50% | 1.50% | 1.50% | 1.50% | ||||
Dividend yield: | 2.00% | 2.00% | 2.00% | 2.00% | ||||
Time Remaining: | 0.50 | 0.50 | 0.50 | 0.50 | ||||
Implied volatility: | 15.00% | 19.00% | 15.00% | 11.00% | ||||
Derivative Price using Black-Scholes: | 10.95% | 4.89% | 0.80% | 0.01% |
Strategy Option Value | = | ATM Call - OTM Call + OTM Put - ATM Put |
= | 0.80% - 0.01% + 4.89% - 10.95% | |
= | -5.26% |
Strategy MVA | = | -4.3121% x max(0, $100,000 - $10,000 x $100,000 / $100,000) |
= | -4.3121% x max(0, $90,000) | |
= | -4.3121% x $90,000 | |
= | -$3,880.93 |
Strategy MVA | = | -2.7647% x max(0, $100,000 - $10,000 x $100,000 / $100,000) |
= | -2.7647% x max(0, $90,000) | |
= | -2.7647% x $90,000 | |
= | -$2,488.27 |
Strategy MVA | = | -2.6182% x max(0, $100,000 - $10,000 x $100,000 / $100,000) |
= | -2.6182% x max(0, $90,000) | |
= | -2.6182% x $90,000 | |
= | -$2,356.34 |
Strategy MVA | = | 4.4587% x max(0, $100,000 - $10,000 x $100,000 / $100,000) |
= | 4.4587% x max(0, $90,000) | |
= | 4.4587% x $90,000 | |
= | +$4,012.86 |
• | As interest rates increase the Strategy Interest MVA Factor will reduce the net amount received on a partial withdrawal or surrender; and |
• | As interest rates decrease the Strategy Interest MVA Factor will increase the net amount received on a partial withdrawal or surrender. |
Downside Protection | Derivative Strategy |
0.00% Floor | Buy ATM Call; Sell OTM Call Strategy Option Value = ATM Call– OTM Call |
-2.50% Floor -5.00% Floor -7.50% Floor -10.00% Floor | Sell ATM Put; Buy OTM Put; Buy ATM Call; Sell OTM Call Strategy Option Value = ATM Call– OTM Call + OTM Put– ATM Put |
-10.00% Buffer | Sell OTM Put; Buy ATM Call; Sell OTM Call Strategy Option Value = ATM Call– OTM Call– OTM Put |
• | If the Index Performance is greater than zero, the Strategy Index MVA Factor will likely be less than zero. |
○ | This means that if you take a partial withdrawal, surrender your Contract, or die prior to the Strategy Term End Date, the Strategy Index MVA Factor will differ from the Index Performance. |
• | If the Index Performance is less than zero, the Strategy Index MVA Factor will likely be greater than zero. |
○ | This means that if you take a partial withdrawal, surrender your Contract, or die prior to the Strategy Term End Date, the Strategy Index MVA Factor will differ from the Index Performance. |
• | Strategy Interest MVA Factor = ( |
○ | As of the Interest MVA Term Start Date: |
○ | As of the date of Request for partial withdrawal or surrender: |
• | Strategy Index MVA Factor = A– B– C x D / E where: |
A = | Strategy Option Value as of the date of Request; |
B = | Strategy Credit Rate as of the date of Request; |
C = | Strategy Option Value calculated on the Strategy Term Start Date; |
D = | The number of years (whole and partial) from the date of Request to the Strategy Term End Date; and |
E = | Strategy Term |
• | Implied volatility of the Selected Index– The implied volatility varies with the time remaining until the Strategy Term End Date and the relationship of the strike price of the option and the current Index Value as of the date of the Strategy Index MVA Factor calculation. The relationship between the strike price and the current price of the Selected Index is known as the moneyness of the option. Implied volatility inputs are provided by an independent third party for all available maturities. Linear interpolation is used to calculate implied volatility by strike price and maturity as needed. |
• | Swap rate– The swap rate applies to the time remaining until the Index Strategy End Date. Swap rate values are provided by an independent third party for all available maturities. Linear interpolation is used to calculate the exact time remaining as needed. |
STATE | GREAT-WEST CAPITAL CHOICE SELECT ADVISOR | Section of Contract where variation is found | IRA Endorsement | Roth Endorsement |
AL | ||||
AK | ||||
AZ | ||||
AR | ||||
CA | If you reside in California the Company will refund the Account Value plus any fees or charges deducted from the Purchase Price if the Contract is cancelled during the right to cancel period. If you are age 60 or older at the time the Contract is issued you may cancel the Contract and return it to us within 30 days and receive return of Account Value if you elected to have the Purchase Price invested in the Strategies. If you did not elect to invest in the Strategies immediately then you will receive return of the Purchase Price and any fees deducted. The definition of Spouse includes people who entered into a domestic partnerships as defined by California Family Code§ 297. | Front Cover.Right to Cancel provision. Section 1:Definitions. | ||
CT | No premium tax is charged in Connecticut for annuities and all reference to premium taxes in the Contracts have been removed. In the event of a misstatement of age or sex, annuity payments will be recalculated and coverage will be what the Purchase Price would have purchased had the | All applicable provisions Paragraph 9.05:Section 9 General Provisions. |
correct age or sex been given when the Contract was issued based on the Company’s published rates. | ||||
DC | ||||
DE | ||||
FL | If you reside in Florida you may cancel the Contract and return it to us within 21 days and receive return of the Purchase Price. All notices or actions required by the Company will be effective when such request or notice is “received” by the Company and not when the request or notice is “recorded” by the Company. There is no guarantee that a Reference/Selected Index will be available for the entire term of the Contract and may be substituted if an original Reference Index is discontinued or there is a material change in the calculation of the original Reference Index. Any payment made in accordance with the provisions of paragraph 10.03 will not incur MVA, Withdrawal Charges or Contract Fees. | Front Cover:Right to Cancel provision. Provisions inSection 1, 2 and 4. Paragraph 4.05 inSection 4: Contract Value and Strategy Value. Paragraph 10.01 inSection 10: Annuity Payment Options. | ||
GA | ||||
HI | ||||
ID | If you reside in Idaho you may cancel the Contract and return it to us within 20 days and receive return of the Purchase Price. In the event of a delay or postponement of payments when the | Front Cover:Right to Cancel provision. Paragraph 7.01 and 7.07 inSection 7:Surrenders and Withdrawals. |
Contract is Surrendered or a Withdrawal is taken beyond 30 days from the date of a Request, the Company will pay interest at the rate specified in Idaho Code Section 28-22-104(2) on any such delayed payments. | ||||
IL | The definition of Spouse includes people who have entered into a Civil Union as defined in Act 750 ILCS 75/1 | Section 1:Definitions. | ||
IN | ||||
IA | ||||
KS | ||||
KY | ||||
LA | ||||
ME | ||||
MD | An annual report will be mailed at least once in each Contract Year showing values as of a date not more than two months prior to the date of mailing. | Paragraph 9.11 inSection 9: General Provisions. | ||
MA | All reference to gender is removed. Annuity payments and rates have been calculated according to unisex tables. Waiver of MVA and Withdrawal Charge for Nursing Home and Hospital confinement is not applicable. | All applicable provisions of the Contract. Section 7.06 | ||
MI | ||||
MN | If you reside in Minnesota the Company will refund the Purchase Payment within 10 days of receipt of the notice of cancellation during the right to cancel period. | Front Cover:Right to Cancel provision. | ||
MS | ||||
MO | If there is a misstatement of age or sex then the | Paragraph 9.05:Section 9 General Provisions. |
annuity payments will be recalculated based on the amount of coverage that the Purchase Price would have bought at the date of issue of the Contract. | ||||
MT | All reference to gender is removed. Annuity payments and rates have been calculated according to unisex tables. No premium tax is charged in Montana and all reference to premium taxes in the Contracts have been removed. When a claim is made under the Death Benefit provisions, then settlement must be made by the Company within 60 days from date of receipt of Due Proof of Death. If settlement is made after 30 days then interest at a rate required by Montana law will be paid. | All applicable provisions of the Contract. All provisions where “premium tax” is referred to. Paragraph 6.01 inSection 6: Death Benefit. | ||
NE | ||||
NV | ||||
NH | The age of annuitization is 99 years of age and not 110 years of age. | Section 1:Definitions and Paragraph 10.01 and 10.02 inSection 10: Annuity Payment Options. | ||
NJ | If you reside in New Jersey and the Contract is cancelled during the Right to Cancel Period, the Company will refund the Cash Surrender Value plus any fees or charges deducted from the Purchase Price. The definition of Spouse includes people who entered into a civil union recognized under the New Jersey Civil Union Act P. L. 2006c. 103. | Front Cover:Right to Cancel provision. Section 1: Definitions. |
NM | ||||
NC | All reference to premium tax has been deleted. | All provisions where Premium Tax is mentioned. | ||
ND | If you reside in North Dakota you may cancel the Contract and return it to us within 20 days and receive return of the Purchase Price. | Front Cover:Right to Cancel provision. | ||
OH | We do not have to accept a Request for assignment of the Contract. All other conditions relating to assignment of the Contract remain applicable. | |||
OK | ||||
OR | Not filed | |||
PA | The right to cancel is extended from 30 days to 45 days if a replacing Contract is issued by an affiliate of the Company. Paragraph (e) has been removed from Section 7.04. If the Company makes any changes to the Contracts in terms of changes allowed to be made in Section 9.04 then the Owner has the right to reject any changes made in terms of this provision within 30 days of receiving notice of changes. The Company has the right to terminate the Contract in the event such changes are rejected. | Front Cover:Right to Cancel provision. Section 7: Surrenders and Withdrawals. Paragraph 9.04 inSection 9: General Provisions. | If the Company makes any changes to the Endorsement as allowed in Paragraph 11 of the Endorsement, then the Owner has the right to reject any changes made in terms of this provision within 30 days of receiving notice of such change. If the changes are rejected then the Company may terminate the Endorsement. This Endorsement will terminate if a Contract loan is taken out. | If the Company makes any changes to the Endorsement as allowed in Paragraph 11 of the Endorsement, then the Owner has the right to reject any changes made in terms of this provision within 30 days of receiving notice of such change. If the changes are rejected then the Company may terminate the Endorsement. This Endorsement will terminate if a Contract loan is taken out. |
RI | If you reside in Rhode Island you may cancel the Contract and return it to us within 20 days and receive return of the Purchase Price. | |||
SC | ||||
SD |
TN | ||||
TX | If you reside in Texas you may cancel the Contract and return it to us within 30 days and receive return of the Purchase Price. The Company will refund the Cash Surrender Value plus any fees or charges deducted from the Purchase Price if the Contract is cancelled during the right to cancel period. | Front Cover:Right to Cancel provision. | ||
UT | ||||
VT | ||||
VA | If there is a misstatement of age or sex then the annuity payments will be recalculated based on the amount of coverage that the Purchase Price would have bought at the date of issue of the Contract. | Paragraph 9.05 inSection 9: General Provisions | ||
WA | If you reside in Washington a Terminal Condition is a condition which will result in a life expectancy is 24 months or less. | Section 7.06 | ||
WV | ||||
WI | ||||
WY |
As of and for the Year Ended December 31, | |||||||||
(In millions) | 2018 | 2017 | 2016 | 2015 | 2014 | ||||
Total income | $7,365 | $6,481 | $6,801 | $7,065 | $6,868 | ||||
Total benefits and expenses | 7,047 | 6,222 | 6,692 | 6,821 | 6,598 | ||||
Income from continuing operations | 318 | 259 | 109 | 244 | 270 | ||||
Dividends to policyholders | 31 | 39 | 46 | 55 | 58 | ||||
Federal income tax (benefit) expense | (18) | 51 | (39) | (6) | 69 | ||||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 305 | 169 | 102 | 195 | 143 | ||||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 10 | 1 | (1) | (8) | (6) | ||||
Net income | $315 | $170 | $101 | $187 | $137 | ||||
Dividends declared | $152 | $145 | $126 | $140 | $316 | ||||
Invested assets | $30,035 | $28,849 | $27,871 | $26,399 | $25,444 | ||||
Separate account assets | 24,655 | 28,197 | 27,495 | 27,048 | 28,081 | ||||
Total assets | 55,786 | 58,010 | 56,436 | 54,461 | 54,523 | ||||
Total aggregate reserves | 27,778 | 26,860 | 25,945 | 24,805 | 23,848 | ||||
Separate account liabilities | 24,655 | 28,197 | 27,495 | 27,048 | 28,082 | ||||
Total liabilities | 54,459 | 56,881 | 55,383 | 53,346 | 53,523 | ||||
Total capital and surplus | 1,327 | 1,130 | 1,053 | 1,115 | 1,001 |
Year Ended December 31, | |||||||||
S&P 500 Index | 2018 | 2017 | 2016 | 2015 | 2014 | ||||
Index Close | 2,507 | 2,674 | 2,239 | 2,044 | 2,059 | ||||
Index Average | 2,744 | 2,448 | 2,094 | 2,061 | 1,931 |
Year Ended December 31, | |||||||||
10-Year Treasury Rate | 2018 | 2017 | 2016 | 2015 | 2014 | ||||
Close | 2.69% | 2.40% | 2.45% | 2.27% | 2.17% | ||||
Average | 2.91% | 2.33% | 1.83% | 2.14% | 2.54% |
• | Valuation of investments; |
• | Impairment of investments; |
• | Valuation of derivatives and related hedge accounting; |
• | Valuation of policy benefits and; |
• | Valuation of deferred taxes; |
Year Ended December 31, | Increase (decrease) | Percentage change | |||||
Statement of Operations data (In millions) | 2018 | 2017 | |||||
Premium income and annuity consideration | $7,593 | $5,271 | $2,322 | 44% | |||
Net investment income | 1,307 | 1,267 | 40 | 3% | |||
Fee and miscellaneous income | 411 | 380 | 31 | 8% | |||
Reserve adjustment on reinsurance ceded | (1,976) | (490) | (1,486) | (303)% | |||
Other | 30 | 53 | (23) | (43)% | |||
Total income | 7,365 | 6,481 | 884 | 14% | |||
Policyholder benefits | 6,587 | 5,566 | 1,021 | 18% | |||
Increase in aggregate reserves for life and accident health policies and contracts | 918 | 916 | 2 | —% | |||
Other insurance benefits, expenses and commissions | 686 | 724 | (38) | (5)% | |||
Net transfers from separate accounts | (1,112) | (945) | (167) | (18)% | |||
Total benefits and expenses | 7,079 | 6,261 | 818 | 13% | |||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 286 | 220 | 66 | 30% | |||
Federal income tax (benefit) expense | (18) | 51 | (69) | (135)% | |||
Net gain from operations before net realized capital gains | 304 | 169 | 135 | 80% | |||
Net realized capital gains less capital gains tax and transfers to interest maintenance reserve | 11 | 1 | 10 | 1,000% | |||
Statutory net income | $315 | $170 | $145 | 85% |
Year Ended December 31, | Increase (decrease) | Percentage change | |||||
Statement of Operations data (In millions) | 2017 | 2016 | |||||
Premium income and annuity consideration | $5,271 | $(398) | $5,669 | 1,424% | |||
Net investment income | 1,267 | 1,236 | 31 | 3% | |||
Fee and miscellaneous income | 380 | 306 | 74 | 24% | |||
Reserve adjustment on reinsurance ceded | (490) | 5,628 | (6,118) | (109)% | |||
Other | 53 | 29 | 24 | 83% | |||
Total income | 6,481 | 6,801 | (320) | (5)% | |||
Policyholder benefits | 5,566 | 4,971 | 595 | 12% | |||
Increase in aggregate reserves for life and accident health policies and contracts | 916 | 1,140 | (224) | (20)% | |||
Other insurance benefits, expenses and commissions | 724 | 727 | (3) | —% | |||
Net transfers from separate accounts | (945) | (101) | (844) | (836)% | |||
Total benefits and expenses | 6,261 | 6,737 | (476) | (7)% | |||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 220 | 64 | 156 | 244% | |||
Federal income tax expense (benefit) | 51 | (38) | 89 | 234% | |||
Net gain from operations before net realized capital gains | 169 | 102 | 67 | 66% | |||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 1 | (1) | 2 | 200% | |||
Statutory net income | $170 | $101 | $69 | 68% |
Year Ended December 31, | Increase (decrease) | Percentage change | |||||
Statement of Operations data (In millions) | 2018 | 2017 | |||||
Premium income and annuity consideration | $5,662 | $1,610 | $4,052 | 252% | |||
Net investment income | 754 | 749 | 5 | 1% | |||
Fee and miscellaneous income | 128 | 112 | 16 | 14% | |||
Reserve adjustment on reinsurance ceded | (3,987) | (340) | (3,647) | (1,073)% | |||
Other | 32 | 34 | (2) | (6)% | |||
Total income | 2,589 | 2,165 | 424 | 20% | |||
Policyholder benefits | 941 | 781 | 160 | 20% | |||
Increase in aggregate reserves for life and accident health policies and contracts | 484 | 582 | (98) | (17)% | |||
Other insurance benefits, expenses and commissions | 191 | 207 | (16) | (8)% | |||
Net transfers from separate accounts | 819 | 449 | 370 | 82% | |||
Total benefits and expenses | 2,435 | 2,019 | 416 | 21% | |||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 154 | 146 | 8 | 5% | |||
Federal income tax expense | — | 49 | (49) | (100)% | |||
Net gain from operations before net realized capital gains | 154 | 97 | 57 | 59% | |||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 6 | 1 | 5 | 500% | |||
Statutory net income | $160 | $98 | $62 | 63% |
Year Ended December 31, | Increase (decrease) | Percentage change | |||||
Statement of Operations data (In millions) | 2017 | 2016 | |||||
Premium income and annuity consideration | $1,610 | $(2,656) | $4,266 | 161% | |||
Net investment income | 749 | 732 | 17 | 2% | |||
Fee and miscellaneous income | 112 | 95 | 17 | 18% | |||
Reserve adjustment on reinsurance ceded | (340) | 3,380 | (3,720) | (110)% | |||
Other | 34 | 26 | 8 | 31% | |||
Total income | 2,165 | 1,577 | 588 | 37% | |||
Policyholder benefits | 781 | 831 | (50) | (6)% | |||
Increase in aggregate reserves for life and accident health policies and contracts | 582 | 117 | 465 | 397% | |||
Other insurance benefits, expenses and commissions | 207 | 175 | 32 | 18% | |||
Net transfers from separate accounts | 449 | 358 | 91 | 25% | |||
Total benefits and expenses | 2,019 | 1,481 | 538 | 36% | |||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 146 | 96 | 50 | 52% | |||
Federal income tax expense | 49 | 21 | 28 | 133% | |||
Net gain from operations before net realized capital gains | 97 | 75 | 22 | 29% | |||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 1 | (1) | 2 | 200% | |||
Statutory net income | $98 | $74 | $24 | 32% |
Year Ended December 31, | Increase (decrease) | Percentage change | |||||
Statement of Operations data (In millions) | 2018 | 2017 | |||||
Premium income and annuity consideration | 1,931 | $3,661 | $(1,730) | (47)% | |||
Net investment income | 537 | 513 | 24 | 5% | |||
Fee and miscellaneous income | 272 | 257 | 15 | 6% | |||
Reserve adjustment on reinsurance ceded | 2,011 | (150) | 2,161 | 1,441% | |||
Other | (2) | 19 | (21) | (111)% | |||
Total income | 4,749 | 4,300 | 449 | 10% | |||
Policyholder benefits | 5,646 | 4,785 | 861 | 18% | |||
Increase in aggregate reserves for life and accident health policies and contracts | 434 | 334 | 100 | 30% | |||
Other insurance benefits, expenses and commissions | 475 | 477 | (2) | —% | |||
Net transfers from separate accounts | (1,931) | (1,393) | (538) | (39)% | |||
Total benefits and expenses | 4,624 | 4,203 | 421 | 10% | |||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 125 | 97 | 28 | 29% | |||
Federal income tax expense | (23) | 14 | (37) | (264)% | |||
Net gain from operations before net realized capital gains | 148 | 83 | 65 | 78% | |||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 5 | — | 5 | 100% | |||
Statutory net income | 153 | $83 | $70 | 84% |
Year Ended December 31, | Increase (decrease) | Percentage change | |||||
Statement of Operations data (In millions) | 2017 | 2016 | |||||
Premium income and annuity consideration | $3,661 | $2,258 | $1,403 | 62% | |||
Net investment income | 513 | 509 | 4 | 1% | |||
Fee and miscellaneous income | 257 | 201 | 56 | 28% | |||
Reserve adjustment on reinsurance ceded | (150) | 2,248 | (2,398) | (107)% | |||
Other | 19 | 3 | 16 | 533% | |||
Total income | 4,300 | 5,219 | (919) | (18)% | |||
Policyholder benefits | 4,785 | 4,140 | 645 | 16% | |||
Increase in aggregate reserves for life and accident health policies and contracts | 334 | 1,023 | (689) | (67)% | |||
Other insurance benefits, expenses and commissions | 477 | 534 | (57) | (11)% | |||
Net transfers from separate accounts | (1,393) | (459) | (934) | (203)% | |||
Total benefits and expenses | 4,203 | 5,238 | (1,035) | (20)% | |||
Net gain (loss) from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 97 | (19) | 116 | 611% | |||
Federal income tax expense | 14 | (51) | 65 | 127% | |||
Statutory net income | $83 | $32 | $51 | 159% |
Year Ended December 31, | Increase (decrease) | Percentage change | |||||
Statement of Operations data (In millions) | 2018 | 2017 | |||||
Net investment income | $16 | $5 | $11 | 220% | |||
Fee and miscellaneous income | 11 | 11 | —% | ||||
Total income | 27 | 16 | 11 | 69% | |||
Other expenses and commissions | 20 | 39 | (19) | (49)% | |||
Total benefits and expenses | 20 | 39 | (19) | (49)% | |||
Net gain (loss) from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 7 | (23) | 30 | 130% | |||
Federal income tax expense (benefit) | 5 | (12) | 17 | 142% | |||
Statutory net income (loss) | $2 | $(11) | $13 | 118% |
Year Ended December 31, | Increase (decrease) | Percentage change | |||||
Statement of Operations data (In millions) | 2017 | 2016 | |||||
Net investment income (loss) | $5 | $(5) | $10 | 200% | |||
Fee and miscellaneous income | 11 | 10 | 1 | 10% | |||
Total income | 16 | 5 | 11 | 220% | |||
Other expenses and commissions | 39 | 18 | 21 | 117% | |||
Total benefits and expenses | 39 | 18 | 21 | 117% | |||
Net loss from operations after dividends to policyholders and before federal income taxes and net realized capital gains | (23) | (13) | (10) | (77)% | |||
Federal income tax benefit | (12) | (7) | (5) | (71)% | |||
Statutory net loss | $(11) | $(6) | $(5) | (83)% |
December 31, | |||||||
(In millions) | 2018 | 2017 | |||||
Bonds | $20,654 | 68.7% | $19,945 | 69.1% | |||
Common stock | 132 | 0.5% | 108 | 0.4% | |||
Mortgage loans | 4,207 | 14.0% | 3,871 | 13.4% | |||
Real estate | 38 | 0.1% | 38 | 0.2% | |||
Contract loans | 4,123 | 13.7% | 4,079 | 14.1% | |||
Cash, cash equivalents and short-term investments | 229 | 0.8% | 242 | 0.8% | |||
Securities lending collateral assets | 45 | 0.2% | — | —% | |||
Other invested assets | 607 | 2.0% | 566 | 2.0% | |||
Total cash and invested assets | $30,035 | 100.0% | $28,849 | 100.0% |
December 31, | |||
NAIC Designations | 2018 | 2017 | |
NAIC 1 | 65.4% | 68.0% | |
NAIC 2 | 33.4% | 30.5% | |
NAIC 3 through 6 | 1.2% | 1.5% | |
Total | 100.0% | 100.0% |
December 31, | |||
Sector | 2018 | 2017 | |
Finance | 18.5% | 17.1% | |
Utility | 15.1% | 17.1% | |
Consumer | 9.5% | 9.9% | |
Natural resources | 5.9% | 5.0% | |
Transportation | 3.0% | 2.8% | |
Other | 10.3% | 11.0% |
Year Ended December 31, | |||||
(In millions) | 2018 | 2017 | 2016 | ||
Net investment income | $1,307 | $1,267 | $1,236 | ||
Less: | |||||
Net investment income from derivative instruments | 16 | 16 | 10 | ||
Net investment income excluding derivative investments | $1,291 | $1,251 | $1,226 | ||
Average invested assets, at amortized cost | 29,252 | 28,433 | 27,432 | ||
Yield on average invested assets | 4.41% | 4.40% | 4.47% |
Payment due by period | |||||||||
(in thousands) | Less than one year | One to three years | Three to five years | More than five years | Total | ||||
Aggregate reserves(1) | $3,169,559 | $5,487,644 | $4,575,744 | $46,864,153 | $60,097,100 | ||||
Policy and contract claims(2) | 183,749 | 45,798 | 35,087 | 123,460 | 388,094 | ||||
Provision for policyholder dividends(3) | 31,184 | — | — | — | 31,184 | ||||
Related party long-term debt - principal(4) | — | — | — | 553,219 | 553,219 | ||||
Related party long-term debt - interest(5) | 30,335 | 60,670 | 60,670 | 557,094 | 708,769 | ||||
Commercial paper(6) | 98,859 | — | — | — | 98,859 | ||||
Payable under securities lending agreements(7) | 45,102 | — | — | — | 45,102 | ||||
Investment purchase obligations(8) | 136,396 | — | — | — | 136,396 | ||||
Operating leases(9) | 9,929 | 11,561 | 2,272 | 11,743 | 35,505 | ||||
Other liabilities(10) | 31,334 | 58,469 | 65,514 | 16,204 | 171,521 | ||||
Total | $3,736,447 | $5,664,142 | $4,739,287 | $48,125,873 | $62,265,749 |
• | Liabilities under reinsurance arrangements |
• | Liabilities related to securities purchased but not yet settled |
• | Liabilities related to derivative obligations |
• | Liabilities related to dollar repurchase agreements |
• | Statutory state escheat liabilities |
• | Expected contributions to the Company’s defined benefit pension plan, and benefit payments for the post-retirement medical plan and supplemental executive retirement plan through 2023 |
• | Unrecognized tax benefits |
• | Miscellaneous purchase obligations to acquire goods and services |
• | 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. |
• | Futures are commitments to either purchase or sell designated financial instruments at a future date for a specified price. |
• | Interest rate swaps involve the periodic exchange of cash flows with third parties at specified intervals calculated using agreed upon rates or other financial variables. |
• | Option contracts grant the purchaser, in consideration for the payment of a premium, the right to either purchase from or sell to the issuer a financial instrument at a specified price within a specified time period or on a stated date. Interest rate swaptions grant the purchaser the right to enter into a swap with predetermined fixed-rate payments over a predetermined time period on the exercise date. |
Projected cash flows by calendar years (In millions) | Benchmark | Interest rate increase one percent | |
2019 | $2,642 | $2,607 | |
2020 | 2,328 | 2,289 | |
2021 | 2,720 | 2,659 | |
2022 | 2,829 | 2,803 | |
2023 | 3,428 | 3,413 | |
Thereafter | 22,855 | 23,285 | |
Undiscounted total | $36,802 | $37,056 | |
Fair value | $28,825 | $27,146 |
Table of Contents
AUDITED FINANCIAL REPORT
Great-West Life & Annuity Insurance Company
(A wholly-owned subsidiary of GWL&A Financial Inc.) |
Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus as of December 31, 2018 and 2017 and
Related Statutory Statements of Operations,
Changes in Capital and Surplus and Cash Flows for Each of the Three Years in the Period Ended December 31, 2018 and Report of Independent Registered Public Accounting Firm
Table of Contents
Page
Number | ||||
Part I | ||||
Item 1 | Business | 3 | ||
Item 1A | Risk Factors | 12 | ||
Item 2 | Properties | 18 | ||
Item 3 | Legal Proceedings | 18 | ||
Part II | ||||
Item 5 | Market for Registrant’s Common Equity and Related Stockholder Matters | 18 | ||
Item 6 | Selected Financial Data | 20 | ||
Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 | ||
Item 7A | Quantitative and Qualitative Disclosure About Market Risk | 40 | ||
Item 8 | Financial Statements | 43 |
Table of Contents
Business
As used in this Document, 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. It is subject to regulation by the Colorado Division of Insurance (the “Division”).
This Document 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. This discussion should be read in conjunction with, and is qualified by reference to, the Company’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report as well as the financial statements and notes thereto in Item 8, “Financial Statements and Supplementary Data.”
The statutory financial statements have been prepared from the separate records maintained by the Company and may not necessarily be indicative of the conditions that would have existed or the results of operations if the Company had been operated as an unaffiliated company.
1.1 Organization and Corporate Structure
The Company is a direct wholly-owned subsidiary of GWL&A Financial Inc. (“GWL&A Financial”), a Delaware holding company. GWL&A Financial is a direct wholly-owned subsidiary of Great-West Lifeco U.S. LLC. (“Lifeco U.S.”) and an indirect wholly-owned subsidiary of Great-West Lifeco Inc. (“Lifeco”), a Canadian holding company. Lifeco operates in the United States primarily through the Company and through Putnam Investments, LLC (“Putnam”), and in Canada and Europe through The Great-West Life Assurance Company (“Great-West Life”) and its subsidiaries, London Life Insurance Company (“London Life”), The Canada Life Assurance Company (“CLAC”), and Irish Life Group Limited. Lifeco is a subsidiary of Power Financial Corporation (“Power Financial”), a Canadian holding company with substantial interests in the financial services industry. Power Corporation of Canada (“Power Corporation”), a Canadian holding and management company, has voting control of Power Financial. The Desmarais Family Residuary Trust, through a group of private holding companies that it controls, has voting control of Power Corporation. The shares of Lifeco, Power Financial, and Power Corporation are traded publicly in Canada on the Toronto Stock Exchange.
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1.2 Business of the Company
The Company offers a wide range of life insurance and retirement and investment products to individuals, businesses, and other private and public organizations throughout the United States. The Company is authorized to engage in the sale of life insurance, accident and health insurance and annuities. It is qualified to do business in all states in the United States, except New York, and in the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands. The Company is also a licensed reinsurer in New York.
The Chief Operating Decision Maker (“CODM”) of the Company is also the Chief Executive Officer (“CEO”) of the Company and Lifeco U.S. The CODM reviews the financial information for the purposes of assessing performance and allocating resources based upon the results of Lifeco U.S. and other U.S. affiliates prepared in accordance with International Financial Reporting Standards. The CODM, in his capacity as CEO of the Company, reviews the Company’s financial information only in connection with the periodic reports that are filed with the Securities and Exchange Commission (“SEC”). Consequently, the Company does not provide its discrete financial information to the CODM to be regularly reviewed to make decisions about resources to be allocated or to assess performance. For purposes of SEC reporting requirements under a statutory basis of accounting, the Company has chosen to present its financial information in three segments, notwithstanding the above. The three segments are: Individual Markets, Empower Retirement, and Other.
Through its Individual Markets segment, the Company offers various forms of life insurance, annuity, and retirement products. Through its Empower Retirement segment, the Company provides various retirement plan products and investment options as well as comprehensive administrative and recordkeeping 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. The Other segment consists of items not associated directly with Individual Markets or Empower Retirement, including the impact of certainnon-continuing items.
No customer accounted for 10% or more of the Company’s revenues during the years 2018, 2017, or 2016. In addition, no segment of the Company’s business is dependent upon a single customer or a few customers, the loss of which would have a significant effect on it or its business segments’ operations. The loss of business from any one, or a few, independent brokers or agents would not have a material adverse effect on the Company or its business segments.
Individual Markets Segment Principal Products
The Company’s Individual Markets segment distributes life insurance, annuity, and retirement products to both individuals and businesses through various distribution channels. Life insurance productsin-force include participating andnon-participating term life, whole life, universal life, and variable universal life.
Participating life insurance - Participating policyholders share in the financial results of the participating business in the form of policyholder dividends that reflect the difference between the assumptions used in the premium charged and the actual experience on those policies. The policyholder dividends can be distributed directly to the policyholders in the form of cash or through an increase in benefits such aspaid-up additions. The Company no longer actively markets participating products.
Term life - Term life insurance products provide coverage for a stated period and generally do not include the accumulation of cash values. Term life insurance products pay a guaranteed death benefit only if the insured dies within the coverage period. The Company’s term life insurance earnings come from the difference between cumulative premiums collected and actual death claims.
Whole life - Whole life insurance products provide guaranteed death benefits in exchange for level premium payments for the life of the insured. Whole life insurance products include the accumulation of cash values. The policyholder can receive the accumulated cash value as a payment by surrendering the insurance policy before the death of the insured. The Company’s whole life insurance earnings come from investment income earned on assets held as reserve in the General Account and the difference between premiums collected and actual death claims.
Universal life - Universal life insurance products include a cash value component that is credited with interest at regular intervals. The account balances for the universal life products are held in the Company’s general account. The Company’s universal life insurance earnings result from the difference between the investment income and interest credited on customer cash values and from differences between charges for mortality and actual death claims. Universal life cash values are charged for the cost of insurance coverage and for administrative expenses.
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Variable universal life - Variable universal life products provide insurance coverage on the same basis as universal life, except that the account balance is directed by the policyholder into either separate account investment options or into the Company’s general account as a fixed option within the variable product. In the separate account investment options, the policyholder bears the entire risk of the investment results. The Company’s variable universal life insurance earnings result from asset-based fees, as well as from the difference between fees collected for mortality as compared to actual death claims paid.
Variable annuity products - The Company’s variable annuity products provide the opportunity for clients to invest on a tax deferred basis with the ability to annuitize assets. Variable annuities can be made available with guaranteed minimum death benefit (“GMDB”) which guarantees the client’s beneficiaries will receive at least a return of premium (less the impact of withdrawals) upon death as well as a guaranteed lifetime withdrawal benefit (“GLWB”) which guarantees that the client is able to take contractually specified withdrawals from their assets that will continue for life regardless of market performance or longevity. The Company earns fees from the separate account for mortality and expense risks pertaining to the variable annuity contract and/or for providing administrative services. For variable annuity assets invested in mutual funds, the Company is reimbursed by the mutual funds for marketing, sales, and service costs under various revenue sharing agreements. There are additional fees charged for election of guaranteed minimum benefits. The guaranteed minimum benefits may be available in variable annuity products or as a stand-alone contract.
Retention is an important factor in profitability and is encouraged through product features. For example, the Company’s life insurance and annuity contracts may impose a surrender charge on policyholder balances withdrawn within the first 10 years of the contract’s inception. The period of time and level of the surrender charge vary by product.
One of the principal markets for the Individual Markets segment is the executive benefits market. The primary executive benefits products are single premium universal life insurance, registered variable universal life insurance, private placement variable universal life insurance (“PPVUL”), and PPVUL with a stable value guarantee feature. These executive benefits life insurance policies indirectly fund employee post-retirement benefits andnon-qualified benefit plans for executives.
Community and regional / national banks are the primary purchasers of single premium universal life insurance utilizing the general account and hybrid products. Regional / national banks sometimes buy PPVUL with a stable value guarantee. Corporations indirectly funding executive benefits purchase the registered variable universal life insurance and PPVUL product. The PPVUL products offer a wide array of equity and bond fund investment options.
Another principal market for the Individual Markets segment is the financial institutions market, which is a partnership between the Company and retail financial institutions to distribute individual life and annuity products. Through its institutional partners, the Company has in excess of 182,000 advisors who sell its products. During 2018 and 2017, the Company focused on the needs of the retiree marketplace by providing wealth transfer solutions to its bank partner’s customers via a single premium universal life product and meeting the retirement income needs via its variable annuity products including guaranteed benefits. Additionally, the Company continues its efforts to partner with large financial institutions to provide individual term life insurance.
Empower Retirement Segment Principal Products
Through its Empower Retirement segment, the Company provides various retirement plan products (including individual retirement accounts (“IRAs”)) and investment options, as well as comprehensive administrative and recordkeeping 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. Defined contribution plans provide for benefits based upon the value of contributions to, and investment returns on, an individual’s account. This has been a rapidly growing portion of the retirement marketplace in recent years.
The retirement plan products and investment options offered by the Company include mutual funds and collective trusts, guaranteed interest rate investment products, and variable annuity products designed to meet the specific needs of the customer. In addition, the Company offers both customized annuity andnon-annuity products.
IRAs - The Company offers an IRA product as a distribution option for employees terminated from employer-sponsored defined contribution plans. The Company earns asset-based fees and per account fees for providing administrative and recordkeeping services for IRA accounts. For those IRAs invested in mutual funds, the Company can be reimbursed by the mutual funds for marketing, sales, and service costs under various revenue sharing agreements.
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Table of Contents
Mutual funds and collective trusts - The Company earns administration fees under various revenue sharing agreements from mutual funds and collective trusts for marketing, sales, and service costs incurred while providing services to individuals and institutional clients on behalf of the funds. On proprietary collective trusts, the Company, through its wholly-owned subsidiary Great-West Trust Company, LLC (“Great-West Trust Company”), earns an asset-based management fee.
Guaranteed interest rate investment products - On its guaranteed interest rate investment products, the Company earns investment margins on the difference between the income earned on investments in its general account and the interest credited to the participant’s account balance. The Company’s general account assets support the guaranteed investment products. The Company also manages fixed interest rate products known as stable value funds that may be structured as separate accounts, pooled collective trusts, and custom collective trusts for which it is paid a management fee that is earned by the Company either directly or through its wholly-owned subsidiaries Great-West Capital Management, LLC (“Great-West Capital Management”) or Great-West Trust Company.
Variable annuity products - The Company’s variable annuity products provide the opportunity for clients to invest on a tax deferred basis with the ability to annuitize assets. Variable annuities can be made available with GLWB which guarantees that the client is able to take contractually specified withdrawals from their assets that will continue for life regardless of market performance or longevity. In 2018, an indexed linked variable annuity was launched, a hybrid between a variable annuity and indexed annuity, where the investment performance is measured by the change in a reference index (i.e. S&P 500) and subject to a floor and cap. The Company earns fees from the separate account for mortality and expense risks pertaining to the variable annuity contract and/or for providing administrative services. For variable annuity assets invested in mutual funds, the Company is reimbursed by the mutual funds for marketing, sales, and service costs under various revenue sharing agreements. There are additional fees charged for election of guaranteed minimum benefits. The GLWB products may be available in variable annuity products or as a stand-alone contract.
Administrative and recordkeeping services - The Company receives asset-based and/or participant-based fees for providing third-party administrative and recordkeeping services to financial institutions and employer-sponsored retirement plans. The number of Empower Retirement participant accounts has grown to 8.8 million at December 31, 2018, from over 8.3 million at December 31, 2017.
The Company’s marketing focus is directed toward providing investment management, advisory services, and recordkeeping services under Internal Revenue Code Sections 401(a), 401(k), 403(b), 408, and 457 to private corporations, state and local governments, hospitals,non-profit organizations, and public school districts. Through the Company’s wholly-owned, registered subsidiaries, Great-West Capital Management, and Advised Assets Group, LLC (“Advised Assets Group”), the Company provides investment management and advisory services. Through the Company’s wholly-owned subsidiary FASCore, LLC, the Company targets and partners with other large financial institutions to provide third-party recordkeeping and administration services.
Certain revenues and expenses generated from the above products from the Empower Segment are represented in changes in value of investment in subsidiaries, as discussed further in the accompanying statutory financial statements.
Future Policy Benefit Liabilities and Life InsuranceIn-Force
The amount of fixed annuity productsin-force is measured by future policy benefits. The following table shows group and individual annuity policy benefits supported by the Company’s general account as well as the annuity balances in Empower Retirement and Individual Markets separate accounts for the years indicated:
(In millions) | ||||||||||||
Year Ended December 31, | General Account Annuity Benefits Liabilities | Empower Retirement Annuity Separate Accounts | Individual Markets Annuity Separate Accounts | |||||||||
2018 | $ | 12,948 | $ | 14,763 | $ | 3,009 | ||||||
2017 | 12,556 | 18,729 | 2,577 | |||||||||
2016 | 12,279 | 19,157 | 1,957 | |||||||||
2015 | 11,309 | 19,340 | 1,660 | |||||||||
2014 | 10,890 | 20,220 | 1,581 |
For Variable Annuities, the future policy benefit liabilities are computed on the basis of prescribed Statutory valuation interest rates and other assumptions as required by Statutory Valuation Law. For all other annuities policy benefit liabilities are
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established at the contract holder’s account value, which is equal to cumulative deposits and credited interest, less withdrawals, mortality and certain other charges.
The general account also has immediate annuities. The policy benefit liabilities for the immediate annuities are computed on the basis of prescribed Statutory valuation interest rates and mortality (where payouts are contingent on survivorship). These assumptions generally vary by plan, year of issue, and policy duration. Policy benefit liabilities for immediate annuities without life contingent payouts are computed on the basis prescribed Statutory valuation interest rates.
The following table summarizes Individual Markets life insurance future policy benefits liabilities, Individual Markets life insurance separate account balances, and Individual Markets life insurancein-force prior to reinsurance ceded for the years indicated:
(In millions) | ||||||||||||
Year Ended December 31, | Individual Markets Life Insurance Future Policy Benefits Liabilities | Individual Markets Life Insurance Separate Accounts | Individual Markets Life Insurance In-force | |||||||||
2018 | $ | 14,554 | $ | 6,304 | $ | 98,202 | ||||||
2017 | 14,031 | 6,215 | 97,801 | |||||||||
2016 | 13,397 | 5,771 | 96,711 | |||||||||
2015 | 13,245 | 5,479 | 97,862 | |||||||||
2014 | 12,712 | 5,308 | 97,170 |
For both the Individual Markets life insurance future policy benefits liabilities and life insurance separate accounts, the future policy benefits are computed on the basis of prescribed Statutory valuation interest rates and mortality. These future policy benefits liabilities are calculated as the present value of future benefits (including dividends) less the present value of future net premiums, subject to a cash surrender value floor. The assumptions used in calculating the future policy benefits liabilities generally vary by plan, year of issue, and policy duration.
Additionally, for both the Individual Markets life insurance future policy benefits liabilities and life insurance separate accounts, policy and contract claim liabilities are established for claims that have been incurred but not reported based on factors derived from past experience.
The aforementioned policy benefit liabilities are computed amounts that, with additions from premiums and deposits to be received and with interest on such liabilities, are expected to be sufficient to meet the Company’s policy obligations (such as paying expected death or retirement benefits or surrender requests) and to generate profits.
Other Segment
The Company’s Other reporting segment is substantially comprised of activity not directly allocated to the other operating segments and interest expense on long-term debt.
Reinsurance
The Company enters into reinsurance transactions as a purchaser of reinsurance for its various insurance products and as a provider of reinsurance for some insurance products. Reinsurance transactions are assumed from and ceded to affiliated entities and third parties. When purchasing reinsurance, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding risks to other insurance enterprises under excess coverage, quota share, yearly renewable term, coinsurance, and modified coinsurance contracts. Under the terms of these contracts, the reinsurer agrees to reimburse the Company for the ceded amount in the event a claim is paid. However, the Company remains liable to its policyholders with respect to the ceded insurance if a reinsurer fails to meet the obligations it assumed. Accordingly, the Company strives to cede risks to highly rated, well-capitalized companies. The Company retains an initial maximum of $3.5 million of coverage per individual life. This initial retention limit of $3.5 million may increase due to automatic policy increases in coverage at a maximum rate of $175 thousand per annum, with an overall maximum increase in coverage of $1.0 million. The Company assumes risk from approximately 40 insurers and reinsurers by participating in yearly renewable term and coinsurance pool agreements. When assuming risk, the Company seeks to generate revenue while maintaining reciprocal working relationships with these partners as they also seek to limit their exposure to loss on any single life. Maximum capacity to be accepted or retained by the Company is dictated at the treaty level and is monitored annually to ensure the total risk acquired or retained on any one life is limited to a maximum retention of $4.5 million.
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Method of Distribution of Products Within the Individual Markets and Empower Retirement Segments
The Individual Markets segment distributes individual life insurance through wholesale and retail sales force, banks, broker-dealers, and investment advisors. Executive benefits products are distributed through wholesalers and specialized consultants.
The Empower Retirement segment distributes products to plan sponsors through a subsidiary, GWFS Equities, Inc. (“GWFS Equities”), as well as through brokers, consultants, advisors, third-party administrators, and banks. It markets IRAs as a distribution option for employees terminated from employer-sponsored defined contribution plans through its Retirement Solutions Group, which includes a retail sales force. Recordkeeping and administrative services are distributed through institutional clients.
Competition Within the Individual Markets and Empower Retirement Segments
The life insurance, savings, and investment marketplaces are highly competitive. The Company’s competitors include insurance companies, banks, investment advisors, mutual fund companies, and certain service and professional organizations. No individual competitor or small group of competitors is dominant. Competition focuses on name recognition, service, technology, cost, variety of investment options, investment performance, product features, and price, in addition to financial strength as indicated by ratings issued by nationally recognized agencies.
Individual Markets Outlook
On January 24, 2019, the Company announced that it had entered into an agreement with Protective Life Insurance Company (“Protective”) to sell, via indemnity reinsurance, substantially all of itsnon-participating individual life insurance and annuity business and group life and health business. The transaction is in its initial stage, and is expected to close in the first half of 2019 subject to regulatory and customary closing conditions. On the closing date of the proposed transaction, the Company will transfer to Protective assets equal to the statutory liabilities being reinsured and will receive a ceding commission (subject to post-closing adjustments) from Protective in consideration of the transferred business. The Company will retain a small block of participating life insurance policies which will be administered by Protective Life following the close of the transaction. Post-transaction, the Company will focus on the defined contribution retirement and asset management markets in the U.S.
Empower Retirement Outlook
As the second largest recordkeeping provider in the U.S., Empower Retirement is positioned for significant growth opportunities with expertise and diversification across all plan types, company sizes and market segments. The Company continually examines opportunities to structure products and develop strategies to stimulate growth in assets under management.
In 2019, Empower Retirement’s strategies to drive sales growth will continue to include active marketing of the brand, investing in product differentiation and offering abest-in-class service model. In 2018, service enhancements were made to this model including standardizing and improving client-facing tools, optimizing advisor relationship management and client alignment as well as adopting best practices for participant communications. In 2019, investments will continue to be made to improve the customer web experiences. This includes Empower Retirement’s unique, interactiveweb-based experience which was launched to help participants understand their retirement income needs. These efforts are expected to increase customer retention and ultimately increase participant retirement savings.
The Company will continue to pursue operational efficiencies. Great West Global Business Services India Private Limited (“Great West Global”), an indirect wholly-owned subsidiary of Lifeco U.S. in India, which launched in 2015 and has over 1,000 professionals based in India, will continue to expand with a focus on driving lower unit costs.
1.3 Investment Operations
The Company’s investment division manages and administers the investments of its general and separate accounts in support of the cash and liquidity requirements of its insurance and investment products.
The Company’s principal general account investments are in bonds and mortgage loans, all of which are exposed to three primary sources of investment risk: credit, interest rate, and market valuation. Total investments at December 31, 2018, of $55 billion were comprised of general account investment assets of $30 billion and separate account assets of $25 billion. Total
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investments at December 31, 2017, of $57 billion were comprised of general account investment assets of $29 billion and separate account assets of $28 billion.
The Company’s general account investments are in a broad range of asset classes, but consist primarily of domestic bonds. Bonds include public and privately placed corporate bonds, government bonds, and mortgage-backed and asset-backed securities. The Company’s mortgage loans are comprised primarily of domestic commercial collateralized loans diversified with regard to geographical markets and commercial mortgage property types.
The Company manages the characteristics of its investment assets, such as liquidity, currency, yield, and duration, to reflect the underlying characteristics of related insurance and policyholder liabilities that vary among its principal product lines. The Company observes strict asset and liability matching guidelines designed to ensure that the investment portfolio will appropriately meet the cash flow requirements of its liabilities. The Company uses derivative financial instruments for risk management purposes associated with certain invested assets and policy liabilities, not for speculative purposes.
The Company routinely monitors and evaluates the status of its investments in light of current economic conditions, trends in capital markets, and other factors. These other factors include investment size, quality, concentration by issuer and industry, and other diversification considerations relevant to the Company’s bonds.
The Company reduces credit risk for the portfolio as a whole by investing primarily in investment grade bonds. At December 31, 2018, and 2017, 99% of the Company’s bond portfolio were designated as investment grade.
1.4 Regulation
The Company and its insurance subsidiaries are licensed in and regulated by all 50 states, the District of Columbia, Puerto Rico, Guam, and the United States Virgin Islands to transact life insurance business, accident and health insurance business, and annuity business. The extent of such regulation varies, but most jurisdictions have laws and regulations governing the business conduct of insurers as well as the financial aspects of insurers, including standards of solvency, statutory reserves, reinsurance, and capital adequacy. In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and certain other related materials, and, for certain lines of insurance, the approval of rates. Such statutes and regulations also prescribe the permitted types and concentration of investments.
The Company and certain of its subsidiaries are subject to, and comply with, insurance holding company regulations in applicable states. The Company’s insurance subsidiaries are each required to file reports, generally including detailed annual financial statements, with insurance regulatory authorities in each of the jurisdictions in which they do business, and their operations and accounts are subject to periodic examination by such authorities. These subsidiaries must also file, and in many jurisdictions and in some lines of insurance, obtain regulatory approval for rules, rates, and forms relating to the insurance written in the jurisdictions in which they operate.
The National Association of Insurance Commissioners (“NAIC”) has established a program of accrediting state insurance departments. NAIC accreditation permits accredited states to conduct periodic examinations of insurers domiciled in such states. NAIC-accredited states will not accept reports of examination of insurers from unaccredited states, except under limited circumstances. As a direct result, insurers domiciled in unaccredited states may be subject to financial examination by accredited states in which they are licensed, in addition to any examinations conducted by their domiciliary states. The Colorado Department of Insurance is the Company’s principal insurance regulator. Additionally, the State of New York Department of Financial Services (“NYDFS”) and the South Carolina Department of Insurance are the principal insurance regulators for the Company’s two wholly-owned subsidiaries, Great-West Life & Annuity Insurance Company of New York (“GWNY”) and Great-West Life & Annuity Insurance Company of South Carolina (“GWSC”), respectively. All three insurance regulators have received NAIC accreditation.
State and federal insurance and securities regulatory authorities, and other state law enforcement agencies and attorneys general, from time to time make inquiries regarding compliance by the Company and its insurance subsidiaries with insurance, securities, and other laws and regulations regarding the conduct of the Company’s insurance and securities business.
Following is a description of certain regulatory and legal frameworks to which the Company or its subsidiaries may be subject:
• | Insurance Company Regulation - The Company and its insurance subsidiaries are subject to regulation under the insurance company laws of various jurisdictions. The insurance company laws and regulations vary from jurisdiction to jurisdiction, but generally require an insurance company that is a member of an insurance holding company system (two or |
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more affiliated persons, one or more of which is an insurer) to register with state regulatory authorities and to file with those authorities certain reports, including information concerning their capital structure, ownership, financial condition, certain intercompany transactions, and general business operations. In addition, various state jurisdictions have broad administrative powers with respect to such matters as admittance of assets, premium rating methodology, policy forms, establishing reserve requirements and solvency standards, maximum interest rates on life insurance policy loans and minimum rates for accumulation of surrender values, the type and amounts and valuation of investments permitted. State insurance statutes also typically place restrictions and limitations on the amount of dividends or other distributions payable by insurance companies to their parent companies, as well as on transactions between an insurer and its affiliates. |
State insurance regulators, the NAIC, and other regulatory agencies are also investigating the use of affiliated captive reinsurers oroff-shore entities to reinsure insurance risks. In October 2011, the NAIC established a subgroup to study insurers’ use of captives and special purpose vehicles to transfer insurance risk in relation to existing state laws and regulations, and to establish appropriate regulatory requirements to address concerns identified in the study. This subgroup, which has been disbanded, prepared a white paper offering seven recommendations for consideration and a possible study. These recommendations addressed accounting considerations, confidentiality, access to alternative markets, International Association of Insurance Supervisors principles, standards and guidance; enhancements to credit for reinsurance models; disclosure and transparency, andFinancial Analysis Handbook guidance. Two task forces have been assigned to determine how to implement many of these recommendations. Additionally, in June 2013, the NYDFS released a report critical of certain captive reinsurance structures and calling, in part, for other state regulators to adopt a moratorium on approving such structures pending further review by state and federal regulators. Also, in December 2013, the United States Treasury Department’s Federal Insurance Office (“FIO”) issued a report on how to modernize and improve the system of insurance regulation in the United States, recommending, in part, that states develop a uniform and transparent solvency oversight regime for the transfer of risk to reinsurance captives and adopt a uniform capital requirement for reinsurance captives, including a prohibition on transactions that do not constitute legitimate risk transfer.
• | Guaranty Associations and Similar Arrangements - Most of the jurisdictions in which the Company and its insurance subsidiaries are permitted to transact business require life insurers doing business within their jurisdiction to participate in guaranty associations, which are organized to pay certain contractual insurance benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. The Company has historically recovered more than half of the guaranty assessments through these offsets. |
• | Statutory Insurance Examinations - As part of their regulatory oversight process, state insurance departments conduct periodic detailed examinations of the books, records, accounts, and business practices of insurers domiciled in their states. During the three-year period ended December 31, 2018, these examinations produced no significant adverse findings regarding the operations or accounts of the Company and its insurance subsidiaries. |
• | Policy and Contract Reserve Sufficiency Analysis - Annually, the Company and its insurance subsidiaries are required to conduct an analysis of the sufficiency of all statutory reserves. In each case, a qualified actuary must submit an opinion which states that the aggregate statutory reserves, when considered in light of the assets held with respect to such reserves, make good and sufficient provision for the associated contractual obligations and related expenses of the insurer. If such an opinion cannot be provided, the insurer must set up additional reserves by moving funds from available statutory surplus. Since inception of this requirement, the Company and its insurance subsidiaries, which are required by their states of domicile to provide these opinions, have provided such opinions without qualification. |
• | Surplus and Capital - The Company and its insurance subsidiaries are subject to the supervision of the regulators in each jurisdiction in which they are licensed to transact business. Regulators have discretionary authority, in connection with the continued licensing of these insurance subsidiaries, to limit or prohibit sales to policyholders if, in their judgment, the regulators determine that such insurer has not maintained the minimum surplus or capital or that the further transaction of business will be hazardous to policyholders. We do not believe that the current or anticipated levels of statutory surplus of the Company and its subsidiaries present a material risk that any such regulator would limit the amount of new policies that we issue. |
• | Risk-Based Capital (“RBC”) - The Company and its insurance subsidiaries are subject to certain RBC requirements and report their RBC based on a formula calculated by applying factors to various asset, premium, face amount, and statutory reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, |
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interest rate risk, and business risk. The formula is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action and not as a means to rank insurers generally. As of the date of the most recent statutory financial statements filed with insurance regulators, the total adjusted capital of the Company and its insurance subsidiaries was in excess of the minimum RBC that require regulatory action. |
• | Regulation of Investments - The Company and its insurance subsidiaries are subject to state laws and regulations that require diversification of its investment portfolios and limit the amount of investments in certain asset categories, such as below investment grade bonds, other equity investments, and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated asnon-admitted assets for purposes of measuring statutory surplus and, in some instances, would require divestiture of suchnon-qualifying investments. As of the date of the most recent statutory financial statements filed with insurance regulators, the Company did not have anynon-admitted assets as a result of investments exceeding regulatory limitations. |
• | Federal Initiatives - Although the federal government generally does not directly regulate the insurance business, federal initiatives often have an impact on the Company’s business in a variety of ways. From time to time, federal measures are proposed that may significantly affect the Company’s business. |
The Dodd-Frank Act mandates changes to the regulation of the financial services industry. Implementation of the Dodd-Frank Act is ongoing and may affect the Company’s operations and governance in ways that could adversely affect its financial condition and results of operations. The Dodd-Frank Act requires central clearing of, and imposes new margin requirements on, certain derivatives transactions, which increases the costs of the Company’s hedging program. The other provision in the Dodd-Frank Act that may impact the Company is the new FIO within the United States Treasury Department.
The Dodd-Frank Act provides the Financial Stability Oversight Council (“FSOC”) with the power to designate “systemically important” institutions, which will be subject to special regulatory supervision and other provisions intended to prevent, or mitigate the impact of, future disruptions in the U.S. financial system. Based on its most current financial data, the Company is below the quantitative thresholds used by the FSOC to determine which nonbank companies merit consideration. However, the FSOC has indicated it will review on a quarterly basis whether nonbank financial institutions meet the metrics for further review. If the Company were to be designated as a systemically important institution, it could be subject to heightened regulation under the Federal Reserve, which could impact requirements regarding its capital, liquidity, and leverage, as well as its business and investment conduct. In addition, the Company could be subject to assessments to pay for the orderly liquidation of other systemically important financial institutions that have become insolvent.
• | Broker-Dealer and Securities Regulation - One of the Company’s subsidiaries, GWFS Equities, is anon-clearing broker-dealer and subject to certain regulatory provisions by the SEC and the Financial Industry Regulatory Authority (“FINRA”). This subsidiary acts as the underwriter and distributor for variable annuity contracts and variable life insurance policies issued by the Company and for Great-West Funds, Inc., anopen-end management investment company, which is a related party of GWL&A. GWFS Equities also acts as an introducing brokerage firm in the offer and sale of debt and equity securities. GWFS Equities is subject to the requirements of the Securities Exchange Act of 1934 relating to broker-dealers, including, among other things, minimum net capital requirements under the SEC Uniform Net Capital Rules (Rule15c3-1) and segregation of client funds under the SEC Customer Protection Rule (Rule15c3-3). GWFS Equities’ net capital was in excess of the minimum requirements. |
• | Banking Regulation - One of the Company’s subsidiaries, Great-West Trust Company, is a Coloradonon-depository trust company that offers directed and discretionary trustee and custodial services to retirement plans, including 401(a), 401(k), 403(b), and 457 plans, IRAs, and Rabbi trusts fornon-qualified deferred compensation plans. Great-West Trust Company operates pursuant to the rules and regulations of the Colorado Division of Banking including various regulatory capital requirements. Great-West Trust Company’s capital was in excess of the minimum requirements. |
• | Registered Investment Advisor Regulation - Two of the Company’s subsidiaries, Great-West Capital Management and Advised Assets Group are registered as investment advisors with the SEC and are subject to examination by the SEC. The Investment Advisers Act of 1940, as amended, and the related regulations impose various obligations and restrictions on registered investment advisors including fiduciary duties, recordkeeping requirements, operational requirements, and marketing requirements. |
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ERISA and Other Considerations
The Company provides products and services to certain employee benefit plans that are subject to the Employee Retirement Income Security Act (“ERISA”), or the Internal Revenue Code of 1986, as amended (the “Code”). As such, the Company’s activities are subject to the restrictions imposed by ERISA and the Code, including the requirement under ERISA that fiduciaries must perform their duties solely in the interests of ERISA plan participants and beneficiaries, and the requirement under ERISA and the Code that fiduciaries may not cause a covered plan to engage in prohibited transactions with persons who have certain relationships with respect to such plans. The applicable provisions of ERISA and the Code are subject to enforcement by the Department of Labor, the Internal Revenue Service (“IRS”), and the Pension Benefit Guaranty Corporation.
1.5 Ratings
The Company is rated by a number of nationally recognized rating agencies. The ratings represent the opinion of the rating agencies regarding the financial strength of the Company and its ability to meet ongoing obligations to policyholders. The Company’s financial strength ratings as of the date of this filing are as follows:
Rating agency | Measurement | Current rating | ||
A.M. Best, Inc. | Financial strength, operating performance, and business profile | A+ (1) | ||
Fitch Ratings | Financial strength | AA (2) | ||
Moody’s Investor Service, Inc. | Financial strength | Aa3 (3) | ||
Standard & Poor’s Rating Services | Financial strength | AA (2) |
(1) Superior (highest category out of 10 categories).
(2) Very Strong (second highest category out of nine categories).
(3) Excellent (second highest category out of nine categories).
1.6 Employees
The Company and its affiliates had approximately 6,200 and 5,800 employees at December 31, 2018 and 2017, respectively.
1.7 Available Information
The Company files periodic reports and other information with the SEC. Such reports and other information may be obtained by visiting the Public Reference Room of the SEC at its Headquarters Office, 100 F Street, N.E., Room 1580, Washington D.C. 20549, or by calling the SEC at1-202-551-8090 (Public Reference Room) or1-800-SEC-0330 (Office of Investor Education and Advocacy). In addition, the SEC maintains an Internet website (www.sec.gov) that contains reports and other information regarding issuers that file electronically with the SEC, including the Company.
The Company makes available, free of charge, on its website (www.greatwest.com) through its Financial Information page, its annual reports, and amendments to all those reports, as soon as reasonably practicable. Other information found on the website is not part of this or any other report filed with or furnished to the SEC.
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 industry in which the Company operates is highly competitive. The Company’s competitors include insurance companies, mutual fund companies, banks, investment advisors, and certain service and professional organizations. Although there has been consolidation in some sectors, no one competitor is dominant. Customer retention is a key factor for continued profitability. Management cannot be certain that the Company will be able to maintain its current competitive position in the
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markets in which it operates, or that it will be able to expand its operations into new markets. If the Company fails to do so, its business, results of operations, and financial condition could be materially and adversely affected.
The insurance and financial services industries are heavily regulated and changes in regulation may reduce profitability.
Federal and state regulatory reform that increases the compliance requirements imposed on the Company or that changes the way that the Company is able to do business may significantly harm its business or adversely impact the results of operations in the future. It is not possible to predict whether future legislation or regulation adversely affecting the Company’s business will be enacted and, if enacted, the extent to which such legislation will have an effect on the Company or its competitors. Furthermore, there can be no assurance as to which of the Company’s specific products would be impacted by any such legislative or regulatory reform.
The Company’s operations and accounts are subject to examination by the Colorado Department of Insurance and other regulators at specified intervals. The NAIC has also prescribed RBC rules and other financial ratios for life insurance companies. The calculations set forth in these rules are used by regulators to assess the sufficiency of an insurer’s capital and measure the risk characteristics of an insurer’s assets, liabilities, and certainoff-balance sheet items. RBC is calculated by applying factors to various asset, premium, face amount, and liability items. Although the Company has RBC levels well in excess of those required by its regulators, there can be no assurances made that it will continue to maintain these levels.
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.
The Company is rated by a number of nationally recognized rating agencies. The ratings represent the opinion of the rating agencies regarding the Company’s financial strength and its ability to meet ongoing obligations to policyholders. Claims paying ability and financial strength ratings are factors in establishing the competitive position of insurers. A rating downgrade, or the potential for such a downgrade, of the Company or any of its rated insurance subsidiaries could, among other things, materially increase the number of policy surrenders and withdrawals by policyholders of cash values from their policies, adversely affecting relationships with broker-dealers, banks, agents, wholesalers, and other distributors of its products and services. This may result in cash payments requiring the Company to sell invested assets, including illiquid assets such as privately placed bonds and mortgage loans, at a price that may result in realized investment losses. These cash payments to policyholders result in a decrease in total invested assets and a decrease in net income. In addition, a significant downgrade may negatively impact new sales and adversely affect the Company’s ability to compete and thereby have a material effect on its business, results of operations, and financial condition. Negative changes in credit ratings may also increase the Company’s cost of funding.
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 establishes and carries, as a liability, reserves based on conservative, prescribed estimates of how much it will need to pay for future benefits and claims. Future policy benefits do not represent an exact calculation of liability. Rather, future policy benefits represent a conservative estimate prescribed by regulators to cover the ultimate settlement and administration of benefits. These estimates, which generally involve actuarial projections, are based upon prescribed persistency (how long a contract stays with the Company), mortality, interest rates, and other factors. These variables are prescribed and are subject to potential legislative changes. The Company’s life insurance products are exposed to the risk of catastrophic events, such as a pandemic, terrorism, or other such events that cause a large number of deaths. Additionally, there may be a significant reporting delay between the occurrence of an insured event and the date it is reported to the Company.
The inherent uncertainties of estimating policy and contract claim liabilities are greater for certain types of liabilities, particularly those in which the various considerations affecting the type of claim are subject to change and in which long periods of time may elapse before a definitive determination of liability is made. Liability estimates including estimated premiums the Company will receive over the assumed life of the policy are continually refined in a regular and ongoing process as experience develops and further claims are reported and settled. Adjustments to policy benefit liabilities are reflected in the Company’s Statement of Operations in the period in which adjustments are determined. Because setting policy benefit liabilities is inherently uncertain, there can be no assurance that current liabilities will prove to be adequate in light of subsequent events.
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.
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The Company purchases reinsurance by transferring, or ceding, part of the risk it assumes to a reinsurance company in exchange for part of the premium it receives in connection with the risk. The part of the risk the Company retains for its own account is known as the retention. The Company retains an initial maximum of $3.5 million of coverage per individual life. This initial retention limit of $3.5 million may increase due to automatic policy increases in coverage at a maximum rate of $175 thousand per annum, with an overall maximum increase in coverage of $4.5 million. Through reinsurance, the Company has the contractual right to collect the amount above its retention from its reinsurers. Although reinsurance makes the reinsurer liable to the Company to the extent the risk is transferred or ceded to the reinsurer, it does not relieve it of its liability to its policyholders. Accordingly, the Company bears credit risk with respect to its reinsurers. Management cannot make assurances that the Company’s reinsurers will pay all of their reinsurance claims, or that they will pay claims on a timely basis. If the Company’s reinsurers cease to meet their obligations, whether because they are in a weakened position as a result of incurred losses or otherwise, the Company’s results of operations, financial position, and cash flows could be materially adversely affected.
As related to the Company’s reinsurance facilities, there are no assurances that the Company can maintain its current reinsurance facilities or that it can obtain other reinsurance facilities in adequate amounts and at favorable rates. If the Company is unable to obtain new reinsurance facilities, either its net exposures would increase or, if it is unwilling to bear an increase in net exposures, it would have to reduce the level of its underwriting commitments. Either of these potential developments could have a material adverse effect on the Company’s business, results of operations, and financial position.
Interest rate fluctuations could have a negative impact on results of operations and financial condition.
In periods of rapidly increasing interest rates, policy surrenders and withdrawals may increase and premiums in flexible premium policies may decrease as policyholders seek investments with higher perceived returns. This activity may result in the Company’s making cash payments, requiring that it sell invested assets at a time when the prices of those assets are adversely affected by the increase in market interest rates.
During periods of sustained low interest rates, life insurance and annuity products may be affected by increased premium payments on products with flexible premium features and a higher percentage of insurance policies remainingin-force from year to year on products with minimum guarantees. During such a period, investment earnings may be lower because the interest earnings on new fixed income investments will likely have declined with the market interest rates. Also there may be increased early repayment on investments held such as mortgage-backed securities, asset-backed securities, and callable bonds. Although the Company invests in a broad range of asset classes, it is primarily invested in domestic fixed income securities. Accordingly, during periods of sustained low interest rates, an adverse effect on the results of operations and financial condition may result from a decrease in the spread between the earned rate on the Company’s assets and either the interest rates credited to policyholders or the rates assumed in reserve calculations. Several products have current credited interest rates that are at or approaching their minimum guaranteed credited rate, which could have an adverse effect on the results of operations and financial condition due to spread compression.
The Company has hedging and other risk mitigating strategies to reduce the risk of a volatile interest rate environment. However, there can be no assurance that it would be fully insulated from realizing any losses on sales of securities. In addition, regardless of whether the Company realized an investment loss, potential withdrawals would produce a decrease in invested assets, with a corresponding adverse effect on the results of operations and financial condition.
Market fluctuations and general economic conditions may adversely affect results of operations and financial condition.
The risk of fluctuations in market value of all of the separate account assets, proprietary mutual funds, proprietary collective trusts, and external mutual funds is borne by the policyholders. The Company’s fee income for administering and/or managing these assets, however, is generally set as a percentage of those assets. Accordingly, fluctuations in the market value of these assets may result in fluctuations in revenue. On certain products, the Company offers guarantees to policyholders to protect them against the risk of adverse market performance, including guaranteed minimum death benefits and guaranteed lifetime withdrawal benefits. When equity markets decline, the Company is at a greater risk of having to pay guaranteed benefits that exceed available policyholder account balances, and will therefore have to increase its reserves for these benefits, resulting in a financial loss. While the Company does have hedging programs in place to reduce the market risk associated with these guarantees, no assurance can be provided that these programs will generate the returns that will be needed to meet policyholder obligations relating to these guarantees.
The Company manages or administers its general and separate accounts in support of cash and liquidity requirements of its insurance and investment products. The Company’s general account investment portfolio is diversified over a broad range of
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asset classes but consists primarily of domestic fixed income investments. The fair value of these and other general account invested assets fluctuates depending upon, among other factors, general economic and market conditions. In general, the market value of the Company’s general account bond portfolio increases or decreases in inverse relationship with fluctuations in interest rates.
The occurrence of a major economic downturn, acts of corporate malfeasance, or other events that adversely affect the issuers of the Company’s investment securities could cause the value of these securities and net income to decline and the default rate of the bonds to increase. A ratings downgrade affecting particular issuers or securities could have a similar effect. Any event reducing the value of these securities other than on a temporary basis could have an adverse effect on the results of operations and financial condition. Ratings downgrades on general account assets may also result in a higher capital charge under RBC, resulting in lower RBC ratio.
Additionally, the Company may, from time to time, for business, regulatory, or other reasons, elect or be required to sell certain of its general account invested assets at a time when their fair values are less than their original cost, resulting in realized capital losses, which would have an adverse effect on the 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.
Changes in U.S. federal income tax law could make some of the Company’s products less attractive to consumers. For example, the following events could adversely affect the Company’s business:
• | Changes in tax laws that would reduce or eliminatetax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance products or change the tax treatment of life insurance death benefits; |
• | Reductions in the federal income tax that investors are required to pay on long-term capital gains and on some dividends paid on stock that may provide an incentive for some of the Company’s customers and potential customers to shift assets into mutual funds and away from products, including life insurance and annuities, designed to defer taxes payable on investment returns; |
• | Changes in applicable regulations that could restrict the ability of some companies to purchase certain executive benefits products; |
• | Changes in the availability of, or rules concerning the establishment, operation, and taxation of, Section 401, 403(b), 408, and 457 plans; and |
• | Repeal of the federal estate tax |
The Company cannot predict whether any legislation will be enacted, what the specific terms of any such legislation will be, or how, if at all, this legislation or any other legislation could have an adverse effect on the Company’s results of operations or financial condition.
Congress, as well as state and local governments, considers from time to time legislation that could change the Company’s tax costs and increase or decrease its ability to use existing tax credits. If such legislation is adopted, the results of operations could be impacted. Changes to the Company’s tax costs would include changes to tax rates, which could affect the financial statements in several ways. For example, an increase in the federal income tax rate could affect the financial statements as follows:
• | A higher current income tax rate, which would have an unfavorable impact on net income over the period that the higher rate remains in effect. |
• | An increase in certain deferred tax assets (“DTAs”) and certain deferred tax liabilities, which could have an immediate favorable impact on surplus in the period during which the higher tax rate came into effect. The favorable impact will depend on the admissibility limitations of DTAs prescribed by Statutory Accounting Principles, which include estimates of future tax events |
• | An increase in tax rates could affect the timing of recognizing tax benefits. |
The Company may be subject to litigation resulting in substantial awards or settlements and this may adversely affect its reputation and results of operations.
In recent years, life and accident insurance and financial service companies have been named as defendants in lawsuits, including class actions. A number of these lawsuits have resulted in substantial awards and settlements. There can be no
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assurance that any future litigation relating to matters such as the provision of insurance coverage or pricing and sales practices will not have a material adverse effect on the Company’s results of operations or financial position.
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.
Management of operational, legal, regulatory, and financial risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events. Management has devoted significant resources to develop the Company’s risk management and disaster recovery policies and procedures. However, policies and procedures may not be fully effective and may leave the Company exposed to unidentified and unanticipated risks. The Company may be subject to disruptions of its operating systems or its ability to conduct business from events that are wholly or partially beyond its control such as a natural catastrophe, act of terrorism, pandemic, or electrical/telecommunications outage.
The Company may experience difficulty in marketing and distributing products through its current and future distribution channels.
The Company distributes its life and savings products through a variety of distribution channels, including brokers, independent agents, consultants, retail financial institutions, and its own internal sales force. In some areas the Company generates a significant portion of its business through third-party arrangements. Management periodically negotiates provisions and renewals of these relationships and there can be no assurance that such terms will remain acceptable to either party. An interruption in the continuing relationship with a significant number of these third parties could materially affect the Company’s ability to market its products. The Company must attract and retain productive internal sales representatives to sell its products. If the Company is unsuccessful in attracting and retaining sales representatives with demonstrated abilities, its results of operations and financial condition could be adversely affected.
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.
The Company depends heavily upon computer systems to provide reliable service, as a significant portion of the Company’s operations relies on the secure processing, storage, and transmission of confidential or proprietary information and complex transactions. Despite the implementation of a variety of security measures, the Company’s computer systems could be subject to physical and electronicbreak-ins, cyber attacks, and similar disruptions from unauthorized tampering, including threats that may come from external factors, such as governments, organized crime, hackers and other third parties, or may originate internally from within the Company.
If one or more of these events occurs, it could potentially jeopardize the confidential or proprietary information, including personally identifiablenon-public information, processed and stored in, and transmitted through, the computer systems and networks. It could also potentially cause interruptions or malfunctions in the operations of the Company, its customers, or other third parties. This could result in damage to the Company’s reputation, financial losses, litigation, increased costs, regulatory penalties, and/or customer dissatisfaction or loss. Although steps have been taken to prevent and detect such attacks, it is possible that the Company may not become aware of a cyber incident for some time after it occurs, which could increase its exposure to these consequences.
The Company could face difficulties, unforeseen liabilities, or asset impairments arising from business acquisitions or integrations and managing growth of such businesses.
The Company has engaged in acquisitions of businesses in the past and may continue to do so in the future. Such activity exposes the Company to a number of risks. For example, there could be unforeseen liabilities or asset impairments, including goodwill impairments that arise in connection with the businesses that will be acquired in the future.
The Company’s ability to achieve certain benefits which are anticipated from acquisitions of businesses will depend in large part upon the Company’s ability to successfully integrate such businesses in an efficient and cost effective manner. The Company may not be able to integrate such businesses smoothly or successfully, and the process may take longer than expected. The integration of operations and differences in operational culture may require the dedication of significant management resources, which may result in greater expenditures than expected to integrate the acquired businesses. If the Company is unable to successfully integrate the operations of such acquired businesses, it may be unable to realize the benefits it expects to achieve as a result of such acquisitions.
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The success with which the Company is able to integrate acquired operations will depend on its ability to manage a variety of issues, including the following:
• | Loss of key personnel or higher than expected employee attrition rates could adversely affect the performance of the acquired business and the Company’s ability to successfully integrate it. |
• | Integrating acquired operations with existing operations may require the Company to coordinate geographically separated organizations, address possible differences in culture and management philosophies, merge financial processes and risk and compliance procedures, combine separate information technology platforms, and integrate organizations that were previously closely tied to the former parent of the acquired business or other service provider. |
Counterparties with whom the Company transfers risk may be unable or unwilling to do business with the Company.
The Company mitigates market risks through the use of derivative transactions with approved counterparties. Should some or all of these counterparties be unwilling or unable to continue to offer derivatives to the Company, the cost of purchasing these financial instruments may increase and/or the Company may not be able to continue to transfer certain risks, thereby increasing its exposure to a financial loss.
The Company may not be able to secure financing to meet the liquidity or capital needs of the Company.
While the Company monitors its liquidity and capital on a regular basis, it may need to seek external financing if available internal levels of liquidity or capital are insufficient. Liquidity demands include but are not limited to the payment of policyholder benefits, collateral posting as required under our agreements with counterparties, the payment of operating expenses, and the servicing of debt. Capital demands could result from the growth of new business, a change in investment strategy, an investment in systems or other infrastructure, or a deterioration of the Company’s capital arising from financial losses. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit in financial markets, the overall availability of credit to the financial services industry, the volume of trading activities in financial markets, the Company’s credit ratings and credit capacity, and the perception of customers or lenders of the Company’s long or short term financial strength. If the Company is unable to secure external financing to meet a liquidity or capital shortfall it may be required to curtail its operations, sell assets or reinsure liabilities, make changes to the investment strategy, or discontinue the use of certain derivatives, which could have a detrimental impact on the financial strength of the Company.
Acquisitions, dispositions and business reorganizations, including our announced transaction with Protective Life Corporation, may not produce anticipated benefits and could result in operating difficulties, unforeseen liabilities, asset impairments or rating agency actions, which may adversely affect our operating results and financial condition.
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Acquisitions, dispositions and other business reorganizations, such as the planned disposition of substantially all of our Individual Markets segment to Protective Life Corporation that was announced in January of 2019, could expose us to a number of risks. Once completed, acquisitions and dispositions may not perform as projected, expense synergies and savings may not materialize as expected and costs associated with the transaction or related transition services may be greater than anticipated. Our financial results could be adversely affected by:
• | potential difficulties achieving projected financial results, including the costs and benefits of integration or deconsolidation, due to macroeconomic, business, demographic, actuarial, regulatory, or political factors; |
• | negative reactions to a transaction by policyholders and contract-holders, distributors, suppliers, plan sponsors and advisors and other clients and potential customers; |
• | ratings agency warnings or downgrades; |
• | unanticipated performance issues; |
• | unforeseen liabilities; |
• | transaction-related charges; |
• | diversion of management time and resources to disposition challenges; |
• | loss of key employees or customers, amortization of expenses related to intangibles; |
• | inefficiencies as we integrate operations and address differences in cultural, management, information, compliance and financial systems and procedures; and |
• | charges for impairment of long-term assets or goodwill and indemnifications. |
In addition, factors such as receiving the required governmental or regulatory approvals to close the transaction, delays in implementation or completion of transition activities or a disruption to our ongoing business could negatively impact our results.
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Reorganizing or consolidating the legal entities through which we conduct our business may raise similar risks. The success with which we are able to realize benefits from legal entity reorganizations will also depend on our ability to manage a variety of issues, including regulatory approvals, modification of our operations and changes to our investment portfolios.
Any of these risks, if realized, could prevent us from achieving the benefits we expect or could otherwise have a material adverse effect on our business, results of operations or financial condition.
Properties
The Company’s corporate office facility is comprised of an 886,000 square foot complex located in Greenwood Village, Colorado. The Company owns its corporate office facilities which are occupied by all of the Company’s segments. The Company also leases approximately 432,000 square feet of sales and administrative offices throughout the United States. At December 31, 2018, the Company leased approximately 188,000 square feet of the complex to CIGNA for a lease period expiring on March 31, 2019. Management believes that the Company’s properties are suitable and adequate for its current and anticipated business operations.
Legal Proceedings
From time to time, the Company may be threatened with, or named as a defendant in, lawsuits, arbitrations, and administrative claims. Any such claims that are decided against the Company could harm the Company’s business. The Company is also subject to periodic regulatory audits and inspections which could result in fines or other disciplinary actions. Unfavorable outcomes in such matters may result in a material impact on the Company’s financial position, results of operations, or cash flows.
The Company is defending lawsuits relating to the costs and features of certain retirement or fund products. Management believes the claims are without merit and will defend these actions. Based on the information known, these actions will not have a material adverse effect on the financial position of the Company.
The Company is involved in other various legal proceedings that arise in the ordinary course of its business. In the opinion of management, after consultation with counsel, the likelihood of loss from the resolution of these proceedings is remote and/or the estimated loss is not expected to have a material effect on the Company’s financial position, results of its operations, or cash flows.
Market for Registrant’s Common Equity and Related Stockholder Matters
5.1 Equity Security Holders and Market Information
There is no established public trading market for the Company’s common equity. GWL&A Financial is the sole shareholder of the Company’s common equity securities.
5.2 Dividends
In the three most recent fiscal years, the Company has paid dividends on its common shares. Dividends paid on the Company’s common stock were $152 million, $145 million, and $126 million during the years ended December 31, 2018, 2017 and 2016, respectively.
Under Colorado law, the Company cannot, without the approval of the Colorado Commissioner of Insurance, pay a dividend if as a result of such payment, the total of that dividend and all dividends paid in the preceding twelve months, would exceed the greater of (i) 10% of the Company’s statutory surplus as regards policyholders as of the preceding year ended December 31; or
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(ii) the Company’s statutory net gain, not including realized capital gains, for the twelve-month period ending the preceding December 31 not including pro rata distributions of the Company’s own securities. Additionally, dividend payments generally will not be allowed if the statutory surplus remaining after the proposed dividend would fall below the minimum RBC that requires regulatory action.
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Selected Financial Data
The following is a summary of selected statutory financial information for the Company. The information should be read in conjunction with and is qualified in its entirety by the information contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the statutory financial statements and notes thereto appearing in Item 8, “Financial Statements and Supplementary Data.”
The selected statutory financial information for the years ended December 31, 2018, 2017 and 2016, and at December 31, 2018 and 2017, has been derived in part from the Company’s audited statutory financial statements included in Item 8. The selected Statement of Operations data for the years ended December 31, 2015, and 2014, and the selected Statutory Statement of Admitted Assets, Liabilities, Capital and Surplus data at December 31, 2016, 2015, and 2014, have been derived in part from the Company’s statutory financial statements not included elsewhere herein.
As of and for the Year Ended December 31, | ||||||||||||||||||||
(In millions) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
Total income | $ | 7,365 | $ | 6,481 | $ | 6,801 | $ | 7,065 | $ | 6,868 | ||||||||||
Total benefits and expenses | 7,047 | 6,222 | 6,692 | 6,821 | 6,598 | |||||||||||||||
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Income from continuing operations | 318 | 259 | 109 | 244 | 270 | |||||||||||||||
Dividends to policyholders | 31 | 39 | 46 | 55 | 58 | |||||||||||||||
Federal income tax (benefit) expense | (18 | ) | 51 | (39 | ) | (6 | ) | 69 | ||||||||||||
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Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 305 | 169 | 102 | 195 | 143 | |||||||||||||||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 10 | 1 | (1 | ) | (8 | ) | (6 | ) | ||||||||||||
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Net income | $ | 315 | $ | 170 | $ | 101 | $ | 187 | $ | 137 | ||||||||||
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Dividends declared | $ | 152 | $ | 145 | $ | 126 | $ | 140 | $ | 316 | ||||||||||
Invested assets | $ | 30,035 | $ | 28,849 | $ | 27,871 | $ | 26,399 | $ | 25,444 | ||||||||||
Separate account assets | 24,655 | 28,197 | 27,495 | 27,048 | 28,081 | |||||||||||||||
Total assets | 55,786 | 58,010 | 56,436 | 54,461 | 54,523 | |||||||||||||||
Total aggregate reserves | 27,778 | 26,860 | 25,945 | 24,805 | 23,848 | |||||||||||||||
Separate account liabilities | 24,655 | 28,197 | 27,495 | 27,048 | 28,082 | |||||||||||||||
Total liabilities | 54,459 | 56,881 | 55,383 | 53,346 | 53,523 | |||||||||||||||
Total capital and surplus | 1,327 | 1,130 | 1,053 | 1,115 | 1,001 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations of the Company for the three years ended December 31, 2018, 2017 and 2016, are as follows. This management discussion and analysis should be read in conjunction with the financial data contained in Item 6, “Selected Financial Data,” and in Item 8, “Financial Statements and Supplementary Data.”
Certain statements in this report constitute forward-looking statements. See “Business” in Item 1 of this report for additional factors relating to these statements, and see “Risk Factors” in Item 1A of this report for a discussion of certain risk factors applicable to the business and its financial condition and results of operations.
7.1 Executive Summary
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The Company and its subsidiaries are providers of insurance and other financial service products to individual, corporate, institutional, and government customers. Management considers the ability to continue to expand its presence in the United States defined contribution and institutional insurance markets to be its primary points of focus. The life insurance, savings, and investments marketplace is highly competitive. Competitors include insurance companies, banks, investment advisors, mutual fund companies, and certain service and professional organizations.
The Individual Markets segment distributes life insurance, annuity, and retirement products to both individuals and businesses through various distribution channels. Life insurance productsin-force include participating andnon-participating term life, whole life, universal life, and variable universal life. The Empower Retirement segment provides various retirement plan products (including IRAs) and investment options, as well as comprehensive administrative and recordkeeping services for financial institutions and employers, which include educational, advisory, enrollment, and communication services to employer-sponsored defined contribution plans and associated defined benefit plans. Defined contribution plans provide for benefits based upon the value of contributions to, and investment returns on, an individual’s account. The Company’s Other reporting segment is substantially comprised of corporate items not directly allocated to the other operating segments and interest expense on long-term debt.
Recent Events
On April 18, 2018, the Securities and Exchange Commission (“SEC”) released its proposal on the best interest standards applicable to brokers and advisors. The Company provided comments to the SEC in August 2018. The Company will monitor any developments or proposed revisions and is preparing to comply with the standards.
The Tax Reconciliation Act, which was signed in December 2017, among other changes, lowered the U.S. corporate federal income tax rate from 35% to 21% effective on January 1, 2018. As a result, net earnings in 2018 reflect net income, tax effected at the lower 21% rate. Other provisions of the tax bill did not have a material effect onyear-to-date taxable income in 2018.
During the second quarter of 2018, the Company issued a surplus note totaling $346 million and redeemed a surplus note totaling $333 million. The Company also recognized an increase in the capital and surplus account of $39 millionafter-tax on an interest rate swap that was hedging the surplus note that was redeemed.
The Company entered into a coinsurance with funds withheld / modified coinsurance agreement with London Life International Reinsurance Corporation (“LLIRC”), an affiliate, to cede portions of its group annuity, whole life, and universal life policies effective December 31, 2016. On January 1, 2018, the Company terminated this 2016 agreement. On December 31, 2018, the Company entered into a modified coinsurance agreement with LLIRC pursuant to which it ceded portions of its group annuity policies. These transactions had large impacts to financial statement lines, but no material impact to statutory net income.
On January 24, 2019, the Company announced that it had entered into an agreement with Protective Life Insurance Company (“Protective”) to sell, via indemnity reinsurance, substantially all of itsnon-participating individual life insurance and annuity business and group life and health business. The transaction is in its initial stage, and is expected to close in the first half of 2019 subject to regulatory and customary closing conditions. On the closing date of the proposed transaction, the Company will transfer to Protective assets equal to the statutory liabilities being reinsured and will receive a ceding commission (subject to post-closing adjustments) from Protective in consideration of the transferred business. The Company will retain a small block of participating life insurance policies which will be administered by Protective Life following the close of the transaction.
Market Conditions
The S&P 500 index ended 2018 down by 6% as compared to 2017, and 2017 was up by 19% when compared to 2016. The average of the S&P 500 index during the year ended December 31, 2018, was up by 12% when compared to the average for the year ended December 31, 2017, and the average was up by 17% for the year ended December 31, 2017, when compared to the average for the year ended December 31, 2016.
Year Ended December 31, | ||||||||||||||||||||
S&P 500 Index | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
Index Close | 2,507 | 2,674 | 2,239 | 2,044 |
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Index Average | 2,744 | 2,448 | 2,094 | 2,061 | 1,931 |
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Variable asset-based fees earned by the Company fluctuate with changes in participant account balances. Participant account balances change due to cash flow and market gains and losses, which are primarily associated with changes in the United States equities market. Fee income increased by $31 million, or 8%, to $411 million for the year ended December 31, 2018, when compared to 2017. The increase was primarily related to asset-based variable fee income resulting from increased average asset levels driven by sales and higher average equity market levels.
The10-year U.S. Treasury rate ended 2018 up by 29 basis points as compared to 2017, while 2017 was down by 5 basis points when compared to 2016. The average of the10-year U.S. Treasury rate during the year ended December 31, 2018 ended up by 58 basis points when compared to the average for the year ended December 31, 2017, and the average was up by 50 basis points for the year ended December 31, 2017, when compared to the average for the year ended December 31, 2016.
Year Ended December 31, | ||||||||||||||||||||
10-Year Treasury Rate | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
Close | 2.69% | 2.40% | 2.45% | 2.27% | 2.17% | |||||||||||||||
Average | 2.91% | 2.33% | 1.83% | 2.14% | 2.54% |
7.2 Summary of Critical Accounting Judgments and Estimates
The Company prepares its statutory financial statements in conformity with accounting practices prescribed or permitted by the Division. The Division requires that insurance companies domiciled in the State of Colorado prepare their statutory financial statements in accordance with the National Association of Insurance Commissioners Accounting Practices and Procedures Manual (“NAIC SAP”), subject to any deviations prescribed or permitted by the State of Colorado Insurance Commissioner.
The only permitted deviation that impacts the Company allows the Company to account for certain separate account products at book value instead of fair value. The Division has not permitted the Company to adopt any other accounting practices that have an impact on the Company’s statutory financial statements as compared to NAIC SAP or the Division’s prescribed accounting practices. There is no impact to either capital and surplus or net income as a result of the prescribed accounting practice.
The Company has identified the following accounting policies, judgments, and estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:
• | Valuation of investments; |
• | Impairment of investments; |
• | Valuation of derivatives and related hedge accounting; |
• | Valuation of policy benefits and; |
• | Valuation of deferred taxes; |
Valuation of investments
The Company’s investments are in bonds, mortgage loans, real estate, contract loans, and other investments. The Company’s investments are exposed to three primary sources of risk: credit, interest rate, and market valuation. The financial statement risks, stemming from such investment risks, are those associated with the determination of fair values.
The fair values for bonds are generally based upon evaluated prices from independent pricing services. In cases where these prices are not readily available, fair values are estimated by the Company. To determine estimated fair value for these instruments, the Company generally utilizes discounted cash flow models with market observable pricing inputs such as spreads, average life, and credit quality. 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. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts of the Company’s financial instruments.
Impairment of investments
The Company evaluates its general account investments on a quarterly basis to determine whether there has been an other-than-temporary decline in fair value below the amortized cost basis. Assumptions and estimates about the issuer’s operations and ability to generate future cash flows are inherent in management’s evaluation of investments for other- than-temporary impairments (“OTTI”). The assessment of whether an OTTI has occurred is based upon management’scase-by-case evaluation of the underlying reasons for the decline in fair value of each individual security. An OTTI is recorded (a) if it is probable that
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the Company will be unable to collect all amounts due according to the contractual terms in effect at the date of acquisition, (b) if the Company has the intent to sell the investment or (c) fornon-interest related declines in value and where the Company does not have the intent and ability at the reporting date, to hold the bond until its recovery. Management considers a wide range of factors regarding the security issuer and uses its best judgment in evaluating the cause of the decline in its estimated fair value and in assessing the prospects for near-term recovery. While all available information is taken into account, it is difficult to predict the ultimate recoverable amount from a distressed or impaired security. The evaluation of impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition or near term recovery prospects, the effects of changes in interest rates or credit spreads, and the recovery period.
If an OTTI has occurred on loan-backed and structured securities, the impairment amount is bifurcated into two components: the amount related to thenon-interest loss and the amount attributed to other factors. The calculation of expected cash flows utilized during the impairment evaluation and bifurcation process is determined using judgment and the best information available to the Company including default rates, credit ratings, collateral characteristics, and current levels of subordination.
The determination of the calculation and the adequacy of the mortgage allowance for credit loss and mortgage impairments (when management deems it probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement) involve judgments that incorporate qualitative and quantitative Company and industry mortgage performance data. Management’s periodic evaluation and assessment of the adequacy of the mortgage provision allowance and the need for mortgage impairments is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the fair value of the underlying collateral, composition of the loan portfolio, current economic conditions, loss experience, and other relevant factors.
Valuation of derivatives and related hedge accounting
Derivatives that qualify for hedge accounting treatment are valued using the valuation method (either amortized cost or fair value) consistent with the underlying hedged asset or liability. Derivatives where hedge accounting is either not elected or that are not eligible for hedge accounting are stated at fair value; changes in fair values are recognized in unassigned surplus in the period of change.
The fair value of derivatives is determined by quoted market prices or through the use of pricing models. The determination of fair value, when quoted market values are not available, is based on valuation methodologies and assumptions deemed appropriate under the circumstances. Values can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, market volatility, and liquidity. Judgment is applied in determining the availability and application of hedge accounting designations and the appropriate accounting treatment under accounting guidance. If it were determined that hedge accounting designations were not appropriately applied, reported capital and surplus could be materially affected. Differences in judgment as to the availability and application of hedge accounting designations and the appropriate accounting treatment may result in a differing impact on the financial statements of the Company from that previously reported. Assessments of hedge effectiveness and measurements of ineffectiveness of hedging relationships are also subject to interpretations and estimations and different interpretations or estimates may have a material effect on the amount reported in capital and surplus.
Policy reserves
Life insurance and annuity policy reserves with life contingencies are computed on the basis of statutory mortality and interest requirements and without consideration for withdrawals. Annuity contract reserves without life contingencies are computed on the basis of statutory interest requirements
Policy reserves for life insurance are valued in accordance with the provision of applicable statutory regulations. Life insurance reserves are determined principally using the Commissioner’s Reserve Valuation Method, using the statutory mortality and interest requirements, without consideration for withdrawals. Some policies contain a surrender value in excess of the reserve as legally computed. This excess is calculated and recorded on apolicy-by-policy basis.
Premium stabilization reserves are calculated for certain policies to reflect the Company’s estimate of experience refunds and interest accumulations on these policies. The reserves are invested by the Company. The income earned on these investments is accumulated in this reserve and is used to mitigate future premium rate increases for such policies.
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Policy reserves ceded to other insurance companies are recorded as a reduction of the reserve liabilities. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies.
Policy and contract claims include provisions for reported life and health claims in process of settlement, valued in accordance with the terms of the related policies and contracts, as well as provisions for claims incurred but not reported based primarily on prior experience of the Company. As such, amounts are estimates, and the ultimate liability may differ from the amount recorded. Any changes in estimates will be reflected in the results of operations when additional information becomes known.
The liabilities for health claim reserves are determined using historicalrun-out rates, expected loss ratios and statistical analysis. The Company provides for significant claim volatility in areas where experience has fluctuated. The liabilities represent estimates of the ultimate net cost of all reported and unreported claims which are unpaid atyear-end. Those estimates are subject to considerable variability in claim severity and frequency. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations.
Valuation of deferred taxes
A net deferred tax asset is included in the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus which is recorded using the asset and liability method in which deferred tax assets and liabilities are recorded for expected future tax consequences of events that have been recognized in either the Company’s statutory financial statements or tax returns. Deferred income tax assets are subject to admissibility limitations prescribed by statutory accounting principles which include estimates of future tax events. The change in deferred income taxes is treated as a component of the change in unassigned funds.
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7.3 Company Results of Operations
Year ended December 31, 2018, compared with the year ended December 31, 2017
The following is a summary of certain financial data of the Company:
Year Ended December 31, | Increase | Percentage | ||||||||||||||
Statement of Operations data (In millions) | 2018 | 2017 | (decrease) | change | ||||||||||||
Premium income and annuity consideration | $ | 7,593 | $ | 5,271 | $ | 2,322 | 44 % | |||||||||
Net investment income | 1,307 | 1,267 | 40 | 3 % | ||||||||||||
Fee and miscellaneous income | 411 | 380 | 31 | 8 % | ||||||||||||
Reserve adjustment on reinsurance ceded | (1,976 | ) | (490 | ) | (1,486 | ) | (303)% | |||||||||
Other | 30 | 53 | (23 | ) | (43)% | |||||||||||
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Total income | 7,365 | 6,481 | 884 | 14 % | ||||||||||||
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Policyholder benefits | 6,587 | 5,566 | 1,021 | 18 % | ||||||||||||
Increase in aggregate reserves for life and accident health policies and contracts | 918 | 916 | 2 | — % | ||||||||||||
Other insurance benefits, expenses and commissions | 686 | 724 | (38 | ) | (5)% | |||||||||||
Net transfers from separate accounts | (1,112 | ) | (945 | ) | (167 | ) | (18)% | |||||||||
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Total benefits and expenses | 7,079 | 6,261 | 818 | 13 % | ||||||||||||
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Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 286 | 220 | 66 | 30 % | ||||||||||||
Federal income tax (benefit) expense | (18 | ) | 51 | (69 | ) | (135)% | ||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain from operations before net realized capital gains | 304 | 169 | 135 | 80 % | ||||||||||||
Net realized capital gains less capital gains tax and transfers to interest maintenance reserve | 11 | 1 | 10 | 1,000 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Statutory net income | $ | 315 | $ | 170 | $ | 145 | 85 % | |||||||||
|
|
|
|
|
|
|
|
|
The Company’s statutory net income increased by $145 million, or 85%, to $315 million. The increase was primarily due to higher net investment income, higher fee income, lower operating expenses and lower income taxes.
Premium income and annuity consideration increased by $2,322 million, or 44%, to $7,593 million due to the LLIRC reinsurance transactions previously discussed. Excluding the LLIRC reinsurance transactions, premiums increased $217 million, or 4%, due to increased sales.
Net investment income increased by $40 million, or 3%, to $1,307 million primarily as a result of higher dividends received from subsidiaries and higher average invested assets.
Fee income increased by $31 million, or 8%, to $411 million primarily related to an increase in asset-based variable fee income resulting from increased average asset levels, which were driven by sales and higher average equity market levels.
The reserve adjustment against income on reinsurance ceded increased by $1,486 million, or 303%, to $1,976 million primarily due to the LLIRC reinsurance transactions.
Policyholder benefits increased by $1,021 million, or 18%, to $6,587 million. Excluding the LLIRC reinsurance transactions, policyholder benefits increased $785 million, or 14%, primarily due to an increase in general account and separate account surrenders.
Other insurance benefits, expenses and commissions decreased by $38 million, or 5%, to $686 million. Excluding the LLIRC reinsurance transactions, other insurance benefits, expenses and commissions decreased by $20 million, or 3%, primarily due to expense management and the completion of integration activities in 2017.
25
Table of Contents
Net transfers from separate accounts changed by $167 million, or 18% to $1,112 million primarily due to higher separate account surrenders in 2018.
Federal tax expense changed to a benefit of $18 million in 2018 compared to an expense of $51 million in 2017 primarily due to the utilization of tax credits and a lower tax rate.
Year ended December 31, 2017, compared with the year ended December 31, 2016
The following is a summary of certain financial data of the Company:
Year Ended December 31, | Increase | Percentage | ||||||||||||||
Statement of Operations data (In millions) | 2017 | 2016 | (decrease) | change | ||||||||||||
Premium income and annuity consideration | $ | 5,271 | $ | (398 | ) | $ | 5,669 | 1,424 % | ||||||||
Net investment income | 1,267 | 1,236 | 31 | 3 % | ||||||||||||
Fee and miscellaneous income | 380 | 306 | 74 | 24 % | ||||||||||||
Reserve adjustment on reinsurance ceded | (490 | ) | 5,628 | (6,118 | ) | (109)% | ||||||||||
Other | 53 | 29 | 24 | 83 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total income | 6,481 | 6,801 | (320 | ) | (5)% | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Policyholder benefits | 5,566 | 4,971 | 595 | 12 % | ||||||||||||
Increase in aggregate reserves for life and accident health policies and contracts | 916 | 1,140 | (224 | ) | (20)% | |||||||||||
Other insurance benefits, expenses and commissions | 724 | 727 | (3 | ) | — % | |||||||||||
Net transfers from separate accounts | (945 | ) | (101 | ) | (844 | ) | (836)% | |||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total benefits and expenses | 6,261 | 6,737 | (476 | ) | (7)% | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 220 | 64 | 156 | 244 % | ||||||||||||
Federal income tax expense (benefit) | 51 | (38 | ) | 89 | 234 % | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain from operations before net realized capital gains | 169 | 102 | 67 | 66 % | ||||||||||||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 1 | (1 | ) | 2 | 200 % | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Statutory net income | $ | 170 | $ | 101 | $ | 69 | 68 % | |||||||||
|
|
|
|
|
|
|
|
|
The Company’s statutory net income increased by $69 million, or 68%, to $170 million. The increase was primarily due to higher net investment income, higher fee income, and lower operating expenses, partially offset by higher income taxes.
Premium income and annuity consideration increased by $5,669 million, or 1,424%, to $5,271 million primarily due to the LLIRC reinsurance transactions previously discussed. Excluding the LLIRC reinsurance transactions, premium incomes and annuity consideration decreased $772 million, or 13%, due to a decrease in general account and separate account premiums.
Net investment income increased $31 million, or 3%, to $1,267 million primarily as a result of higher average invested assets partially offset by lower yields.
Fee income increased $74 million, or 24%, to $380 million primarily related to an increase in asset-based variable fee income resulting from increased average asset levels, which were driven by sales and higher average equity market levels.
Reserve adjustment on reinsurance ceded decreased by $6,118 million, or 109%, to $(490) million primarily due to the LLIRC reinsurance transactions.
Policyholder benefits increased by $595 million, or 12%, to $5,566 million. Excluding the LLIRC reinsurance transactions, policyholder benefits increased $831 million, or 17%, primarily due to an increase in general account and separate account surrenders.
26
Table of Contents
Net transfers from separate accounts changed by $844 million, or 836%, to $945 million due to lower separate account sales in 2017.
Other insurance benefits, expenses and commissions decreased by $3 million to $724 million. Excluding the LLIRC reinsurance transactions, other insurance benefits, expenses and commissions decreased by $21 million, or 3%, primarily due to a $39 million decrease in operating expenses due to expense management and the completion of integration activities in 2017. This was partially offset by an $18 million increase in commissions due to higher commission-based sales.
Federal tax expense changed to an expense of $51 million in 2017 compared to a benefit of $38 million in 2016 primarily due to an increase in gain from operations before federal income tax.
27
Table of Contents
7.4 Individual Markets Segment Results of Operations
Year ended December 31, 2018, compared with the year ended December 31, 2017
The following is a summary of certain financial data of the Individual Markets segment:
Year Ended December 31, | Increase | Percentage | ||||||||||||||
Statement of Operations data (In millions) | 2018 | 2017 | (decrease) | change | ||||||||||||
Premium income and annuity consideration | $ | 5,662 | $ | 1,610 | $ | 4,052 | 252 % | |||||||||
Net investment income | 754 | 749 | 5 | 1 % | ||||||||||||
Fee and miscellaneous income | 128 | 112 | 16 | 14 % | ||||||||||||
Reserve adjustment on reinsurance ceded | (3,987 | ) | (340 | ) | (3,647 | ) | (1,073)% | |||||||||
Other | 32 | 34 | (2 | ) | (6)% | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total income | 2,589 | 2,165 | 424 | 20 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Policyholder benefits | 941 | 781 | 160 | 20 % | ||||||||||||
Increase in aggregate reserves for life and accident health policies and contracts | 484 | 582 | (98 | ) | (17)% | |||||||||||
Other insurance benefits, expenses and commissions | 191 | 207 | (16 | ) | (8)% | |||||||||||
Net transfers from separate accounts | 819 | 449 | 370 | 82 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total benefits and expenses | 2,435 | 2,019 | 416 | 21 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 154 | 146 | 8 | 5 % | ||||||||||||
Federal income tax expense | — | 49 | (49 | ) | (100)% | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain from operations before net realized capital gains | 154 | 97 | 57 | 59 % | ||||||||||||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 6 | 1 | 5 | 500 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Statutory net income | $ | 160 | $ | 98 | $ | 62 | 63 % | |||||||||
|
|
|
|
|
|
|
|
|
Statutory net income for the Individual Markets segment increased by $62 million, or 63%, to $160 million. The increase was primarily due to higher net investment income, higher fee income, lower operating expenses and lower income tax expenses, partially offset by higher policyholder benefits.
Premium income and annuity consideration increased by $4,052 million, or 252%, to $5,662 million primarily due to the LLIRC reinsurance transactions previously discussed. Excluding the LLIRC reinsurance transactions, premiums increased by $7 million.
Net investment income increased by $5 million, or 1%, to $754 million primarily as a result of higher average invested assets.
Fee income increased by $16 million, or 14%, to $128 million primarily related to an increase in asset-based variable fee income resulting from increased average asset levels, which were driven by sales and higher average equity market levels
The reserve adjustment on reinsurance ceded increased by $3,647 million, or 1,073%, to $3,987 million primarily due to the LLIRC reinsurance transactions.
Policyholder benefits increased by $160 million, or 20%, to $941 million. Excluding the LLIRC reinsurance transactions, policyholder benefits increased by $48 million, or 6% due to unfavorable mortality experience.
Net transfers from separate accounts increased by $370 million, or 82%, to $819 million primarily due to lower separate account surrenders in 2018.
Federal tax expense decreased by $49 million, or 100%, to $0 primarily due to the utilization of tax credits and a lower tax rate.
28
Table of Contents
Year ended December 31, 2017, compared with the year ended December 31, 2016
The following is a summary of certain financial data of the Individual Markets segment:
Year Ended December 31, | Increase | Percentage | ||||||||||||||
Statement of Operations data (In millions) | 2017 | 2016 | (decrease) | change | ||||||||||||
Premium income and annuity consideration | $ | 1,610 | $ | (2,656 | ) | $ | 4,266 | 161 % | ||||||||
Net investment income | 749 | 732 | 17 | 2 % | ||||||||||||
Fee and miscellaneous income | 112 | 95 | 17 | 18 % | ||||||||||||
Reserve adjustment on reinsurance ceded | (340 | ) | 3,380 | (3,720 | ) | (110)% | ||||||||||
Other | 34 | 26 | 8 | 31 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total income | 2,165 | 1,577 | 588 | 37 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Policyholder benefits | 781 | 831 | (50 | ) | (6)% | |||||||||||
Increase in aggregate reserves for life and accident health policies and contracts | 582 | 117 | 465 | 397 % | ||||||||||||
Other insurance benefits, expenses and commissions | 207 | 175 | 32 | 18 % | ||||||||||||
Net transfers from separate accounts | 449 | 358 | 91 | 25 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total benefits and expenses | 2,019 | 1,481 | 538 | 36 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 146 | 96 | 50 | 52 % | ||||||||||||
Federal income tax expense | 49 | 21 | 28 | 133 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain from operations before net realized capital gains | 97 | 75 | 22 | 29 % | ||||||||||||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 1 | (1 | ) | 2 | 200 % | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Statutory net income | $ | 98 | $ | 74 | $ | 24 | 32 % | |||||||||
|
|
|
|
|
|
|
|
|
Statutory net income for the Individual Markets segment increased by $24 million, or 32%, to $98 million. The increase was primarily due to higher premium income and annuity consideration, net investment income and fee income.
Premium income and annuity consideration increased by $4,266 million, or 161%, to $1,610 million primarily due to the LLIRC reinsurance transactions previously discussed. Excluding the LLIRC reinsurance transactions, premiums increased $154 million, or 11%, primarily due to increased annuity sales.
Net investment income increased $17 million, or 2%, to $749 million primarily as a result of higher average invested assets partially offset by lower yields.
Fee income increased $17 million, or 18%, to $112 million primarily related to an increase in asset-based variable fee income resulting from increased average asset levels, which were driven by sales and higher average equity market levels.
Reserve adjustment on reinsurance ceded decreased by $3,720 million, or 110%, to $(340) million primarily due to the LLIRC reinsurance transactions.
Increase in aggregate reserves for life and accident health policies and contracts changed by $465 million, or 397%, to $582 million primarily due to the LLIRC reinsurance transactions. Excluding the LLIRC reinsurance transactions, increase in aggregate reserves increased $106 million, or 22%, primarily due to increased premiums.
Other insurance benefits, expenses and commissions increased by $32 million, or 18%, to $207 million. Excluding the LLIRC reinsurance transactions, other insurance benefits, expenses and commissions increased by $16 million, or 9%, primarily due to an $11 million increase in commissions due to higher sales.
Net transfers from separate accounts increased by $91 million, or 25%, to $449 million primarily due to higher separate account premiums in 2017.
29
Table of Contents
7.5 Empower Retirement Segment Results of Operations
Year ended December 31, 2018, compared with the year ended December 31, 2017
The following is a summary of certain financial data of the Empower Retirement segment:
Year Ended December 31, | Increase | Percentage | ||||||||||||||
Statement of Operations data (In millions) | 2018 | 2017 | (decrease) | change | ||||||||||||
Premium income and annuity consideration | $ | 1,931 | $ | 3,661 | $ | (1,730 | ) | (47)% | ||||||||
Net investment income | 537 | 513 | 24 | 5 % | ||||||||||||
Fee and miscellaneous income | 272 | 257 | 15 | 6 % | ||||||||||||
Reserve adjustment on reinsurance ceded | 2,011 | (150 | ) | 2,161 | 1,441 % | |||||||||||
Other | (2 | ) | 19 | (21 | ) | (111)% | ||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total income | 4,749 | 4,300 | 449 | 10 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Policyholder benefits | 5,646 | 4,785 | 861 | 18 % | ||||||||||||
Increase in aggregate reserves for life and accident health policies and contracts | 434 | 334 | 100 | 30 % | ||||||||||||
Other insurance benefits, expenses and commissions | 475 | 477 | (2 | ) | — % | |||||||||||
Net transfers from separate accounts | (1,931 | ) | (1,393 | ) | (538 | ) | (39)% | |||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total benefits and expenses | 4,624 | 4,203 | 421 | 10 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 125 | 97 | 28 | 29 % | ||||||||||||
Federal income tax (benefit) expense | (23 | ) | 14 | (37 | ) | (264)% | ||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain from operations before net realized capital gains | 148 | 83 | 65 | 78 % | ||||||||||||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 5 | — | 5 | 100 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Statutory net income | $ | 153 | $ | 83 | $ | 70 | 84 % | |||||||||
|
|
|
|
|
|
|
|
|
Statutory net income for the Empower Retirement segment increased by $70 million, or 84%, to $153 million. The increase was primarily due to higher fee income and lower income taxes.
Premium income and annuity consideration decreased by $1,730 million, or 47% to $1,931 million primarily due to the reinsurance with LLIRC previously mentioned. Excluding the LLIRC reinsurance transactions, premium income increased $219 million, or 6%, due to increased general account sales.
Net investment income increased $24 million, or 5%, to $537 million primarily as a result of higher dividends received from subsidiaries and higher average invested assets.
Fee income increased $15 million, or 6%, to $272 million primarily related to an increase in asset-based variable fee income resulting from increased average asset levels, which were driven by sales and higher average equity market levels
Reserve adjustment on reinsurance ceded increased by $2,161 million, or 1,441%, to $2,011 million primarily due to the LLIRC reinsurance transactions.
Policyholder benefits increased by $861 million, or 18%, to $5,646 million. Excluding the LLIRC reinsurance transactions, policyholder benefits increased $737 million, or 15%, primarily due to an increase in general account and separate account surrenders.
Net transfers from separate accounts changed by $538 million, or 39% to $1,931 million due to higher separate account surrenders.
30
Table of Contents
Federal tax expense changed to a benefit of $23 million in 2018 compared to an expense of $14 million in 2017 primarily due to the utilization of tax credits and a lower tax rate.
Year ended December 31, 2017, compared with the year ended December 31, 2016
The following is a summary of certain financial data of the Empower Retirement segment:
Year Ended December 31, | Increase | Percentage | ||||||||||||||
Statement of Operations data (In millions) | 2017 | 2016 | (decrease) | change | ||||||||||||
Premium income and annuity consideration | $ | 3,661 | $ | 2,258 | $ | 1,403 | 62 % | |||||||||
Net investment income | 513 | 509 | 4 | 1 % | ||||||||||||
Fee and miscellaneous income | 257 | 201 | 56 | 28 % | ||||||||||||
Reserve adjustment on reinsurance ceded | (150 | ) | 2,248 | (2,398 | ) | (107)% | ||||||||||
Other | 19 | 3 | 16 | 533 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total income | 4,300 | 5,219 | (919 | ) | (18)% | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Policyholder benefits | 4,785 | 4,140 | 645 | 16 % | ||||||||||||
Increase in aggregate reserves for life and accident health policies and contracts | 334 | 1,023 | (689 | ) | (67)% | |||||||||||
Other insurance benefits, expenses and commissions | 477 | 534 | (57 | ) | (11)% | |||||||||||
Net transfers from separate accounts | (1,393 | ) | (459 | ) | (934 | ) | (203)% | |||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total benefits and expenses | 4,203 | 5,238 | (1,035 | ) | (20)% | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain (loss) from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 97 | (19 | ) | 116 | 611 % | |||||||||||
Federal income tax expense (benefit) | 14 | (51 | ) | 65 | 127 % | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Statutory net income | $ | 83 | $ | 32 | $ | 51 | 159 % | |||||||||
|
|
|
|
|
|
|
|
|
Statutory net income for the Empower Retirement segment increased by $51 million, or 159%, to $83 million. The increase was primarily due to higher fee income and lower operating expenses, partially offset by higher income taxes.
Premium income and annuity consideration increased by $1,403 million, or 62%, to $3,661 million primarily due to the reinsurance with LLIRC previously mentioned. Excluding LLIRC reinsurance transactions, premium income and annuity consideration decreased $926 million, or 20%, due to a decrease in general account and separate account premiums.
Fee income increased $56 million, or 28%, to $257 million primarily related to an increase in asset-based variable fee income resulting from increased average asset levels, which were driven by sales and higher average equity market levels
Reserve adjustment on reinsurance ceded decreased by $2,398 million, or 107%, to $(150) million primarily due to the LLIRC reinsurance transactions.
Policyholder benefits increased by $645 million, or 16%, to $4,785 million. Excluding the LLIRC reinsurance transactions, policyholder benefits increased $769 million, or 19%, primarily due to an increase in general account and separate account surrender benefits.
Aggregate reserves for life and accident health policies and contracts decreased by $689 million, or 67%, to $334 million. Excluding the LLIRC reinsurance transactions, aggregate reserves decreased $761 million, or 69%, primarily due to lower premiums and higher policyholder benefits.
Other insurance benefits, expenses and commissions decreased by $57 million, 11%, to $477 million. Excluding the LLIRC reinsurance transactions, other insurance benefits, expenses and commissions decreased by $59 million, or 11%, primarily due to a decrease in operating expenses related to expense management and the completion of integration activities in 2017.
31
Table of Contents
Net transfers from separate accounts changed by $934 million, or 203%, to $1,393 million due to lower separate account premiums.
Federal tax expense changed to an expense of $14 million in 2017 compared to a benefit of $51 million in 2016 primarily due to an increase in gain from operations before federal income tax.
32
Table of Contents
7.6 Other Segment Results of Operations
Year ended December 31, 2018, compared with the year ended December 31, 2017
The following is a summary of certain financial data of the Other segment:
Year Ended December 31, | Increase | Percentage | ||||||||||||||
Statement of Operations data (In millions) | 2018 | 2017 | (decrease) | change | ||||||||||||
Net investment income | $ | 16 | $ | 5 | $ | 11 | 220 % | |||||||||
Fee and miscellaneous income | 11 | 11 | — | — % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total income | 27 | 16 | 11 | 69 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Other expenses and commissions | 20 | 39 | (19 | ) | (49)% | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total benefits and expenses | 20 | 39 | (19 | ) | (49)% | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net gain (loss) from operations after dividends to policyholders and before federal income taxes and net realized capital gains | 7 | (23 | ) | 30 | 130 % | |||||||||||
Federal income tax expense (benefit) | 5 | (12 | ) | 17 | 142 % | |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Statutory net income (loss) | $ | 2 | $ | (11 | ) | $ | 13 | 118 % | ||||||||
|
|
|
|
|
|
|
|
|
Statutory net income (loss) for the Other segment increased by $13 million, from a loss of $11 million to a gain of $2 million in 2018. The increase was primarily due to an increase in net investment income related to aone-time interest rate swap gain and a decrease in operating expense with the completion of integration activities in 2017. This was partially offset by an increase in federal income tax expenses primarily due to taxes on theone-time interest rate swap gain.
Year ended December 31, 2017, compared with the year ended December 31, 2016
The following is a summary of certain financial data of the Other segment:
Year Ended December 31, | Increase | Percentage | ||||||||||||||
Statement of Operations data (In millions) | 2017 | 2016 | (decrease) | change | ||||||||||||
Net investment income (loss) | $ | 5 | $ | (5 | ) | $ | 10 | 200 % | ||||||||
Fee and miscellaneous income | 11 | 10 | 1 | 10 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total income | 16 | 5 | 11 | 220 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Other expenses and commissions | 39 | 18 | 21 | 117 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Total benefits and expenses | 39 | 18 | 21 | 117 % | ||||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net loss from operations after dividends to policyholders and before federal income taxes and net realized capital gains | (23 | ) | (13 | ) | (10 | ) | (77)% | |||||||||
Federal income tax benefit | (12 | ) | (7 | ) | (5 | ) | (71)% | |||||||||
|
|
|
|
|
|
|
|
| ||||||||
Statutory net loss | $ | (11 | ) | $ | (6 | ) | $ | (5 | ) | (83)% | ||||||
|
|
|
|
|
|
|
|
|
Statutory net loss for the Other segment increased by $5 million from a loss of $6 million in 2016 to a loss of $11 million in 2017. The increase is primarily due to higher operating expenses with the integration activities in 2017.
33
Table of Contents
7.7 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.
The following table presents the percentage distribution of the carrying values of the Company’s general account investment portfolio.
December 31, | ||||||||||||||||
(In millions) | 2018 | 2017 | ||||||||||||||
Bonds | $ | 20,654 | 68.7% | $ | 19,945 | 69.1% | ||||||||||
Common stock | 132 | 0.5% | 108 | 0.4% | ||||||||||||
Mortgage loans | 4,207 | 14.0% | 3,871 | 13.4% | ||||||||||||
Real estate | 38 | 0.1% | 38 | 0.2% | ||||||||||||
Contract loans | 4,123 | 13.7% | 4,079 | 14.1% | ||||||||||||
Cash, cash equivalents and short-term investments | 229 | 0.8% | 242 | 0.8% | ||||||||||||
Securities lending collateral assets | 45 | 0.2% | — | —% | ||||||||||||
Other invested assets | 607 | 2.0% | 566 | 2.0% | ||||||||||||
|
|
|
|
|
|
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Total cash and invested assets | $ | 30,035 | 100.0% | $ | 28,849 | 100.0% | ||||||||||
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Bonds
Bonds include public and privately placed corporate bonds, government bonds, and mortgage-backed and asset-backed securities. Included in bonds 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 bond 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 independent external rating agencies.
The percentage distribution of the book adjusted carrying value of the Company’s short-term and long-term bond portfolios by NAIC designation is summarized as follows:
December 31, | ||||||||
NAIC Designations | 2018 | 2017 | ||||||
NAIC 1 | 65.4% | 68.0% | ||||||
NAIC 2 | 33.4% | 30.5% | ||||||
NAIC 3 through 6 | 1.2% | 1.5% | ||||||
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Total | 100.0% | 100.0% | ||||||
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The percentage distribution of the book adjusted carrying value of the industrial and miscellaneous category of short-term and long-term bond portfolios, calculated as a percentage of total bonds, is summarized as follows:
December 31, | ||||||||
Sector | 2018 | 2017 | ||||||
Finance | 18.5% | 17.1% | ||||||
Utility | 15.1% | 17.1% | ||||||
Consumer | 9.5% | 9.9% | ||||||
Natural resources | 5.9% | 5.0% | ||||||
Transportation | 3.0% | 2.8% | ||||||
Other | 10.3% | 11.0% |
Mortgage Loans
The Company’s mortgage loans are comprised primarily of domestic commercial collateralized loans. The mortgage loan portfolio is diversified with regard to geographical markets and commercial mortgage property types. The Company originates, directly or through correspondents, 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, forwards, 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. Derivatives that qualify for hedge accounting treatment are valued using the valuation method (either amortized cost or fair value) consistent with the underlying hedged asset or liability. At inception of a derivative transaction, the hedge relationship and risk management objective is documented and the designation of the derivative is determined based on specific criteria of the transaction. Derivatives where hedge accounting is either not elected or that are not eligible for hedge accounting are stated at fair value with changes in fair value recognized in unassigned surplus in the period of change. Investment gains and losses generally result from the termination of derivative contracts prior to expiration and are generally recognized in net income and may be subject to IMR. For derivative instruments where hedge accounting is either not elected or the transactions are not eligible for hedge accounting, changes in interest rates, foreign currencies, or equity markets may generate derivative gains or losses which may cause the Company to experience volatility in capital and surplus. The Company controls the credit risk of itsover-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.
Investment Yield
Net investment income includes interest income, dividends, the amortization of premiums, discounts and origination fees.
To analyze investment performance, the Company excludes net investment income related to derivative instruments in order to assess underlying profitability and results from ongoing operations. Net investment income performance is summarized as follows:
(In millions) | Year Ended December 31, | |||||||||||
2018 | 2017 | 2016 | ||||||||||
Net investment income | $ | 1,307 | $ | 1,267 | $ | 1,236 | ||||||
Less: | ||||||||||||
Net investment income from derivative instruments | 16 | 16 | 10 | |||||||||
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Net investment income excluding derivative investments | $ | 1,291 | $ | 1,251 | $ | 1,226 | ||||||
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Average invested assets, at amortized cost | 29,252 | 28,433 | 27,432 | |||||||||
Yield on average invested assets | 4.41 | % | 4.40 | % | 4.47 | % |
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The yield on average invested assets increased in 2018 when compared to 2017. The yield on average invested assets decreased in 2017 when compared to 2016.
7.8 Liquidity and Capital Resources
Liquidity refers to a company’s ability to generate sufficient cash flows to meet the short-term 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 short-term 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 and cash equivalents that totaled $229 million and $242 million as of December 31, 2018, and 2017, respectively. In addition, 99% of the bond portfolio carried an investment grade rating at December 31, 2018, and 2017, which provides 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 $99 million and $100 million of commercial paper outstanding as of December 31, 2018, and 2017, respectively. The commercial paper has been given a rating ofA-1+ by Standard & Poor’s Ratings Services and a rating ofP-1 by Moody’s Investors Service, each being the highest rating available. The Company’s issuance of commercial paper is not used to fund daily operations and does not have a significant impact on the Company’s liquidity.
The Company also has available a revolving credit facility agreement with U.S. Bank, which expires on March 1, 2023, in the amount of $50 million for general corporate purposes. The Company had no borrowings under this credit facility as of or during the year ended December 31, 2018. 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.
Risk-based capital (“RBC”) is a regulatory tool for measuring the minimum amount of capital appropriate for a life, accident and health organization to support its overall business operations in consideration of its size and risk profile. The Division requires the Company to maintain minimum capital and surplus equal to the company action level as calculated in the RBC model. The Company exceeds the required amount.
7.9 Off-Balance Sheet Arrangements
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The Company makes commitments to fund partnership interests, mortgage loans, and other investments in the normal course of its business. The amounts of these unfunded commitments at December 31, 2018 and 2017 were $136 million and $313 million, respectively. The precise timing of the fulfillment of the commitment cannot be predicted; however, all $136 million of the December 31, 2018 balance, and $312 million of the December 31, 2017 balance may be required to be paid within one year of the dates indicated. The remaining $1 million of the December 31, 2017 balance is due within one to three years. 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 counterparty financial institutions putnon-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 $11 million and $23 million at December 31, 2018 and 2017,respectively. Non-cash collateral on deposit with the third-party custodian on the Company’s behalf was $11 million and $24 million at December 31, 2018 and 2017, respectively, which cannot be sold orre-pledged and which has not been recorded on the Statement of Admitted Assets, Liabilities, Capital and Surplus. Collateral related to the reverse repurchase agreements generally consists of U.S. government or U.S. government agency securities.
The Company, as lessee, has entered into various lease and sublease agreements primarily for the rental of office space.
The Company maintains a corporate credit facility agreement in the amount of $50 million for general corporate purposes. The Company had no borrowings under the credit facility either at or during the years ended December 31, 2018 and 2017.
In addition, the Company has other letters of credit with a total amount of $9 million, renewable annually for an indefinite period of time.
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7.10 Contractual Obligations
The following table summarizes the Company’s major contractual obligations at December 31, 2018:
Payment due by period | ||||||||||||||||||||
Less than | One to | Three to | More than | |||||||||||||||||
(in thousands) | one year | three years | five years | five years | Total | |||||||||||||||
Aggregate reserves(1) | $ | 3,169,559 | $ | 5,487,644 | $ | 4,575,744 | $ | 46,864,153 | $ | 60,097,100 | ||||||||||
Policy and contract claims(2) | 183,749 | 45,798 | 35,087 | 123,460 | 388,094 | |||||||||||||||
Provision for policyholder dividends(3) | 31,184 | — | — | — | 31,184 | |||||||||||||||
Related party long-term debt - principal(4) | — | — | — | 553,219 | 553,219 | |||||||||||||||
Related party long-term debt - interest(5) | 30,335 | 60,670 | 60,670 | 557,094 | 708,769 | |||||||||||||||
Commercial paper(6) | 98,859 | — | — | — | 98,859 | |||||||||||||||
Payable under securities lending agreements(7) | 45,102 | — | — | — | 45,102 | |||||||||||||||
Investment purchase obligations(8) | 136,396 | — | — | — | 136,396 | |||||||||||||||
Operating leases(9) | 9,929 | 11,561 | 2,272 | 11,743 | 35,505 | |||||||||||||||
Other liabilities (10) | 31,334 | 58,469 | 65,514 | 16,204 | 171,521 | |||||||||||||||
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Total | $ | 3,736,447 | $ | 5,664,142 | $ | 4,739,287 | $ | 48,125,873 | $ | 62,265,749 | ||||||||||
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(1),(2) Aggregate reserves, and policy and contract claims - The Company has estimated payments to be made to policy and contract holders for future policy benefits. Insurance and investment contract liabilities include various investment-type products with contractually scheduled maturities, including periodic payments of a term certain nature. However, a significant portion of policy benefits and claims to be paid do not have stated contractual maturity dates and ultimately may not result in any payment obligation.
Estimated future policyholder obligations have been developed in accordance with industry accepted actuarial standards based upon the estimated timing of cash flows related to the policies or contracts, the Company’s historical experience and its expectation of future payment patterns. Management has incorporated significant assumptions in developing these estimates, many of which are outside of the Company’s control and include assumptions relating to mortality, morbidity, policy renewals and terminations, retirement, inflation, disability recovery rates, investment returns, future interest credited rate levels, policy loans, future premium receipts on current policiesin-force, and other contingent events as may be appropriate to the respective product type. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results.
The amounts presented in the table above are undiscounted as to interest. Accordingly, the sum of the estimated cash payment presented significantly exceeds the liability amount on the Company’s Statement of Admitted Assets, Liabilities, Capital and Surplus principally due to the time value of money.
Separate account liabilities have been excluded from the table above. Separate account obligations are legally insulated from general account assets. Separate account liabilities represent funds maintained by the Company to meet the specific investment objectives of the contract holders who bear the related investment risk. It is generally expected that the separate account liabilities will be fully funded by the separate account assets.
Policy and contract claims consist of liabilities associated with installment claims on certain long-term disability policies. Because the timing of the payment of these obligations is based upon assumptions of disability recovery rates, the amounts presented could differ from actual results.
(3) Provision for policyholders’ dividends - The provision for policyholders’ dividends payable represents the liabilities related to dividends payable in the following year on participating policies. As such, the obligations related to these liabilities are presented in the table above in the less than one year category in the amounts of the liabilities presented in the Company’s Statement of Admitted Assets, Liabilities, Capital and Surplus.
(4) Related party long-term debt principal - Represents contractual maturities of principal due to the Company’s parent, GWL&A Financial, under the terms of three long-term surplus notes. The amounts shown in this table differ from the amounts included in the Company’s Statement of Admitted Assets, Liabilities, Capital and Surplus because the amounts shown above do not consider the discount upon the issuance of one of the surplus notes.
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(5) Related party long-term debt interest - Two long-term surplus notes bear interest at a fixed rate through maturity. One surplus note bears a variable interest rate plus the then-current three-month London Interbank Offering Rate (“LIBOR”). The interest payments shown in this table are calculated based upon the contractual rates in effect on December 31, 2018, and do not consider the impact of future interest rate changes.
(6) Commercial paper - The Company’s obligations under its commercial paper program are short-term in nature. The amount presented represents the amount due upon maturity of the instrument. The obligation related to this liability is presented in the table above in the less than one year category as presented in the Company’s Statement of Admitted Assets, Liabilities, Capital and Surplus.
(7) Payable under securities lending agreements - The Company accepts cash collateral in connection with its securities lending program. Since the securities lending transactions generally terminate within one year or the timing of the return of the collateral is uncertain, the obligations related to these liabilities are presented in the table above in the less than one year category in the amounts of the liabilities as presented in the Company’s Statement of Admitted Assets, Liabilities, Capital and Surplus.
(8) Investment purchase obligations - The Company makes commitments to fund partnership interests, mortgage loans, and other investments in the normal course of its business. As the timing of the fulfillment of the commitment to fund partnership interests cannot be predicted, such obligations are presented in the less than one year category. The timing of the funding of mortgage loans is based on the expiration date of the commitment.
(9) Operating leases - The Company is obligated to make payments under variousnon-cancelable operating leases, primarily for office space. Contractual provisions exist that could increase the lease obligations presented, including operating expense escalation clauses. Management does not consider the impact of any such clauses to be material to the Company’s operating lease obligations. Rent expense for the years ended December 31, 2018, 2017 and 2016 were $27,768, $28,244 and $27,815 respectively.
From time to time, the Company enters into agreements or contracts, including capital leases, to purchase goods or services in the normal course of its business. However, these agreements and contracts are not material and are excluded from the table above.
(10) Other liabilities - Other liabilities include those other liabilities which represent contractual obligations not included elsewhere in the table above. If the timing of the payment of any other liabilities was sufficiently uncertain, the amounts were included in the less than one year category. Other liabilities presented in the table above include:
• | Liabilities under reinsurance arrangements |
• | Liabilities related to securities purchased but not yet settled |
• | Liabilities related to derivative obligations |
• | Liabilities related to dollar repurchase agreements |
• | Statutory state escheat liabilities |
• | Expected contributions to the Company’s defined benefit pension plan, and benefit payments for the post-retirement medical plan and supplemental executive retirement plan through 2023 |
• | Unrecognized tax benefits |
• | Miscellaneous purchase obligations to acquire goods and services |
7.11 Application of Recent Accounting Pronouncements
See Note 2 to the accompanying financial statements for a further discussion of the application of recent accounting pronouncements.
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Item 7A. 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. |
Market risk
The Company’s exposure to interest rate changes results from its significant holdings of floating rate debt, bonds, mortgage loans, and interest rate sensitive liabilities. The bonds primarily consist of direct obligations of the U.S. government and its agencies, direct obligations of U.S. states and their subdivisions, corporate debt securities, and asset-backed and mortgage-backed securities. All of these investments are exposed to changes in interest rates. Interest rate sensitive product liabilities, primarily those liabilities associated with universal life insurance contracts and annuity contracts, have the same type of interest rate risk exposure as bonds and mortgage loans.
To reduce interest rate risk, the Company performs periodic projections of asset and liability cash flows in order to evaluate the interest rate sensitivity of its bonds and its product liabilities to interest rate movements. For determinate liabilities, i.e. liabilities with stable, predictable cash flows on products that can’t be repriced (for example, certificate annuities and payout annuities), asset/liability cash flow mismatches are monitored and the asset portfolios are rebalanced as necessary to keep the mismatches within tolerance limits. For these determinate liabilities, the investment policy predominantly requires assets with stable, predictable cash flows so that changes in interest rates will not cause changes in the timing of asset cash flows resulting in mismatches. For indeterminate liabilities, i.e. liabilities that have less predictable cash flows but that can be repriced (for example, portfolio annuities and universal life insurance), the potential mismatch of assets and liabilities is tested under a wide variety of interest rate scenarios. The potential cost of this mismatch is calculated. If the potential cost is considered to be too high, actions considered would include rebalancing the asset portfolio and/or purchasing derivatives that reduce the risk as part of the hedging strategy program discussed below. For each major block of indeterminate liabilities, the asset and liability positions are reviewed in senior management meetings to proactively recommend changes in the current investment strategy and/or a rebalance of the asset portfolio.
The Company has strict operating policies which prohibit the use of derivative instruments for speculative purposes, permit derivative transactions only with approved counterparties, specify limits on concentration of risk, and provide requirements of reporting and monitoring systems. The Company supports a hedging strategy program that consists of the use of various derivative instruments including futures, interest rate swaps, and options such as interest rate swaptions. Derivative strategies include the following:
• | Futures are commitments to either purchase or sell designated financial instruments at a future date for a specified price. |
• | Interest rate swaps involve the periodic exchange of cash flows with third parties at specified intervals calculated using agreed upon rates or other financial variables. |
• | Option contracts grant the purchaser, in consideration for the payment of a premium, the right to either purchase from or sell to the issuer a financial instrument at a specified price within a specified time period or on a stated date. Interest rate swaptions grant the purchaser the right to enter into a swap with predetermined fixed-rate payments over a predetermined time period on the exercise date. |
The Company has estimated the possible effects of interest rate changes at December 31, 2018. If interest rates increased by 100 basis points (1.00%), the December 31, 2018 fair value of the fixed income assets in the general account would decrease by approximately $1.7 billion. This calculation uses projected asset cash flows, discounted back to December 31, 2018. The cash
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flow projections are shown in the table below. The table below shows cash flows rather than expected maturity dates because many of the Company’s assets have substantial expected principal payments prior to the final maturity date. The fair value shown in the table below was calculated using spot discount interest rates that varied by the year in which the cash flows are expected to be received. The spot rates in the benchmark calculation range from 2.647% to 4.237%.
Projected cash flows by calendar years (In millions) | Benchmark | Interest rate increase one percent | ||||||
2019 | $ | 2,642 | $ | 2,607 | ||||
2020 | 2,328 | 2,289 | ||||||
2021 | 2,720 | 2,659 | ||||||
2022 | 2,829 | 2,803 | ||||||
2023 | 3,428 | 3,413 | ||||||
Thereafter | 22,855 | 23,285 | ||||||
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Undiscounted total | $ | 36,802 | $ | 37,056 | ||||
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Fair value | $ | 28,825 | $ | 27,146 |
The Company administers separate account variable annuities and provides other investment and retirement services where fee income is earned based upon a percentage of account balances. Fluctuations in fund asset levels occur as a result of both changes in cash flow and general market conditions. There is a market risk of lower fee income if equity markets decline. If equity markets were to decline by 10% from benchmark levels at December 31, 2018, the Company’s associated net fee income after payment of subadvisor fees in 2018 would decline by approximately $28 million.
The Company’s surplus assets include equity investments, primarily partnership interests. There is a market risk of lower asset values if equity markets decline. If equity markets were to decline by 10%, the Company would have an additional unrealized loss of approximately $7.9 million on equity investments. This unrealized loss would not impact statutory net income but would reduce capital and surplus.
The Company has sold variable annuities with various forms of GMDB and GLWB. The Company is required to hold future policy benefit liabilities for these guaranteed benefits. If equity markets were to decline by 10%, the liability for GMDB and GLWB would increase by approximately $19.5 million. The Company’s dynamic hedging program for the GLWB product would be expected to offset $12.2 million of the $19.5 million change in the benefit liability related to capital markets. Therefore the net impact to variable annuities with various forms of guarantees for a 10% decline in the equity markets is estimated to be $7.3 million.
Insurance risk
The Company manages the risks associated with its insurance and other contractual liabilities through the use of actuarial modeling techniques. These techniques utilize significant assumptions including morbidity, mortality, persistency, expenses, and the cash flow stream of benefit payments. Through these techniques, the Company attempts to match the anticipated cash flow streams of its invested assets with the anticipated cash flow streams of its insurance and other contractual obligations. The cash flows associated with determinate policy liabilities are not interest rate sensitive but will vary based upon the timing and amount of benefit payments. The primary risks associated with these liabilities are that the benefits will exceed those anticipated in the actuarial modeling or that the actual timing of the payment of benefits will differ from what was anticipated.
The Company utilizes reinsurance programs to control its exposure to general insurance risks. Reinsurance agreements do not relieve the Company from its direct obligations to its insured. However, an effective reinsurance program limits the Company’s exposure to potentially large losses. The failure of reinsurers to honor their obligations could result in losses to the Company. To manage this risk, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk relative to the reinsurers in order to minimize its exposure to significant losses from reinsurer insolvencies. The Company retains an initial maximum of $3.5 million of coverage per individual life. This initial retention limit of $3.5 million may increase due to automatic policy increases in coverage at a maximum rate of $175 thousand per annum, with an overall maximum increase in coverage of $1.0 million. Maximum capacity to be accepted or retained by the Company is dictated at the treaty level and is monitored annually to ensure the total risk acquired or retained on any one life is limited to a maximum retention of $4.5 million.
Credit risk
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Credit risk is the risk the Company assumes if its debtors, customers, reinsurers, or other counterparties and intermediaries may be unable or unwilling to pay their contractual obligations when they come due and may manifest itself through the downgrading of credit ratings of counterparties. It is the Company’s policy to acquire only investment grade assets to enable it to provide for future policy obligations and to minimize undue concentrations of assets in any single geographic area, industry, or entity. To minimize this risk, management regularly reviews the credit ratings of the entities in which the Company invests. These credit ratings are internally derived by the Company, taking into consideration ratings from several external credit rating agencies.
Operational and corporate risk
The Company manages and mitigates internal operational risk through integrated and complementary policies, procedures, processes, and practices. Human Resources hiring practices, performance evaluations and promotion, and compensation practices are designed to attract, retain and develop the skilled personnel required. A comprehensive job evaluation process is in place and training and development programs are supported. Each business area provides training designed for its specific needs and has developed internal controls for significant processes. Processes and controls are monitored and redefined by the business areas and subject to review by the Company’s internal audit staff. The Company applies a robust project management discipline to all significant initiatives.
Appropriate security measures protect premises and information. The Company has emergency procedures in place for short-term incidents and is committed to maintaining business continuity and disaster recovery plans at every business location for the recovery of critical functions in the event of a disaster, including offsite data backup and work facilities. The Company maintains various corporate insurance coverages such as property, general liability, excess liability, automobile liability, workers’ compensation, financial institution bonds, other regulatory bonds, and professional liability insurance to protect its owned property assets and to insure against certain third-party liabilities.
The Company’s businesses are subject to various regulatory requirements imposed by regulation or legislation applicable to insurance companies and companies providing financial services. These regulations are primarily intended to protect policyholders and beneficiaries. Material changes in the regulatory framework or the failure to comply with legal and regulatory requirements could have a material adverse effect on the Company. The Company monitors compliance with legal and regulatory requirements in all jurisdictions in which it conducts business and assesses trends in legal and regulatory change to keep business areas current and responsive.
In the course of its business activities, the Company may be exposed to the risk that some actions may lead to damaging its reputation and hence damage its future business prospects. These actions may include unauthorized activities of employees or others associated with the Company, inadvertent actions of the Company that become publicized and damage its reputation, regular or past business activities of the Company that become the subject of regulatory or media scrutiny or litigation and, due to a change of public perception, cause damage to the Company. To manage or mitigate this risk, the Company has ongoing controls to limit the unauthorized activities of people associated with it. The Company has adopted a Code of Business Conduct and Ethics which sets out the standards of business conduct to be followed by all of its directors, officers, and employees.
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Index to Financial Statements, Notes, and Schedules
Page Number | ||
�� | 44 | |
Statutory Financial Statements at December 31, 2018, and 2017 and for the Years Ended December 31, 2018, 2017, and 2016 | ||
Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus | 46 | |
48 | ||
49 | ||
50 | ||
52 | ||
52 | ||
61 | ||
62 | ||
64 | ||
73 | ||
77 | ||
77 | ||
77 | ||
78 | ||
78 | ||
Note 11 - Liability for Unpaid Claims and Claim Adjustment Expenses | 80 | |
81 | ||
81 | ||
Note 14 - Capital and Surplus, Dividend Restrictions, and Other Matters | 84 | |
85 | ||
91 | ||
95 | ||
99 | ||
99 | ||
99 | ||
100 |
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Deloitte & Touche LLP 1601 Wewatta Street Suite 400 Denver, CO 80202-3942 USA
Tel: 1 303 292 5400 Fax: 1 303 312 4000 www.deloitte.com |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Great-West Life & Annuity Insurance Company
Greenwood Village, Colorado
Opinion on the Statutory Financial Statements
We have audited the accompanying statutory statements of admitted assets, liabilities, and capital and surplus of Great-West Life & Annuity Insurance Company (the "Company") (a wholly-owned subsidiary of GWL&A Financial Inc.), as of December 31, 2018 and 2017, the related statutory statements of operations, changes in capital and surplus, and cash flows for the years then ended, and the related notes (collectively referred to as the "statutory financial statements"). In our opinion, because of the effects of the matters discussed in the following paragraph, the statutory financial statements do not present fairly, in conformity with accounting principles generally accepted in the United States of America, the financial position of the Company as of December 31, 2018 and 2017, or the results of its operations or its cash flows for the years then ended.
As described in Note 1 to the statutory financial statements, the statutory financial statements are prepared by the Company using the accounting practices prescribed or permitted by the Colorado Division of Insurance, which is a basis of accounting other than accounting principles generally accepted in the United States of America, to meet the requirements of the Colorado Division of Insurance. The effects on the statutory financial statements of the variances between the statutory-basis of accounting described in Note 1 to the statutory financial statements and accounting principles generally accepted in the United States of America, although not reasonably determinable, are presumed to be material.
In our opinion, the statutory financial statements present fairly, in all material respects, the admitted assets, liabilities, and capital and surplus of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in conformity with accounting practices prescribed or permitted by the Colorado Division of Insurance, as described in Note 1 to the statutory financial statements.
Basis for Opinion
These statutory financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's statutory financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statutory financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing
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an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the statutory financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the statutory financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the statutory financial statements. We believe that our audits provide a reasonable basis for our opinion.
Emphasis of Matter
As discussed in Note 1 to the statutory financial statements, the accompanying statutory financial statements have been prepared from separate records maintained by the Company and may not necessarily be indicative of conditions that would have existed or the results of operations if the Company had been operated as an unaffiliated company, as portions of certain expenses represent allocations made from affiliates.
Denver, Colorado
March 19, 2019
We have served as the Company’s auditor since 1981
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus
December 31, 2018 and 2017
(In Thousands, Except Share Amounts)
December 31, | ||||||||
2018 | 2017 | |||||||
Admitted assets: | ||||||||
Cash and invested assets: | ||||||||
Bonds | $ | 20,654,118 | $ | 19,944,862 | ||||
Common stock | 131,883 | 107,977 | ||||||
Mortgage loans (net of allowances of $746 and $746) | 4,206,865 | 3,871,338 | ||||||
Real estate occupied by the company | 37,555 | 36,302 | ||||||
Real estate held for the production of income | 1,407 | 1,466 | ||||||
Contract loans | 4,122,637 | 4,078,669 | ||||||
Cash, cash equivalents and short-term investments | 229,003 | 242,084 | ||||||
Securities lending collateral assets | 45,102 | — | ||||||
Other invested assets | 606,787 | 566,187 | ||||||
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|
| |||
Total cash and invested assets | 30,035,357 | 28,848,885 | ||||||
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|
|
|
| |||
Investment income due and accrued | 284,303 | 279,822 | ||||||
Premiums deferred and uncollected | 25,795 | 15,919 | ||||||
Reinsurance recoverable | 8,090 | 7,090 | ||||||
Current federal income taxes recoverable | 71,875 | 16,535 | ||||||
Deferred income taxes | 150,497 | 149,315 | ||||||
Due from parent, subsidiaries and affiliates | 50,107 | 67,355 | ||||||
Cash value of company owned life insurance | 272,606 | 264,798 | ||||||
Other assets | 231,965 | 163,388 | ||||||
Assets from separate accounts | 24,654,916 | 28,197,122 | ||||||
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|
|
| |||
Total admitted assets | $ | 55,785,511 | $ | 58,010,229 | ||||
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|
|
|
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See notes to statutory financial statements. | Continued |
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus
December 31, 2018 and 2017
(In Thousands, Except Share Amounts)
December 31, | ||||||||
2018 | 2017 | |||||||
Liabilities, capital and surplus: | ||||||||
Liabilities: | ||||||||
Aggregate reserves for life policies and contracts | $ | 27,501,121 | $ | 26,587,834 | ||||
Aggregate reserves for accident and health policies | 276,762 | 272,539 | ||||||
Liability for deposit-type contracts | 189,895 | 206,134 | ||||||
Life and accident and health policy and contract claims | 123,705 | 120,537 | ||||||
Provision for policyholders’ dividends | 31,184 | 38,872 | ||||||
Liability for premiums received in advance | 13,926 | 12,768 | ||||||
Liability for contract deposit funds | 150,981 | 174,296 | ||||||
Unearned investment income | 622 | 4,483 | ||||||
Asset valuation reserve | 204,393 | 203,546 | ||||||
Interest maintenance reserve | 50,674 | 82,238 | ||||||
Due to parent, subsidiaries and affiliates | 41,735 | 52,081 | ||||||
Commercial paper | 98,859 | 99,886 | ||||||
Payable under securities lending agreements | 45,102 | — | ||||||
Repurchase agreements | 664,650 | — | ||||||
Other liabilities | 410,076 | 828,393 | ||||||
Liabilities from separate accounts | 24,654,907 | 28,197,113 | ||||||
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| |||
Total liabilities | 54,458,592 | 56,880,720 | ||||||
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| |||
Commitments and contingencies (see Note 20) | ||||||||
Capital and surplus: | ||||||||
Preferred stock, $1 par value, 50,000,000 shares authorized; none issued and outstanding | — | — | ||||||
Common stock, $1 par value; 50,000,000 shares authorized; 7,320,176 shares issued and outstanding | 7,320 | 7,320 | ||||||
Surplus notes | 591,699 | 539,930 | ||||||
Gross paid in and contributed surplus | 710,271 | 706,178 | ||||||
Unassigned funds | 17,629 | (123,919 | ) | |||||
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| |||
Total capital and surplus | 1,326,919 | 1,129,509 | ||||||
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| |||
Total liabilities, capital and surplus | $ | 55,785,511 | $ | 58,010,229 | ||||
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See notes to statutory financial statements. | Concluded |
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Statutory Statements of Operations
Years Ended December 31, 2018, 2017 and 2016
(In Thousands)
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
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| ||||||||
Income: | ||||||||||||
Premium income and annuity consideration | $ | 7,592,609 | $ | 5,270,518 | $ | (397,783 | ) | |||||
Net investment income | 1,307,387 | 1,266,963 | 1,235,841 | |||||||||
Amortization of interest maintenance reserve | 24,863 | 22,045 | 23,253 | |||||||||
Commission and expense allowances on reinsurance ceded | 5,211 | 31,582 | 5,785 | |||||||||
Fee income from separate accounts | 160,573 | 160,280 | 151,744 | |||||||||
Reserve adjustment on reinsurance ceded | (1,975,763 | ) | (490,424 | ) | 5,627,638 | |||||||
Miscellaneous income | 250,272 | 220,204 | 154,696 | |||||||||
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| ||||||||
Total income | 7,365,152 | 6,481,168 | 6,801,174 | |||||||||
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| ||||||||
Expenses: | ||||||||||||
Death benefits | 380,057 | 276,519 | 341,292 | |||||||||
Annuity benefits | 228,530 | 203,679 | 202,093 | |||||||||
Disability benefits and benefits under accident and health policies | 41,719 | 44,208 | 41,580 | |||||||||
Surrender benefits | 5,895,938 | 4,992,338 | 4,330,313 | |||||||||
Increase in aggregate reserves for life and accident and health policies and contracts | 917,510 | 915,763 | 1,139,669 | |||||||||
Other benefits | 10,528 | 12,032 | 11,991 | |||||||||
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| ||||||||
Total benefits | 7,474,282 | 6,444,539 | 6,066,938 | |||||||||
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| ||||||||
Commissions | 196,489 | 199,814 | 181,567 | |||||||||
Other insurance expenses | 488,250 | 522,610 | 544,488 | |||||||||
Net transfers from separate accounts | (1,112,465 | ) | (944,644 | ) | (101,482 | ) | ||||||
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| ||||||||
Total benefit and expenses | 7,046,556 | 6,222,319 | 6,691,511 | |||||||||
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| ||||||||
Net gain from operations before dividends to policyholders, federal income taxes and realized capital gains (losses) | 318,596 | 258,849 | 109,663 | |||||||||
Dividends to policyholders | 31,276 | 38,782 | 45,842 | |||||||||
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| ||||||||
Net gain from operations after dividends to policyholders and before federal income taxes and net realized capital gains (losses) | 287,320 | 220,067 | 63,821 | |||||||||
Federal income tax (benefit) expense | (17,604 | ) | 50,584 | (37,932 | ) | |||||||
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| ||||||||
Net gain from operations before net realized capital gains (losses) | 304,924 | 169,483 | 101,753 | |||||||||
Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve | 10,576 | 535 | (1,096 | ) | ||||||||
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| ||||||||
Statutory net income | $ | 315,500 | $ | 170,018 | $ | 100,657 | ||||||
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See notes to statutory financial statements.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Statutory Statements of Changes in Capital and Surplus
Years Ended December 31, 2018, 2017 and 2016
(In Thousands)
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Capital and surplus, beginning of year | $ | 1,129,509 | $ | 1,053,333 | $ | 1,114,764 | ||||||
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| ||||
Statutory net income | 315,500 | 170,018 | 100,657 | |||||||||
Dividends to stockholder | (152,295 | ) | (145,301 | ) | (125,691 | ) | ||||||
Change in net unrealized capital (losses) gains, net of income taxes | (11,491 | ) | (17,021 | ) | (32,223 | ) | ||||||
Change in minimum pension liability, net of income taxes | 3,824 | 2,459 | (1,863 | ) | ||||||||
Change in asset valuation reserve | (846 | ) | (18,503 | ) | 6,171 | |||||||
Change innon-admitted assets | 28,921 | 96,814 | (47,306 | ) | ||||||||
Change in net deferred income taxes | (40,732 | ) | (110,528 | ) | 16,605 | |||||||
Change in liability for reinsurance in unauthorized companies | — | 2 | — | |||||||||
Capitalpaid-in | — | 27 | 60 | |||||||||
Surpluspaid-in | 4,093 | 86,480 | 22,359 | |||||||||
Change in capital and surplus as a result of separate accounts | (208 | ) | (211 | ) | (150 | ) | ||||||
Change in unrealized foreign exchange capital (losses) gains | (1,125 | ) | (88 | ) | (78 | ) | ||||||
Change in surplus note | 51,769 | 12,028 | 28 | |||||||||
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| ||||
Net change in capital and surplus for the year | 197,410 | 76,176 | (61,431 | ) | ||||||||
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Capital and surplus, end of year | $ | 1,326,919 | $ | 1,129,509 | $ | 1,053,333 | ||||||
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See notes to statutory financial statements.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Statutory Statements of Cash Flows
Years Ended December 31, 2018, 2017 and 2016
(In Thousands)
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
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Operating activities: | ||||||||||||
Premium income, net of reinsurance | $ | 5,352,630 | $ | 5,208,527 | $ | 5,910,875 | ||||||
Investment income received, net of investment expenses paid | 1,136,338 | 1,111,282 | 1,080,450 | |||||||||
Other miscellaneous expense received (paid) | 160,008 | (77,825 | ) | (23,874 | ) | |||||||
Benefit and loss related payments, net of reinsurance | (6,417,233 | ) | (5,393,966 | ) | (4,671,246 | ) | ||||||
Net transfers to separate accounts | 1,097,423 | 909,388 | 99,783 | |||||||||
Commissions, other expenses and taxes paid | (644,838 | ) | (669,995 | ) | (687,938 | ) | ||||||
Dividends paid to policyholders | (38,959 | ) | (46,583 | ) | (51,521 | ) | ||||||
Federal income taxes (paid) received, net | (38,241 | ) | (15,138 | ) | 15,711 | |||||||
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| |||||||
Net cash provided by operating activities | 607,128 | 1,025,690 | 1,672,240 | |||||||||
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Investing activities: | ||||||||||||
Proceeds from investments sold, matured or repaid: | ||||||||||||
Bonds | 3,351,579 | 5,719,282 | 7,202,702 | |||||||||
Stocks | 3,704 | 14,597 | 1,539 | |||||||||
Mortgage loans | 357,545 | 399,982 | 365,790 | |||||||||
Real estate | — | — | 1,457 | |||||||||
Other invested assets | 25,233 | 14,614 | 9,883 | |||||||||
Net gains on cash, cash equivalents and short-term investments | — | (1 | ) | 13 | ||||||||
Miscellaneous proceeds | 22,212 | — | 40,414 | |||||||||
Cost of investments acquired: | ||||||||||||
Bonds | (3,398,701 | ) | (6,023,940 | ) | (8,434,227 | ) | ||||||
Stocks | (38,742 | ) | (99 | ) | (19 | ) | ||||||
Mortgage loans | (697,245 | ) | (844,304 | ) | (688,991 | ) | ||||||
Real estate | (4,319 | ) | (2,980 | ) | (2,006 | ) | ||||||
Other invested assets | (36,870 | ) | (31,194 | ) | (3,985 | ) | ||||||
Miscellaneous applications | (39,654 | ) | (67,286 | ) | (4,708 | ) | ||||||
Net change in contract loans and premium notes | (1,355 | ) | (12,161 | ) | 6,809 | |||||||
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| |||||||
Net cash used in investing activities | (456,613 | ) | (833,490 | ) | (1,505,329 | ) | ||||||
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| |||||||
Financing and miscellaneous activities: | ||||||||||||
Surplus notes | 51,410 | 12,000 | — | |||||||||
Capital and paid in surplus | 3,325 | 84,944 | 20,306 | |||||||||
Deposit-type contract withdrawals, net of deposits | (18,908 | ) | (21,673 | ) | (22,342 | ) | ||||||
Dividends to stockholder | (152,295 | ) | (145,301 | ) | (125,691 | ) | ||||||
Funds (repaid) borrowed, net | (1,027 | ) | 2,348 | 4,167 | ||||||||
Change in due to/from parent, subsidiaries and affiliates | 6,013 | 1,485 | 5,987 | |||||||||
Employee taxes paid for withheld shares | (78 | ) | (818 | ) | (517 | ) | ||||||
Other | (51,605 | ) | (70,011 | ) | (38,528 | ) | ||||||
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Net cash used in financing and miscellaneous activities | (163,165 | ) | (137,026 | ) | (156,618 | ) | ||||||
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| |||||||
Net (decrease) increase in cash, cash equivalents and short-term investments and restricted cash | (12,650 | ) | 55,174 | 10,293 | ||||||||
Cash, cash equivalents and short-term investments and restricted cash: | ||||||||||||
Beginning of year | 242,084 | 186,910 | 176,617 | |||||||||
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End of year | $ | 229,434 | $ | 242,084 | $ | 186,910 | ||||||
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The cash, cash equivalents and short-term investments and restricted cash balance at December 31, 2018 includes $431 of restricted cash which isnon-admitted and not included in the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus.
See notes to statutory financial statements. | Continued |
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Statutory Statements of Cash Flows
Years Ended December 31, 2018, 2017 and 2016
(In Thousands)
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
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Non-cash investing and financing transactions during the year: | ||||||||||||
Share-based compensation expense | $ | 768 | $ | 1,563 | $ | (2,113 | ) | |||||
Assets received from limited partnership investment distributions | — | — | (10 | ) | ||||||||
Fair value of assets acquired in settlement of bonds | 28,815 | 9,659 | — |
See notes to statutory financial statements. | Concluded |
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
1. Organization and Significant Accounting Policies
Great-West Life & Annuity Insurance Company (the “Company” or “GWL&A”) is a direct wholly-owned subsidiary of GWL&A Financial Inc. (“GWL&A Financial”), a holding company. GWL&A Financial is a direct wholly-owned subsidiary of Great-West Lifeco U.S. LLC (“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 (“Division”).
The Company is authorized to engage in the sale of life insurance, accident and health insurance and annuities. It is qualified to do business in all states in the United States, except New York, and in the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands. The Company is also a licensed reinsurer in New York.
The statutory financial statements have been prepared from the separate records maintained by the Company and may not necessarily be indicative of the conditions that would have existed or the results of operations if the Company had been operated as an unaffiliated company.
Accounting policies and use of estimates
The Company prepares its statutory financial statements in conformity with accounting practices prescribed or permitted by the Division. The Division requires that insurance companies domiciled in the State of Colorado prepare their statutory financial statements in accordance with the National Association of Insurance Commissioners Accounting Practices and Procedures Manual (“NAIC SAP”), subject to any deviations prescribed or permitted by the State of Colorado Insurance Commissioner.
The only prescribed deviation that impacts the Company allows the Company to account for certain separate account products at book value instead of fair value. The Division has not permitted the Company to adopt any accounting practices that have an impact on the Company’s statutory financial statements as compared to NAIC SAP or the Division’s prescribed accounting practices. There is no impact to either capital and surplus or net income as a result of the prescribed accounting practice.
Statutory accounting principles vary in some respects from accounting principles generally accepted in the United States of America (“GAAP”). The more significant of these differences are as follows:
• | Bonds, including loan-backed and structured securities (collectively referred to as “bonds”), are carried at statutory adjusted carrying value in accordance with the National Association of Insurance Commissioners (“NAIC”) designation of the security. Carrying value is amortized cost, unless the bond is either (a) designated as a six, in which case it is the lower of amortized cost or fair value or (b) required to be carried at fair value due to the structured securities ratings methodology. Under GAAP, bonds are carried at amortized cost for securities classified asheld-to-maturity and fair value for securities classified asavailable-for-sale andheld-for-trading. |
• | Short-term investments include all investments whose remaining maturities, at the time of acquisition, are three months to one year. Under GAAP, short-term investments include securities purchased with investment intent and with initial remaining maturities of one year or less. |
• | As prescribed by the NAIC, the asset valuation reserve (“AVR”) is computed in accordance with a prescribed formula and represents a provision for possiblenon-interest related fluctuations in the value of bonds equity securities, mortgage loans, real estate and other invested assets. Changes to the AVR are charged or credited directly to unassigned surplus. This type of reserve is not necessary or required under GAAP. |
• | As prescribed by the NAIC, the interest maintenance reserve (“IMR”) consists of net accumulated unamortized realized capital gains and losses, net of income taxes, on sales or interest related impairments of bonds and derivative investments attributable to changes in the general level of interest rates. Such gains or losses are initially deferred and then amortized into income over the remaining period to maturity, based on groupings of individual securities sold in five-year bands. An IMR asset is designated as anon-admitted asset and is recorded as a reduction to capital and surplus. Under GAAP, realized gains and losses are recognized in income in the period in which a security is sold. |
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
• | As prescribed by the NAIC, an other-than-temporary impairment (“OTTI”) is recorded (a) if it is probable that the Company will be unable to collect all amounts due according to the contractual terms in effect at the date of acquisition, (b) if the Company has the intent to sell the investment or (c) fornon-interest related declines in value and where the Company does not have the intent and ability at the reporting date, to hold the bond until its recovery. Under GAAP, if either (a) management has the intent to sell a bond investment or (b) it is more likely than not the Company will be required to sell a bond investment before its anticipated recovery, a charge is recorded in net realized investment losses equal to the difference between the fair value and cost or amortized cost basis of the security. If management does not intend to sell the security and it is not more likely than not the Company will be required to sell the bond investment before recovery of its amortized cost basis, but the present value of the cash flows expected to be collected (discounted at the effective interest rate implicit in the bond investment prior to impairment) is less than the amortized cost basis of the bond investment (referred to as the credit loss portion), an OTTI is considered to have occurred. |
Under GAAP, total OTTI is bifurcated into two components: the amount related to the credit loss, which is recognized in current period earnings through realized capital losses; and the amount attributed to other factors (referred to as thenon-credit portion), which is recognized as a separate component in accumulated other comprehensive income (loss). As prescribed by the NAIC,non-interest related OTTI is only bifurcated on loan-backed and structured securities. Factors related to interest and other components do not have a financial statement impact and are disclosed in “Unrealized losses and OTTI” in the notes to the statutory financial statements.
• | Derivatives that qualify for hedge accounting are carried at the same valuation method as the underlying hedged asset, while derivatives that do not qualify for hedge accounting are carried at fair value. Under GAAP, all derivatives, regardless of hedge accounting treatment, are recorded on the balance sheet in other assets or other liabilities at fair value. As prescribed by the NAIC, for those derivatives which qualify for hedge accounting, the change in the carrying value or cash flow of the derivative is recorded consistently with how the changes in the carrying value or cash flow of the hedged asset, liability, firm commitment or forecasted transaction are recorded. Under GAAP, if the derivative is designated as a cash flow hedge, the effective portions of the changes in the fair value of the derivative are recorded in accumulated other comprehensive income and are recognized in the income statements when the hedged item affects earnings. Changes in fair value resulting from foreign currency translations are recorded in either AOCI or net investment income, consistent with where they are recorded on the underlying hedged asset or liability. Changes in the fair value, including changes resulting from foreign currency translations, of derivatives not eligible for hedge accounting or where hedge accounting is not elected and the over effective portion of cash flow hedges are recognized in investment gains (losses) as a component of net income in the period of the change. Realized foreign currency transactional gains and losses on derivatives subject to hedge accounting are recorded in net investment income, whereas those on derivatives not subject to hedge accounting are recorded in investment gains (losses). As prescribed by the NAIC, upon termination of a derivative that qualifies for hedge accounting, the gain or loss is recognized in income in a manner that is consistent with the hedged item. Alternatively, if the item being hedged is subject to IMR, the gain or loss on the hedging derivative is realized and is subject to IMR upon termination. Under GAAP, gains or losses on terminated contracts that are effective hedges are recorded in earnings in net investment income or other comprehensive income. The gains or losses on terminated contracts where hedge accounting is not elected, or contracts that are not eligible for hedge accounting, are recorded in investment gains (losses). |
• | The Company enters into dollar repurchase agreements with third party broker-dealers. The Company does not enter into these types of transactions for liquidity purposes, but rather for yield enhancement on its investment portfolio. The dollar repurchase trading strategy involves the sale of securities, with a simultaneous agreement to repurchase similar securities at a future date at an agreed-upon price. Assets to be repurchased are the same, or substantially the same, as the assets transferred, and are accounted for as secured borrowings. Under GAAP, these transactions are recorded as forward settling to be announced (“TBA”) securities that are accounted for as derivative instruments, but hedge accounting is not elected as the Company does not regularly accept delivery of such securities when issued. |
• | Acquisition costs, such as commissions and other costs incurred in connection with acquiring new business, are charged to operations as incurred, rather than deferred and amortized over the lives of the related contracts as under GAAP. |
• | Deferred income taxes are recorded using the asset and liability method in which deferred tax assets and liabilities are recorded for expected future tax consequences of events that have been recognized in either the Company’s statutory financial statements or tax returns. Deferred income tax assets are subject to limitations prescribed by statutory accounting |
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
principles. The change in deferred income taxes is treated as a component of the change in unassigned funds, whereas under GAAP deferred taxes are included in the determination of net income. |
• | Certain assets, including various receivables, furniture and equipment and prepaid assets, are designated asnon-admitted assets and are recorded as a reduction to capital and surplus, whereas they are recorded as assets under GAAP. |
• | The excess of the cost of acquiring an entity over the Company’s share of the book value of the acquired entity is recorded as goodwill which is admissible subject to limitations and is amortized over the period in which the Company benefits economically, not to exceed ten years. Under GAAP, the excess of the cost of acquiring an entity over the acquisition-date fair value of identifiable assets acquired and liabilities assumed is allocated between goodwill, indefinite-lived intangible assets and definite-lived intangible assets. Goodwill and indefinite-lived intangible assets are not amortized and definite-lived intangible assets are amortized over their estimated useful lives under GAAP. |
• | Aggregate reserves for life policies and contracts are based on statutory mortality and interest requirements and without consideration of withdrawals, which differ from reserves established under GAAP that are based on assumptions using Company experience for mortality, interest, and withdrawals. |
• | As prescribed by the NAIC, ceded reserves are limited to the amount of direct reserves. Ceded aggregate reserves and policy and contract claim liabilities are netted against aggregate reserves for life policies and contracts for statutory accounting purposes. Under GAAP, these items are reported as reinsurance recoverable. |
• | Surplus notes are reflected as a component of capital and surplus, whereas under GAAP they are reflected as a liability. |
• | The policyholder’s share of net income on participating policies that has not been distributed to participating policyholders is included in capital and surplus in the statutory financial statements. For GAAP, these amounts are reported as a liability with a charge to net income. |
• | Changes in separate account values from cash transactions are recorded as premium income and benefit expenses whereas they do not impact the statement of operations under GAAP and are presented only as increases or decreases to account balances. |
• | Benefit payments and the related decrease in policy reserves are recorded as expenses for all contracts subjecting the Company to any mortality risk. Under GAAP, such benefit payments for life and annuity contracts without significant mortality risks are recorded as direct reductions to the policy reserve liability. |
• | Premium receipts and the related increase in policy reserves are recorded as revenues and expenses, respectively, for all contracts subjecting the Company to any mortality risk. Under GAAP, such premium receipts for life and annuity contracts without significant mortality risks are recorded as direct credits to the policy reserve liability. |
• | Comprehensive income and its components are not presented in the statutory financial statements. |
• | The Statutory Statement of Cash Flows is presented based on a prescribed format for statutory reporting. For purposes of presenting statutory cash flows, cash includes short-term investments. Under GAAP, the statement of cash flows is typically presented based on the indirect method and cash excludes short-term investments. |
The preparation of financial statements in conformity with statutory accounting principles requires the Company’s management to make a variety of estimates and assumptions. These estimates and assumptions affect, among other things, the reported amounts of admitted assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. Significant estimates are required to account for items and matters such as, but not limited to, the valuation of investments in the absence of quoted market values, impairment of investments, valuation of policy benefit liabilities and the valuation of deferred tax assets. Actual results could differ from those estimates.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Significant statutory accounting policies
Investments
Investments are reported as follows:
• | In accordance with the NAIC SAP, the adjusted carrying value amounts of certain assets are gross ofnon-admitted assets. |
Bonds are carried at statutory adjusted carrying value in accordance with the NAIC designation of the security. Carrying value is amortized cost, unless the bond is either (a) designated as a six, in which case it is the lower of amortized cost or fair value or (b) required to be carried at fair value due to the structured securities ratings methodology. The Company recognizes the acquisition of its public bonds on a trade date basis and its private placement investments on a funding date basis. Bonds containing call provisions are amortized to the call or maturity value/date which produces the lowest asset value.
Premiums and discounts are recognized as a component of net investment income using the effective interest method. Realized gains and losses not subject to IMR, including those from foreign currency translations, are included in net realized capital gains (losses).
The recognition of income on certain investments (e.g. loan-backed securities, including mortgage-backed and asset-backed securities) is dependent upon market conditions, which may result in prepayments and changes in amounts to be earned. Prepayments on all mortgage-backed and asset-backed securities are monitored monthly, and amortization of the premium and/or the accretion of the discount associated with the purchase of such securities are adjusted by such prepayments. Prepayment assumptions are based on the average of recent historical prepayments and are obtained from broker/dealer survey values or internal estimates. These assumptions are consistent with the current interest rate and economic environment. Significant changes in estimated cash flows from the original purchase assumptions are accounted for using the retrospective method.
• | Mortgage loans consist primarily of domestic commercial collateralized loans and are carried at their unpaid principal balances adjusted for any unamortized premiums or discounts, allowances for credit losses, and foreign currency translations. Interest income is accrued on the unpaid principal balance for all loans, except for loans onnon-accrual status. Premiums and discounts are amortized to net investment income using the effective interest method. Prepayment penalty and origination fees are recognized in net investment income upon receipt. |
The Company actively manages its mortgage loan portfolio by completing ongoing comprehensive analysis of factors such as debt service coverage ratios,loan-to-value ratios, payment status, default or legal status, annual collateral property evaluations and general market conditions. On a quarterly basis, the Company reviews the above primary credit quality indicators in its internal risk assessment of loan impairment and credit loss. Management’s risk assessment process is subjective and includes the categorization of all loans, based on the above mentioned credit quality indicators, into one of the following categories:
• | Performing - generally indicates the loan has standard market risk and is within its original underwriting guidelines. |
• | Non-performing - generally indicates there is a potential for loss due to the deterioration of financial/monetary default indicators or potential foreclosure. Due to the potential for loss, these loans are evaluated for impairment. |
The adequacy of the Company’s allowance for credit loss is reviewed quarterly. The determination of the calculation and the adequacy of the mortgage allowance for credit loss and mortgage impairments involve judgments that incorporate qualitative and quantitative Company and industry mortgage performance data. Management’s periodic evaluation and assessment of the adequacy of the mortgage allowance for credit loss and the need for mortgage impairments is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the fair value of the underlying collateral, composition of the loan portfolio, current economic conditions, loss experience and other relevant factors. Loans included in thenon-performing category and other loans with certain substandard credit quality indicators are individually reviewed to determine if a specific impairment is required. Risk is mitigated primarily through first position collateralization, guarantees, loan covenants and borrower reporting requirements. Since the Company does not originate or hold uncollateralized mortgages, loans are generally not deemed fully uncollectable. Generally, unrecoverable amounts are written off during the final stage of the foreclosure process.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Loan balances are considered past due when payment has not been received based on contractually agreed upon terms. The accrual of interest is discontinued when concerns exist regarding the realization of loan principal or interest. The Company resumes interest accrual on loans when a loan returns to current status or under new terms when loans are restructured or modified.
On a quarterly basis, any loans with terms that were modified during that period are reviewed to determine if the loan modifications constitute a troubled debt restructuring (“TDR”). In evaluating whether a loan modification constitutes a TDR, it must be determined that the modification is a significant concession and the debtor is experiencing financial difficulties.
• | Real estate properties held for the production of income are valued at depreciated cost less encumbrances. Properties held for sale are carried at the lower of depreciated cost or fair value less encumbrances and estimated costs to sell the property. Real estate is depreciated on a straight-line basis over the estimated life of the building or term of the lease for tenant improvements. |
• | Real estate properties occupied by the Company are carried at depreciated cost unless the carrying amount of the asset is deemed to be unrecoverable. The Company includes in both net investment income and other operating expenses an amount for rent relating to real estate properties occupied by the Company. Rent is derived from consideration of the repairs, expenses, taxes, interest and depreciation incurred. The reasonableness of the amount of rent recorded is verified by comparison to rent received from other like properties in the same area. |
• | Limited partnership interests are included in other invested assets and are accounted for using either net asset value per share (“NAV”) as a practical expedient to fair value or the equity method of accounting with changes in these values recognized in unassigned surplus in the period of change. The Company uses NAV as a practical expedient on partnership interests in investment companies where it has a minor equity interest and no significant influence over the entity’s operations. The Company uses the equity method when it has a partnership interest that is considered more than minor, although the Company has no significant influence over the entity’s operations. |
• | Common stocks, other than stocks of subsidiaries, are recorded at fair value based on the most recent closing price of the common stock as quoted on its exchange. Related party mutual funds, which are carried at fair value, are also included in common stocks. The net unrealized gain or loss on common stocks is reported as a component of surplus. |
• | Contract loans are carried at their unpaid balance. Contract loans are fully collateralized by the cash surrender value of the associated insurance policy. |
• | Short-term investments include all investments whose remaining maturities, at the time of acquisition, are three months to one year. Cash equivalent investments include all investments whose remaining maturities, at the time of acquisition, are three months or less. Both short-term and cash equivalent investments, excluding money market mutual funds, are stated at amortized cost, which approximates fair value. Cash equivalent investments also include highly liquid money market securities that are traded in an active market, and are carried at fair value. |
• | The Company enters into reverse repurchase agreements with third party broker-dealers for the purpose of enhancing the total return on its investment portfolio. The repurchase trading strategy involves the purchase of securities, with a simultaneous agreement to resell similar securities at a future date at an agreed-upon price. Securities purchased under these agreements are accounted for as secured borrowings, and are reported at amortized cost in cash, cash equivalents and short-term investments. Under thesetri-party repurchase agreements, the designated custodian takes possession of the underlying collateral on the Company’s behalf, which is required to be cash or government securities. The fair value of the securities is monitored and additional collateral is obtained, where appropriate, to protect against credit exposure. The collateral cannot be sold orre-pledged and has not been recorded on the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus. |
The Company enters into dollar repurchase agreements with third party broker-dealers. The Company does not enter into these types of transactions for liquidity purposes, but rather for yield enhancement on its investment portfolio. The dollar repurchase trading strategy involves the sale of securities, with a simultaneous agreement to repurchase similar securities at a future date at an agreed-upon price. Assets to be repurchased are the same, or substantially the same, as the assets transferred, and are accounted for as secured borrowings. Proceeds of the sale are reinvested in other securities and may
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
enhance the current yield and total return. The difference between the sales price and the future repurchase price is recorded as an adjustment to net investment income. During the period between the sale and repurchase, the Company will not be entitled to receive interest and principal payments on the securities sold. Losses may arise from changes in the value of the securities or if the counterparty enters bankruptcy proceedings or becomes insolvent. In such cases, the Company’s right to repurchase the security may be restricted. Amounts owed to brokers under these arrangements are included as a liability in repurchase agreements.
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. The Company does not enter into these types of transactions for liquidity purposes, but rather for yield enhancement on its investment portfolio. The borrower can return and the Company can request the loaned securities be returned at any time. The Company maintains ownership of the securities at all times and is entitled to receive from the borrower any payments for interest received on such securities during the loan term. Securities lending transactions are accounted for as secured borrowings. The securities on loan are included within bonds and short-term investments in the accompanying Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus. 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. The Company generally requires initial cash collateral in an amount greater than or equal to 102% of the fair value of domestic securities loaned and 105% of foreign securities loaned. Such collateral is used to replace the securities loaned in event of default by the borrower. Some cash collateral is reinvested in short-term repurchase agreements which are also collateralized by U.S. Government or U.S. Government Agency securities. Reinvested cash collateral is reported in securities lending reinvested collateral assets, with a corresponding liability in payable for securities lending. Collateral that cannot be sold or repledged is excluded from the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus.
• | The Company’s OTTI accounting policy requires that a decline in the value of a bond below its cost or amortized cost basis be assessed to determine if the decline is other-than-temporary. An OTTI is recorded (a) if it is probable that the Company will be unable to collect all amounts due according to the contractual terms in effect at the date of acquisition, (b) if the Company has the intent to sell the investment or (c) fornon-interest related declines in value and where the Company does not have the intent and ability at the reporting date, to hold the bond until its recovery. Management considers a wide range of factors, as described below, regarding the bond issuer and uses its best judgment in evaluating the cause of the decline in its estimated fair value and in assessing the prospects for near-term recovery. Inherent in management’s evaluation of the bond are assumptions and estimates about the operations and ability to generate future cash flows. While all available information is taken into account, it is difficult to predict the ultimate recoverable amount from a distressed or impaired bond. |
Considerations used by the Company in the impairment evaluation process include, but are not limited to, the following:
• | The extent to which estimated fair value is below cost; |
• | Whether the decline in fair value is attributable to specific adverse conditions affecting a particular instrument, its issuer, an industry or geographic area; |
• | The length of time for which the estimated fair value has been below cost; |
• | Downgrade of a bond investment by a credit rating agency; |
• | Deterioration of the financial condition of the issuer; |
• | The payment structure of the bond investment and the likelihood of the issuer being able to make payments in the future; and |
• | Whether dividends have been reduced or eliminated or scheduled interest payments have not been made. |
For loan-backed and structured securities, if management does not intend to sell the bond and has the intent and ability to hold the bond until recovery of its amortized cost basis, but the present value of the cash flows expected to be collected (discounted at the effective interest rate implicit in the bond prior to impairment) is less than the amortized cost basis of the bond (referred to as thenon-interest loss portion), an OTTI is considered to have occurred. In this instance, total OTTI is bifurcated into two components: the amount related to thenon-interest loss is recognized in current period earnings through realized capital gains (losses); and the amount attributed to other factors does not have any financial impact and is disclosed only in the notes to the statutory financial statements. The calculation of expected cash flows utilized during the impairment evaluation process are determined using judgment and the best information available to the Company including default rates, credit ratings, collateral characteristics and current levels of subordination.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
For bonds not backed by other loans or assets, if management does not intend to sell the bond and has the intent and ability to hold, but does not expect to recover the entire cost basis, an OTTI is considered to have occurred. A charge is recorded in net realized capital gains (losses) equal to the difference between the fair value and cost or amortized cost basis of the bond. After the recognition of an OTTI, the bond is accounted for as if it had been purchased on the measurement date of the OTTI, with an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in net income. The difference between the new amortized cost basis and the expected future cash flows is accreted into net investment income. The Company continues to estimate the present value of cash flows expected to be collected over the life of the bond.
Fair value
Certain assets and liabilities are recorded at fair value on the Company’s Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus. The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company categorizes its assets and liabilities measured at fair value into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The Company’s assets and liabilities have been categorized based upon the following fair value hierarchy:
• | Level 1 inputs which are utilized for separate account assets and liabilities, utilize observable, quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Financial assets utilizing Level 1 inputs include certain mutual funds. |
• | Level 2 inputs utilize other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs, which are utilized for general and separate account assets and liabilities, include quoted prices for similar assets and liabilities in active markets and inputs, other than quoted prices, that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. The fair values for some Level 2 securities are obtained from pricing services. The inputs used by the pricing services are reviewed at least quarterly or when the pricing vendor issues updates to its pricing methodology. For bond and separate account assets and liabilities, inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads,two-sided markets, benchmark securities, bids, evaluated bids, offers and reference data including market research publications. Additional inputs utilized for assets and liabilities classified as Level 2 are: |
○ | Derivative instruments - trading activity, swap curves, credit spreads, currency volatility, net present value of cash flows and news sources. |
○ | Separate account assets and liabilities - various index data and news sources, amortized cost (which approximates fair value), trading activity, swap curves, credit spreads, recovery rates, restructuring, net present value of cash flows and quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. |
• | Level 3 inputs are unobservable and include situations where there is little, if any, market activity for the asset or liability. In general, the prices of Level 3 securities are obtained from single broker quotes and internal pricing models. If the broker’s inputs are largely unobservable, the valuation is classified as a Level 3. Broker quotes are validated through an internal analyst review process, which includes validation through known market conditions and other relevant data, as noted below. Internal models are usually cash flow based utilizing characteristics of the underlying collateral of the security such as default rate and other relevant data. Inputs utilized for securities classified as Level 3 are as follows: |
○ | Corporate debt securities - unadjusted single broker quotes which may be in an illiquid market or otherwise deemed unobservable. |
The fair value of certain investments in the separate accounts and limited partnerships are estimated using net asset value per share as a practical expedient, and are excluded from the fair value hierarchy levels in Note 5. These net asset values are based on the fair value of the underlying investments, less liabilities.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability
Overall, transfers between levels are attributable to a change in the observability of inputs. Assets are transferred to a lower level in the hierarchy when a significant input cannot be corroborated with market observable data. This may occur when market activity decreases and underlying inputs cannot be observed, current prices are not available, and/or when there are significant variances in quoted prices, thereby affecting transparency. Assets are transferred to a higher level in the hierarchy when circumstances change such that a significant input can be corroborated with market observable data. This may be due to a significant increase in market activity including recent trades, a specific event, or one or more significant input(s) becoming observable. All transfers between levels are recognized at the beginning of the reporting period in which the transfer occurred. There were no transfers during the year.
The policies and procedures utilized to review, account for, and report on the value and level of the Company’s securities were determined and implemented by the Finance division. The Investments division is responsible for the processes related to security purchases and sales and provides valuation and leveling input to the Finance division when necessary. Both divisions within the Company have worked in conjunction to establish thorough pricing, review, approval, accounting, and reporting policies and procedures around the securities valuation process.
In some instances, securities are priced using external broker quotes. In most cases, when broker quotes are used as pricing inputs, more than one broker quote is obtained. External broker quotes are reviewed internally by comparing the quotes to similar securities in the public market and/or to vendor pricing, if available. Additionally, external broker quotes are compared to market reported trade activity to ascertain whether the price is reasonable, reflective of the current market prices, and takes into account the characteristics of the Company’s securities.
Derivative financial instruments
The Company enters into derivative transactions which include the use of interest rate swaps, interest rate swaptions, cross-currency swaps, foreign currency forwards, U.S. government treasury futures contracts, Eurodollar futures contracts, futures on equity indices and interest rate swap futures. The Company uses these derivative instruments to manage various risks, including interest rate and foreign currency exchange rate risk associated with its invested assets and liabilities. Derivative instruments are not used for speculative reasons. Certain of the Company’sover-the-counter (“OTC”) derivatives are cleared and settled through a central clearing counterparty while others are bilateral contracts between the Company and a counterparty.
Derivatives are reported as other invested assets or other liabilities. Although some derivatives are executed under a master netting arrangement, the Company does not offset in the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus the carrying value of those derivative instruments and the related cash collateral or net derivative receivables and payables executed with the same counterparty under the same master netting arrangement. Derivatives that qualify for hedge accounting treatment are valued using the valuation method (either amortized cost or fair value) consistent with the underlying hedged asset or liability. At inception of a derivative transaction, the hedge relationship and risk management objective is documented and the designation of the derivative is determined based on specific criteria of the transaction. Derivatives where hedge accounting is either not elected, or that are not eligible for hedge accounting, are stated at fair value with changes in fair value recognized in unassigned surplus in the period of change. Investment gains and losses generally result from the termination of derivative contracts prior to expiration and are generally recognized in net income and may be subject to IMR.
The Company uses derivative financial instruments for risk management purposes associated with certain invested assets and policy liabilities. Derivatives are used to (a) hedge the economic effects of interest rate and stock market movements on the Company’s guaranteed lifetime withdrawal benefit (“GLWB”) liability, (b) hedge the economic effect of a large increase in interest rates on the Company’s general account life insurance, group pension liabilities and certain separate account life insurance liabilities, (c) hedge the economic risks of other transactions such as future asset acquisitions or dispositions, the timing of liability pricing, currency risks onnon-U.S. dollar denominated assets, and (d) convert floating rate assets or debt obligations to fixed rate assets or debt obligations for asset/liability management purposes.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The Company controls the credit risk of its derivative contracts through credit approvals, limits, monitoring procedures and in many cases, requiring collateral. The Company’s exposure is 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.
Derivatives in a net asset position may have cash or securities pledged as collateral to the Company in accordance with the collateral support agreements with the counterparty. This collateral is held in a custodial account for the benefit of the Company. Unrestricted cash collateral is included in other assets and the obligation to return it is included in other liabilities. The cash collateral is reinvested in a government money market fund. Cash collateral pledged by the Company is included in other assets.
The Company may purchase a financial instrument that contains a derivative embedded in the financial instrument. Contracts that do not in their entirety meet the definition of a derivative instrument, may contain “embedded” derivative instruments implicit or explicit terms that affect some or all of the cash flows or the value of other exchanges required by the contract in a manner similar to a derivative instrument. An embedded derivative instrument shall not be separated from the host contract and accounted for separately as a derivative instrument.
Goodwill
Goodwill, resulting from acquisitions of subsidiaries that are reported in common stock and other invested assets, is amortized to unrealized capital gains/(losses) over the period in which the Company benefits economically, not to exceed ten years. Goodwill resulting from assumption reinsurance is reported in goodwill and is amortized to other insurance expenses over the period in which the Company benefits economically, not to exceed ten years. Admissible goodwill is limited in the aggregate to 10% of the Company’s adjusted capital and surplus. The Company tests goodwill for impairment annually or more frequently if events or circumstances indicate that there may be justification for conducting an interim test. If the carrying value of goodwill exceeds its fair value, the excess is recognized as impairment and recorded as a realized loss in the period in which the impairment is identified. There were no impairments of goodwill recognized during the years ended December 31, 2018 and 2017.
Cash value of company owned life insurance
The Company is the owner and beneficiary of life insurance policies which are included in Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus at their cash surrender values. At December 31, 2018, the investments underlying variable life insurance policies utilize various fund structures, with underlying investment characteristics of 8% equity and 92% fixed income.
Net investment income
Interest income from bonds is recognized when earned. Interest income on contract loans is recognized in net investment income at the contract interest rate when earned. All investment income due and accrued with amounts that are deemed uncollectible or that are over 90 days past due, including mortgage loans in default (“in process of foreclosure”), is not included in investment income. Amounts over 90 days past due arenon-admitted assets and are recorded as a reduction to unassigned surplus. Real estate due and accrued income is excluded from net investment income if its collection is uncertain.
Net realized capital gains (losses)
Realized capital gains and losses are reported as a component of net income and are determined on a specific identification basis. Interest-related gains and losses are primarily subject to IMR, whilenon-interest related gains and losses are primarily subject to AVR. Realized capital gains and losses also result from the termination of derivative contracts prior to expiration and may be subject to IMR.
Policy reserves
Life insurance and annuity policy reserves with life contingencies are computed on the basis of statutory mortality and interest requirements and without consideration for withdrawals. Annuity contract reserves without life contingencies are computed on the basis of statutory interest requirements.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Policy reserves for life insurance are valued in accordance with the provision of applicable statutory regulations. Life insurance reserves are determined principally using the Commissioner’s Reserve Valuation Method, using the statutory mortality and interest requirements, without consideration for withdrawals. Some policies contain a surrender value in excess of the reserve as legally computed. This excess is calculated and recorded on apolicy-by-policy basis.
Premium stabilization reserves are calculated for certain policies to reflect the Company’s estimate of experience refunds and interest accumulations on these policies. The reserves are invested by the Company. The income earned on these investments is accumulated in this reserve and is used to mitigate future premium rate increases for such policies.
Policy reserves ceded to other insurance companies are recorded as a reduction of the reserve liabilities. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies.
Policy and contract claims include provisions for reported life and health claims in process of settlement, valued in accordance with the terms of the related policies and contracts, as well as provisions for claims incurred but not reported based primarily on prior experience of the Company. As such, amounts are estimates, and the ultimate liability may differ from the amount recorded. Any changes in estimates will be reflected in the results of operations when additional information becomes known.
The liabilities for health claim reserves are determined using historicalrun-out rates, expected loss ratios and statistical analysis. The Company provides for significant claim volatility in areas where experience has fluctuated. The liabilities represent estimates of the ultimate net cost of all reported and unreported claims which are unpaid atyear-end. Those estimates are subject to considerable variability in claim severity and frequency. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations.
Premium, fee income and expenses
Life insurance premiums are recognized when due. Annuity considerations are recognized as revenue when received. Accident and health premiums are earned ratably over the terms of the related insurance and reinsurance contracts or policies. Life and accident and health insurance premiums received in advance are recorded as a liability and recognized as income when the premiums become earned. Fees from assets under management, assets under administration, shareholder servicing, mortality and expense risk charges, administration and record-keeping services and investment advisory services are recognized when earned in fee income or other income. Expenses incurred in connection with acquiring new insurance business, including acquisition costs such as sales commissions, are charged to operations as incurred.
Income taxes
The Company is included in the consolidated federal income tax return of Lifeco U.S. The federal income tax expense reported in the Statutory Statements of Operations represent income taxes provided on income that is currently taxable, excluding tax on net realized capital gains and losses. A net deferred tax asset is included in the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus which is recorded using the asset and liability method in which deferred tax assets and liabilities are recorded for expected future tax consequences of events that have been recognized in either the Company’s statutory financial statements or tax returns. Deferred income tax assets are subject to limitations prescribed by statutory accounting principles. The change in deferred income taxes is treated as a component of the change in unassigned funds.
Changes in Accounting Principles
In 2009, the NAIC introduced Principle-Based Reserving (“PBR”) as a new method for calculating life insurance policy reserves. In cases where the PBR reserve is higher, it will replace the historic formulaic measure with one that more accurately reflects the risks of highly complex products. PBR is effective for 2017; however, companies are permitted to delay implementation until January 1, 2020. The Company will defer implementation for life and fixed annuity contracts until January 1, 2020 and is currently evaluating impact of adoption of PBR on its statutory financial statements.
In 2018, the Statutory Accounting Principles Working Group adopted, as final, a new SSAP No. 108,Derivatives Hedging Variable Annuity Guarantees, and a corresponding Issue Paper No. 159,Special Accounting for Limited Derivatives. The new
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
SSAP, which prescribes guidance for derivatives that hedge interest rate risk of variable annuity guarantees, was adopted with an effective date of January 1, 2020, with early adoption permitted as of January 1, 2019. The Company is currently evaluating impact of adoption of this elective guidance on its statutory financial statements.
In the normal course of business the Company enters into agreements with related parties whereby it provides and/or receives record-keeping services, investment advisory services, andtax-related services, as well as corporate support services which include general and administrative services, information technology services, sales and service support and marketing services. The following table presents revenue earned, expenses incurred and expense reimbursement from insurance andnon-insurance related parties for services provided and/or received pursuant to the service agreements. These amounts, in accordance with the terms of the contracts, are based upon market price, estimated costs incurred or resources expended as determined by number of policies, certificatesin-force, administered assets or other similar drivers.
Year Ended December 31, | Financial | |||||||||||||||||
Description | Related party | 2018 | 2017 | 2016 | statement line | |||||||||||||
Provides corporate support service | Insurance affiliates: Great-West Life & Annuity Insurance Company of New York (“GWL&A NY”)(1), Great-West Life & Annuity Insurance Company of South Carolina (“GWSC”)(1),The Canada Life Assurance Company (“CLAC”)(2) and Great-West Life Assurance Company (“Great-West Life”)(2) | $ | (15,522 | ) | $ | (14,610 | ) | $ | (14,895 | ) | | Other insurance benefits and expenses | | |||||
Non-insurance affiliates: FASCore, LLC (“FASCore”)(1), Advised Assets Group, LLC (“AAG”)(1), Great-West Capital Management, LLC (“GWCM”)(1), Great-West Trust Company, LLC (“GWTC”)(1), GWFS Equities, Inc. (“GWFS”)(1), Great-West Financial Retirement Plan Services (“Great-West RPS”)(1), Emjay, Inc.(1), MAM Holding Inc.(2) and Putnam(3) | (142,424 | ) | (113,504 | ) | (102,698 | ) | ||||||||||||
Total | (157,946 | ) | (128,114 | ) | (117,593 | ) | ||||||||||||
Receives corporate support services | Insurance affiliates: CLAC( 1) and Great-West Life(1) | 1,711 | 1,966 | 1,999 | | Other insurance | | |||||||||||
Non-insurance affiliates: Putnam(2) and Great West Global(2) | 3,381 | 3,128 | 5,922 | �� | | benefits and expenses | | |||||||||||
Total | 5,092 | 5,094 | 7,921 | |||||||||||||||
Provides marketing, distribution and administrative services to certain underlying funds and/or mutual funds | Non-insurance affiliate: GWFS(1) | 198,976 | 202,880 | 203,288 | | Other income | | |||||||||||
Provides record-keeping services | Non-insurance affiliates: GWTC(1) | 38,200 | 30,517 | 21,110 | | Other income | | |||||||||||
Non-insurance related party: Great-West Funds(4) | 65,281 | 65,743 | 57,867 | |||||||||||||||
Total | 103,481 | 96,260 | 78,977 | |||||||||||||||
Receives record-keeping services | Insurance affiliate: GWL&A NY(1) | (2,551 | ) | (2,423 | ) | (2,096 | ) | | Other income | | ||||||||
Non-insurance affiliates: FASCore(1)and GWTC(1) | (342,803 | ) | (316,923 | ) | (291,945 | ) | ||||||||||||
Total | (345,354 | ) | (319,346 | ) | (294,041 | ) | ||||||||||||
Receives custodial services | Non-insurance affiliate: GWTC(1) | (12,410 | ) | (11,854 | ) | (11,125 | ) | | Other income | | ||||||||
Receives reimbursement from tax sharing indemnification related to state and local tax liabilities | Non-insurance affiliate: Putnam(3) | 9,140 | 9,611 | 12,261 | | Other income | |
(1) A wholly-owned subsidiary of GWL&A
(2) An indirect wholly-owned subsidiary of Lifeco
(3) A wholly-owned subsidiary of Lifeco U.S.
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Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
(4) Anopen-end management investment company, a related party of GWL&A
The Company’s separate accounts invest in shares of Great-West Funds, Inc. and Putnam Funds, which are affiliates of the Company and shares of othernon-affiliated mutual funds and government and corporate bonds. The Company’s separate accounts include mutual funds or other investment options that purchase guaranteed interest annuity contracts issued by the Company. During the years ended December 31, 2018, 2017 and 2016, these purchases totaled $169,857, $292,774 and $183,365 respectively. As the general account investment contracts are also included in the separate account balances in the accompanying statutory statements of admitted assets, liabilities, capital and surplus, the Company has included the separate account assets and liabilities of $284,278 and $335,311 at December 31, 2018 and 2017, respectively, which is also included in the assets and liabilities of the general account at those dates.
The following table summarizes amounts due from parent and affiliates:
December 31, | ||||||||||||
Related party | Indebtedness | Due date | 2018 | 2017 | ||||||||
GWFS(1) | On account | On demand | $ | 34,394 | $ | 37,770 | ||||||
CLAC(2) | On account | On demand | — | 20,063 | ||||||||
GWTC(1) | On account | On demand | 5,489 | 4,008 | ||||||||
GWCM(1) | On account | On demand | 1,367 | 2,179 | ||||||||
AAG(1) | On account | On demand | 3,088 | 994 | ||||||||
GWSC(1) | On account | On demand | 1,418 | 878 | ||||||||
Putnam(3) | On account | On demand | 4,027 | — | ||||||||
Great-West RPS(1) | On account | On demand | 324 | 595 | ||||||||
Other related party receivables | On account | On demand | — | 868 | ||||||||
|
|
|
|
|
| |||||||
Total | $ | 50,107 | $ | 67,355 | ||||||||
|
|
|
|
|
| |||||||
(1) A wholly-owned subsidiary of GWL&A (2) An indirect wholly-owned subsidiary of Lifeco (3) A wholly-owned subsidiary of Lifeco U.S.
The following table summarizes amounts due to parent and affiliates: | ||||||||||||
December 31, | ||||||||||||
Related party | Indebtedness | Due date | 2018 | 2017 | ||||||||
FASCore(1) | On account | On demand | $ | 35,385 | $ | 46,371 | ||||||
Putnam(3) | On account | On demand | 770 | 3,432 | ||||||||
CLAC(2) | On account | On demand | 4,032 | — | ||||||||
Other related party payables | On account | On demand | 1,548 | 2,278 | ||||||||
|
|
|
|
|
| |||||||
Total | $ | 41,735 | $ | 52,081 | ||||||||
|
|
|
|
|
|
(1) A wholly-owned subsidiary of GWL&A
(2) An indirect wholly-owned subsidiary of Lifeco
(3) A wholly-owned subsidiary of Lifeco U.S.
Included in current federal income taxes recoverable at December 31, 2018 and 2017 is $72,188 and $17,456, respectively, of income tax receivable from Lifeco U.S. related to the consolidated income tax return filed by Lifeco U.S.
The Company (paid) received cash payments of $(42,577) and $171 from its subsidiary, GWSC, in 2018 and 2017, respectively, for the utilization of GWSC’s operating loss carryforward amounts under the terms of its tax sharing agreement. Additionally, during the years ended December 31, 2018, 2017 and 2016, the Company received interest income of $2,527, $3,044 and $2,733, respectively, from GWSC relating to the tax sharing agreement.
During the year ended December 31, 2018, the Company received dividends and return of capital of $106,000 and $680, respectively, from its subsidiaries, the largest being $42,000 from AAG. During the year ended December 31, 2017, the Company received dividends and return of capital of $82,500 and $1,150, respectively, from its subsidiaries, the largest being $35,000 from FASCore.
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Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
During the years ended December 31, 2018 and 2017, the Company paid cash dividends to GWL&A Financial in the amounts of $152,295 and $145,301, respectively.
The Company and GWL&A NY have an agreement whereby the Company has committed to provide GWL&A NY financial support related to the maintenance of adequate regulatory surplus and liquidity.
Investments in bonds consist of the following:
December 31, 2018 | ||||||||||||||||
Book/adjusted carrying value | Gross unrealized gains | Gross unrealized losses | Fair value | |||||||||||||
U.S. government | $ | 6,306 | $ | 926 | $ | 22 | $ | 7,210 | ||||||||
U.S. states, territories and possessions | 1,025,470 | 91,508 | 672 | 1,116,306 | ||||||||||||
Political subdivisions of states and territories | 842,211 | 63,945 | 2,034 | 904,122 | ||||||||||||
Special revenue and special assessments | 687 | 4 | — | 691 | ||||||||||||
Industrial and miscellaneous | 12,849,382 | 237,900 | 321,254 | 12,766,028 | ||||||||||||
Parent, subsidiaries and affiliates | 15,102 | — | — | 15,102 | ||||||||||||
Hybrid securities | 234,411 | 77 | 31,209 | 203,279 | ||||||||||||
Loan-backed and structured securities | 5,680,549 | 91,517 | 96,761 | 5,675,305 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total bonds | $ | 20,654,118 | $ | 485,877 | $ | 451,952 | $ | 20,688,043 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
December 31, 2017 | ||||||||||||||||
Book/adjusted carrying value | Gross unrealized gains | Gross unrealized losses | Fair value | |||||||||||||
U.S. government | $ | 11,547 | $ | 1,603 | $ | 12 | $ | 13,138 | ||||||||
U.S. states, territories and possessions | 1,054,936 | 130,027 | 123 | 1,184,840 | ||||||||||||
Political subdivisions of states and territories | 949,988 | 89,898 | 1,486 | 1,038,400 | ||||||||||||
Special revenue and special assessments | 1,993 | 62 | — | 2,055 | ||||||||||||
Industrial and miscellaneous | 12,536,852 | 537,262 | 60,617 | 13,013,497 | ||||||||||||
Parent, subsidiaries and affiliates | 19,912 | — | — | 19,912 | ||||||||||||
Hybrid securities | 236,060 | 6,354 | 8,213 | 234,201 | ||||||||||||
Loan-backed and structured securities | 5,133,574 | 168,214 | 30,288 | 5,271,500 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total bonds | $ | 19,944,862 | $ | 933,420 | $ | 100,739 | $ | 20,777,543 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The book/adjusted carrying value and estimated fair value of bonds and assets receiving bond treatment, 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.
December 31, 2018 | ||||||||
Book/adjusted carrying value | Fair value | |||||||
Due in one year or less | $ | 767,254 | $ | 777,131 | ||||
Due after one year through five years | 3,834,629 | 3,863,897 | ||||||
Due after five years through ten years | 6,883,504 | 6,803,249 | ||||||
Due after ten years | 3,527,628 | 3,607,680 | ||||||
Loan-backed and structured securities | 5,670,623 | 5,665,599 | ||||||
|
|
|
|
|
| |||
Total bonds | $ | 20,683,638 | $ | 20,717,556 | ||||
|
|
|
|
|
|
Loan-backed and structured securities include those issued by U.S. government and U.S. agencies.
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Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The following table summarizes information regarding the sales of securities:
Years ended December 31, | ||||||||||||
2018 | 2017 2016 | |||||||||||
Proceeds from sales | $ | 12,788,008 | $ | 17,492,392 | $ | 23,931,241 | ||||||
Gross realized gains from sales | 32,672 | 34,506 | 80,975 | |||||||||
Gross realized losses from sales | 30,960 | 56,354 | 34,646 |
Unrealized losses on bonds
The following tables summarize gross unrealized investment losses including thenon-credit-related portion of OTTI losses, by class of investment:
December 31, 2018 | ||||||||||||||||||||||||
Less than twelve months | Twelve months or longer | Total | ||||||||||||||||||||||
Bonds: | Fair value | Unrealized loss and OTTI | Fair value | Unrealized loss and OTTI | Fair value | Unrealized loss and OTTI | ||||||||||||||||||
U.S. government | $ | 116 | $ | 4 | $ | 818 | $ | 19 | $ | 934 | $ | 23 | ||||||||||||
U.S. states, territories and possessions | 42,429 | 360 | 11,365 | 312 | 53,794 | 672 | ||||||||||||||||||
Political subdivisions of states and territories | 103,774 | 1,115 | 28,604 | 919 | 132,378 | 2,034 | ||||||||||||||||||
Industrial and miscellaneous | 6,334,837 | 235,993 | 2,763,614 | 201,312 | 9,098,451 | 437,305 | ||||||||||||||||||
Hybrid securities | 104,167 | 13,710 | 88,517 | 17,498 | 192,684 | 31,208 | ||||||||||||||||||
Loan-backed and structured securities | 2,462,938 | 46,794 | 1,568,844 | 53,417 | 4,031,782 | 100,211 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total bonds | $ | 9,048,261 | $ | 297,976 | $ | 4,461,762 | $ | 273,477 | $ | 13,510,023 | $ | 571,453 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total number of securities in an unrealized loss position | 815 | 475 | 1,290 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Less than twelve months | Twelve months or longer | Total | ||||||||||||||||||||||
Bonds: | Fair value | Unrealized loss and OTTI | Fair value | Unrealized loss and OTTI | Fair value | Unrealized loss and OTTI | ||||||||||||||||||
U.S. government | $ | 860 | $ | 12 | $ | — | $ | — | $ | 860 | $ | 12 | ||||||||||||
U.S. states, territories and possessions | 11,794 | 125 | — | — | 11,794 | 125 | ||||||||||||||||||
Political subdivisions of states and territories | 13,114 | 56 | 43,949 | 1,430 | 57,063 | 1,486 | ||||||||||||||||||
Industrial and miscellaneous | 1,911,630 | 17,016 | 1,708,202 | 74,659 | 3,619,832 | 91,675 | ||||||||||||||||||
Hybrid securities | — | — | 106,351 | 8,214 | 106,351 | 8,214 | ||||||||||||||||||
Loan-backed and structured securities | 1,530,747 | 12,379 | 694,016 | 19,586 | 2,224,763 | 31,965 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total bonds | $ | 3,468,145 | $ | 29,588 | $ | 2,552,518 | $ | 103,889 | $ | 6,020,663 | $ | 133,477 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total number of securities in an unrealized loss position | 328 | 257 | 585 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
Bonds -Total unrealized losses and OTTI increased by $437,983, or 328%, from December 31, 2017 to December 31, 2018. The increase in unrealized losses was across all asset classes and reflects higher interest rates at December 31, 2018 compared to December 31, 2017, resulting in lower valuations of these bonds.
Total unrealized losses greater than twelve months increased by $169,588 from December 31, 2017 to December 31, 2018. Industrial and miscellaneous account for 74%, or $201,312, of the unrealized losses and OTTI greater than twelve months at December 31, 2018. The majority of these bonds continue to be designated as investment grade. Management does not have the intent to sell these assets; therefore, an OTTI was not recognized in net income.
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Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Loan-backed and structured securities account for 20%, or $53,417, of the unrealized losses and OTTI greater than twelve months at December 31, 2018. Of the $53,417 of unrealized losses and OTTI over twelve months on loan-backed and structured securities, 99% or $52,708 are on securities which continue to be designated as investment grade. The present value of 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 net income.
Loan-backed and structured securities
The Company had a concentration in loan-backed and structured securities of 19% and 18% of total invested assets at December 31, 2018 and 2017, respectively.
Derivative financial instruments
Derivative transactions are generally entered into pursuant to International Swaps and Derivatives Association (“ISDA”) Master Agreements 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 aggregate fair value, inclusive of accrued income and expense, of derivative instruments with credit-risk-related contingent features that were in a net liability position was $36,177 and $106,038 as of December 31, 2018 and 2017, respectively. The Company had pledged collateral related to these derivatives of $0 and $42,750 as of December 31, 2018 and 2017, respectively, in the normal course of business. If the credit-risk-related contingent features were triggered on December 31, 2018 the fair value of assets that could be required to settle the derivatives in a net liability position was $36,177.
At December 31, 2018 and 2017, the Company had pledged $30,220 and $42,750, respectively, of unrestricted cash collateral to counterparties in the normal course of business, while other counterparties had pledged $71,280 and $14,332 of unrestricted cash collateral to the Company to satisfy collateral netting arrangements, respectively.
At December 31, 2018 and 2017, the Company had pledged U.S. Treasury bills in the amount of $8,197 and $3,215, respectively, with a broker as collateral for futures contracts.
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 and debt obligations from a floating rate to a fixed rate.
Not designated as hedging instruments
The Company enters into certain transactions in which derivatives are hedging an economic risk but hedge accounting is either not elected or the transactions are not eligible for hedge accounting. These derivative instruments include: exchange-traded interest rate swap futures, 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 bonds and forecasted liability pricing.
66
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Foreign currency contracts
Cross-currency swaps and foreign currency forwards 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, some are not eligible for hedge accounting. The Company uses foreign currency forwards to reduce the risk of foreign currency exchange rate changes on proceeds received on sales of foreign denominated debt instruments; however, hedge accounting is not elected.
Equity contracts
The Company uses futures on equity indices to offset changes in GLWB liabilities; however, they are not eligible for hedge accounting.
The following tables summarize derivative financial instruments:
December 31, 2018 | ||||||||||||
Notional amount | Net book/adjusted carrying value (1) | Fair value (2) | ||||||||||
Hedge designation/derivative type: | ||||||||||||
Derivatives designated as hedges: | ||||||||||||
Cash flow hedges: | ||||||||||||
Interest rate swaps | $ | 22,300 | $ | — | $ | 6,248 | ||||||
Cross-currency swaps | 886,018 | 55,808 | 39,109 | |||||||||
|
|
|
|
|
|
|
|
| ||||
Total derivatives designated as hedges | 908,318 | 55,808 | 45,357 | |||||||||
|
|
|
|
|
|
|
|
| ||||
Derivatives not designated as hedges: | ||||||||||||
Interest rate swaps | 636,500 | (13,645 | ) | (12,775 | ) | |||||||
Futures on equity indices | 137,829 | 5,920 | (786 | ) | ||||||||
Interest rate futures | 53,000 | 2,276 | 37 | |||||||||
Interest rate swaptions | 194,330 | 173 | 173 | |||||||||
Cross-currency swaps | 573,703 | 26,208 | 24,945 | |||||||||
|
|
|
|
|
|
|
|
| ||||
Total derivatives not designated as hedges | 1,595,362 | 20,932 | 11,594 | |||||||||
|
|
|
|
|
|
|
|
| ||||
Total cash flow hedges, and derivatives not designated as hedges | $ | 2,503,680 | $ | 76,740 | $ | 56,951 | ||||||
|
|
|
|
|
|
|
|
|
(1) The book/adjusted carrying value excludes accrued income and expense. The book/adjusted carrying value of all derivatives in an asset position is reported within other invested assets and the book/adjusted carrying value of all derivatives in a liability position is reported within other liabilities in the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus.
(2) The fair value includes accrued income and expense.
67
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
December 31, 2017 | ||||||||||||
Notional amount | Net book/adjusted carrying value | Fair value | ||||||||||
Hedge designation/derivative type: | ||||||||||||
Derivatives designated as hedges: | ||||||||||||
Cash flow hedges: | ||||||||||||
Interest rate swaps | $ | 388,800 | $ | — | $ | 28,725 | ||||||
Cross-currency swaps | 800,060 | 4,710 | (31,358) | |||||||||
|
|
|
|
|
|
|
|
| ||||
Total cash flow hedges | 1,188,860 | 4,710 | (2,633) | |||||||||
|
|
|
|
|
|
|
|
| ||||
Derivatives not designated as hedges: | ||||||||||||
Interest rate swaps | 519,100 | (3,911) | (3,911) | |||||||||
Futures on equity indices | 22,074 | 857 | 77 | |||||||||
Interest rate futures | 60,700 | 2,358 | (5) | |||||||||
Interest rate swaptions | 164,522 | 75 | 75 | |||||||||
Cross-currency swaps | 612,733 | (21,279) | (21,279) | |||||||||
|
|
|
|
|
|
|
|
| ||||
Total derivatives not designated as hedges | 1,379,129 | (21,900) | (25,043) | |||||||||
|
|
|
|
|
|
|
|
| ||||
Total cash flow hedges and derivatives not designated as hedges | $ | 2,567,989 | $ | (17,190) | $ | (27,676) | ||||||
|
|
|
|
|
|
|
|
|
The following table presents net unrealized gains/(losses) on derivatives not designated as hedging instruments as reported in the Statutory Statements of Changes in Capital and Surplus:
Net unrealized gain (loss) on derivatives recognized in surplus | ||||||||||||
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||
Interest rate swaps | $ | (8,039) | $ | 130 | $ | (4,901) | ||||||
Interest rate swaptions | 198 | (54) | 196 | |||||||||
Futures on equity indices | 297 | (363) | 531 | |||||||||
Interest rate futures | 159 | 48 | (37) | |||||||||
Cross-currency swaps | 32,525 | (39,021) | 44,541 | |||||||||
|
|
|
|
|
|
| ||||||
Total | $ | 25,140 | $ | (39,260) | $ | 40,330 | ||||||
|
|
|
|
|
|
|
Securities Lending
Securities classified as industrial and miscellaneous with a cost or amortized cost of $47,218 and estimated fair values of $43,425 were on loan under the program at December 31, 2018. There were no securities on loan at December 31, 2017. The Company received cash of $45,102 as collateral at December 31, 2018.
The Company’s securities lending agreements are open agreements meaning the borrower can return and the Company can recall the loaned securities at any time.
The cash collateral received of $45,102 was reinvested into short-term repurchase agreements which are collateralized by U.S. government or U.S. government agency securities and mature in under 30 days.
68
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Dollar Repurchase Agreements
Dollar repurchase agreements with a book/adjusted carrying value of $688,765 at December 31, 2018, was included with bonds in the Statutory Statement of Admitted Assets, Liabilities, Capital and Surplus. At December 31, 2018, the obligation of $664,650 to repurchase the agreements at a later date was recorded in repurchase agreements liabilities. The following table summarizes the securities underlying the dollar repurchase agreements at December 31, 2018:
December 31, 2018 | ||||||||||||
Issuer | Book/adjusted carrying value | Fair value | Maturity | |||||||||
FHLMC | $ | 66,283 | $ | 64,754 | 1/1/2034 | |||||||
FHLMC | 482,628 | 471,162 | 1/1/2049 | |||||||||
FNMA | 35,506 | 34,925 | 1/1/2034 | |||||||||
FNMA | 104,348 | 101,971 | 1/1/2049 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 688,765 | $ | 672,812 | ||||||||
|
|
|
|
|
|
There were no dollar repurchase agreements open at December 31, 2017.
The cash collateral of $664,791 related to the dollar repurchase agreement program at December 31, 2018 was primarily reinvested into investment grade corporate securities with a book/adjusted carrying value of $664,791 and fair value of $657,553, with maturities greater than 3 years.
Reverse Repurchase Agreements
The Company had short-term reverse repurchase agreements with book/adjusted carrying values of $11,200 and $23,200 at December 31, 2018 and December 31, 2017, respectively, with maturities of 2 days to 1 week. The fair value of securities acquired under thetri-party agreement and held on the Company’s behalf was $11,424 and $23,664 at December 31, 2018 and December 31, 2017, respectively.
69
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Restricted Assets
The following tables summarize collateral pledged by the Company and investments on deposit or in trust accounts controlled by various state insurance departments in accordance with statutory requirements:
December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||
Gross (Admitted & Non-admitted) Restricted | Percentage | |||||||||||||||||||||||||||||||||||||||||||
Total General Account (G/A) | G/A Supporting S/A Activity | Total Separate Account (S/A) Restricted Assets | S/A Assets Supporting G/A Activity | Total | Total From Prior Year | Increase/ (Decrease) | Total Non- admitted Restricted | Total Admitted Restricted | Gross (Admitted & Non- admitted) Restricted to Total Assets | Admitted Restricted to Total Admitted Assets | ||||||||||||||||||||||||||||||||||
Restricted Asset Category: | ||||||||||||||||||||||||||||||||||||||||||||
Collateral held under security lending arrangements | $ | 45,102 | $ | — | $ | — | $ | — | $ | 45,102 | $ | — | $ | 45,102 | $ | — | $ | 45,102 | 0.08% | 0.08% | ||||||||||||||||||||||||
Subject to repurchase agreements | — | — | — | — | — | — | — | — | — | 0.00% | 0.00% | |||||||||||||||||||||||||||||||||
Subject to reverse repurchase agreements | 11,200 | — | — | — | 11,200 | 23,200 | (12,000 | ) | — | 11,200 | 0.02% | 0.02% | ||||||||||||||||||||||||||||||||
Subject to dollar repurchase agreements | 688,765 | — | — | — | 688,765 | — | 688,765 | — | 688,765 | 1.23% | 1.23% | |||||||||||||||||||||||||||||||||
On deposit with states | 4,443 | — | — | — | 4,443 | 4,351 | 92 | — | 4,443 | 0.01% | 0.01% | |||||||||||||||||||||||||||||||||
On deposit with other regulatory bodies | 603 | — | — | — | 603 | 627 | (24 | ) | — | 603 | 0.00% | 0.00% | ||||||||||||||||||||||||||||||||
Pledged as collateral not captured in other categories: | ||||||||||||||||||||||||||||||||||||||||||||
Futures margin deposits | 8,197 | — | — | — | 8,197 | 3,388 | 4,809 | — | 8,197 | 0.02% | 0.02% | |||||||||||||||||||||||||||||||||
Other collateral | 5,320 | — | — | — | 5,320 | — | 5,320 | — | 5,320 | 0.01% | 0.01% | |||||||||||||||||||||||||||||||||
Derivative cash collateral | 30,220 | — | — | — | 30,220 | 42,751 | (12,531 | ) | — | 30,220 | 0.05% | 0.05% | ||||||||||||||||||||||||||||||||
Other restricted assets | 1,259 | — | — | — | 1,259 | 228 | 1,031 | — | 1,259 | 0.00% | 0.00% | |||||||||||||||||||||||||||||||||
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| |||||||||||||
Total Restricted Assets | $ | 795,109 | $ | — | $ | — | $ | — | $ | 795,109 | $ | 74,545 | $ | 720,564 | $ | — | $ | 795,109 | 1.42% | 1.43% | ||||||||||||||||||||||||
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December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||
Gross (Admitted & Non-admitted) Restricted | Percentage | |||||||||||||||||||||||||||||||||||||||||||
Total General Account (G/A) | G/A Supporting S/A Activity | Total Separate Account (S/A) Restricted Assets | S/A Assets Supporting G/A Activity | Total | Total From Prior Year | Increase/ (Decrease) | Total Non- admitted Restricted | Total Admitted Restricted | Gross (Admitted & Non- admitted) Restricted to Total Assets | Admitted Restricted to Total Admitted Assets | ||||||||||||||||||||||||||||||||||
Restricted Asset Category: | ||||||||||||||||||||||||||||||||||||||||||||
Subject to reverse repurchase agreements | $ | 23,200 | $ | — | $ | — | $ | — | $ | 23,200 | $ | — | $ | 23,200 | $ | — | $ | 23,200 | 0.000% | 0.000% | ||||||||||||||||||||||||
On deposit with states | 4,351 | — | — | — | 4,351 | 4,350 | 1 | — | 4,351 | 0.000% | 0.000% | |||||||||||||||||||||||||||||||||
On deposit with other regulatory bodies | 627 | — | — | — | 627 | 513 | 114 | — | 627 | 0.000% | 0.000% | |||||||||||||||||||||||||||||||||
Other restricted assets | 228 | — | — | — | 228 | 581 | (353 | ) | — | 228 | 0.000% | 0.000% | ||||||||||||||||||||||||||||||||
Pledged as collateral not captured in other categories: | ||||||||||||||||||||||||||||||||||||||||||||
Futures margin deposits | 3,215 | — | 173 | — | 3,388 | 3,570 | (182 | ) | — | 3,388 | 0.000% | 0.000% | ||||||||||||||||||||||||||||||||
Derivative cash collateral | 42,750 | — | 1 | — | 42,751 | — | 42,751 | — | 42,751 | 0.000% | 0.000% | |||||||||||||||||||||||||||||||||
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Total Restricted Assets | $ | 74,371 | $ | — | $ | 174 | $ | — | $ | 74,545 | $ | 9,014 | $ | 65,531 | $ | — | $ | 74,545 | 0.000% | 0.000% | ||||||||||||||||||||||||
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70
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Net Investment Income
The following table summarizes net investment income:
Years Ended December 31, | ||||||||||||
2018 | 2017 2016 | |||||||||||
Bonds | $ | 822,645 | $ | 817,282 | $ | 787,272 | ||||||
Common stock | 221 | 425 | 633 | |||||||||
Mortgage loans | 169,415 | 164,055 | 151,505 | |||||||||
Real estate | 26,557 | 25,979 | 25,401 | |||||||||
Contract loans | 199,507 | 198,672 | 198,846 | |||||||||
Cash, cash equivalents and short-term investments | 4,749 | 6,556 | 7,030 | |||||||||
Derivative instruments | 16,308 | 16,216 | 10,029 | |||||||||
Other invested assets | 125,821 | 100,134 | 116,701 | |||||||||
Miscellaneous | 1,896 | 4,552 | 1,761 | |||||||||
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Gross investment income | 1,367,119 | 1,333,871 | 1,299,178 | |||||||||
Expenses | (59,732 | ) | (66,908 | ) | (63,337 | ) | ||||||
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Net investment income | $ | 1,307,387 | $ | 1,266,963 | $ | 1,235,841 | ||||||
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The amount of interest incurred and charged to investment expense during the years ended December 31, 2018, 2017 and 2016 was $22,070, $29,278 and $31,042, respectively.
The following table summarizes net realized capital gains (losses) on investments net of federal income tax and interest maintenance reserve transfer:
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Net realized capital gains (losses), before federal income tax | $ | 4,905 | $ | (19,270) | $ | 46,048 | ||||||
Less: Federal income tax | 1,030 | (6,745) | 16,117 | |||||||||
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Net realized capital gains (losses), before IMR transfer | 3,875 | (12,525) | 29,931 | |||||||||
Net realized capital gains (losses) transferred to IMR, net of federal income tax of ($1,781), ($7,032) and $16,707, respectively | (6,701) | (13,060) | 31,027 | |||||||||
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Net realized capital gains (losses), net of federal income tax expense (benefit) of $2,811, $287 and ($590), respectively, and IMR transfer | $ | 10,576 | $ | 535 | $ | (1,096) | ||||||
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Concentrations
The Company had the following bond concentrations based on total invested assets:
Concentration by type | ||||
December 31, | ||||
2018 | 2017 | |||
Industrial and miscellaneous | 56% | 56% | ||
Concentration by industry | ||||
December 31, | ||||
2018 | 2017 | |||
Financial services | 14% | 13% | ||
Utilities | 8% | 10% |
71
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Mortgage Loans
The recorded investment of the commercial mortgage loan portfolio categorized as performing was $4,207,611 and $3,872,084 as of December 31, 2018 and 2017, respectively. These mortgages were current as of December 31, 2018 and 2017.
The maximum lending rates for commercial mortgage loans originated during the years ended December 31, 2018 and 2017 were 4.61% and 4.23%, respectively. The minimum lending rates for commercial mortgage loans originated during the years ended December 31, 2018 and 2017 were 3.51% and 3.17%, respectively.
During 2018 and 2017, the maximum percentage of any one loan to the value of security at the time of the loan, exclusive of insured or guaranteed or purchase money mortgages, was 69% and 69%, respectively.
The following table summarizes activity in the commercial mortgage provision allowance for the years ended December 31, 2018 and 2017:
Year ended December 31, | ||||||||
2018 | 2017 | |||||||
Beginning balance | $ | 745 | $ | 2,713 | ||||
Additions charged to operations | — | 157 | ||||||
Direct write-downs charged against the allowances | — | (600 | ) | |||||
Recoveries of amounts previously charged off | — | (1,525 | ) | |||||
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Ending balance | $ | 745 | $ | 745 | ||||
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The following tables present concentrations of the total commercial mortgage portfolio:
Concentration by type | ||||
December 31, | ||||
2018 | 2017 | |||
Multi-family | 37% | 39% | ||
Industrial | 29% | 25% | ||
Office | 17% | 17% | ||
Retail | 10% | 11% | ||
Other | 7% | 8% | ||
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100% | 100% | |||
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Concentration by geographic area | ||||
December 31, | ||||
2018 | 2017 | |||
Pacific | 35% | 36% | ||
East North Central | 18% | 16% | ||
South Atlantic | 14% | 13% | ||
Middle Atlantic | 10% | 11% | ||
Mountain | 9% | 10% | ||
Other | 8% | 8% | ||
West South Central | 6% | 6% | ||
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100% | 100% | |||
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72
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Troubled Debt Restructuring
After being impaired in 2016, a security classified as industrial and miscellaneous was subject to a troubled debt restructuring in August 2017, under which the original security with a recorded investment, after impairments, of $11,710 was extinguished in exchange for new assets. Cash, equities, receivable and debt in the amounts of $1,887, $6,591, $164 and $3,068, respectively, were acquired in full satisfaction of the original debt. The new debt has extended the maturity date from December 30, 2017 to August 1, 2022 and the interest rate increased from 7% to 8%. Upon consummation of the troubled debt restructuring, a total realized capital loss of $7,789 was recorded in the “Net realized capital gains (losses) less capital gains tax and transfers to interest maintenance reserve” line on the Statutory Statements of Operations. There were no payment defaults recognized on previously restructured investments.
The following tables summarize the fair value hierarchy for all financial instruments and invested assets:
Fair Value Measurements at Reporting Date | ||||||||||||||||||||||||||||
Type of financial instrument | December 31, 2018 | |||||||||||||||||||||||||||
Assets: | Aggregate fair value | Admitted assets and liabilities | (Level 1) | (Level 2) | (Level 3) | Net Asset Value (NAV) | Total (All Levels) | |||||||||||||||||||||
Bonds | $ | 20,688,043 | $ | 20,654,118 | $ | — | $ | 20,666,851 | $ | 21,192 | $ | — | $ | 20,688,043 | ||||||||||||||
Common stock | 35,635 | 35,635 | 35,635 | — | — | — | 35,635 | |||||||||||||||||||||
Mortgage loans | 4,176,880 | 4,206,865 | — | 4,176,880 | — | — | 4,176,880 | |||||||||||||||||||||
Real estate | 137,700 | 38,962 | — | — | 137,700 | — | 137,700 | |||||||||||||||||||||
Cash, cash equivalents and short-term investments | 228,997 | 229,003 | 188,283 | 40,714 | — | — | 228,997 | |||||||||||||||||||||
Contract loans | 4,122,637 | 4,122,637 | — | 4,122,637 | — | — | 4,122,637 | |||||||||||||||||||||
Other long-term invested assets | 392,232 | 338,837 | — | 319,299 | 31 | 72,902 | 392,232 | |||||||||||||||||||||
Securities lending collateral assets | 45,102 | 45,102 | — | 45,102 | — | — | 45,102 | |||||||||||||||||||||
Collateral under derivative counterparty collateral agreements | 101,561 | 101,561 | 101,561 | — | — | — | 101,561 | |||||||||||||||||||||
Other collateral | 9,315 | 9,315 | 9,315 | — | — | — | 9,315 | |||||||||||||||||||||
Receivable for securities | 9,654 | 9,654 | — | 9,654 | — | — | 9,654 | |||||||||||||||||||||
Derivative instruments | 114,612 | 115,922 | 66 | 114,546 | — | — | 114,612 | |||||||||||||||||||||
Separate account assets | 24,639,265 | 24,654,916 | 13,236,266 | 10,975,973 | — | 427,026 | 24,639,265 | |||||||||||||||||||||
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| ||||||||
Total assets | $ | 54,701,633 | $ | 54,562,527 | $ | 13,571,126 | $ | 40,471,656 | $ | 158,923 | $ | 499,928 | $ | 54,701,633 | ||||||||||||||
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Liabilities: | ||||||||||||||||||||||||||||
Deposit-type contracts | $ | 196,778 | $ | 189,895 | $ | — | $ | 196,778 | $ | — | $ | — | $ | 196,778 | ||||||||||||||
Commercial paper | 98,859 | 98,859 | — | 98,859 | — | — | 98,859 | |||||||||||||||||||||
Payable under securities lending agreements | 45,102 | 45,102 | — | 45,102 | — | — | 45,102 | |||||||||||||||||||||
Collateral under derivative counterparty collateral agreements | 71,280 | 71,280 | 71,280 | — | — | — | 71,280 | |||||||||||||||||||||
Other collateral | 3,995 | 3,995 | 3,995 | — | — | — | 3,995 | |||||||||||||||||||||
Payable for securities | 11,096 | 11,096 | — | 11,096 | — | — | 11,096 | |||||||||||||||||||||
Derivative instruments | 57,660 | 47,378 | 814 | 56,846 | — | — | 57,660 | |||||||||||||||||||||
Dollar repurchase agreements | 664,650 | 664,650 | — | 664,650 | — | — | 664,650 | |||||||||||||||||||||
Separate account liabilities | 251,806 | 251,806 | 44 | 251,762 | — | — | 251,806 | |||||||||||||||||||||
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Total liabilities | $ | 1,401,226 | $ | 1,384,061 | $ | 76,133 | $ | 1,325,093 | $ | — | $ | — | $ | 1,401,226 | ||||||||||||||
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73
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Fair Value Measurements at Reporting Date | ||||||||||||||||||||||||
Type of financial instrument | December 31, 2017 | |||||||||||||||||||||||
Assets: | Aggregate fair value | Admitted assets and liabilities | (Level 1) | (Level 2) | (Level 3) | Total (All Levels) | ||||||||||||||||||
Bonds | $ | 20,777,543 | $ | 19,944,862 | $ | — | $ | 20,750,605 | $ | 26,938 | $ | 20,777,543 | ||||||||||||
Mortgage loans | 3,858,883 | 3,871,338 | — | 3,858,883 | — | 3,858,883 | ||||||||||||||||||
Real estate | 137,526 | 37,768 | — | — | 137,526 | 137,526 | ||||||||||||||||||
Cash, cash equivalents and short-term investments | 242,084 | 242,084 | 198,869 | 43,215 | — | 242,084 | ||||||||||||||||||
Contract loans | 4,078,669 | 4,078,669 | — | 4,078,669 | — | 4,078,669 | ||||||||||||||||||
Other long-term invested assets | 412,019 | 325,181 | — | 363,198 | 48,821 | 412,019 | ||||||||||||||||||
Collateral under derivative counterparty collateral agreements | 57,420 | 57,420 | 57,420 | — | — | 57,420 | ||||||||||||||||||
Receivable for securities | 23,760 | 23,135 | — | 23,760 | — | 23,760 | ||||||||||||||||||
Derivative instruments | 78,431 | 68,439 | 98 | 78,333 | — | 78,431 | ||||||||||||||||||
Separate account assets | 28,222,102 | 28,197,126 | 16,058,519 | 12,163,583 | — | 28,222,102 | ||||||||||||||||||
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Total assets | $ | 57,888,437 | $ | 56,846,022 | $ | 16,314,906 | $ | 41,360,246 | $ | 213,285 | $ | 57,888,437 | ||||||||||||
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Liabilities: | ||||||||||||||||||||||||
Deposit-type contracts | $ | 219,909 | $ | 206,134 | $ | — | $ | 219,909 | $ | — | $ | 219,909 | ||||||||||||
Commercial paper | 99,886 | 99,886 | — | 99,886 | — | 99,886 | ||||||||||||||||||
Collateral under derivative counterparty collateral agreements | 14,332 | 14,332 | 14,332 | — | — | 14,332 | ||||||||||||||||||
Payable for securities | 2,364 | 2,364 | — | 2,364 | — | 2,364 | ||||||||||||||||||
Derivative instruments | 106,106 | 88,843 | 26 | 106,080 | — | 106,106 | ||||||||||||||||||
Separate account liabilities | 409,275 | 409,275 | 9 | 409,266 | — | 409,275 | ||||||||||||||||||
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Total liabilities | $ | 851,872 | $ | 820,834 | $ | 14,367 | $ | 837,505 | $ | — | $ | 851,872 | ||||||||||||
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Bonds and common stock
The fair values for bonds and common stock are generally based upon evaluated prices from independent pricing services. In cases where these prices are not readily available, fair values are estimated by the Company. To determine estimated fair value for these instruments, the Company generally utilizes discounted cash flow models with market observable pricing inputs such as spreads, average life, and credit quality. 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.
Mortgage loans
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.
Real estate
The estimated fair value for real estate is based on the unadjusted appraised value which includes factors such as comparable property sales, property income analysis, and capitalization rates.
74
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Cash, cash equivalents, short-term investments, collateral receivable and payable under securities lending agreements, receivable and payable for securities, dollar repurchase agreements and commercial paper
The amortized cost of cash, cash equivalents, short-term investments, collateral receivable and payable under securities lending agreements, receivable and payable for securities, dollar repurchase agreements and commercial paper is a reasonable estimate of fair value due to their short-term nature and the high credit quality of the issuers, counterparties and obligor. Cash equivalent investments also include money market funds that are valued using unadjusted quoted prices in active markets.
Contract loans
The Company believes the fair value of contract loans approximates book value. Contract loans are funds provided to contract holders in return for a claim on the contract. The funds provided are limited to the cash surrender value of the underlying contract. The nature of contract loans is to have a negligible default risk as the loans are fully collateralized by the value of the contract. Contract loans do not have a stated maturity and the balances and accrued interest are repaid either by the contractholder or with proceeds from the contract. Due to the collateralized nature of contract loans and unpredictable timing of repayments, the Company believes the fair value of contract loans approximates carrying value.
Other long-term invested assets
The fair values of other long-term invested assets are based on the specific asset type. Other invested assets that are held as bonds, such as surplus notes, are primarily valued the same as bonds. Forlow-income housing tax credits, amortized cost approximates fair value.
Limited partnership interests represent the Company’s minority ownership interests in pooled investment funds. These funds employ varying investment strategies that primarily make private equity investments across diverse industries and geographical focuses. The net asset value, determined using the partnership financial statement reported capital account adjusted for other relevant information, which may impact the exit value of the investments, is used as a practical expedient to estimate fair value. 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. In the absence of permitted sales of its ownership interest, the Company will be redeemed out of the partnership interests through distributions.
Collateral under derivative counterparty collateral agreements and other collateral
Included in other assets is cash collateral received from or pledged to 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
The estimated fair values of OTC derivatives, primarily consisting of cross-currency swaps, interest rate swaps and interest rate swaptions, are the estimated amount 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
Separate account assets and liabilities primarily include investments in mutual funds, unregistered funds, most of which are not subject to redemption restrictions, bonds, and short-term securities. Mutual funds and unregistered funds are recorded at net asset value, which approximates fair value, on a daily basis. The bond and short-term investments are valued in the same manner, and using the same pricing sources and inputs as the bond and short-term investments of the Company.
Deposit-type contracts
Fair values for liabilities under deposit-type insurance contracts are estimated using discounted liability calculations, adjusted to approximate the effect of current market interest rates for the assets supporting the liabilities.
75
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Fair value hierarchy
The following tables present information about the Company’s financial assets and liabilities carried at fair value and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
Fair Value Measurements at Reporting Date | ||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||
Net Asset Value | Total | |||||||||||||||||||
Assets: | (Level 1) | (Level 2) | (Level 3) | (NAV) | (All Levels) | |||||||||||||||
Bonds | ||||||||||||||||||||
Industrial and miscellaneous | $ | — | $ | — | $ | 1,275 | $ | — | $ | 1,275 | ||||||||||
Common stock | ||||||||||||||||||||
Mutual funds | 30,969 | — | — | — | 30,969 | |||||||||||||||
Industrial and miscellaneous | 4,666 | — | — | — | 4,666 | |||||||||||||||
Other invested assets | ||||||||||||||||||||
Limited partnerships | — | — | — | 72,902 | 72,902 | |||||||||||||||
Derivatives | ||||||||||||||||||||
Interest rate swaps | — | 8,964 | — | — | 8,964 | |||||||||||||||
Cross-currency swaps | — | 39,705 | — | — | 39,705 | |||||||||||||||
Interest rate swaptions | — | 173 | — | — | 173 | |||||||||||||||
Separate account assets(1) | 13,212,700 | 9,887,836 | — | 427,026 | 23,527,562 | |||||||||||||||
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Total assets | $ | 13,248,335 | $ | 9,936,678 | $ | 1,275 | $ | 499,928 | $ | 23,686,216 | ||||||||||
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Liabilities: | ||||||||||||||||||||
Derivatives | ||||||||||||||||||||
Interest rate swaps | $ | — | 21,740 | $ | — | $ | — | $ | 21,740 | |||||||||||
Cross-currency swaps | — | 14,760 | — | — | 14,760 | |||||||||||||||
Separate account liabilities(1) | 44 | 251,762 | — | — | 251,806 | |||||||||||||||
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Total liabilities | $ | 44 | $ | 288,262 | $ | — | $ | — | $ | 288,306 | ||||||||||
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(1)Includes only separate account investments which are carried at the fair value of the underlying invested assets or liabilities owned by the separate accounts.
Fair Value Measurements at Reporting Date | ||||||||||||||||
December 31, 2017 | ||||||||||||||||
Total | ||||||||||||||||
Assets: | (Level 1) | (Level 2) | (Level 3) | (All Levels) | ||||||||||||
Bonds | ||||||||||||||||
Industrial and miscellaneous | $ | — | $ | — | $ | 1,297 | $ | 1,297 | ||||||||
States | — | 228 | — | 228 | ||||||||||||
Derivatives | ||||||||||||||||
Interest rate swaps | — | 9,732 | — | 9,732 | ||||||||||||
Cross-currency swaps | — | 20,320 | — | 20,320 | ||||||||||||
Interest rate swaptions | — | 75 | — | 75 | ||||||||||||
Separate account assets (1) | 16,057,788 | 11,172,811 | — | 27,230,599 | ||||||||||||
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|
|
|
|
|
|
|
|
|
|
| |||||
Total assets | $ | 16,057,788 | $ | 11,203,166 | $ | 1,297 | $ | 27,262,251 | ||||||||
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| |||||
Liabilities: | ||||||||||||||||
Derivatives | ||||||||||||||||
Interest rate swaps | $ | — | $ | 13,643 | $ | — | $ | 13,643 | ||||||||
Cross-currency swaps | — | 41,599 | — | 41,599 | ||||||||||||
Separate account liabilities(1) | 9 | 409,266 | — | 409,275 | ||||||||||||
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|
|
|
|
|
|
|
|
|
|
| |||||
Total liabilities | $ | 9 | $ | 464,508 | $ | — | $ | 464,517 | ||||||||
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|
|
|
|
|
|
|
|
|
|
|
(1) Include only separate account investments which are carried at the fair value of the underlying invested assets or liabilities owned by the separate accounts.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The following table summarizes the Company’snon-admitted assets:
December 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
Type | Asset | Non- admitted asset | Admitted asset | Asset | Non- admitted asset | Admitted asset | ||||||||||||||||||
Common stock | $ | 131,883 | $ | — | $ | 131,883 | $ | 109,948 | $ | 1,971 | $ | 107,977 | ||||||||||||
Cash, cash equivalents and short-term investments | 229,434 | 431 | 229,003 | 242,084 | — | 242,084 | ||||||||||||||||||
Other invested assets | 607,793 | 1,006 | 606,787 | 569,702 | 3,515 | 566,187 | ||||||||||||||||||
Premiums deferred and uncollected | 25,904 | 109 | 25,795 | 16,232 | 313 | 15,919 | ||||||||||||||||||
Deferred income taxes | 340,645 | 190,148 | 150,497 | 382,188 | 232,873 | 149,315 | ||||||||||||||||||
Due from parent, subsidiaries and affiliate | 94,542 | 44,435 | 50,107 | 110,901 | 43,546 | 67,355 | ||||||||||||||||||
Other prepaid assets | 28,150 | 28,150 | — | 16,478 | 16,478 | — | ||||||||||||||||||
Capitalized internal use software | 58,658 | 58,658 | — | 55,279 | 55,279 | — | ||||||||||||||||||
Furniture, fixtures and equipment | 4,949 | 4,949 | — | 16,182 | 5,196 | 10,986 | ||||||||||||||||||
Reinsurance recoverable | 8,468 | 378 | 8,090 | 7,090 | — | 7,090 | ||||||||||||||||||
Other assets | 234,504 | 2,539 | 231,965 | 152,955 | 553 | 152,402 | ||||||||||||||||||
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| |||||||
Total | $ | 1,764,930 | $ | 330,803 | $ | 1,434,127 | $ | 1,679,039 | $ | 359,724 | $ | 1,319,315 | ||||||||||||
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The following table summarizes the Company’s aggregate Statement of Admitted Assets, Liabilities, Capital and Surplus values of all subsidiary, controlled and affiliated entities (“SCA”), except insurance SCA entities as follows:
December 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
Type | Asset | Non- admitted asset | Admitted asset | Asset | Non- admitted asset | Admitted asset | ||||||||||||||||||
Common stock | $ | 13,544 | $ | — | $ | 13,544 | $ | 15,636 | $ | 1,971 | $ | 13,665 | ||||||||||||
Other invested assets | 143,533 | 975 | 142,558 | 151,318 | 1,610 | 149,708 | ||||||||||||||||||
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| |||||||
Total | $ | 157,077 | $ | 975 | $ | 156,102 | $ | 166,954 | $ | 3,581 | $ | 163,373 | ||||||||||||
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7. Premiums Deferred and Uncollected
The following table summarizes the Company’s ordinary and group life insurance premiums and annuity considerations deferred and uncollected, both gross and net of loading:
December 31, 2018 | December 31, 2017 | |||||||||||||||
Type | Gross | Net of loading | Gross | Net of loading | ||||||||||||
Ordinary new business | $ | 427 | $ | 221 | $ | 226 | $ | 64 | ||||||||
Ordinary renewal business | 31,069 | 25,544 | 20,681 | 16,095 | ||||||||||||
Group life | 32 | 30 | (260 | ) | (240 | ) | ||||||||||
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Total | $ | 31,528 | $ | 25,795 | $ | 20,647 | $ | 15,919 | ||||||||
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8. Business Combination and Goodwill
The Company’s goodwill is the result of two types of transactions.
Goodwill that arises as a result of the acquisition of subsidiary limited liability companies is included in other invested assets in the accompanying Statutory Statement of Admitted Assets, Liabilities and Capital. On August 29, 2014, the Company completed the acquisition of all of the voting equity interests in the J.P. Morgan Retirement Plan Services (“RPS”) large-market
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Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
recordkeeping business. This transaction was accounted for as a statutory purchase. Goodwill of $51,098 was recorded in other invested assets, which will be amortized over 10 years. At December 31, 2018 and 2017, the Company has $28,955 and $34,065, respectively, of admitted goodwill related to this acquisition. Goodwill amortization of $5,110 was recorded for the years ended December 31, 2018, 2017 and 2016.
Acquisition date | Cost of acquired entity | Original amount of admitted goodwill | Admitted goodwill as of December 31, 2018 | Amount of goodwill amortized for the year ended December 31, 2018 | Admitted goodwill as a book/adjusted carrying | |||||||||||||||
August 29, 2014 | $ | 64,169 | $ | 51,098 | $ | 28,955 | $ | 5,110 | 104.4% |
In addition, goodwill that arises as a result of the acquisition of various assumption reinsurance agreements is included in goodwill in the accompanying Statutory Statement of Admitted Assets, Liabilities and Capital. At December 31, 2018 and 2017, this goodwill was fully amortized. During each of the years ended December 31, 2018, 2017 and 2016, the Company recorded $0, $977 and $12,929, respectively, of goodwill amortization related to these acquisitions.
In the normal course of its business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding risks to other insurance enterprises under excess coverage and coinsurance contracts. The Company retains an initial maximum of $3,500 of coverage per individual life. This initial retention limit of $3,500 may increase due to automatic policy increases in coverage at a maximum rate of $175 per annum, with an overall maximum increase in coverage of $1,000.
Ceded reinsurance contracts do not relieve the Company from its obligations to policyholders. The failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.
The Company assumes risk from approximately 40 insurers and reinsurers by participating in yearly renewable term and coinsurance pool agreements. When assuming risk, the Company seeks to generate revenue while maintaining reciprocal working relationships with these partners as they also seek to limit their exposure to loss on any single life.
Maximum capacity to be retained by the Company is dictated at the treaty level and is monitored annually to ensure the total risk retained on any one life is limited to a maximum retention of $4,500.
The Company did not have any write-offs for uncollectible reinsurance receivables during the years ended December 31, 2018 and 2017 for losses incurred, loss adjustment expenses incurred or premiums earned.
The Company does not have any uncollectible reinsurance, commutation of ceded reinsurance, or certified reinsurer downgraded of status subject to revocation.
Aggregate reserves are computed in accordance with the Commissioner’s Annuity Reserve Valuation Method (“CARVM”) and the Commissioner’s Reserve Valuation Method (“CRVM”), the standard statutory reserving methodologies.
The significant assumptions used to determine the liability for future life insurance benefits are as follows:
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Interest | - Life Insurance | 2.25% to 6.00% | ||
- Annuity Funds | 3.00% to 11.25% | |||
- Disability | 2.50% to 6.00% | |||
Mortality | - Life Insurance | Various valuation tables, primarily including 1941, 1958, 1980 and 2001 Commissioners Standard Ordinary (“CSO”) tables, and American Experience | ||
- Annuity Funds | Various annuity valuation tables, primarily including the GA 1951, 71, 83a and 2012 Individual Annuitant Mortality (“IAM”), Group Annuity Reserve (“GAR”) 94, 1971 and 1983 Group Annuity Mortality (“GAM”), and Annuity 2000 | |||
Morbidity | - Disability | 1970 Intercompany DISA Group Disability Tables |
The Company waives deduction of deferred fractional premiums upon the death of the insured. When surrender values exceed aggregate reserves, excess cash value reserves are held.
Policies issued at premium corresponding to ages higher than the true ages are valued at therated-up ages. Policies providing for payment at death during certain periods of an amount less than the full amount of insurance, being policies subject to liens, are valued as if the full amount is payable without any deduction.
For policies issued with, or subsequently subject to, an extra premium payable annually, an extra reserve is held. The extra premium reserve is the unearned gross extra premium payable during the year if the policies are rated for reasons other than medical impairments. For medical impairments, the extra premium reserve is calculated as the excess of the reserve based on rated mortality over that based on standard mortality. All substandard annuities are valued at their true ages.
At December 31, 2018 and 2017, the Company had $3,904,519 and $4,354,703, respectively of insurance in force for which the gross premiums are less than the net premiums according to the standard valuation set by the Division.
Tabular interest, tabular interest on funds not involving life contingencies and tabular cost have been determined from the basic data for the calculation of aggregate reserves. Tabular less actual reserves released has been determined from basic data for the calculation of aggregate reserves and the actual reserves released.
The withdrawal characteristics of annuity reserves and deposit liabilities are as follows:
December 31, 2018 | ||||||||||||||||||||
General Account | Separate Account with Guarantees | Separate Account Non- guaranteed | Total | Percent of total gross | ||||||||||||||||
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Subject to discretionary withdrawal: | ||||||||||||||||||||
With market value adjustment | $ | 850,240 | $ | — | $ | — | $ | 850,240 | 2.8 | % | ||||||||||
At book value less current surrender charges of 5% or more | 779,760 | — | — | 779,760 | 2.5 | % | ||||||||||||||
At fair value | — | 6,460,894 | 11,311,267 | 17,772,161 | 57.5 | % | ||||||||||||||
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| |||||||||
Total with adjustment or at market value | 1,630,000 | 6,460,894 | 11,311,267 | 19,402,161 | 62.8 | % | ||||||||||||||
At book value without adjustment (minimal or no charge adjustment) | 155,150 | — | — | 155,150 | 0.5 | % | ||||||||||||||
Not subject to discretionary withdrawal | 11,355,177 | — | — | 11,355,177 | 36.7 | % | ||||||||||||||
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| |||||||||
Total gross | 13,140,327 | 6,460,894 | 11,311,267 | 30,912,488 | 100.0 | % | ||||||||||||||
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Reinsurance ceded | 1,479 | — | — | 1,479 | ||||||||||||||||
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| |||||||||
Total, net | $ | 13,138,848 | $ | 6,460,894 | $ | 11,311,267 | $ | 30,911,009 | ||||||||||||
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79
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
December 31, 2017 | ||||||||||||||||||||
General Account | Separate Account with Guarantees | Separate guaranteed | Total | Percent of total gross | ||||||||||||||||
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Subject to discretionary withdrawal: | ||||||||||||||||||||
With market value adjustment | $ | 780,008 | $ | — | $ | — | $ | 780,008 | 2.3% | |||||||||||
At book value less current surrender charges of 5% or more | 716,402 | — | — | 716,402 | 2.1% | |||||||||||||||
At fair value | — | 6,914,918 | 14,390,470 | 21,305,388 | 62.4% | |||||||||||||||
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| |||||||||
Total with adjustment or at market value | 1,496,410 | 6,914,918 | 14,390,470 | 22,801,798 | 66.8% | |||||||||||||||
At book value without adjustment (minimal or no charge adjustment) | 159,104 | — | — | 159,104 | 0.5% | |||||||||||||||
Not subject to discretionary withdrawal | 11,181,649 | — | — | 11,181,649 | 32.7% | |||||||||||||||
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| |||||||||
Total gross | 12,837,163 | 6,914,918 | 14,390,470 | 34,142,551 | 100.0% | |||||||||||||||
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| ||||||||||||||||||
Reinsurance ceded | 73,007 | — | — | 73,007 | ||||||||||||||||
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| |||||||||
Total, net | $ | 12,764,156 | $ | 6,914,918 | $ | 14,390,470 | $ | 34,069,544 | ||||||||||||
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The following information is obtained from the applicable exhibit in the Company’s December 31, 2018 and 2017 annual statements and related separate account annual statement, both of which are filed with the Division and is provided to reconcile annuity reserves and deposit funds to amounts reported in the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus:
December 31, | ||||||||
2018 | 2017 | |||||||
Life and Accident and Health Annual Statement (net of reinsurance): | ||||||||
Annuities included in aggregate reserve for life policies and contracts | $ | 12,936,341 | $ | 12,544,414 | ||||
Supplementary contracts with life contingencies and other contracts included in aggregate reserve for life policies and contracts | 12,611 | 13,608 | ||||||
Liability for deposit-type contracts | 189,896 | 206,134 | ||||||
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| |||
Subtotal - general account | 13,138,848 | 12,764,156 | ||||||
Separate Accounts Annual Statement: | ||||||||
Annuities included in aggregate reserve for life policies and contracts | 17,772,161 | 21,305,388 | ||||||
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| |||
Total | $ | 30,911,009 | $ | 34,069,544 | ||||
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11. Liability for Unpaid Claims and Claim Adjustment Expenses
Activity in the accident and health liability for unpaid claims and for claim adjustment expenses included in aggregate reserve for life policies and contracts and accident and health policies, excluding unearned premium reserves, is summarized as follows:
2018 | 2017 | |||||||
Balance, January 1, net of reinsurance of $25,283 and $28,843 | $ | 243,517 | $ | 240,280 | ||||
Incurred related to: | ||||||||
Current year | 38,844 | 53,969 | ||||||
Prior year | 6,634 | (6,728 | ) | |||||
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Total incurred | 45,478 | 47,241 | ||||||
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| |||
Paid related to: | ||||||||
Current year | (10,375 | ) | (6,896 | ) | ||||
Prior year | (31,091 | ) | (37,108 | ) | ||||
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Total paid | (41,466 | ) | (44,004 | ) | ||||
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| |||
Balance, December 31, net of reinsurance of $19,082 and $25,283 | $ | 247,529 | $ | 243,517 | ||||
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Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Reserves for incurred claims and claim adjustment expenses attributable to insured events of prior years has increased (decreased) by $6,634 and $(6,728) during the years ended December 31, 2018 and 2017, respectively. The change in both years is the result of ongoing analysis of recent claim development trends.
The Company has a commercial paper program that is partially supported by a $50,000 credit facility agreement. The commercial paper has been given a rating ofA-1+ by Standard & Poor’s Ratings Services and a rating ofP-1 by Moody’s Investors Service, each being the highest rating available. The Company’s issuance of commercial paper is not used to fund daily operations and does not have a significant impact on the Company’s liquidity.
The following table provides information regarding the Company’s commercial paper program:
December 31, | ||||||||
2018 | 2017 | |||||||
Face value | $ | 98,859 | $ | 99,886 | ||||
Carrying value | $ | 98,859 | $ | 99,886 | ||||
Interest expense paid | $ | 1,746 | $ | 974 | ||||
Effective interest rate | 2.5% - 2.7% | 1.4% - 1.7% | ||||||
Maturity range (days) | 16 - 25 | 19 - 67 |
The Company utilizes separate accounts to record and account for assets and liabilities for particular lines of business and/or transactions. The Company reported assets and liabilities from the following product lines into a separate account:
• | Individual Annuity Product |
• | Group Annuity Product |
• | Variable Life Insurance Product |
• | Hybrid Ordinary Life Insurance Product |
• | Individual Indexed-Linked Annuity Product |
In accordance with the domiciliary state procedures for approving items within the separate account, the separate account classification of the following items are supported by Colorado Insurance CodeSection 10-7-402:
• | Individual Annuity |
• | Group Annuity |
• | Variable Life Insurance Product |
The following items are supported by direct approval by the Commissioner:
• | Hybrid Ordinary Life Insurance Product |
• | Group Annuity - Custom Stable Value Asset Funds |
• | Variable Life Insurance Product |
• | Individual Indexed-Linked Annuity Product |
The Company’s separate accounts invest in shares of Great-West Funds, Inc. and Putnam Funds,open-end management investment companies, which are related parties of the Company, and shares of othernon-affiliated mutual funds. and government and corporate bonds.
Some assets within each of the Company’s separate accounts are considered legally insulated whereas others are not legally insulated from the general account. The legal insulation of the separate accounts prevents such assets from being generally available to satisfy claims resulting from the general account.
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Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
At December 31, 2018 and 2017, the Company’s separate account assets that are legally insulated from the general account claims are $24,652,973 and $28,192,883, respectively.
Some separate account liabilities are guaranteed by the general account. In accordance with the guarantees provided, if the investment proceeds are insufficient to cover the rate of return guaranteed for the product, the policyholder proceeds will be remitted by the general account. To compensate the general account for the risk taken, the separate account has paid risk charges of $11,608, $12,581, $12,961, $12,542 and $12,171 for the years ended December 31, 2018, 2017, 2016, 2015 and 2014, respectively. No separate account guarantees were paid by the general account for the years ending December 31, 2018, 2017, 2016, 2015 and 2014, respectively.
Separate accounts with guarantees
The Government Guaranteed Funds are separate accounts investing in fixed income securities backed by the credit of the U.S. Government, its agencies or its instrumentalities.
The Stable Asset Funds invest in investment-grade corporate bonds in addition to the above mentioned securities.
The Company also has separate accounts comprised of assets underlying variable universal life policies issued privately to accredited investors. The accounts invest in investment grade fixed income securities.
The Individual Indexed-Linked Annuity Product provides returns based on the performance of one or more indices and invests in fixed income securities. The returns from these securities are invested in derivative instruments which mimic the returns of select indices. There is also a return of premium death benefit guarantee to policyholders.
The Government Guaranteed Funds and Stable Asset Funds have a guaranteed minimum crediting rate of at least 0%. All of the above separate accounts provide a book value guarantee. Some of them also provide a death benefit of the greater of account balance or premium paid.
Distributions to a participant are based on the participant’s account balance and are permitted for the purpose of paying a benefit to a participant. Distributions for purposes other than paying a benefit to a participant may be restricted. Participants’ distributions are based on the amount of their account balance, whereas, distributions as a result of termination of the group annuity contract are based on net assets attributable to the contract and can be made to the group through (1) transfer of the underlying securities and any remaining cash balance, or (2) transfer of the cash balance after sale of the Fund’s securities.
Most guaranteed separate account assets and related liabilities are carried at fair value. Certain separate account assets are carried at book value based on the prescribed deviation from the Division.
Non-guaranteed separate accounts
Thenon-guaranteed separate accounts include unit investment trusts or series accounts that invest in diversifiedopen-end management investment companies. These separate account assets and related liabilities are carried at fair value.
The investments in shares are valued at the closing net asset value as determined by the appropriate fund/portfolio at the end of each day. The net investment experience of the separate account is credited directly to the policyholder and can be positive or negative. Some of the separate accounts provide an incidental death benefit of the greater of the policyholder’s account balance or premium paid and some provide an incidental annual withdrawal benefit for the life of the policyholder. Certain contracts contain provisions relating to a contingent deferred sales charge. In such contracts, charges will be made for total or partial surrender of a participant annuity account in excess of the “free amount” before the retirement date by a deduction from a participant’s account. The “free amount” is an amount equal to 10% of the participant account value at December 31 of the calendar year prior to the partial or total surrender.
The following tables provide information regarding the Company’s separate accounts:
82
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Year Ended December 31, 2018 | ||||||||||||
Non-indexed guaranteed less than/equal to 4% | Non-guaranteed separate account | Total | ||||||||||
Premiums, considerations or deposits | $ | 721,339 | $ | 1,900,171 | $ | 2,621,510 | ||||||
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Reserves | ||||||||||||
For accounts with assets at: | ||||||||||||
Fair value | $ | 7,286,636 | $ | 15,682,027 | $ | 22,968,663 | ||||||
Amortized cost | 1,107,812 | — | 1,107,812 | |||||||||
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| ||||
Total reserves | $ | 8,394,448 | $ | 15,682,027 | $ | 24,076,475 | ||||||
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| ||||
By withdrawal characteristics: | ||||||||||||
At fair value | $ | 7,286,636 | $ | 15,682,027 | $ | 22,968,663 | ||||||
At book value without fair value adjustment and with current surrender charge less than 5% | 1,107,812 | — | 1,107,812 | |||||||||
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| ||||
Total subject to discretionary withdrawals | $ | 8,394,448 | $ | 15,682,027 | $ | 24,076,475 | ||||||
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| ||||
Year Ended December 31, 2017 | ||||||||||||
Non-indexed guaranteed less than/equal to 4% | Non-guaranteed separate account | Total | ||||||||||
Premiums, considerations or deposits | $ | 560,537 | $ | 1,888,820 | $ | 2,449,357 | ||||||
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Reserves | ||||||||||||
For accounts with assets at: | ||||||||||||
Fair value | $ | 7,918,332 | $ | 18,643,242 | $ | 26,561,574 | ||||||
Amortized cost | 958,780 | — | 958,780 | |||||||||
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| ||||
Total reserves | $ | 8,877,112 | $ | 18,643,242 | $ | 27,520,354 | ||||||
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| ||||
By withdrawal characteristics: | ||||||||||||
At fair value | $ | 7,918,332 | $ | 18,643,242 | $ | 26,561,574 | ||||||
At book value without fair value adjustment and with current surrender charge less than 5% | 958,780 | — | 958,780 | |||||||||
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| ||||
Total subject to discretionary withdrawals | $ | 8,877,112 | $ | 18,643,242 | $ | 27,520,354 | ||||||
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A reconciliation of the amounts transferred to and from the separate accounts is presented below:
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Transfers as reported in the Summary of Operations of the separate account statement: | ||||||||||||
Transfers to separate accounts | $ | 2,621,510 | $ | 2,449,357 | $ | 2,686,225 | ||||||
Transfers from separate accounts | (5,198,817 | ) | (4,417,525 | ) | (3,561,699 | ) | ||||||
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Net transfers from separate accounts | (2,577,307 | ) | (1,968,168 | ) | (875,474 | ) | ||||||
Reconciling adjustments: | ||||||||||||
Net transfer of reserves to separate accounts | 1,464,314 | 1,023,384 | 773,253 | |||||||||
Miscellaneous other | 528 | 140 | 739 | |||||||||
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Net transfers as reported in the Statements of Operations | $ | (1,112,465 | ) | $ | (944,644 | ) | $ | (101,482 | ) | |||
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
14. Capital and Surplus, Dividend Restrictions, and Other Matters
On November 15, 2004, the Company issued a surplus note in the face amount of $195,000 to GWL&A Financial. The proceeds were used to redeem a $175,000 surplus note issued May 4, 1999 and for general corporate purposes. The new surplus note bears interest at the rate of 6.675% and is due November 14, 2034. The carrying amount of the surplus note was $194,558 and $194,530 at December 31, 2018 and 2017, respectively. Payments of principal and interest under this surplus note can be made only with prior written approval of the Commissioner of Insurance of the State of Colorado. Such payments are payable only out of surplus funds of the Company and only if at the time of such payment, and after giving effect to the making thereof, the financial condition of the Company is such that its surplus would not fall below two andone-half times the authorized control level as required by the most recent risk-based capital calculations. Subject to the foregoing restrictions on payment of principal and interest, (a) interest is payable on the principal sum of the surplus note semi-annually, in arrears, on May 14 and November 14 of each year, and (b) the surplus note may only be redeemed prior to its stated maturity in connection with (i) a mandatory redemption by the Company in the event of a redemption or acceleration by GWL&A Financial Inc., of its 6.675% junior subordinated deferrable debentures due November 14, 2034, or (ii) an optional redemption by the Company at any time on or after November 15, 2024. Interest paid on the note was $13,016 for all the years ended December 31, 2018, 2017 and 2016, respectively, bringing total interest paid from inception to December 31, 2018 to $182,227. The amount of unapproved principal and interest was $0 at December 31, 2018 and 2017.
On May 19, 2006, the Company issued a surplus note in the face amount and carrying amount of $333,400 to GWL&A Financial Inc. The proceeds were used for general corporate purposes. Initially, the surplus note bore interest at the rate of 7.203% per annum, and was payable on each May 16 and November 16 until May 16, 2016. After May 16, 2016, the surplus note bears an interest rate of 2.588% plus the then current three-month London Interbank Offering Rate. The carrying amount of the surplus note was $0 and $333,400 at December 31, 2018 and 2017. The surplus note became redeemable by the company at the principal amount plus any accrued and unpaid interest after May 16, 2016. On June 15, 2018, this surplus note was redeemed in full. Payments of principal and interest under the surplus note can be made only with prior written approval of the Commissioner of Insurance of the State of Colorado. Such payments are payable out of surplus funds of the Company and only if at the time of such payment, and after giving effect to the making thereof, the financial condition of the Company is such that its surplus would not fall below two andone-half times the authorized control level as required by the most recent risk-based capital calculations. Interest paid on the note was $6,868, $12,721 and $16,137 for the year ended December 31, 2018, 2017 and 2016, respectively, bringing total interest paid from inception to December 31, 2018 to $262,875. The amount of unapproved principal and interest was $0 at December 31, 2018 and 2017.
On December 29, 2017, the Company issued a surplus note in the face amount and carrying amount of $12,000 to GWL&A Financial Inc. The proceeds were used for general corporate purposes. The surplus note bears an interest rate of 3.5% per annum. The note matures of December 29, 2027. Payments of principal and interest under the surplus note can be made only with prior written approval of the Commissioner of Insurance of the State of Colorado. Such payments are payable out of surplus funds of the Company and only if at the time of such payment, and after giving effect to the making thereof, the financial condition of the Company is such that its surplus would not fall below two andone-half times the authorized control level as required by the most recent risk-based capital calculations. Interest paid on the note during 2018, 2017 and 2016 amounted to $420, $2 and $0, respectively, bringing total interest paid from inception to December 31, 2018 to $422. The amount of unapproved principal and interest was $0 at December 31, 2018.
On May 17, 2018, the Company issued a surplus note in the face amount and carrying amount of $346,218 to GWL&A Financial Inc. The proceeds were used to redeem the $333,400 surplus note issued in 2006 and for general corporate purposes. The surplus note bears an interest rate of 4.881% per annum. The note matures on May 17, 2048. Payments of principal and interest under the surplus note can be made only with prior written approval of the Commissioner of Insurance of the State of Colorado. Such payments are payable out of surplus funds of the Company and only if at the time of such payment, and after giving effect to the making thereof, the financial condition of the Company is such that its surplus would not fall below two andone-half times the authorized control level as required by the most recent risk-based capital calculations. Interest paid on the note during 2018 and 2017 amounted to $10,515 and $0, respectively, bringing total interest paid from inception to December 31, 2018 to $10,515 The amount of unapproved principal and interest was $0 at December 31, 2018.
In the first quarter of 2018, the Company realized a $39,921 after tax gain on an interest rate swap that hedged the existing $333,400 surplus note. The Company adjusted the basis of the hedged item, in this case the surplus note, for the amount of the after tax gain. Further, the Company accounted for the redemption of the $333,400 surplus note and the issuance of the $346,218 surplus note in the second quarter as debt modification instead of debt extinguishment. Therefore, the after tax swap
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
gain will be amortized into income over the 30 year life of the new surplus note. Amortization of the gain during 2018, 2017 and 2016 amounted to $998, $0 and $0, respectively bringing the total amortization from inception to December 31, 2018 amounted to $998, leaving an unamortized balance of $38,923 in surplus as part of the surplus note amounts.
Interest paid to GWL&A Financial attributable to these surplus notes, was $30,819, $25,739 and $29,153 for the years ended December 31, 2018, 2017 and 2016, respectively.
As an insurance company domiciled in the State of Colorado, the Company is required to maintain a minimum of $2,000 of capital and surplus. In addition, the maximum amount of dividends which can be paid to stockholders by insurance companies domiciled in the State of Colorado, without prior approval of the Insurance Commissioner, is subject to restrictions relating to statutory capital and surplus and statutory net gain from operations. The Company may pay an amount less than $132,692 of dividends during the year ended December 31, 2019, without the prior approval of the Colorado Insurance Commissioner. Prior to any payment of dividends, the Company provides notice to the Colorado Insurance Commissioner. Dividends arenon-cumulative.
The Company paid cash dividends on common stock during 2018 as follows: $24,000 on March 30, 2018 (ordinary); $20,000 on May 1, 2018 (extraordinary); $55,895 on May 17, 2018 (extraordinary); $30,000 on September 28, 2018 (extraordinary) and $22,400 on September 29, 2018 (extraordinary). Dividends during 2017 were paid as follows: $77,000 on March 15, 2017 (extraordinary); $60,301 on June 15, 2017 (ordinary); and $8,000 on September 29, 2017 (ordinary). Dividends are paid as determined by the Board of Directors, subject to the limitations described above.
The portion of unassigned funds (surplus) represented or (reduced) by each of the following items is:
December 31, | ||||||||
2018 | 2017 | |||||||
Unrealized gains (losses) | $ | 152,801 | $ | 165,416 | ||||
Non-admitted assets | (330,803 | ) | (359,724 | ) | ||||
Asset valuation reserve | (204,393 | ) | (203,546 | ) | ||||
Provision for reinsurance | (17 | ) | (17 | ) | ||||
Separate account business | (1,076 | ) | (868 | ) |
Risk-based capital (“RBC”) is a regulatory tool for measuring the minimum amount of capital appropriate for a life, accident and health organization to support its overall business operations in consideration of its size and risk profile. The Division requires the Company to maintain minimum capital and surplus equal to the company action level as calculated in the RBC model. The Company exceeds the required amount.
The following table presents the components of the net admitted deferred tax asset (liability):
December 31, 2018 | December 31, 2017 | Change | ||||||||||||||||||||||||||||||||||
Ordinary | Capital | Total | Ordinary | Capital | Total | Ordinary | Capital | Total | ||||||||||||||||||||||||||||
Gross deferred tax assets | $ | 368,917 | $ | 2,793 | $ | 371,710 | $ | 388,131 | $ | 16,580 | $ | 404,711 | $ | (19,214 | ) | $ | (13,787 | ) | $ | (33,001 | ) | |||||||||||||||
Valuation allowance adjustment | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
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Adjusted gross deferred tax asset | 368,917 | 2,793 | 371,710 | 388,131 | 16,580 | 404,711 | (19,214 | ) | (13,787 | ) | (33,001 | ) | ||||||||||||||||||||||||
Deferred tax assets non-admitted | (189,578 | ) | (570 | ) | (190,148 | ) | (228,728 | ) | (4,145 | ) | (232,873 | ) | 39,150 | 3,575 | 42,725 | |||||||||||||||||||||
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Net admitted deferred tax asset | 179,339 | 2,223 | 181,562 | 159,403 | 12,435 | 171,838 | 19,936 | (10,212 | ) | 9,724 | ||||||||||||||||||||||||||
Gross deferred tax liabilities | (31,065 | ) | — | (31,065 | ) | (22,523 | ) | — | (22,523 | ) | (8,542 | ) | — | (8,542 | ) | |||||||||||||||||||||
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Net admitted deferred tax asset | $ | 148,274 | $ | 2,223 | $ | 150,497 | $ | 136,880 | $ | 12,435 | $ | 149,315 | $ | 11,394 | $ | (10,212 | ) | $ | 1,182 | |||||||||||||||||
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The Company admits deferred tax assets pursuant to paragraphs 11.a, 11.b.i, 11.b.ii, and 11.c, in SSAP No. 101. The following table presents the amount of deferred tax asset admitted under each component of SSAP No. 101:
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
December 31, 2018 | December 31, 2017 | Change | ||||||||||||||||||||||||||||||||||
Ordinary | Capital | Total | Ordinary | Capital | Total | Ordinary | Capital | Total | ||||||||||||||||||||||||||||
(a) Federal income taxes paid in prior years recoverable through loss carrybacks | $ | — | $ | 2,224 | $ | 2,224 | $ | — | $ | 3,884 | $ | 3,884 | $ | — | $ | (1,660 | ) | $ | (1,660 | ) | ||||||||||||||||
(b) Adjusted gross deferred tax assets expected to be realized (excluding the amount of deferred tax assets from (a) above) after application of the threshold limitation (lesser of (i) and (ii) below) | 148,274 | 148,274 | 136,880 | 8,551 | 145,431 | 11,394 | (8,551 | ) | 2,843 | |||||||||||||||||||||||||||
(i) Adjusted gross deferred tax assets expected to be realized following the balance sheet date | 148,274 | 148,274 | 136,880 | 8,551 | 145,431 | 11,394 | (8,551 | ) | 2,843 | |||||||||||||||||||||||||||
(ii) Adjusted gross deferred tax assets expected allowed per limitation threshold | 175,682 | 145,431 | — | — | 30,251 | |||||||||||||||||||||||||||||||
(c) Adjusted gross deferred tax assets (excluding the amount of deferred tax assets from (a) and (b) above) offset by gross deferred tax liabilities | 31,065 | — | 31,065 | 22,523 | — | 22,523 | 8,542 | — | 8,542 | |||||||||||||||||||||||||||
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Total deferred tax assets admitted as a result of the application of SSAP No. 101 | $ | 179,339 | $ | 2,224 | $ | 181,563 | $ | 159,403 | $ | 12,435 | $ | 171,838 | $ | 19,936 | $ | (10,211 | ) | $ | 9,725 | |||||||||||||||||
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The following table presents the threshold limitations utilized in the admissibility of deferred tax assets under paragraph 11.b of SSAP No. 101:
2018 | 2017 | |||||||
Ratio percentage used to determine recovery period and threshold limitation amount | 867.76% | 894.97% | ||||||
Amount of adjusted capital and surplus used to determine recovery period and threshold limitation | $ | 1,171,212 | $ | 969,537 |
The following table presents the impact of tax planning strategies:
December 31, 2018 December 31, 2017 | Change | |||||||||||||||||||||||
Ordinary | Capital | Ordinary | Capital | Ordinary | Capital | |||||||||||||||||||
Adjusted gross deferred tax asset | $ | 368,917 | $ | 2,793 | $ | 388,131 | $ | 16,580 | $ | (19,214 | ) | $ | (13,787 | ) | ||||||||||
% of adjusted gross deferred tax asset by character attributable to tax planning strategies | — | % | — | % | — | % | — | % | — | % | — | % | ||||||||||||
Net admitted adjusted gross deferred tax assets | $ | 179,339 | $ | 2,224 | $ | 159,403 | $ | 12,435 | $ | 19,936 | $ | (10,211 | ) | |||||||||||
% of net admitted adjusted gross deferred tax asset by character attributable to tax planning strategies | — | % | — | % | — | % | — | % | — | % | — | % |
The Company’s tax planning strategies do not include the use of reinsurance.
There are no temporary differences for which deferred tax liabilities are not recognized.
The components of current income taxes incurred include the following:
Year Ended December 31, | ||||||||||||
2018 | 2017 | Change | ||||||||||
Current income tax | $ | (17,604 | ) | $ | 50,584 | $ | (68,188 | ) | ||||
Federal income tax on net capital gains | 1,030 | (6,744 | ) | 7,774 | ||||||||
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Total | $ | (16,574 | ) | $ | 43,840 | $ | (60,414 | ) | ||||
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Year Ended December 31, | ||||||||||||
2017 | 2016 | Change | ||||||||||
Current income tax | $ | 50,584 | $ | (37,932 | ) | $ | 88,516 | |||||
Federal income tax on net capital gains | (6,744 | ) | 16,117 | (22,861 | ) | |||||||
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Total | $ | 43,840 | $ | (21,815 | ) | $ | 65,655 | |||||
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The tax effects of temporary differences, which give rise to the deferred income tax assets and liabilities are as follows:
December 31, | ||||||||||||
Deferred income tax assets: | 2018 | 2017 | Change | |||||||||
Ordinary: | ||||||||||||
Reserves | $ | 80,303 | $ | 65,831 | $ | 14,472 | ||||||
Investments | 4,374 | 1,263 | 3,111 | |||||||||
Deferred acquisition costs | 76,759 | 77,369 | (610 | ) | ||||||||
Provision for dividends | 3,399 | 4,593 | (1,194 | ) | ||||||||
Fixed assets | 3,264 | 2,761 | 503 | |||||||||
Compensation and benefit accrual | 20,890 | 22,065 | (1,175 | ) | ||||||||
Receivables -non-admitted | 13,991 | 12,737 | 1,254 | |||||||||
Tax credit carryforward | 131,409 | 168,567 | (37,158 | ) | ||||||||
Other | 34,527 | 32,945 | 1,582 | |||||||||
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Total ordinary gross deferred tax assets | 368,916 | 388,131 | (19,215 | ) | ||||||||
Valuation allowance adjustment | — | — | — | |||||||||
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Total adjusted ordinary gross deferred tax assets | 368,916 | 388,131 | (19,215 | ) | ||||||||
Non-admitted ordinary deferred tax assets | (189,578 | ) | (228,728 | ) | 39,150 | |||||||
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Admitted ordinary deferred tax assets | 179,338 | 159,403 | 19,935 | |||||||||
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Capital: | — | |||||||||||
Investments | 2,793 | 16,580 | (13,787 | ) | ||||||||
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Total capital gross deferred tax assets | 2,793 | 16,580 | (13,787 | ) | ||||||||
Valuation allowance adjustment | — | — | — | |||||||||
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Total adjusted gross capital deferred tax assets | 2,793 | 16,580 | (13,787 | ) | ||||||||
Non-admitted capital deferred tax assets | (569 | ) | (4,145 | ) | 3,576 | |||||||
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Admitted capital deferred tax assets | 2,224 | 12,435 | (10,211 | ) | ||||||||
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Total admitted deferred tax assets | $ | 181,562 | $ | 171,838 | $ | 9,724 | ||||||
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Deferred income tax liabilities: | ||||||||||||
Ordinary: | ||||||||||||
Investments | $ | — | $ | (4,501 | ) | $ | 4,501 | |||||
Premium receivable | (5,417 | ) | (3,343 | ) | (2,074 | ) | ||||||
Policyholder Reserves | (17,644 | ) | (10,033 | ) | (7,611 | ) | ||||||
Experience Refunds | (5,079 | ) | — | (5,079 | ) | |||||||
Other | (2,925 | ) | (4,646 | ) | 1,721 | |||||||
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Total ordinary deferred tax liabilities | (31,065 | ) | (22,523 | ) | (8,542 | ) | ||||||
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Net admitted deferred income tax asset | $ | 150,497 | $ | 149,315 | $ | 1,182 | ||||||
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The change in deferred income taxes reported in surplus before consideration ofnon-admitted assets is comprised of the following components:
December 31, |
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| 2018 | 2017 | Change | |||||||||
Total deferred income tax assets | $ | 371,710 | $ | 404,711 | $ | (33,001 | ) | |||||
Total deferred income tax liabilities | (31,065 | ) | (22,523 | ) | (8,542 | ) | ||||||
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Net deferred income tax asset | $ | 340,645 | $ | 382,188 | (41,543 | ) | ||||||
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Tax effect of unrealized capital gains (losses) | (260 | ) | ||||||||||
Other surplus | 1,071 | |||||||||||
Change in net deferred income tax | $ | (40,732 | ) | |||||||||
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December 31, |
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| 2017 | 2016 | Change | |||||||||
Total deferred income tax assets | $ | 404,711 | $ | 521,431 | $ | (116,720 | ) | |||||
Total deferred income tax liabilities | (22,523 | ) | (20,681 | ) | (1,842 | ) | ||||||
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Net deferred income tax asset | $ | 382,188 | $ | 500,750 | (118,562 | ) | ||||||
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Tax effect of unrealized capital gains (losses) | 6,427 | |||||||||||
Other surplus | 1,607 | |||||||||||
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Change in net deferred income tax | $ | (110,528 | ) | |||||||||
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The provision for federal income taxes and change in deferred income taxes differ from that which would be obtained by applying the statutory federal income tax rate of 21% and 35% to income before income taxes. The significant items causing this difference are as follows:
December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Income tax expense at statutory rate | $ | 60,337 | $ | 77,023 | $ | 22,425 | ||||||
Federal tax rate change | — | 132,029 | — | |||||||||
Earnings from subsidiaries | (22,003 | ) | (28,875 | ) | (35,175 | ) | ||||||
Swap gain on debt refinancing | 8,175 | — | — | |||||||||
Dividend received deduction | (6,657 | ) | (7,992 | ) | (7,302 | ) | ||||||
Tax adjustment for interest maintenance reserve | (5,221 | ) | (7,716 | ) | (8,138 | ) | ||||||
Prior year adjustment | (4,124 | ) | (1,881 | ) | (2,032 | ) | ||||||
Tax effect onnon-admitted assets | (3,476 | ) | 2,291 | (1,111 | ) | |||||||
Tax credits | (2,901 | ) | (908 | ) | (21,212 | ) | ||||||
Income tax (benefit) on realized capital gain (loss) | 1,030 | (6,744 | ) | 16,117 | ||||||||
Tax contingency | (607 | ) | 359 | (99 | ) | |||||||
Other | (395 | ) | (3,219 | ) | (1,893 | ) | ||||||
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Total | $ | 24,158 | $ | 154,367 | $ | (38,420 | ) | |||||
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2018 | 2017 | 2016 | ||||||||||
Federal income taxes incurred | $ | (16,574 | ) | $ | 43,839 | $ | (21,815 | ) | ||||
Change in net deferred income taxes | 40,732 | 110,528 | (16,605 | ) | ||||||||
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Total income taxes | $ | 24,158 | $ | 154,367 | $ | (38,420 | ) | |||||
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On December 22, 2017, H.R. 1, the Tax Cuts and Jobs Act (the “Act”), was enacted. The legislation, which is generally effective for tax years beginning on January 1, 2018, represented significant U.S. tax reform and revised the Internal Revenue Code by, among other items, lowering the federal corporate income tax rate from 35% to 21% and modifying how the U.S.
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
taxes multinational entities. Further, the Act changed how tax basis policy reserves, capitalized specified policy acquisition expenses, and the company’s share of the dividends received deduction and tax exempt interest are to be calculated.
Shortly after enactment, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provided US GAAP guidance on the accounting for the Act’s impact at December 31, 2017. A reporting entity could recognize provisional amounts, where the necessary information was not available, prepared or analyzed (including computations) in reasonable detail or where additional guidance was needed from the taxing authority to determine the appropriate application of the Act. A reporting entity’s provisional impact analysis was to be adjusted within the 12 month measurement period provided for under SAB 118. The Statutory Accounting Working Group subsequently provided informal interpretative guidance allowing for statutory accounting conformity with the SAB 118 US GAAP guidance.
The Company’s accounting for the income tax effects of the Act is complete as of the period ended December 31, 2018, and no material measurement period adjustments were recognized during the 2018 reporting period.
As of December 31, 2018, the Company had no operating loss carryforwards.
As of December 31, 2018, the Company has Guaranteed Federal Low Income Housing tax credit carryforwards of $111,328. These credits will begin to expire in 2030.
As of December 31, 2018, the Company has foreign tax credit carryforwards of $20,082. These credits will begin to expire in 2020.
The following are income taxes incurred in prior years that will be available for recoupment in the event of future net losses:
Year Ended December 31, 2018 | $ | 4,146 | ||
Year Ended December 31, 2017 | 13,328 |
The Company has no deposits admitted under Section 6603 of the Internal Revenue Code.
The Company’s federal income tax return is consolidated with the following entities (the “U.S. Consolidated Group”):
Great-West Lifeco U.S. LLC
Emjay Corporation
GWFS Equities, Inc.
GWL&A Financial Inc.
Great-West Life & Annuity Insurance Company of South Carolina
Great-West Life & Annuity Insurance Company of New York
Putnam Investments, LLC
Putnam Acquisition Financing, Inc.
Putnam Retail Management, LP
Putnam Retail Management GP, Inc.
Putnam Advisory Company, LLC
Putnam Advisory Holdings, LLC
Putnam Fiduciary Trust Company
Putnam Investor Services, Inc.
PanAgora Holdings, Inc
PanAgora Asset Management, Inc.
Putnam Advisory Holdings II, LLC
FASCore, LLC
Advised Assets Group, LLC
Great-West Trust Company, LLC
Great-West Capital Management, LLC
The Company, GWL&A NY and GWSC (“GWLA Subgroup”) are life insurance companies who form a life subgroup under the consolidated return regulations. These regulations determine whether the taxable income or losses of this subgroup may offset or be offset with the taxable income or losses of othernon-life entities.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The GWLA Subgroup accounts for income taxes on the modified separate return method on each of their separate company, statutory financial statements. Under this method, current and deferred tax expense or benefit is determined on a standalone basis; however the Company also considers taxable income or losses from other members of the GWLA Subgroup when determining its deferred tax assets and liabilities, and in evaluating the realizability of its deferred tax assets.
The method of settling income tax payables and receivables (“Tax Sharing Agreement”) among the U.S. consolidated group is subject to a written agreement approved by the Board of Directors, whereby settlement is made on a separate return basis (i.e., the amount that would be due to or from a jurisdiction had an actual separate return been filed) except for the current utilization of any net operating losses and other tax attributes by members of the U.S. Consolidated Group, which can lead to receiving a payment when none would be received from the jurisdiction had a real separate tax return been required. The GWLA Subgroup has a policy of settling intercompany balances as soon as practical after the filing of the federal consolidated return or receipt of the income tax refund from the Internal Revenue Service (“I.R.S.”).
The Company determines income tax contingencies in accordance with Statement of Statutory Accounting Principles No. 5R,Liabilities, Contingencies and Impairments of Assets(“SSAP No. 5R”) as modified by SSAP 101. As of December 31, 2018 the amount of tax contingencies computed in accordance with SSAP No. 5R is $0, with the exception of interest and penalties. The Company does not expect a significant increase in tax contingencies within the 12 month period following the balance sheet date.
The Company recognizes accrued interest and penalties related to tax contingencies in current income tax expense. During the years ended December 31, 2018 and 2017, the Company recognized approximately $607 and $359 of benefit and expense, respectively, from interest and penalties related to the uncertain tax positions. The Company had $314 and $921 accrued for the payment of interest and penalties at December 31, 2018 and 2017, respectively.
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 the I.R.S. for years 2014 and prior. Tax years 2015 through 2017 are open to federal examination by the I.R.S. The Company does not expect significant increases or decreases to tax contingencies relating to federal, state or local audits.
The Company does not have any outstanding AMT credits as of the filing of the 2017 tax return.
The Company does not have any foreign operations as of the periods ended December 31, 2017 and December 31, 2018 and therefore is not subject to the Repatriation Transition Tax or the tax on Global IntangibleLow-Taxed Income.
Post-Retirement Medical and Supplemental Executive Retirement Plans
The Company sponsors an unfunded Post-Retirement Medical Plan (the “Medical Plan”) that provides health benefits to retired employees who are not Medicare eligible. The Medical Plan is contributory and contains other cost sharing features which may be adjusted annually for the expected general inflation rate. The Company’s policy is to fund the cost of the Medical Plan benefits in amounts determined at the discretion of management.
The Company also provides Supplemental Executive Retirement Plans to certain key executives. These plans provide key executives with certain benefits upon retirement, disability or death based upon total compensation. The Company has purchased individual life insurance policies with respect to employees covered by these plans. The Company is the owner and beneficiary of the insurance contracts.
A December 31 measurement date is used for the employee benefit plans.
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The following tables provide a reconciliation of the changes in the benefit obligations, fair value of plan assets and the underfunded status for the Company’s Post-Retirement Medical and Supplemental Executive Retirement plans:
Post-Retirement Medical Plan | Supplemental Executive Retirement Plan | Total | ||||||||||||||||||||||
Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Change in projected benefit obligation: | ||||||||||||||||||||||||
Benefit obligation, January 1 | $ | 19,329 | $ | 19,031 | $ | 40,921 | $ | 44,501 | $ | 60,250 | $ | 63,532 | ||||||||||||
Service cost | 1,425 | 1,457 | — | (16 | ) | 1,425 | 1,441 | |||||||||||||||||
Interest cost | 703 | 758 | 1,357 | 1,620 | 2,060 | 2,378 | ||||||||||||||||||
Actuarial (gain) loss | (1,511 | ) | (1,216 | ) | (2,316 | ) | (1,872 | ) | (3,827 | ) | (3,088 | ) | ||||||||||||
Regular benefits paid | (407 | ) | (701 | ) | (2,400 | ) | (3,336 | ) | (2,807 | ) | (4,037 | ) | ||||||||||||
Amendment | — | — | — | 24 | — | 24 | ||||||||||||||||||
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Benefit obligation and under funded status, December 31 | $ | 19,539 | $ | 19,329 | $ | 37,562 | $ | 40,921 | $ | 57,101 | $ | 60,250 | ||||||||||||
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Accumulated benefit obligation | $ | 19,539 | $ | 19,329 | $ | 37,562 | $ | 40,921 | $ | 57,101 | $ | 60,250 | ||||||||||||
Post-Retirement Medical Plan | Supplemental Executive Retirement Plan | Total | ||||||||||||||||||||||
Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Change in plan assets: | ||||||||||||||||||||||||
Value of plan assets, January 1 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Employer contributions | 407 | 701 | 2,400 | 3,337 | 2,807 | 4,038 | ||||||||||||||||||
Regular benefits paid | (407 | ) | (701 | ) | (2,400 | ) | (3,337 | ) | (2,807 | ) | (4,038 | ) | ||||||||||||
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Value of plan assets, December 31 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
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The following table presents amounts recognized in the Statutory Statements of Admitted Assets, Liabilities, Capital and Surplus for the Company’s Post-Retirement Medical and Supplemental Executive Retirement plans:
Post-Retirement Medical Plan | Supplemental Executive Retirement Plan | Total | ||||||||||||||||||||||
December 31, | December 31, | December 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Amounts recognized in the statutory statements of admitted assets, liabilities, capital and surplus: | ||||||||||||||||||||||||
Accrued benefit liability | $ | (20,534 | ) | $ | (18,078 | ) | $ | (40,091 | ) | $ | (40,855 | ) | $ | (60,625 | ) | $ | (58,933 | ) | ||||||
Liability for pension benefits | 995 | (1,251 | ) | 2,529 | (66 | ) | 3,524 | (1,317 | ) | |||||||||||||||
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Total other liabilities | $ | (19,539 | ) | $ | (19,329 | ) | $ | (37,562 | ) | $ | (40,921 | ) | $ | (57,101 | ) | $ | (60,250 | ) | ||||||
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Unassigned surplus (deficit) | $ | 995 | $ | (1,251 | ) | $ | 2,529 | $ | (66 | ) | $ | 3,524 | $ | (1,317 | ) |
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The following table presents amounts not yet recognized in the statements of financial position for the Company’s Post-Retirement Medical and Supplemental Executive Retirement plans:
Post-Retirement Medical Plan | Supplemental Executive Retirement Plan | Total | ||||||||||||||||||||||
December 31, | December 31, | December 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Unrecognized net actuarial gain (loss) | $ | 5,152 | $ | 3,723 | $ | 3,428 | $ | 1,157 | $ | 8,580 | $ | 4,880 | ||||||||||||
Unrecognized prior service cost | (4,157 | ) | (4,974 | ) | (899 | ) | (1,223 | ) | (5,056 | ) | (6,197 | ) |
The following table presents amounts in unassigned funds recognized as components of net periodic benefit cost for the Company’s Post-Retirement Medical and Supplemental Executive Retirement plans:
Post-Retirement Medical Plan | Supplemental Executive Retirement Plan | Total | ||||||||||||||||||||||
Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Items not yet recognized as component of net periodic cost on January 1, | $ | (1,251 | ) | $ | (3,021 | ) | $ | (66 | ) | $ | (2,360 | ) | $ | (1,317 | ) | $ | (5,381 | ) | ||||||
Prior service cost recognized in net periodic cost | 817 | 587 | 324 | 501 | 1,141 | 1,088 | ||||||||||||||||||
(Gain) loss recognized in net periodic cost | (82 | ) | (33 | ) | (45 | ) | (54 | ) | (127 | ) | (87 | ) | ||||||||||||
Gain (loss) arising during the year | 1,511 | 1,216 | 2,316 | 1,847 | 3,827 | 3,063 | ||||||||||||||||||
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Items not yet recognized as component of net periodic cost on December 31 | $ | 995 | $ | (1,251 | ) | $ | 2,529 | $ | (66 | ) | $ | 3,524 | $ | (1,317 | ) | |||||||||
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The following table provides information regarding amounts in unassigned funds that are expected to be recognized as components of net periodic benefit costs during the year ended December 31, 2019:
Post-Retirement Medical Plan | Supplemental Executive Retirement Plan | Total | ||||||||||
Net actuarial gain | $ | 217 | $ | 50 | $ | 267 | ||||||
Prior service cost | (817 | ) | (300 | ) | (1,117 | ) |
The expected benefit payments for the Company’s Post-Retirement Medical and Supplemental Executive Retirement plans for the years indicated are as follows:
2019 | 2020 | 2021 | 2022 | 2023 | 2024 through 2028 | |||||||||||||||||||
Post-retirement medical plan | $ | 961 | $ | 959 | $ | 1,054 | $ | 1,123 | $ | 1,234 | $ | 7,119 | ||||||||||||
Supplemental executive retirement plan | 2,347 | 2,530 | 2,473 | 10,206 | 5,701 | 9,085 |
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The following table presents the components of net periodic cost (benefit):
Post-Retirement Medical Plan | Supplemental Executive Retirement Plan | Total | ||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2016 | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||||
Components of net periodic cost (benefit): | ||||||||||||||||||||||||||||||||||||||||||||||
Service cost | $ | 1,425 | $ | 1,457 | $ | 1,246 | $ | — | $ | (16 | ) | $ | 294 | $ | 1,425 | $ | 1,441 | $ | 1,540 | |||||||||||||||||||||||||||
Interest cost | 703 | 758 | 713 | 1,356 | 1,620 | 1,775 | 2,059 | 2,378 | 2,488 | |||||||||||||||||||||||||||||||||||||
Amortization of unrecognized prior service cost | 817 | 587 | 150 | 324 | 501 | 501 | 1,141 | 1,088 | 651 | |||||||||||||||||||||||||||||||||||||
Amortization of gain from prior periods | (82 | ) | (33 | ) | (137 | ) | (45 | ) | (54 | ) | (61 | ) | (127 | ) | (87 | ) | (198 | ) | ||||||||||||||||||||||||||||
Net periodic cost | $ | 2,863 | $ | 2,769 | $ | 1,972 | $ | 1,635 | $ | 2,051 | $ | 2,509 | $ | 4,498 | $ | 4,820 | $ | 4,481 | ||||||||||||||||||||||||||||
The following tables present the assumptions used in determining benefit obligations of the Post-Retirement Medical and the Supplemental Executive Retirement plans at December 31, 2018 and 2017:
Post-Retirement Medical Plan | ||||||
December 31, | ||||||
2018 | 2017 | |||||
Discount rate | 4.34% | 3.63% | ||||
Initial health care cost trend | 6.25% | 6.50% | ||||
Ultimate health care cost trend | 5.00% | 5.00% | ||||
Year ultimate trend is reached | 2024 | 2024 | ||||
Supplemental Executive Retirement Plan | ||||||
December 31, | ||||||
2018 | 2017 | |||||
Discount rate | 4.16% | 3.43% | ||||
Rate of compensation increase | N/A | 4.00% |
During 2018, the Company adopted the Society of Actuaries Morality Improvement Scale(MP-2018).
During 2017, the Company adopted the Society of Actuaries Morality Improvement Scale(MP-2017).
The following tables present the weighted average interest rate assumptions used in determining the net periodic benefit/cost of the Post-Retirement Medical and the Supplemental Executive Retirement plans:
Post-Retirement Medical Plan | ||||||
Year Ended December 31, | ||||||
2018 | 2017 | |||||
Discount rate | 3.63% | 4.05% | ||||
Initial health care cost trend | 6.50% | 6.75% | ||||
Ultimate health care cost trend | 5.00% | 5.00% | ||||
Year ultimate trend is reached | 2024 | 2024 |
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Supplemental Executive Retirement Plan | ||||||
Year Ended December 31, | ||||||
2018 | 2017 | |||||
Discount rate | 3.43% | 3.80% | ||||
Rate of compensation increase | 4.00% | 4.00% |
The discount rate has been set based on the rates of return on high-quality fixed-income investments currently available and expected to be available during the period the benefits will be paid. In particular, the yields on bonds rated AA or better on the measurement date have been used to set the discount rate.
The following table presents the impact on the Post-Retirement Medical Plan thatone-percentage-point change in assumed health care cost trend rates would have on the following:
One percentage point increase | One percentage point decrease | |||||||
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Increase (decrease) on total service and interest cost on components | $ | 357 | $ | (297) | ||||
Increase (decrease) on post-retirement benefit obligations | 2,417 | (2,075) |
Beginning December 31, 2012, the Company began participation in the pension plan sponsored by GWL&A Financial. During 2017, that plan froze all future benefit accruals for pension-eligible participants as of December 31, 2017. The Company’s share of net expense for the pension plan was $3,057, $0 and $0 during the years ended December 31, 2018, 2017 and 2016.
In August 2017, the Company filed an application for a compliance statement from the IRS under their Voluntary Correction Program with respect to operational matters under the pension plan. The IRS issued a compliance statement approving the Company’s request in November 2018. The corrective measure will result in a payment of approximately $7 million to the plan in 2019.
The Company offers unfunded,non-qualified deferred compensation plans to a select group of executives, management and highly compensated individuals. Participants defer a portion of their compensation and realize potential market gains / losses or interest on the amount deferred. The programs are not qualified under Section 401 of the Internal Revenue Code. Participant balances, which are included in Amounts withheld or retained by company as agent or trustee in the accompanying statutory financial statements, are $35,588 and $33,454 at December 31, 2018 and 2017, respectively.
The Company sponsors a qualified defined contribution benefit plan covering all employees. Under this plan, employees may contribute a percentage of their annual compensation to the plan up to certain maximums, as defined by the plan and by the Internal Revenue Service (“IRS”). Currently, the Company matches a percentage of employee contributions in cash. The Company recognized $11,935, $8,713 and $7,275 in expense related to this plan for the years ended December 31, 2018, 2017 and 2016, respectively.
Equity Awards
Lifeco, of which the Company is an indirect wholly-owned subsidiary, maintains the Great-West Lifeco Inc. Stock Option Plan (the “Lifeco plan”) that provides for the granting of options on its common shares to certain of its officers and employees and those of its subsidiaries, including the Company. Options are granted with exercise prices not less than the average market price of the shares on the five days preceding the date of the grant. The Lifeco plan provides for the granting of options with varying terms and vesting requirements with vesting commencing on the first anniversary of the grant, exercisable within 10 years from the date of grant. Compensation expense is recognized in the Company’s financial statements over the vesting period of these stock options using the accelerated method of recognition.
Termination of employment prior to the vesting of the options results in the forfeiture of the unvested options, unless otherwise determined by the Human Resources Committee. At its discretion, the Human Resources Committee may vest the unvested options of retiring option holders, with the options exercisable within five years from the date of retirement. In such event, the Company
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
accelerates the recognition period to the date of retirement for any unrecognized share-based compensation cost related thereto and recognizes it in its earnings at that time.
Liability Awards
The Company maintains a Performance Share Unit Plan (“PSU plan”) for officers and employees of the Company. Under the PSU plan, “performance share units” are granted to certain of its officers and employees of the Company. Each performance unit has a value equal to one share of Lifeco common stock and is subject to adjustment for cash dividends paid to Lifeco stockholders, Company earnings results as well as stock dividends and splits, consolidations and the like that affect shares of Lifeco common stock outstanding.
If the performance share units vest, they are payable in cash equal to the average closing price of Lifeco common stock for the 20 trading days prior to the date following the last day of the three-year performance period. The estimated fair value of the performance unit is based on the average closing price of Lifeco common stock for the 20 trading days prior to the grant. The performance share units generally vest in their entirety at the end of the three years performance period based on continued service. The PSU plan contains a provision that permits all unvested performance share units to become vested upon death or retirement. Changes in the fair value of the performance share units that occur during the vesting period is recognized as compensation cost over that period.
Performance share units are settled in cash and are recorded as liabilities until payout is made. Unlike share-settled awards, which have a fixed grant-date fair value, the fair value of unsettled or unvested liabilities awards is remeasured at the end of each reporting period based on the change in fair value of one share of Lifeco common stock. The liability and corresponding expense are adjusted accordingly until the award is settled.
Compensation Expense Related to Share-Based Compensation
The compensation expense related to share-based compensation was as follows:
Year Ended December 31, | ||||||||||||
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2018 | 2017 | 2016 | ||||||||||
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Lifeco Stock Plan | $ | 768 | $ | 1,451 | $ | 2,113 | ||||||
Performance Share Unit Plan | 5,388 | 7,207 | 5,318 | |||||||||
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Total compensation expense | $ | 6,156 | $ | 8,658 | $ | 7,431 | ||||||
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Income tax benefits | $ | 1,243 | $ | 2,831 | $ | 2,445 |
During the year ended December 31, 2018, 2017 and 2016, the Company had $26, $769 and $555 respectively, income tax benefits realized from stock options exercised.
The following table presents the total unrecognized compensation expense related to share-based compensation at December 31, 2018 and the expected weighted average period over which these expenses will be recognized:
Expense | Weighted average period (years) | |||||||
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Lifeco Stock Plan | $ | 819 | 1.6 | |||||
Performance Share Unit Plan | 8,403 | 1.4 |
Equity Award Activity
During the year ended December 31, 2018, Lifeco granted 473,400 stock options to employees of the Company. These stock options vest over five-year periods ending in 2023. Compensation expense of $448 will be recognized in the Company’s financial statements over the vesting period of these stock options using the accelerated method of recognition.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The following table summarizes the status of, and changes in, the Lifeco plan options granted to Company employees which are outstanding. The options granted relate to underlying stock traded in Canadian dollars on the Toronto Stock Exchange; therefore, the amounts, which are presented in United States dollars, will fluctuate as a result of exchange rate fluctuations.
Weighted average | ||||||||||||||
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Shares under option | Exercise price (Whole dollars) | Remaining contractual term (Years) | Aggregate intrinsic value (1) | |||||||||||
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Outstanding, January 1, 2018 | 3,446,975 | $ | 24.88 | |||||||||||
Granted | 473,400 | 25.15 | ||||||||||||
Exercised | (114,589 | ) | 21.06 | |||||||||||
Cancelled and expired | (156,000 | ) | 24.54 | |||||||||||
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Outstanding, December 31, 2018 | 3,649,786 | 23.32 | 5.9 | $ | 2,339 | |||||||||
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Vested and expected to vest, December 31, 2018 | 3,649,786 | 23.32 | 5.9 | 2,144 | ||||||||||
Exercisable, December 31, 2018 | 2,323,353 | 21.95 | 4.7 | 2,144 |
(1) The aggregate intrinsic value is calculated as the difference between the market price of Lifeco common shares on December 31, 2018 and the exercise price of the option (only if the result is positive) multiplied by the number of options.
The following table presents additional information regarding stock options under the Lifeco plan:
Year Ended December 31, | ||||||||||||
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Weighted average fair value of options granted | $ | 0.95 | $ | 2.75 | $ | 2.74 | ||||||
Intrinsic value of options exercised (1) | 345 | 2,869 | 2,102 | |||||||||
Fair value of options vested | 1,115 | 2,203 | 1,605 |
(1)The intrinsic value of options exercised is calculated as the difference between the market price of Lifeco common shares on the date of exercise and the exercise price of the option multiplied by the number of options exercised.
The fair value of the options granted during the years ended December 31, 2018, 2017 and 2016 was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
Year Ended December 31, | ||||||||||||
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Dividend yield | 4.55 | % | 3.98 | % | 3.99 | % | ||||||
Expected volatility | 9.01 | % | 13.99 | % | 19.03 | % | ||||||
Risk free interest rate | 2.03 | % | 1.25 | % | 0.80 | % | ||||||
Expected duration (years) | 6.0 | 6.0 | 6.0 |
Liability Award Activity
The following table summarizes the status of, and changes in, the Performance Share Unit Plan units granted to Company employees which are outstanding:
Performance Units | ||||
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Outstanding, January 1, 2018 | 681,510 | |||
Granted | 405,464 | |||
Forfeited | (18,397 | ) | ||
Paid | (157,510 | ) | ||
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Outstanding, December 31, 2018 | 911,067 | |||
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Vested and expected to vest, December 31, 2018 | 911,067 |
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
The cash payment in settlement of the Performance Share Unit Plan units was $4,104, $3,398 and $3,988 for the years ended December 31, 2018, 2017 and 2016, respectively.
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Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
Individual life insurance premiums paid, net of reinsurance, under individual life insurance participating policies were 1%, 6%, and (2)% of total individual life insurance premiums earned during the years ended December 31, 2018, 2017 and 2016 respectively. The Company accounts for its policyholder dividends based upon the three-factor formula. The Company paid dividends in the amount of $31,276, $38,782 and $45,842 to its policyholders during the years ended December 31, 2018, 2017 and 2016, respectively.
No customer accounted for 10% or more of the Company’s revenues during the year ended December 31, 2018. In addition, neither Individual Markets nor Empower Retirement is dependent upon a single customer or a few customers. The loss of business from any one, or a few, independent brokers or agents would not have a material adverse effect on the Company or any of its business agents.
20. Commitments and Contingencies
Future Contractual Obligations
The following table summarizes the Company’s estimated future contractual obligations:
Payment due by period | ||||||||||||||||||||||||||||
| 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | |||||||||||||||||||||
Surplus notes - principal(1) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 553,219 | $ | 553,219 | ||||||||||||||
Surplus notes - interest(2) | 30,335 | 30,335 | 30,335 | 30,335 | 30,335 | 557,094 | 708,769 | |||||||||||||||||||||
Investment purchase obligations(3) | 136,396 | — | — | — | — | — | 136,396 | |||||||||||||||||||||
Operating leases(4) | 9,929 | 7,844 | 3,717 | 1,235 | 1,037 | 11,743 | 35,505 | |||||||||||||||||||||
Other liabilities(5) | 23,334 | 26,774 | 12,695 | 19,579 | 6,935 | 16,204 | 105,521 | |||||||||||||||||||||
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Total | $ | 199,994 | $ | 64,953 | $ | 46,747 | $ | 51,149 | $ | 38,307 | $ | 1,138,260 | $ | 1,539,410 | ||||||||||||||
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(1)Surplus notes principal - Represents contractual maturities of principal due to the Company’s parent, GWL&A Financial, under the terms of three long-term surplus notes. The amounts shown in this table differ from the amounts included in the Company’s Statement of Admitted Assets, Liabilities, Capital and Surplus because the amounts shown above do not consider the discount upon the issuance of one of the surplus notes.
(2)Surplus notes interest - One long-term surplus note bears interest at a fixed rate through maturity. The second surplus note bore interest initially at a fixed rate but changed during 2016 to be based upon the current three-month London Interbank Offering Rate in addition to a spread. The third long-term surplus note bears interest at a fixed rate through maturity. The interest payments shown in this table are calculated based upon the contractual rates in effect on December 31, 2018 and do not consider the impact of future interest rate changes.
(3)Investment purchase obligations -The Company makes commitments to fund partnership interests, mortgage loans, and other investments in the normal course of its business. As the timing of the fulfillment of the commitment to fund partnership interests cannot be predicted, such obligations are presented in the less than one year category. The timing of the funding of mortgage loans is based on the expiration date of the commitment. The amounts of these unfunded commitments at December 31, 2018 and 2017 were $136,396 and $313,242, of which $104,286 and $114,726 were related to cost basis limited partnership interests, respectively. All unfunded commitments at December 31, 2018 were due within one year. At December 31, 2017, $312,152 is due within one year, and $1,090 is due within one to three years.
(4) Operating leases - The Company is obligated to make payments under variousnon-cancelable operating leases, primarily for office space. Contractual provisions exist that could increase the lease obligations presented, including operating expense escalation clauses. Management does not consider the impact of any such clauses to be material to the Company’s operating lease obligations. Rent expense for the years ended December 31, 2018, 2017 and 2016 were $27,768, $28,244 and $27,815 respectively.
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
From time to time, the Company enters into agreements or contracts, including capital leases, to purchase goods or services in the normal course of its business. However, these agreements and contracts are not material and are excluded from the table above.
(5) Other liabilities - Other liabilities include those other liabilities which represent contractual obligations not included elsewhere in the table above. If the timing of the payment of any other liabilities was sufficiently uncertain, the amounts were included in the less than one year category. Other liabilities presented in the table above include:
• | Expected benefit payments for the Company’s post-retirement medical plan and supplemental executive retirement plan through 2027 |
• | Unrecognized tax benefits |
• | Miscellaneous purchase obligations to acquire goods and services |
The Company has a revolving credit facility agreement in the amount of $50,000 for general corporate purposes. The credit facility expired on March 1, 2018 and was replaced with a revolving credit facility agreement in the amount of $50,000 with an expiration date of March 1, 2023. 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, of $1,022,680, as defined in the credit facility agreement (compiled on the unconsolidated statutory accounting basis prescribed by the NAIC), at any time. The Company was in compliance with all covenants at December 31, 2018 and 2017. At December 31, 2018 and 2017 there were no outstanding amounts related to the current and prior credit facilities.
In addition, the Company has other letters of credit with a total amount of $9,095, renewable annually for an indefinite period of time. At December 31, 2018 and 2017, there were no outstanding amounts related to those letters of credit.
Contingencies
From time to time, the Company may be threatened with, or named as a defendant in, lawsuits, arbitrations, and administrative claims. Any such claims that are decided against the Company could harm the Company’s business. The Company is also subject to periodic regulatory audits and inspections which could result in fines or other disciplinary actions. Unfavorable outcomes in such matters may result in a material impact on the Company’s financial position, results of operations, or cash flows.
The Company is defending lawsuits relating to the costs and features of certain of its retirement or fund products. Management believes the claims are without merit and will defend these actions. Based on the information known, these actions will not have a material adverse effect on the financial position of the Company.
The Company is involved in other various legal proceedings that arise in the ordinary course of its business. In the opinion of management, after consultation with counsel, the likelihood of loss from the resolution of these proceedings is remote and/or the estimated loss is not expected to have a material effect on the Company’s financial position, results of its operations, or cash flows.
The Company and GWL&A NY have an agreement whereby the Company has committed to provide financial support to GWL&A NY related to the maintenance of adequate regulatory surplus and liquidity. The Company is obligated to invest in shares of GWL&A NY in order for GWL&A NY to maintain the capital and surplus at the greater of 1) $6,000, 2) 200% of GWL&A NY RBC minimum capital requirements if GWL&A NY total assets are less than $3,000,000 or 3) 175% of GWL&A NY RBC minimum capital requirements if GWL&A NY total assets are $3,000,000 or more. There is no limitation on the maximum potential future payments under the guarantee. The Company has no liability at December 31, 2018 and 2017 for obligations under the guarantee.
Management has evaluated subsequent events for potential recognition or disclosure in the Company’s statutory financial statements through March 12, 2019, the date on which they were issued.
On January 24, 2019, the Company announced that it had entered into an agreement with Protective Life Insurance Company (“Protective”) to sell, via indemnity reinsurance, substantially all of its non-participating individual life insurance and annuity
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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
Notes to Statutory Financial Statements
(In Thousands, Except Share Amounts)
business and group life and health business. The transaction is in its initial stage, and is expected to close in the first half of 2019 subject to regulatory and customary closing conditions. On the closing date of the proposed transaction, the Company will transfer to Protective assets equal to the statutory liabilities being reinsured and will receive a ceding commission (subject to post-closing adjustments) from Protective in consideration of the transferred business.
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Item 13. | Other Expenses of Issuance and Distribution. |
Securities and Exchange Commission Registration Fees | $0* |
Printing and engraving | $10,000 |
Accounting fees and expenses | $10,000 |
Legal fees and expenses | $20,000 |
Miscellaneous | $10,000 |
Total Expenses (approximate) | $50,000 |
(1) | “Corporation” includes any domestic or foreign entity that is a predecessor of a corporation by reason of a merger or other transaction in which the predecessor’s existence ceased upon consummation of the transaction. |
(2) | “Director” means an individual who is or was a director of a corporation or an individual who, while a director of a corporation, is or was serving at the corporation’s request as a director, an officer, an agent, an associate, an employee, a fiduciary, a manager, a member, a partner, a promoter, or a trustee of, or to hold any similar position with, another domestic or foreign entity or of an employee benefit plan. A director is considered to be serving an employee benefit plan at the corporation’s request if the director’s duties to the corporation also impose duties on, or otherwise involve services by, the director to the plan or to participants in or beneficiaries of the plan. “Director” includes, unless the context requires otherwise, the estate or personal representative of a deceased director. |
(3) | “Expenses” includes counsel fees. |
(4) | “Liability” means the obligation incurred with respect to a proceeding to pay a judgment, settlement, penalty, fine, including an excise tax assessed with respect to an employee benefit plan, or reasonable expenses. |
(5) | “Official capacity” means, when used with respect to a director, the office of director in a corporation and, when used with respect to a person other than a director as contemplated in section 7-109-107, the office in a corporation held by the officer or the employment, fiduciary, or agency relationship undertaken by the employee, fiduciary, or agent on behalf of the corporation. “Official capacity” does not include service for any other domestic or foreign corporation or other person or employee benefit plan. |
(6) | “Party” includes a person who was, is, or is threatened to be made a named defendant or respondent in a proceeding. |
(7) | “Proceeding” means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative and whether formal or informal. |
(1) | Except as provided in subsection (4) of this section, a corporation may indemnify a person made a party to a proceeding because the person is or was a director against liability incurred in the proceeding if: | ||
(a) | The person’s conduct was in good faith; and | ||
(b) | The person reasonably believed: | ||
(I) | In the case of conduct in an official capacity with the corporation, that such conduct was in the corporation’s best interests; and | ||
(II) | In all other cases, that such conduct was at least not opposed to the corporation’s best interests; and | ||
(c) | In the case of any criminal proceeding, the person had no reasonable cause to believe the person’s conduct was unlawful. | ||
(2) | A director’s conduct with respect to an employee benefit plan for a purpose the director reasonably believed to be in the interests of the participants in or beneficiaries of the plan is conduct that satisfies the requirement of subparagraph (II) of paragraph (b) of subsection (1) of this section. A director’s conduct with respect to an employee benefit plan for a purpose that the director did not reasonably believe to be in the interests of the participants in or beneficiaries of the plan shall be deemed not to satisfy the requirements of paragraph (a) of subsection (1) of this section. | ||
(3) | The termination of a proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent is not, of itself, determinative that the director did not meet the standard of conduct described in this section. | ||
(4) | A corporation may not indemnify a director under this section: | ||
(a) | In connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation; or | ||
(b) | In connection with any other proceeding charging that the director derived an improper personal benefit, whether or not involving action in an official capacity, in which proceeding the director was adjudged liable on the basis that the director derived an improper personal benefit. | ||
(5) | Indemnification permitted under this section in connection with a proceeding by or in the right of the corporation is limited to reasonable expenses incurred in connection with the proceeding. |
(1) | A corporation may pay for or reimburse the reasonable expenses incurred by a director who is a party to a proceeding in advance of final disposition of the proceeding if: | |
(a) | The director furnishes to the corporation a written affirmation of the director’s good-faith belief that the director has met the standard of conduct described in section 7-109-102; | |
(b) | The director furnishes to the corporation a written undertaking, executed personally or on the director’s behalf, to repay the advance if it is ultimately determined that the director did not meet the standard of conduct; and | |
(c) | A determination is made that the facts then known to those making the determination would not preclude indemnification under this article. | |
(2) | The undertaking required by paragraph (b) of subsection (1) of this section shall be an unlimited general obligation of the director but need not be secured and may be accepted without reference to financial ability to make repayment. | |
(3) | Determinations and authorizations of payments under this section shall be made in the manner specified in section 7-109-106. |
(1) | Unless otherwise provided in the articles of incorporation, a director who is or was a party to a proceeding may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction. On receipt of an application, the court, after giving any notice the court considers necessary, may order indemnification in the following manner: | |
(a) | If it determines that the director is entitled to mandatory indemnification under section 7-109-103, the court shall order indemnification, in which case the court shall also order the corporation to pay the director’s reasonable expenses incurred to obtain court-ordered indemnification. | |
(b) | If it determines that the director is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not the director met the standard of conduct set forth in section 7-109-102(1) or was adjudged liable in the circumstances described in section 7-109-102(4), the court may order such indemnification as the court deems proper; except that the indemnification with respect to any proceeding in which liability shall have been adjudged in the circumstances described in section 7-109-102(4) is limited to reasonable expenses incurred in connection with the proceeding and reasonable expenses incurred to obtain court-ordered indemnification. |
(1) | A corporation may not indemnify a director under section 7-109-102 unless authorized in the specific case after a determination has been made that indemnification of the director is permissible in the circumstances because the director has met the standard of conduct set forth in section 7-109-102. A corporation shall not advance expenses to a director under section 7-109-104 unless authorized in the specific case after the written affirmation and undertaking required by section 7-109-104(1)(a) and (1)(b) are received and the determination required by section 7-109-104(1)(c) has been made. | |
(2) | The determinations required by subsection (1) of this section shall be made: | |
(a) | By the board of directors by a majority vote of those present at a meeting at which a quorum is present, and only those directors not parties to the proceeding shall be counted in satisfying the quorum; or |
(b) | If a quorum cannot be obtained, by a majority vote of a committee of the board of directors designated by the board of directors, which committee shall consist of two or more directors not parties to the proceeding; except that directors who are parties to the proceeding may participate in the designation of directors for the committee. | |
(3) | If a quorum cannot be obtained as contemplated in paragraph (a) of subsection (2) of this section, and a committee cannot be established under paragraph (b) of subsection (2) of this section, or, even if a quorum is obtained or a committee is designated, if a majority of the directors constituting such quorum or such committee so directs, the determination required to be made by subsection (1) of this section shall be made: | |
(a) | By independent legal counsel selected by a vote of the board of directors or the committee in the manner specified in paragraph (a) or (b) of subsection (2) of this section or, if a quorum of the full board cannot be obtained and a committee cannot be established, by independent legal counsel selected by a majority vote of the full board of directors; or | |
(b) | By the shareholders. | |
(4) | Authorization of indemnification and advance of expenses shall be made in the same manner as the determination that indemnification or advance of expenses is permissible; except that, if the determination that indemnification or advance of expenses is permissible is made by independent legal counsel, authorization of indemnification and advance of expenses shall be made by the body that selected such counsel. |
(1) | Unless otherwise provided in the articles of incorporation: | |
(a) | An officer is entitled to mandatory indemnification under section 7-109-103, and is entitled to apply for court-ordered indemnification under section 7-109-105, in each case to the same extent as a director; | |
(b) | A corporation may indemnify and advance expenses to an officer, employee, fiduciary, or agent of the corporation to the same extent as to a director; and | |
(c) | A corporation may also indemnify and advance expenses to an officer, employee, fiduciary, or agent who is not a director to a greater extent, if not inconsistent with public policy, and if provided for by its bylaws, general or specific action of its board of directors or shareholders, or contract. |
(1) | A provision treating a corporation’s indemnification of, or advance of expenses to, directors that is contained in its articles of incorporation or bylaws, in a resolution of its shareholders or board of directors, or in a contract, except an insurance policy, or otherwise, is valid only to the extent the provision is not inconsistent with sections 7-109-101 to 7-109-108. If the articles of incorporation limit indemnification or advance of expenses, indemnification and advance of expenses are valid only to the extent not inconsistent with the articles of incorporation. |
(2) | Sections 7-109-101 to 7-109-108 do not limit a corporation’s power to pay or reimburse expenses incurred by a director in connection with an appearance as a witness in a proceeding at a time when the director has not been made a named defendant or respondent in the proceeding. |
(a) | “expenses” means reasonable expenses incurred in a proceeding, including expenses of investigation and preparation, expenses in connection with an appearance as a witness, and fees and disbursement of counsel, accountants or other experts; | |
(b) | “liability” means an obligation incurred with respect to a proceeding to pay a judgment, settlement, penalty or fine; | |
(c) | “party” includes a person who was, is, or is threatened to be made a named defendant or respondent in a proceeding; | |
(d) | “proceeding” means any threatened, pending or completed action, suit, or proceeding whether civil, criminal, administrative or investigative, and whether formal or informal. |
(a) | the person conducted himself or herself in good faith; and | |
(b) | the person reasonably believed that his or her conduct was in the corporation’s best interests; and | |
(c) | in the case of any criminal proceeding, the person had no reasonable cause to believe that his or her conduct was unlawful; and | |
(d) | if the person is or was an employee of the corporation, the person acted in the ordinary course of the person’s employment with the corporation. |
(a) | the person is or was appointed to serve at the request of the corporation as a director, officer, trustee or employee of the other company or entity in accordance with Indemnification Procedures approved by the Board of Directors of the corporation; and | ||
(b) | with respect to the matter(s) giving rise to the proceeding: | ||
(i) | the person conducted himself or herself in good faith; and |
(ii) | the person reasonably believed that his or her conduct was at least not opposed to the corporation’s best interests (in the case of a trustee of one of the corporation’s staff benefits plans, this means that the person’s conduct was for a purpose the person reasonably believed to be in the interests of the plan participants); and | ||
(iii) | in the case of any criminal proceeding, the person had no reasonable cause to believe that his or her conduct was unlawful; and | ||
(iv) | if the person is or was an employee of the other company or entity, the person acted in the ordinary course of the person’s employment with the other company or entity. |
Item 15. | Recent Sales of Unregistered Securities. |
Item 16. | Exhibits and Financial Statement Schedules. |
19 | Not applicable. |
20 | Not applicable. |
21 | Subsidiaries of the Registrant are filed herewith. |
22 | Not applicable. |
23.1 | Consent of Ryan L. Logsdon, Associate General Counsel for Great-West Life & Annuity Insurance Company is filed herewith. |
23.2 | Consent of Eversheds Sutherland (US) LLP is filed herewith. |
23.3 | Consent of Deloitte & Touche LLP is filed herewith. |
24 | Powers of Attorney for Directors Bernbach, Bienfait, Coutu, A. Desmarais, P. Desmarais, Jr., Doer, Fleming, Généreux, Louvel, Madoff, Mahon, Orr, Ryan, Jr., Selitto, Tretiak, and Walsh are filed herewith. |
25 | Not applicable. |
26 | Not applicable. |
(b) Financial Statement Schedules | |
None |
Item 17. | Undertakings. |
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY (Registrant) | |
By: | /s/ Edmund F. Murphy III |
Edmund F. Murphy III President and Chief Executive Officer of Great-West Life & Annuity Insurance Company |
Signature | Title | Date | |||
/s/ R. Jeffrey Orr | Chairman of the Board | March 27, 2019 | |||
R. Jeffrey Orr* | |||||
/s/ Edmund F. Murphy III | President and Chief Executive Officer | March 27, 2019 | |||
Edmund F. Murphy III | |||||
/s/ Andra S. Bolotin | Executive Vice President & Chief Financial Officer | March 27, 2019 | |||
Andra S. Bolotin | |||||
/s/ John L. Bernbach | Director | March 27, 2019 | |||
John L. Bernbach* | |||||
/s/ Robin Bienfait | Director | March 27, 2019 | |||
Robin Bienfait* | |||||
/s/ Marcel R. Coutu | Director | March 27, 2019 | |||
Marcel R. Coutu* | |||||
/s/ André R. Desmarais | Director | March 27, 2019 | |||
André R. Desmarais | |||||
/s/ Paul G. Desmarais, Jr. | Director | March 27, 2019 | |||
Paul G. Desmarais, Jr.* | |||||
/s/ Gary A. Doer | Director | March 27, 2019 | |||
Gary A. Doer* | |||||
/s/ Gregory J. Fleming | Director | March 27, 2019 | |||
Gregory J. Fleming* | |||||
/s/ Claude Généreux | Director | March 27, 2019 | |||
Claude Généreux* | |||||
/s/ Alain Louvel | Director | March 27, 2019 | |||
Alain Louvel* | |||||
/s/ Paula B. Madoff | Director | March 27, 2019 | |||
Paula B. Madoff |
Signature | Title | Date | |||
/s/ Paul A. Mahon | Director | March 27, 2019 | |||
Paul A. Mahon* | |||||
Director | |||||
Donald Raymond | |||||
Director | |||||
Robert L. Reynolds | |||||
/s/ T. Timothy Ryan, Jr. | Director | March 27, 2019 | |||
T. Timothy Ryan, Jr.* | |||||
/s/ Jerome J. Selitto | Director | March 27, 2019 | |||
Jerome J. Selitto* | |||||
/s/ Gregory D. Tretiak | Director | March 27, 2019 | |||
Gregory D. Tretiak* | |||||
/s/ Brian E. Walsh | Director | March 27, 2019 | |||
Brian E. Walsh* | |||||
*By: | /s/ Ryan L. Logsdon | *Attorney-in-fact pursuant to Power of Attorney | March 27, 2019 | ||
Ryan L. Logsdon |