Table of Contents
Registration No. 333-217293
• | 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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A-1 |
• | The “Contract” is the Great-West SecureFoundation Group Fixed Deferred Contract issued by Great-West Life & Annuity Insurance Company. |
• | “We,” “us,” “our,” “Great-West,” or the “Company” means Great-West Life & Annuity Insurance Company. |
• | “Covered Person” or “Covered Persons” means the person or persons, respectively, named in the Contract whose age is used for certain important purposes under the Contract, including determining the amount of the guaranteed income that may be provided by the Contract. The GLWB Participant must be a Covered Person. |
• | “Covered Fund” or “Covered Funds” refer to the Great-West SecureFoundation® Lifetime 2020 Fund, Great-West SecureFoundation® Lifetime 2025 Fund, Great-West SecureFoundation® Lifetime 2030 Fund, Great-West SecureFoundation® Lifetime 2035 Fund, Great-West SecureFoundation® Lifetime 2040 Fund, Great-West SecureFoundation® Lifetime 2045 Fund, Great-West SecureFoundation® Lifetime 2050 Fund, Great-West SecureFoundation® Lifetime 2055 Fund, Great-West SecureFoundation® Lifetime 2060 Fund and the Great-West SecureFoundation® Balanced Fund. The Covered Funds are not issued by Great-West. Great-West Funds, Inc. is the issuer of the Covered Funds and is an affiliate of Great-West. |
• | The maximum Guarantee Benefit Fee, as a percentage of a GLWB Participant’s Covered Fund Value, on an annual basis, is 1.5%. |
• | The minimum Guarantee Benefit Fee, as a percentage of a GLWB Participant’s Covered Fund Value, on an annual basis, is 0.70%. |
• | The current Guarantee Benefit Fee, as a percentage of a GLWB Participant’s Covered Fund Value, on an annual basis, is 0.90%. |
• | longevity risk, which is the risk that a GLWB Participant will outlive the assets invested in the Covered Fund; and |
• | income volatility risk, which is the risk of downward fluctuations in a GLWB Participant’s retirement income due to changes in market performance. |
• | The Accumulation Phase:During the Accumulation Phase, the GLWB Participant may make additional Contract Contributions to the Covered Fund, which establishes the Benefit Base (this is the sum of all Contract Contributions minus any withdrawals and any adjustments made on the “Ratchet Date” as described later in this prospectus), and take Distributions from the Account just as the GLWB Participant otherwise would be permitted to (although Excess Withdrawals will reduce the amount of the Benefit Base under the Contract). The GLWB Participant is responsible for managing withdrawals during the Accumulation Phase. |
• | The GAW Phase:After the GLWB Participant (or if there are joint Covered Persons, the younger joint Covered Person) has turned age 55, then the GLWB Participant can enter the GAW Phase and begin to take GAWs (which are annual withdrawals that do not exceed a specified amount) without reducing the Benefit Base. GAWs before age 59 1⁄2 may result in certain tax penalties, and may not be permissible in certain circumstances. |
• | Settlement Phase:If the Covered Fund Value falls to zero as a result of Covered Fund performance, the Guarantee Benefit Fee, certain other fees that are not directly associated with the GLWB or Contract (e.g.,custodian fees or advisory fees), and/or GAWs, the Settlement Phase will begin. During the Settlement Phase, we make Installments to the GLWB Participant for life. However, the Settlement Phase may never occur, depending on how long the GLWB Participant lives and how well the Covered Fund performs. |
Great-West SecureFoundation® Lifetime 2020 Fund |
Great-West SecureFoundation® Lifetime 2025 Fund |
Great-West SecureFoundation® Lifetime 2030 Fund |
Great-West SecureFoundation® Lifetime 2035 Fund |
Great-West SecureFoundation® Lifetime 2040 Fund |
Great-West SecureFoundation® Lifetime 2045 Fund |
Great-West SecureFoundation® Lifetime 2050 Fund |
Great-West SecureFoundation® Lifetime 2055 Fund |
Great-West SecureFoundation® Lifetime 2060 Fund |
Great-West SecureFoundation® Balanced Fund |
• | If the Plan Sponsor selects a new record keeper, the GLWB Participant may lose the entire benefit.Currently, the Contracts are only offered to Plan Sponsors of Retirement Plans that select Great-West as their record keeper. If the Plan Sponsor elects a new record keeper, it is likely that this will result in the termination of the Contract and the GLWB Participant will lose the entire benefit unless the GLWB Participant has already reached Settlement Phase. The Guarantee Benefit Fee will not be refunded. |
• | The Plan Sponsor may cancel the Contract or remove the Covered Funds.The GLWB is an investment option offered by the Retirement Plan and is contingent on the Retirement Plan offering one or more of the Covered Funds. The Plan Sponsor may elect to cancel the Contract at any time or remove the Covered Funds from the Retirement Plan’s investment options. If the Plan Sponsor takes either of these actions, the GLWB Participant will lose the entire benefit unless the GLWB Participant has already reached Settlement Phase. The Guarantee Benefit Fee will not be refunded. |
• | The GLWB Participant may die before receiving payments from us or may not live long enough to receive enough income to exceed the amount of the Guarantee Benefit Fees paid.If the GLWB Participant (assuming he is the sole Covered Person) dies before the Covered Fund Value is reduced to zero, the GLWB Participant will never receive any payments under the Contract. Neither the Contract nor the GLWB has any cash value or provides a death benefit. Furthermore, even if the GLWB Participant begins to receive Installments in the Settlement Phase, the GLWB Participant may die before receiving an amount equal to or greater than the amount paid in Guarantee Benefit Fees. |
• | The Covered Funds may perform well enough so that the GLWB Participant may not need the guarantee that may otherwise be provided by the Contract.The Covered Funds are managed by a registered investment adviser, Great-West Capital Management, LLC (“GWCM”), a wholly owned subsidiary of Great-West. GWCM manages the Great-West SecureFoundation® Lifetime Funds to become more conservative as time goes on, which may minimize the likelihood that the GLWB Participant will experience a significant loss of capital at an advanced age. GWCM also has the flexibility to manage the Great-West SecureFoundation® Balanced Fund conservatively. Therefore, there is a good chance that the Covered Funds will perform well enough that GAWs will not reduce Covered Fund Value to zero. As a result, the likelihood that we will make payments to the GLWB Participant is minimal. In this case, the GLWB Participant will have paid us the Guarantee Benefit Fee for the life of the GLWB and received no payments in the Settlement Phase in return. |
• | The GLWB Participant may need to make Excess Withdrawals, which have the potential to substantially reduce or even terminate the benefits available under the Contract.Because personal financial needs can arise unpredictably (e.g., unexpected medical bills), the GLWB Participant may need to make a withdrawal from a Covered Fund before the start of the GAW Phase or following the start of the GAW Phase in an amount larger than the GAW. These types of withdrawals are Excess Withdrawals that will reduce or eliminate the guarantee that may otherwise be provided by the Contract. There is no provision under the Contract to cure any decrease in the benefits due to Excess Withdrawals. To avoid making Excess Withdrawals, the GLWB Participant will need to carefully manage any withdrawals. The Contract does not require us to warn the GLWB Participant of Excess Withdrawals or other actions with adverse consequences. |
• | The GLWB Participant may choose to cancel the GLWB prior to a severe market downturn.The GLWB is designed to protect the GLWB Participant from outliving the assets in the Covered Fund. If the GLWB Participant terminates the GLWB before reaching the GAW Phase or Settlement Phase, we will not make payments to the GLWB Participant, even if subsequent Covered Fund performance reduces the Covered Fund Value to zero. |
• | The GLWB Participant might not begin making GAWs at the most financially beneficial time.Because of decreasing life expectancy as one ages, in certain circumstances, the longer the GLWB Participant waits to start taking GAWs, the less likely it is that the GLWB Participant will benefit from the GLWB. On the other hand, the earlier the GLWB Participant begins taking GAWs, the lower the GAW Percentage the GLWB Participant will receive and therefore the lower the GAWs (if any) will be. Because of the uncertainty of how long the GLWB Participant will live and how the GLWB Participant’s investments will perform over time, it will be difficult to determine the most financially beneficial time to begin making GAWs. |
• | If the GLWB Participant moves his assets out of the Retirement Plan, the GLWB Participant may never receive a benefit from the GLWB.The GLWB is currently available to participants in certain Section 403(b) Plans. The Contract is entered into by the Plan Sponsor. If the GLWB Participant moves his assets out of the Retirement Plan, such as by a full distribution of all of the assets in the Plan, or moves to an IRA provider that does not offer the GLWB, the GLWB Participant will cause the GLWB to terminate. In that case, the GLWB Participant may never receive a benefit from the GLWB, and the Guarantee Benefit Fee will not be refunded. See“IRA Rollovers,”below for further information on how to maintain the Benefit Base after an IRA rollover. |
• | We reserve the right to increase the Guarantee Benefit Fee at any time.If we increase the Guarantee Benefit Fee, then depending upon how long the GLWB Participant lives, the GLWB Participant may not receive enough income to exceed the amount of total fees paid. |
• | The deduction of the Guarantee Benefit Fee each month will negatively affect the growth of the Covered Fund Value.The growth of the Plan account value is likely important to the GLWB Participant because the GLWB Participant may never receive Installments during Settlement Phase. Therefore, depending on how long the GLWB Participant lives and how other investment options available to the GLWB Participant under the Retirement Plan perform, the GLWB Participant may be financially better off without electing the Covered Funds and GLWB. |
• | The Contract limits the GLWB Participant’s investment choices.Only certain funds are available under the Contract. These Covered Funds may be managed in a more conservative fashion than other mutual funds available to the GLWB Participant. If the GLWB Participant does not elect the GLWB, it is possible that the GLWB Participant may invest under the Retirement Plan in other mutual funds (or other types of investments) that experience higher growth or lower losses, depending on the market, than the Covered Funds experience. It is impossible to know how various investments will fare on a comparative basis. |
• | Covered Funds may become ineligible. If the Covered Fund that the GLWB Participant invests in becomes ineligible for the Contract, the GLWB Participant must Transfer the Covered Fund Value to another Covered Fund in order to keep the Contract in force. We reserve the right to designate Covered Funds that were previously eligible for use with the Contract as ineligible for use with the Contract, for any reason including due to changes to their investment objectives. In the event that all Covered Funds become ineligible or are liquidated, we will designate a new fund as a Covered Fund. The new Covered Fund may have higher fees and charges and different investment objectives/strategies than the ineligible Covered Fund. In addition, designating a new fund as a Covered Fund may result in an increase in the current Guarantee Benefit Fee, which will not exceed the maximum Guarantee Benefit Fee of 1.5%. The Guarantee Benefit Fee will not be refunded if the Covered Funds become ineligible or are liquidated. |
• | We may terminate the Contract upon 75 days written notice to the Contract Owner.If we terminate the Contract, such termination will not adversely affect the GLWB Participant’s rights under the Contract, except that we will not permit additional Contributions to the Covered Fund. However, we will accept reinvested dividends and capital gains. The GLWB Participant will still be obligated to pay the Guarantee Benefit Fee. |
• | The Contract will terminate if the Guaranteed Benefit Fee is not paid.If we do not receive the Guarantee Benefit Fee (except during the Settlement Phase), including as a result of the failure of the Retirement Plan custodian to submit it to us, the Contract will terminate as of the date that the fee is due. |
• | The Contract is novel and innovative and, to date, the tax consequences of the GLWB have not been addressed in published legal authorities. A prospective GLWB Participant should consult a tax advisor before electing the Covered Funds and GLWB. See “Taxation of the Contract and GLWB,” below for further discussion of tax issues relating to the GLWB. |
• | You should be aware of various regulatory protections that do and do not apply to the Contract. The Contract is registered in accordance with the Securities Act of 1933. The issuance and sale of the Contract must be conducted in accordance with the requirements of the Securities Act of 1933. |
• | We have elected to rely on the exemption provided by Rule 12h-7 under the Securities Exchange Act of 1934 (“1934 Act”) from the requirements to file reports pursuant to Section 15(d) of that Act. In reliance on that exemption, Great-West Life & Annuity Insurance Company will not file the periodic reports that would otherwise be required under the 1934 Act. Annual Audited Financial Statements and other information regarding the Company required by the Securities Act of 1933 will be provided annually in this prospectus. |
• | We are neither an investment company nor an investment adviser and do not provide investment advice in connection with the Contract. Therefore, we are not governed by the Investment Advisers Act of 1940 (the “Advisers Act”) or the Investment Company Act of 1940 (the “1940 Act”). Accordingly, the protections provided by the Advisers Act and the 1940 Act are not applicable with respect to our sale of the Contract. |
Great-West SecureFoundation® Lifetime 2020 Fund |
Great-West SecureFoundation® Lifetime 2025 Fund |
Great-West SecureFoundation® Lifetime 2030 Fund |
Great-West SecureFoundation® Lifetime 2035 Fund |
Great-West SecureFoundation® Lifetime 2040 Fund |
Great-West SecureFoundation® Lifetime 2045 Fund |
Great-West SecureFoundation® Lifetime 2050 Fund |
Great-West SecureFoundation® Lifetime 2055 Fund |
Great-West SecureFoundation® Lifetime 2060 Fund |
• | Weincreasethe GLWB Participant’s Benefit Base on a dollar-for-dollar basis each time the GLWB Participant makes a Contribution. |
• | Wedecreasethe GLWB Participant’s Benefit Base on a proportionate basis each time the GLWB Participant makes an Excess Withdrawal. |
• | On each Ratchet Date (described below), we willincreasethe GLWB Participant’s Benefit Base to equal the GLWB Participant’s current Covered Fund Value if the GLWB Participant ‘s Covered Fund Value is greater than the GLWB Participant’s Benefit Base. (If so, the GLWB Participant’s Benefit Base will then reflect positive Covered Fund performance.) |
• | The Benefit Base is used only for purposes of calculating the GLWB Participant’s Installment Payments during the GAW Phase and the Settlement Phase. It has no other purpose. The Benefit Base does not provide and is not available as a cash value or settlement value. |
• | It is important that the GLWB Participant does not confuse the Benefit Base with the Covered Fund Value. |
• | During the Accumulation Phase and the GAW Phase, the Benefit Base will be re-calculated each time the GLWB Participant makes a Contract Contribution or Excess Withdrawal, as well as on an annual basis as described below, which is known as the Ratchet Date. |
• | The maximum Benefit Base is $5,000,000. |
(a) | the current Benefit Base; or |
(b) | the current Covered Fund Value. |
• | become a new GLWB Participant and maintain the deceased GLWB Participant’s current Benefit Base (or proportionate share if multiple Beneficiaries) as of the date of death; or |
• | establish a new Account with a new Benefit Base based on the current Covered Fund Value on the date of the deceased GLWB Participant’s death. |
(a) | the current Benefit Base; or |
(b) | the current Covered Fund Value. |
Sole Covered Person | Joint Covered Person | |
4.0% for life at ages 55-64 | 3.5% for youngest joint life at ages 55-64 | |
5.0% for life at ages 65-69 | 4.5% for youngest joint life at ages 65-69 | |
6.0% for life at ages 70-79 | 5.5% for youngest joint life at ages 70-79 | |
7.0% for life at ages 80+ | 6.5% for youngest joint life at ages 80+ |
(a) | Annual– the GAW will be paid on the Initial Installment Date and each anniversary annually, or next business day, thereafter. |
(b) | Semi-Annual– half of the GAW will be paid on the Initial Installment Date and in Installments every 6 month anniversary, or next business day, thereafter. |
(c) | Quarterly– one quarter of the GAW will be paid on the Initial Installment Date and in Installments every 3 month anniversary, or next business day, thereafter. |
(d) | Monthly– one-twelfth of the GAW will be paid on the Initial Installment Date and in Installments every monthly anniversary, or next business day, thereafter. |
• | GLWB Participant information: |
• | $100,000 Benefit Base |
• | GAWs start at age 62: GAW% at 5% |
• | Vested % at age 62: 50% |
• | Vested % at age 63: 60% |
• | Vested % at age 64: 70% |
• | Guaranteed Annual Withdrawal = Benefit Base x Vested % x GAW % |
• | Age 62 (when GAWs start): $100,000 x 50% x 5% = $2,500 |
• | Age 63 (on next Ratchet Date): $100,000 x 60% x 5% = $3,000 |
• | Age 64 (on next Ratchet Date): $100,000 x 70% x 5% = $3,500 |
• | GLWB Participant information: |
• | $100,000 Benefit Base |
• | $60,000 Covered Fund Value |
• | GAWs start at age 62: 5% |
• | Vested % at age 62: 50% |
• | When GAWs start: |
• | Unvested Covered Fund Value is returned to Plan’s forfeiture account |
• | Unvested Covered Fund Value: 0.50% x $60,000 = $30,000 |
• | Note: Covered Fund Value is reduced by 50% |
• | Benefit Base is adjusted proportionately to Covered Fund Value reduction: |
• | Benefit Base Adjustment: 0.50% x $100,000 = $50,000 |
• | Note: New Benefit Base is $50,000 |
• | GAWs start based on new Benefit Base: |
• | GAW = 5% x $50,000 = $2,500 |
If | (Attained Age GAW%) x (Covered Fund Value as of Ratchet Date)is greater than (Current GAW%) x (Current Benefit Base) |
Then | (Attained Age GAW%) x (Covered Fund Value as of Ratchet Date)becomes new GAW and (Covered Fund Value) = (New Benefit Base) |
Benefit Base = $100,000
GAW%: 5%
GAW Amount = $100,000 x 5% = $5,000
Total annual withdrawal: $10,000
So,
Excess Withdrawal = $10,000– $5,000 = $5,000
Covered Fund Valueafter GAW = $55,000– $5,000 = $50,000
Covered Fund Valueafter Excess Withdrawal = $50,000– $5,000 = $45,000
Covered Fund Value Adjustment due to Excess Withdrawal = $45,000/$50,000 = 0.90
Adjusted Benefit Base = $100,000 x 0.90 = $90,000
Adjusted GAW Amount (assuming no Benefit Base increase on succeeding Ratchet Date) = $90,000 x 5% = $4,500
• | All Contract Contributions are assumed to be at the end of the year and occur immediately before the next Ratchet Date. |
• | All withdrawals are assumed to be at the beginning of the year and occur on the Ratchet Date. |
• | All GLWB Participants are assumed to be fully vested. |
• | All positive investment performance of the Covered Fund is assumed to be net of investment management fees. |
• | In all of the examples, the GLWB Participant has access to his Covered Fund Value until it is depleted: |
• | If the GLWB Participant dies before the Covered Fund Value is depleted, the remaining Covered Fund Value would be available to beneficiaries. |
• | If the GLWB Participant needs to take a withdrawal in excess of the GLWB Participant’s GAW, the GLWB Participant may take up to the Covered Fund Value, which will be considered an Excess Withdrawal. |
• | Sole Covered Person |
• | Initial Covered Fund Value: $500,000 |
• | GAW Percent: 5% |
• | GAW Amount: $500,000 x 5% = $25,000 |
• | Guarantee Benefit Fee: 0.90% |
• | Changes in Covered Fund Value (net of investment management fees): |
• | Year 1: -10%, Year 2: -10%, Years 3+: 5% |
• | The GLWB Participant annually withdraws $25,000 from the GLWB Participant’s Covered Fund until about age 87 when the Covered Fund is depleted: |
• | At age 87 the GLWB Participant’s Covered Fund Value is $9,474. |
• | The GLWB Participant withdraws the $9,474 which depletes the Covered Fund and the GLWB Participant is now in Settlement Phase. |
• | We provide the remaining $15,526 necessary to make the Installment of $25,000. |
• | We continue to pay Installments of $25,000 each year for the GLWB Participant’s life. |
• | Sole Covered Person |
• | Initial Covered Fund Value: $500,000 |
• | GAW Percent: 5% |
• | Guarantee Benefit Fee: 0.90% |
• | Changes in Covered Fund Value (net of investment management fees): |
• | Years 1 through 7: 5%, Years 8 through 11: -10%, Years 12+: 5% |
• | Positive Covered Fund performance through year 7 results in a Covered Fund Value of $662,407 on the Ratchet Date. |
• | The GLWB Participant’s Benefit Base Ratchets to $662,407. |
• | Covered Fund Value at the beginning of year 10 is $468,552, but GAWs are based on the Benefit Base, which is $662,407. |
• | GAWs are $662,407 x 5% = $33,120. |
• | The GLWB Participant annually withdraws $33,120 from the GLWB Participant’s Covered Fund until about age 81 when the Covered Fund is depleted: |
• | At age 81, the GLWB Participant’s Covered Fund Value is $13,326. |
• | The GLWB Participant withdraws the $13,326 which depletes the Covered Fund and the GLWB Participant is now in Settlement Phase. We provide the remaining $19,794 necessary to make the Installment $33,120. |
• | We continue to pay Installments of $33,120 each year for the GLWB Participant’s life. |
• | Sole Covered Person |
• | Initial Covered Fund Value: $500,000 |
• | Additional Annual Contract Contributions until GAWs Begin: $2,500 |
• | GAW Percent: 5% |
• | Guarantee Benefit Fee: 0.90% |
• | Changes in Covered Fund Value (net of investment management fees): |
• | Years 1 through 10: -5%, Years 11+: 5% |
• | Poor Covered Fund performance in years 1 through 10 results in a Covered Fund Value of $291,493 at the end of year 10. |
• | The GLWB Participant’s Benefit Base at the end of year 10 is $525,000 as a result of the additional Contract Contributions in years 1 through 10. |
• | GAWs are $525,000 x 5% = $26,250. |
• | The GLWB Participant annually withdraws $26,250 from the GLWB Participant’s Covered Fund until about age 79 when the Covered Fund is depleted: |
• | At age 79, the GLWB Participant’s Covered Fund Value is $8,316. |
• | The GLWB Participant withdraws the $8,316 which depletes the Covered Fund and the GLWB Participant is now in Settlement Phase. We provide the remaining $17,934 necessary to make the Installment $26,250. |
• | We continue to pay Installments of $26,250 each year for the GLWB Participant’s life. |
(i) | maintaining the current proportionate Benefit Base of the previous GLWB Participant; or |
(ii) | establishing a new Benefit Base based on the current Covered Fund Value on the date his or her Account is established and he or she will continue as a GLWB Participant. |
• | Income for Single Life Only |
• | Income for Single Life with Guaranteed Period |
• | Income for Joint Life Only |
• | Income for Joint Life with Guaranteed Period |
• | Income for a Specific Period |
• | Any other form of annuity payment permitted under the Retirement Plan, if acceptable to Great-West. |
(a) | the GLWB Participant may elect a direct rollover of the Covered Fund Value to an IRA that offers a Great-West approved GLWB feature, if available. In this situation, the Benefit Base and GAW, if applicable, will be retained as of the date of Distribution from the Covered Fund(s) and will apply to the new GLWB feature. |
(b) | the GLWB Participant may choose to transfer the Covered Fund Value to any investment vehicle that does not offer a GLWB feature or to an investment vehicle that offers a GLWB feature, but does not permit the GLWB Participant to apply the Benefit Base and GAW to such feature. In this situation, the Benefit Base and GAW, if applicable, will be reduced to zero as of the date of the Distribution from the Covered Fund(s). |
• | A GLWB is intended for purchase only by an employee participating in a Section 403(b) Retirement Plan. |
• | We are not responsible for determining whether a GLWB complies with the terms and conditions of, or applicable law governing, the Retirement Plan. You are responsible for making that determination. Similarly, unless otherwise agreed, we are not responsible for administering any applicable tax or other legal requirements applicable to the Retirement Plan. The Plan Sponsor, the GLWB Participant or a service provider for the Retirement Plan is responsible for determining that distributions, beneficiary designations, investment restrictions, charges and other transactions under a GLWB are consistent with the terms and conditions of the Retirement Plan and applicable law. |
• | Among other things, if the Retirement Plan is subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), you should consider how the GLWB will be treated under the ERISA qualified joint and survivor annuity and qualified pre-retirement survivor annuity rules and, if applicable, make provision for complying with those rules in the governing documents and procedures of the Retirement Plan. Guidance published by the Internal Revenue Service on February 21, 2012, may suggest that the GLWB will be treated as an annuity for purposes of those rules. |
• | If the GLWB Participant’s spouse is a joint Covered Person, that spouse must be the GLWB Participant’s sole beneficiary under the Retirement Plan. |
• | The GLWB Participant’s Account is subject to required minimum distribution rules. Withdrawals during the GAW Phase from the Covered Fund Value taken to meet required minimum distribution requirements, in the proportion of the GLWB Participant’s Covered Fund Value to the overall Account balance (and not taking into account any other retirement balances of the GLWB Participant), will be deemed to be within the contract limits for the GLWB and will not be treated as Excess Withdrawals. The required minimum distribution shall not exceed the required minimum distribution amount calculated under the Code and regulations issued thereunder as in effect on the Election Date. In the event of a dispute about the required minimum distribution amount, our determination will govern. In some circumstances, compliance with the minimum distribution rules may affect the amount and timing of Installments pursuant to the GLWB. |
• | We generally are required to confirm, with the Plan Sponsor or otherwise, that surrenders or transfers requested by GLWB Participants comply with applicable tax requirements and to decline requests that are not in compliance. We will defer such payments requested by GLWB Participants until all information required under the tax law has been received. By requesting a surrender or transfer, a GLWB Participant consents to the sharing of confidential information about the GLWB Participant, the Contract and Certificate, and transactions under the Contract, the GLWB and any other 403(b) contracts or accounts the GLWB Participant has under the Retirement Plan among us, the employer or Plan Sponsor, any Plan administrator or recordkeeper, and other product providers. |
• | The Retirement Plan can be terminated, or the availability of the GLWB under the Retirement Plan otherwise discontinued by persons other than the GLWB Participant. |
Annuity Administration
(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. |
• | Great-West SecureFoundation® Balanced Fund |
• | Great-West SecureFoundation® Lifetime Funds |
• | Any other fund as approved by Great-West for the Contract and Certificate. |
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
Index to Financial Statements, Notes, and Schedules
Page Number | ||
3 | ||
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 | 5 | |
7 | ||
8 | ||
9 | ||
11 | ||
11 | ||
20 | ||
21 | ||
23 | ||
32 | ||
36 | ||
36 | ||
36 | ||
37 | ||
37 | ||
Note 11 - Liability for Unpaid Claims and Claim Adjustment Expenses | 39 | |
40 | ||
40 | ||
Note 14 - Capital and Surplus, Dividend Restrictions, and Other Matters | 43 | |
44 | ||
50 | ||
54 | ||
58 | ||
58 | ||
58 | ||
59 |
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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 each of the three years in the period ended December 31, 2018, 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 each of the three years in the period ended December 31, 2018.
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 each of the three years in the period ended December 31, 2018 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
3
Table of Contents
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
4
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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 | ||||||
|
|
|
|
|
| |||
Total cash and invested assets | 30,035,357 | 28,848,885 | ||||||
|
|
|
|
|
| |||
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 | ||||
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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 | ||||||
|
|
|
|
|
| |||
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 | ) | |||||
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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 | ||||||||||
|
|
|
|
| ||||||||
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 | |||||||||
|
|
|
|
| ||||||||
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 | ) | ||||||||
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Statutory net income | $ | 315,500 | $ | 170,018 | $ | 100,657 | ||||||
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|
|
See notes to statutory financial statements.
7
Table of Contents
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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|
|
|
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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.
8
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 | ||||||||||
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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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|
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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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|
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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 |
10
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. |
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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 |
12
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.
13
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.
14
Table of Contents
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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Table of Contents
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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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 | ||||||||
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Total | $ | 50,107 | $ | 67,355 | ||||||||
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(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 | ||||||||
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Total | $ | 41,735 | $ | 52,081 | ||||||||
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(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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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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Total bonds | $ | 19,944,862 | $ | 933,420 | $ | 100,739 | $ | 20,777,543 | ||||||||
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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.
23
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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| |||||||
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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| |||||||
Total bonds | $ | 3,468,145 | $ | 29,588 | $ | 2,552,518 | $ | 103,889 | $ | 6,020,663 | $ | 133,477 | ||||||||||||
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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.
24
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.
25
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 | |||||||||
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| ||||
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 | |||||||||
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| ||||
Total derivatives not designated as hedges | 1,595,362 | 20,932 | 11,594 | |||||||||
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| ||||
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.
26
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) | |||||||||
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| ||||
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) | |||||||||
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| ||||
Total derivatives not designated as hedges | 1,379,129 | (21,900) | (25,043) | |||||||||
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| ||||
Total cash flow hedges and derivatives not designated as hedges | $ | 2,567,989 | $ | (17,190) | $ | (27,676) | ||||||
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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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| ||||||
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.
27
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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| �� |
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.
28
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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29
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% |
30
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% | |||
|
| |||
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% | |||
|
|
31
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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32
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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|
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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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|
|
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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.
33
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.
34
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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|
|
|
|
|
|
|
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|
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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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|
|
|
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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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|
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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.
35
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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|
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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
36
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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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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39
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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42
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
43
Table of Contents
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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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
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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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
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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46
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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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47
Table of Contents
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, |
| |||||||||||
| 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, |
| |||||||||||
| 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.
48
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
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.
49
Table of Contents
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.
50
Table of Contents
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
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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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
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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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
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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GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
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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