The Schwab Fixed Annuity(R)
A flexible premium deferred fixed annuity
Distributed by
Charles Schwab & Co., Inc.
Issued by
Great-West Life & Annuity Insurance Company
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Overview
This Prospectus describes The Schwab Fixed Annuity--a flexible premium deferred
annuity contract which allows you to accumulate assets on a tax-deferred basis
for retirement or other long-term purposes. This Contract is issued either on a
group basis or as individual contracts by Great-West Life & Annuity Insurance
Company (we, us, the Company, Great-West or GWL&A) - both will be referred to as
the "Contract" throughout this prospectus. How to Invest The minimum initial
investment (a "Contribution") is:
o $5,000
o $2,000 if an IRA
o $1,000 if subsequent Contributions are made via Automatic Contribution Plan
The minimum subsequent Contribution is:
o $500 per Contribution
o $100 per Contribution if made via Automatic Contribution Plan
Allocating Your Money
You can allocate the money you contribute to the Guarantee Period Fund. The
Guarantee Period Fund allows you to select one or more Guarantee Periods that
offer specific interest rates for a specific period. Please note that the
Contract may not be available in all states.
You may be subject to a Market Value Adjustment which may increase or decrease
the amount Transferred or withdrawn from the value of a Guarantee Period if the
Guarantee Period is broken prior to the Guarantee Period Maturity Date. A
negative adjustment may result in an effective interest rate lower than the
stated rate of interest for the applicable Guarantee Period and the Contractual
Guarantee of a Minimum Rate of Interest and the value of the Contribution(s)
allocated to the Guarantee Period Fund being less than the Contribution(s) made.
Sales and Surrender Charges
A maximum Surrender Charge of three percent may be applicable for amounts
withdrawn in the first three years. Free Look Period After you receive your
Contract, you can look it over free of obligation for at least 10 days or longer
if required by your state law (up to 35 days for replacement policies), during
which you may cancel your Contract. Payout Options The Schwab Fixed Annuity
offers a variety of annuity payout and periodic withdrawal options. Depending on
the option you select, income can be guaranteed for your lifetime, your spouse's
and/or beneficiaries' lifetime or for a specified period of time.
The Contracts are not deposits of, or guaranteed or endorsed by any bank, nor
are the Contracts federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency. The
Contracts involve certain investment risks, including possible loss of
principal.
For account information, please contact:
Annuity Administration Department
P.O. Box 173920
Denver, Colorado 80217-3920
800-838-0650
This prospectus presents important information you should review before
purchasing The Schwab Fixed Annuity. Please read it carefully and keep it for
future reference. You may obtain a copy without charge by contacting the Annuity
Administration Department at the above address or phone number. Or, you can
obtain it by visiting the Securities and Exchange Commission's web site at
www.sec.gov. This web site also contains other information about us that has
been filed electronically.
Neither the Securities and Exchange Commission nor any state securities
departments has approved or disapproved these securities or passed upon the
accuracy or adequacy of the Prospectus. Any representation to the contrary is a
criminal offense. No person is authorized by Great-West to give information or
to make any representation, other than those contained in this Prospectus, in
connection with the offers contained in this Prospectus. This Prospectus does
not constitute an offering in any jurisdiction in which such offering may not
lawfully be made. Please read this Prospectus and keep it for future reference.
The date of this Prospectus is May 1, 2001.
1
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Table of Contents
Definitions...............................................4
Summary...................................................6
How to contact Schwab..................................6
Fee Table.................................................7
Great-West Life & Annuity Insurance
Company...................................................8
The Guarantee Period Fund.................................8
Investments of the Guarantee Period Fund...............8
Subsequent Guarantee Periods...........................9
Breaking a Guarantee Period............................9
Interest Rates.........................................9
Market Value Adjustment................................9
Application and Initial Contributions....................10
Free Look Period.........................................10
Subsequent Contributions.................................10
Annuity Account Value....................................10
Transfers................................................10
Possible Restrictions.................................11
Cash Withdrawals.........................................11
Withdrawals to Pay Investment Manager or
Financial Advisor Fees................................11
Tax Consequences of Withdrawals.......................11
Telephone Transactions...................................12
Death Benefit............................................12
Beneficiary...........................................12
Distribution of Death Benefit.........................13
Charges and Deductions...................................13
Transfer Fees.........................................13
Premium Tax...........................................13
Other Taxes...........................................13
Payout Options...........................................14
Periodic Withdrawals..................................14
Periodic Withdrawal Payout Options....................15
Annuity Payout Information...............................15
Annuity IRAs..........................................16
Seek Tax Advice..........................................16
Federal Tax Matters......................................16
Taxation of Annuities.................................16
Individual Retirement Annuities.......................18
Assignments or Pledges...................................19
Distribution of the Contracts............................19
Selected Financial Data..................................20
Management's Discussion and Analysis of
Financial Conditions and Results of Operations 20
Rights Reserved by Great-West............................41
Legal Proceedings........................................41
Legal Matters............................................41
Experts..................................................41
Available Information....................................41
Appendix A--Market Value Adjustments.....................42
Consolidated Financial Statements and Independent
Auditor's Report 45
This Prospectus does not constitute an offering in any jurisdiction in which
such offering may not lawfully be made. No dealer, salesperson or other person
is authorized to give any information or make any representations in connection
with this offering other than those contained in this Prospectus, and, if given
or made, such other information or representations must not be relied on.
The Contract is not available in all states.
Definitions
1035 Exchange--A provision of the Internal Revenue Code of 1986, as amended,
(the "Code") that allows for the tax-free exchange among certain types of
insurance contracts.
Accumulation Period--The time period between the Effective Date and the Annuity
Commencement Date. During this period, you're contributing to the annuity.
Annuitant--The person named in the application upon whose life the payout of an
annuity is based and who will receive annuity payouts. If a Contingent Annuitant
is named, the Annuitant will be considered the Primary Annuitant.
Annuity Account--An account established by us in your name that reflects all
account activity under your Contract. Annuity Account Value--The sum of the
value of all Guarantee Periods credited to your Annuity Account--less partial
withdrawals, amounts applied to an annuity payout option, periodic withdrawals,
charges deducted under the Contract, and Premium Tax, if any.
Annuity Commencement Date--The date annuity payouts begin.
Annuity Individual Retirement Account (or Annuity IRA)--An annuity contract used
in a retirement savings program that is intended to satisfy the requirements of
Section 408 of the Code.
Annuity Payout Period--The period beginning on the Annuity Commencement Date and
continuing until all annuity payouts have been made under the Contract. During
this period, the Annuitant receives payouts from the annuity.
Automatic Contribution Plan--A feature which allows you to make automatic
periodic Contributions. Contributions will be withdrawn from an account you
specify and automatically credited to your Annuity Account.
Beneficiary--The person(s) designated to receive any Death Benefit under the
terms of the Contract.
Contingent Annuitant--The person you may name in the application who becomes the
Annuitant when the Primary Annuitant dies. The Contingent Annuitant must be
designated before the death of the Primary Annuitant.
Contributions--The amount of money you invest or deposit into your annuity.
Death Benefit--The amount payable to the Beneficiary when the Owner or the
Annuitant dies.
Effective Date--The date on which the first Contribution is credited to your
Annuity Account.
Fixed Account Value--The value of the fixed investment option credited to you
under the Annuity Account
Guarantee Period--The number of years available in the Guarantee Period Fund
during which Great-West will credit a stated rate of interest. Great-West may
discontinue offering a period at any time for new Contributions. Amounts
allocated to one or more guaranteed periods may be subject to a Market Value
Adjustment.
Guarantee Period Fund--A fixed investment option which pays a stated rate of
interest for a specified time period.
Guarantee Period Maturity Date--The last day of any Guarantee Period.
Guaranteed Interest Rate--The minimum annual interest rate in effect that
applies to each Guarantee Period at the time the Contribution is made.
Market Value Adjustment (or MVA)--An amount added to or subtracted from certain
transactions involving the Guarantee Period Fund to reflect the impact of
changing interest rates.
Non-Qualified Annuity Contract--An annuity contract funded with money outside a
tax qualified retirement plan.
Owner (Joint Owner) or You--The person(s) named in the application who is
entitled to exercise all rights and privileges under the Contract, while the
Annuitant is living. Joint Owners must be husband and wife as of the date the
Contract is issued. The Annuitant will be the Owner unless otherwise indicated
in the application. If a Contract is purchased in an IRA, the Owner and the
Annuitant must be the same individual and a Joint Owner is not allowed.
Payout Commencement Date--The date on which annuity payouts or periodic
withdrawals begin under a payout option. The Payout Commencement Date must be at
least one year after the Effective Date of the Contract. If you do not indicate
a Payout Commencement Date on your application, annuity payouts will begin on
the first day of the month of the Annuitant's 91st birthday.
Premium Tax--A tax charged by a state or other governmental authority. Varying
by state, the current range of Premium Taxes is 0% to 3.5% and may be assessed
at the time you make a Contribution or when annuity payments begin.
Request--Any written, telephoned, or computerized instruction in a form
satisfactory to Great-West and Schwab received at the Annuity Administration
Department (or other annuity service center subsequently named) from you, your
designee (as specified in a form acceptable to Great-West and Charles Schwab &
Co., Inc. ("Schwab")) or the Beneficiary (as applicable) as required by any
provision of the Contract.
Surrender Charge--A maximum charge of three percent will be assessed if funds
are withdrawn in the first three Contract years.
Surrender Value--The value of your annuity account with any applicable Market
Value Adjustment, less any applicable Surrender Charge on the Effective Date of
the surrender, less Premium Tax, if any.
Transaction Date--The date on which any Contribution or Request from you will be
processed. Contributions and Requests received after 4:00 p.m. EST/EDT will be
deemed to have been received on the next business day. Requests will be
processed on each day that the New York Stock Exchange is open for trading.
Transfer--Moving money among the Guaranteed Periods.
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Summary
The Schwab Fixed Annuity allows you to accumulate assets on a tax-deferred basis
by investing in a fixed investment option (the Guarantee Period Fund). The
Guarantee Period Fund is comprised of Guarantee Periods, each of which has its
own stated rate of interest and its own maturity date.
You may be subject to a Market Value Adjustment which may increase or decrease
the amount Transferred or withdrawn from the value of a Guarantee Period if the
Guarantee Period is broken prior to the Guarantee Period Maturity Date. A
negative adjustment may result in an effective interest rate lower than the
stated rate of interest for the applicable Guarantee Period and the Contractual
Guarantee of a Minimum Rate of Interest and the value of the Contribution(s)
allocated to the Guarantee Period being less than the Contribution(s) made.
The Schwab Fixed Annuity can be purchased on a non-qualified basis or purchased
and used in connection with an IRA. You can also purchase it through a 1035
Exchange from another insurance contract.
Tax deferral under IRAs arises under the Code. Tax deferral under non-qualified
Contracts arises under the Contract.
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To contact Schwab:
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Schwab Insurance & Annuity Service Center
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P.O. Box 7666
San Francisco, CA 94120-7666
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800-838-0650
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Your initial Contribution must be at least $5,000; $2,000 if an IRA; $1,000 if
you are setting up an Automatic Contribution Plan. Subsequent Contributions must
be either $500; or $100 if made through an Automatic Contribution Plan.
The money you contribute to the Contract will be invested at your direction.
Prior to the Payout Commencement Date, you can withdraw all or a part of your
Annuity Account Value. There is a maximum Surrender Charge of three percent if
funds are withdrawn in the first three Contract years. Certain withdrawals may
be subject to federal income tax as well as a federal penalty tax.
When you're ready to start taking money out of your Contract, you can select
from a variety of payout options, including fixed annuity payouts as well as
periodic payouts.
If the Annuitant dies before the Annuity Commencement Date, we will pay the
Death Benefit to the Beneficiary you select. If the Owner dies before the entire
value of the Contract is distributed, the remaining value will be distributed
according to the rules outlined in the "Death Benefit" section on page 12.
There is no annual contract maintenance charge.
You may cancel your Contract during the "free look period" by sending it to the
Annuity Administration Department. If you are replacing an existing insurance
contract with the Contract, the free look period may be extended based on your
state of residence. We will refund the greater of:
o Contributions received, less surrenders, withdrawals and distributions, or o
The Annuity Account Value.
This summary highlights some of the more significant aspects of The Schwab Fixed
Annuity. You'll find more detailed information about these topics throughout the
prospectus and in your Contract. Please keep them both for future reference.
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Fee Table
The purpose of this table is to help you understand the various costs and
expenses in connection with investing in the Contract. The information set forth
should be considered together with the narrative provided under the heading
"Charges and Deductions." In addition to the expenses listed below, Premium Tax
may be applicable.
Sales load None
Surrender fee Maximum 3%
Annual Contract Maintenance Charge None
Transfer fee $10.00
(no transfer fee is charged for the
first 12 transfers in any calendar year)
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Great-West Life & Annuity Insurance Company
Great-West is a stock life insurance company that was originally organized under
the laws of the state of Kansas as the National Interment Association. Our name
was changed to Ranger National Life Insurance Company in 1963 and to
Insuramerica Corporation, prior to changing to our current name in 1982. In
September of 1990, we re-domesticated under the laws of the state of Colorado.
We are authorized to do business in 49 states, the District of Columbia, Puerto
Rico, U.S. Virgin Islands and Guam.
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The Guarantee Period Fund
Amounts allocated to the Guarantee Period Fund will be deposited to, and
accounted for, in a non-unitized market value separate account. As a result, you
do not participate in the performance of the assets through unit values.
The assets accrue solely to the benefit of Great-West and any gain or loss in
the separate account is borne entirely by Great-West. You will receive the
Contract guarantees made by Great-West for amounts you contribute to the
Guarantee Period Fund.
When you contribute or Transfer amounts to the Guarantee Period Fund, you select
a new Guarantee Period from those available. All Guarantee Periods will have a
term of at least one year. Contributions allocated to the Guarantee Period Fund
will be credited on the Transaction Date we receive them.
Each Guarantee Period will have its own stated rate of interest and maturity
date determined by the date the Guarantee Period is established and the term you
choose.
Currently, Guarantee Periods with annual terms of 1 to 10 years are offered only
in those states where the Guarantee Period Fund is available. The Guarantee
Periods may change in the future, but this will not have an impact on any
Guarantee Period already in effect.
The value of amounts in each Guarantee Period equals Contributions plus interest
earned, less any Premium Tax, amounts distributed, withdrawn (in whole or in
part), amounts Transferred or applied to an annuity option, periodic withdrawals
and charges deducted under the Contract. If a Guarantee Period is broken, a
Market Value Adjustment may be assessed (please see "Breaking a Guarantee
Period" on page 9). Any amount withdrawn or Transferred prior to the Guarantee
Period Maturity Date will be paid in accordance with the Market Value Adjustment
formula. You can read more about Market Value Adjustments on page 9.
Investments of the Guarantee Period Fund
We use various techniques to invest in assets that have similar characteristics
to our general account assets--especially cash flow patterns. We will primarily
invest in investment-grade fixed income securities including:
o Securities issued by the U.S. Government or its agencies or
instrumentalities, which may or may not be guaranteed by the U.S.
Government.
o Debt securities which have an investment grade, at the time of purchase,
within the four highest grades assigned by Moody's Investment Services,
Inc. (Aaa, Aa, A or Baa), Standard & Poor's Corporation (AAA, AA, A or BBB)
or any other nationally recognized rating service.
o Other debt instruments, including, but not limited to, issues of banks or
bank holding companies and of corporations, which obligations--although not
rated by Moody's, Standard & Poor's, or other nationally recognized rating
firms--are deemed by us to have an investment quality comparable to
securities which may be purchased as stated above.
o Commercial paper, cash or cash equivalents and other short-term investments
having a maturity of less than one year which are considered by us to have
investment quality comparable to securities which may be purchased as
stated above.
In addition, we may invest in futures and options solely for non-speculative
hedging purposes. We may sell a futures contract or purchase a put option on
futures or securities to protect the value of securities held in or to be sold
for the general account or the non-unitized separate if the securities prices
are anticipated to decline. Similarly, if securities prices are expected to
rise, we may purchase a futures contract or a call option against anticipated
positive cash flow or may purchase options on securities.
The above information generally describes the investment strategy for the
Guarantee Period Fund. However, we are not obligated to invest the assets in the
Guarantee Period Fund according to any particular strategy, except as may be
required by Colorado and other state insurance laws. And, the stated rate of
interest that we establish will not necessarily relate to the performance of the
non-unitized market value separate account.
Subsequent Guarantee Periods
Before annuity payouts begin, you may reinvest the value of amounts in a
maturing Guarantee Period in a new Guarantee Period of any length we offer at
that time. On the quarterly statement issued to you prior to the end of any
Guarantee Period, we will notify you of the upcoming maturity of a Guarantee
Period. The Guarantee Period available for new Contributions may be changed at
any time, including between the date we notify you of a maturing Guarantee
Period and the date a new Guarantee Period begins.
If you do not tell us where you would like the amounts in a maturing Guarantee
Period allocated by the maturity date, we will automatically allocate the amount
to a Guarantee Period of the same length as the maturing period. If the term
previously chosen is no longer available, the amount will be allocated to the
next shortest available Guarantee Period term. No Guarantee Period may mature
later than six months after your Payout Commencement Date. For example, if a
3-year Guarantee Period matures and the Payout Commencement Date begins 1 3/4
years from the Guarantee Period maturity date, the matured value will be
transferred to a 2-year Guarantee Period.
Breaking a Guarantee Period
If you begin annuity payouts, Transfer or withdraw prior to the Guarantee Period
maturity date, you are breaking a Guarantee Period. When we receive a request to
break a Guarantee Period and you have another Guarantee Period that is closer to
its maturity date, we will break that Guarantee Period first.
If you break a Guarantee Period, you may be assessed an interest rate adjustment
called a Market Value Adjustment.
Interest Rates
The declared annual rates of interest are guaranteed throughout the Guarantee
Period. For Guarantee Periods not yet in effect, Great-West may declare interest
rates different than those currently in effect. When a subsequent Guarantee
Period begins, the rate applied will be equal to or more than the rate currently
in effect for new Contracts with the same Guarantee Period.
The stated rate of interest must be at least equal to the Guaranteed Interest
Rate, but Great-West may declare higher rates. The Guaranteed Interest Rate is
based on the applicable state standard non-forfeiture law. The standard
nonforfeiture rate in all states is 3%, except in Florida, Mississippi and
Oklahoma, it's 0%.
The determination of the stated interest rate is influenced by, but does not
necessarily correspond to, interest rates available on fixed income investments
which Great-West may acquire using funds deposited into the Guarantee Period
Fund. In addition, Great-West considers regulatory and tax requirements, sales
commissions and administrative expenses, general economic trends and competitive
factors in determining the stated interest rate.
Market Value Adjustment
Amounts you allocate to the Guarantee Period Fund may be subject to an interest
rate adjustment called a Market Value Adjustment if, six months or more before
the Guarantee Period Fund's maturity date, you: o surrender your investment in
the Guarantee Period Fund, o transfer money from the Guarantee Period Fund, o
partially withdraw money from the Guarantee Period Fund, o apply amounts from
the Guarantee Period Fund to purchase an annuity to receive payouts from your
account, o take a distribution from the Guarantee Period Fund upon the death of
the Owner or the Annuitant.or o take a periodic withdrawal.
The Market Value Adjustment will not apply to any Guarantee Period having fewer
than six months prior to the Guarantee Period maturity date in each of the
following situations: o Transfer to another Guarantee Period offered under this
Contract o Surrenders, partial withdrawals, annuitization or periodic
withdrawals o A single sum payout upon death of the Owner or Annuitant
A Market Value Adjustment may increase or decrease the amount payable on the
above-described distributions. The formula for calculating Market Value
Adjustments is detailed in Appendix A. Appendix A also includes examples of how
Market Value Adjustments work.
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Application and Initial Contributions
The first step to purchasing The Schwab Fixed Annuity is to complete your
Contract application and submit it with your initial minimum Contribution of
$5,000; $2,000 if an IRA; or $1,000 if you are setting up an Automatic
Contribution Plan. Initial Contributions can be made by check (payable to GWL&A)
or transferred from a Schwab brokerage account.
If your application is complete, your Contract will be issued and your
Contribution will be credited within two business days after receipt at the
Annuity Administration Department. Acceptance is subject to sufficient
information in a form acceptable to us. We reserve the right to reject any
application or Contribution.
If your application is incomplete, the Annuity Administration Department will
complete the application from information Schwab has on file or contact you by
telephone to obtain the required information. If the information necessary to
complete your application is not received within five business days, we will
return to you both your check and the application. If you provide consent we
will retain the initial Contribution and credit it as soon as we have completed
your application.
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Free Look Period
During the free look period (ten-days or longer where required by law), you may
cancel your Contract. During the free look period, all Contributions will be
allocated to one or more of the available Guarantee Periods in accordance with
your instructions in the application and will be effective upon the Transaction
Date.
Contracts returned during the free look period will be void from the date we
issued the Contract and the greater of the following will be refunded: o
Contributions less withdrawals and distributions, or o The Annuity Account
Value.
If you exercise the free look privilege, you must return the Contract to
Great-West or to the Annuity Administration Department.
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Subsequent Contributions
Once your application is complete and we have received your initial
Contribution, you can make subsequent Contributions at any time prior to the
Payout Commencement Date, as long as the Annuitant is living. Additional
Contributions must be at least $500; or $100 if made via an Automatic
Contribution Plan. Total Contributions may exceed $1,000,000 with our prior
approval.
Subsequent Contributions can be made by check or via an Automatic Contribution
plan directly from your bank or savings account. You can designate the date
you'd like your subsequent Contributions deducted from your account each month.
If you make subsequent Contributions by check, your check should be payable to
GWL&A.
You'll receive a confirmation of each Contribution you make upon its acceptance.
Great-West reserves the right to modify the limitations set forth in this
section.
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Annuity Account Value
Before the date annuity payouts begin, your Annuity Account Value is the sum of
your Fixed Account under your Contract.
Unlike a brokerage account, amounts held under a Contract are not covered by the
Securities Investor Protection Corporation ("SIPC").
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Transfers
Prior to the Annuity Commencement Date you may Transfer all or part of your
Annuity Account Value among the available Guarantee Periods by telephone, by
sending a Request to the Annuity Administration Department or by calling our
touch-tone account and trading service.
Your Request must specify:
o the amounts being Transferred,
o the Guarantee Period(s) from which the Transfer is to be made, and o the
Guarantee Period(s) that will receive the Transfer.
Currently, there is no limit on the number of Transfers you can make during any
calendar year. However, we reserve the right to limit the number of Transfers
you make.
There is no charge for the first twelve Transfers each calendar year, but there
will be a charge of $10 for each additional Transfer made. The charge will be
deducted from the amount Transferred. All Transfers made on a single Transaction
Date will count as only one Transfer toward the twelve free Transfers.
A Transfer generally will be effective on the date the Request for Transfer is
received by the Annuity Administration Department if received before 4:00 p.m.
Eastern time. Under current tax law, there will not be any tax liability to you
if you make a Transfer.
When you make a Transfer from amounts in a Guarantee Period before the Guarantee
Period maturity date, the amount Transferred may be subject to a Market Value
Adjustment as discussed on page 9. If you request in advance to Transfer amounts
from a maturing Guarantee Period upon maturity, your Transfer will not count
toward the 12 free Transfers and no Transfer fees will be charged.
Possible Restrictions
We reserve the right without prior notice to modify, restrict, suspend or
eliminate the Transfer privileges (including telephone Transfers) at any time.
We reserve the right to require that all Transfer requests be made by you and
not by your designee and to require that each Transfer request be made by a
separate communication to us. We also reserve the right to require that each
Transfer request be submitted in writing and be signed by you
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Cash Withdrawals
You may withdraw all or part of your Annuity Account Value at any time during
the life of the Annuitant and prior to the date annuity payouts begin by
submitting a written withdrawal request to the Annuity Administration
Department. Withdrawals are subject to the rules below and federal or state
laws, rules or regulations may also apply. The amount payable to you if you
surrender your Contract is your Annuity Account Value, with any applicable
Market Value Adjustment and with any applicable Surrender Charge, on the
Effective Date of the surrender, less any applicable Premium Tax. No withdrawals
may be made after the date annuity payouts begin.
If you request a partial withdrawal, your Annuity Account Value will be reduced
by the dollar amount withdrawn. A Market Value Adjustment may apply. Market
Value Adjustments are discussed on page 9.
Partial withdrawals are unlimited. However, you must specify the Guarantee
Period(s) from which the withdrawal is to be made. After any partial withdrawal,
if your remaining Annuity Account Value is less than $2,000, then a full
surrender may be required. The minimum partial withdrawal (before application of
the MVA) is $500.
The following terms apply to withdrawals:
o Partial withdrawals or surrenders are not permitted after the date annuity
payouts begin. o A partial withdrawal or a surrender will be effective upon the
Transaction Date. o A partial withdrawal or a surrender may be subject to the
Market Value Adjustment provisions, and the Guarantee
Period Fund provisions of the Contract.
o A partial withdrawal may be subject to a Surrender Charge.
Withdrawal requests must be in writing with your original signature. If your
instructions are not clear, your request will be denied and no withdrawal or
partial withdrawal will be processed.
After a withdrawal of all of your Annuity Account Value, or at any time that
your Annuity Account Value is zero, all your rights under the Contract will
terminate.
Withdrawals to Pay Investment Manager or Financial Advisor Fees
You may request partial withdrawals from your Annuity Account Value and direct
us to remit the amount withdrawn directly to your designated Investment Manager
or Financial Advisor (collectively "Consultant"). A withdrawal request for this
purpose must meet the $500 minimum withdrawal requirements and comply with all
terms and conditions applicable to partial withdrawals, as described above. Tax
consequences of withdrawals are detailed below, but you should consult a
competent tax advisor prior to authorizing a withdrawal from your Annuity
Account to pay Consultant fees.
Tax Consequences of Withdrawals
Withdrawals made for any purpose may be taxable--including payments made by us
directly to your Consultant.
In addition, the Code may require us to withhold federal income taxes from
withdrawals and report such withdrawals to the IRS. If you request partial
withdrawals to pay Consultant fees, your Annuity Account Value will be reduced
by the sum of the fees paid to the Consultant and the related withholding.
You may elect, in writing, to have us not withhold federal income tax from
withdrawals, unless withholding is mandatory for your Contract. If you are
younger than 59 1/2, the taxable portion of any withdrawal is generally
considered to be an early withdrawal and is subject to an additional federal
penalty tax of 10%.
Some states also require withholding for state income taxes. For details about
state withholding, please see "Federal Tax Matters" on page 16.
If you are interested in this Contract as an IRA, please refer to Section 408 of
the Code for limitations and restrictions on cash withdrawals.
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Telephone Transactions
You may make Transfer requests by telephone. Telephone Transfer requests
received before 4:00 p.m. Eastern time will be made on that day. Calls completed
after 4:00 p.m. Eastern time will be made on the next business day we and the
NYSE are open for business.
We will use reasonable procedures to confirm that instructions communicated by
telephone are genuine, such as: o requiring some form of personal identification
prior to acting on instructions, o providing written confirmation of the
transaction and/or o tape recording the instructions given by telephone.
If we follow such procedures we will not be liable for any losses due to
unauthorized or fraudulent instructions.
We reserve the right to suspend telephone transaction privileges at any time,
for some or all Contracts, and for any reason. Withdrawals are not permitted by
telephone.
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Death Benefit
Before the date when annuity payouts begin, the Death Benefit, if any, will be
equal to the greater of:
o the Annuity Account Value with an MVA, if applicable, as of the date the
request for payout is received, less any Premium Tax, or
o the sum of Contributions, less partial withdrawals and/or periodic
withdrawals, less any Premium Tax.
The Death Benefit will become payable following our receipt of the Beneficiary's
claim in good order. When an Owner or the Annuitant dies before the Annuity
Commencement Date and a Death Benefit is payable to a Beneficiary, the Death
Benefit proceeds will remain invested according to the allocation instructions
given by the Owner(s) until new allocation instructions are requested by the
Beneficiary or until the Death Benefit is actually paid to the Beneficiary.
The amount of the Death Benefit will be determined as of the date payouts begin.
Subject to the distribution rules below, payout of the Death Benefit may be made
as follows:
o payout in a single sum that may be subject to a Market Value Adjustment, or
o payout under any of the annuity options provided under this Contract that
may be subject to a Market Value Adjustment
o payout on the Guarantee Period Maturity Date in order that the payment will
not be subject to a Market Value Adjustment
Any payment within 6 months of the Guarantee Period Maturity Date will not be
subject to a Market Value Adjustment.
In any event, no payout of benefits provided under the Contract will be allowed
that does not satisfy the requirements of the Code and any other applicable
federal or state laws, rules or regulations.
Beneficiary
You may select one or more Beneficiaries. If more than one Beneficiary is
selected, they will share equally in any Death Benefit payable unless you
indicate otherwise. You may change the Beneficiary any time before the
Annuitant's death.
A change of Beneficiary will take effect as of the date the request is processed
by the Annuity Administration Department, unless a certain date is specified by
the Owner. If the Owner dies before the request is processed, the change will
take effect as of the date the request was made, unless we have already made a
payout or otherwise taken action on a designation or change before receipt or
processing of such request. A Beneficiary designated irrevocably may not be
changed without the written consent of that Beneficiary, except as allowed by
law.
The interest of any Beneficiary who dies before the Owner or the Annuitant will
terminate at the death of the Beneficiary. The interest of any Beneficiary who
dies at the time of, or within 30 days after the death of an Owner or the
Annuitant will also terminate if no benefits have been paid to such Beneficiary,
unless the Owner otherwise indicates by request. The benefits will then be paid
as though the Beneficiary had died before the deceased Owner or Annuitant. If no
Beneficiary survives the Owner or Annuitant, as applicable, we will pay the
Death Benefit proceeds to the Owner's estate.
If the Beneficiary is not the Owner's surviving spouse, she/he may elect, not
later than one year after the Owner's date of death, to receive the Death
Benefit in either a single sum or payout under any of the fixed annuity options
available under the Contract, provided that:
o such annuity is distributed in substantially equal installments over the
life or life expectancy of the Beneficiary or over a period not extending
beyond the life expectancy of the Beneficiary and
o such distributions begin not later than one year after the Owner's date of
death.
If an election is not received by Great-West from a non-spouse Beneficiary and
substantially equal installments begin no later than one year after the Owner's
date of death, then the entire amount must be distributed within five years of
the Owner's date of death. The Death Benefit will be determined as of the date
the payouts begin.
If a corporation or other non-individual entity is entitled to receive benefits
upon the Owner's death, the Death Benefit must be completely distributed within
five years of the Owner's date of death.
Distribution of Death Benefit
Death of Annuitant
Upon the death of the Annuitant while the Owner is living, and before the
Annuity Commencement Date, we will pay the Death Benefit to the Beneficiary
unless there is a Contingent Annuitant.
If a Contingent Annuitant was named by the Owner(s) prior to the Annuitant's
death, and the Annuitant dies before the Annuity Commencement Date while the
Owner and Contingent Annuitant are living, no Death Benefit will be payable and
the Contingent Annuitant will become the Annuitant.
If the Annuitant dies after the date annuity payouts begin and before the entire
interest has been distributed, any benefit payable must be distributed to the
Beneficiary according to and as rapidly as under the payout option which was in
effect on the Annuitant's date of death.
If the deceased Annuitant is an Owner, or if a corporation or other
non-individual is an Owner, the death of the Annuitant will be treated as the
death of an Owner and the Contract will be subject to the "Death of Owner"
provisions described below.
Death of Owner Who Is Not the Annuitant
If there is a Joint Owner who is the surviving spouse and the Beneficiary of the
deceased Owner, the Joint Owner becomes the Owner and Beneficiary and the Death
Benefit will be paid to the Joint Owner or the Joint Owner may elect to continue
the Contract in force.
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- ------------------------------------------------------------------
Contingent Annuitant
While the Annuitant is living, you may, by Request, designate or change a
Contingent Annuitant from time to time. A change of Contingent Annuitant will
take effect as of the date the Request is processed at the Annuity
Administration Department, unless a certain date is specified by the Owner(s).
Please note, you are not required to designate a Contingent Annuitant.
- -------------------------------------------------------------------
If the Owner dies after annuity payouts commence and before the entire interest
has been distributed while the Annuitant is living, any benefit payable will
continue to be distributed to the Annuitant as rapidly as under the payout
option applicable on the Owner's date of death. All rights granted the Owner
under the Contract will pass to any surviving Joint Owner and, if none, to the
Annuitant.
In all other cases, we will pay the Death Benefit to the Beneficiary even if a
Joint Owner (who was not the Owner's spouse on the date of the Owner's death),
the Annuitant and/or the Contingent Annuitant are alive at the time of the
Owner's death, unless the sole Beneficiary is the deceased Owner's surviving
spouse who may elect to become the Owner and Annuitant and to continue the
Contract in force.
Death of Owner Who Is the Annuitant
If there is a Joint Owner who is the surviving spouse of the deceased Owner and
a Contingent Annuitant, the Joint Owner becomes the Owner and the Beneficiary,
the Contingent Annuitant will become the Annuitant, and the Contract will
continue in force.
If there is a Joint Owner who is the surviving spouse and the Beneficiary of the
deceased Owner but no Contingent Annuitant, the Joint Owner will become the
Owner, Annuitant and Beneficiary and may elect to take the Death Benefit or
continue the Contract in force.
In all other cases, we will pay the Death Benefit to the Beneficiary, even if a
Joint Owner (who was not the Owner's spouse on the date of the Owner's death),
Annuitant and/or Contingent Annuitant are alive at the time of the Owner's
death, unless the sole Beneficiary is the deceased Owner's surviving spouse who
may elect to become the Owner and Annuitant and to continue the Contract in
force.
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Charges and Deductions
No amounts will be deducted from your Contributions except for any applicable
Premium Tax. As a result, the full amount of your Contributions (less any
applicable Premium Tax) are invested in the Contract.
As more fully described below, charges under the Contract are assessed only as
deductions for:
o Certain Transfers, o Surrender Charges, and o Premium Tax, if applicable.
Transfer Fee
There will be a $10 charge for each Transfer in excess of 12 Transfers in any
calendar year. We do not expect a profit from the Transfer fee.
Surrender Charge
We may deduct a maximum Surrender Charge of three percent (3%) from amounts
withdrawn or distributed within the first three Contract years. The Surrender
Charge applies to the amounts withdrawn or distributed after they have been
adjusted by any applicable Market Value Adjustment. The applicable Surrender
Charge will decrease over time as indicated in the table below.
Years Completed Percentage of
Distribution
- -------------------------- -----------------------
1 3%
2 2%
3 1%
4+ 0%
Premium Tax
We may be required to pay state Premium Taxes or retaliatory taxes currently
ranging from 0% to 3.5% in connection with Contributions or values under the
Contracts. Depending upon applicable state law, we will deduct charges for the
Premium Taxes we incur with respect to your Contributions, from amounts
withdrawn, or from amounts applied on the Payout Commencement Date. In some
states, charges for both direct Premium Taxes and retaliatory Premium Taxes may
be imposed at the same or different times with respect to the same Contribution,
depending on applicable state law.
Other Taxes
Under present laws, we will incur state or local taxes (in addition to the
Premium Tax described above) in several states. No charges are currently made
for taxes other than Premium Tax. However, we reserve the right to deduct
charges in the future for federal, state, and local taxes or the economic burden
resulting from the application of any tax laws that we determine to be
attributable to the Contract.
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Payout Options
During the Distribution Period, you can choose to receive payouts in four
ways--through periodic withdrawals,fixed annuity payouts or in a single,
lump-sum payment.
You may change the Payout Commencement Date within 60 days prior to commencement
of payouts or your Beneficiary may change it upon the death of the Owner.
If this is an IRA, payouts which satisfy the minimum distribution requirements
of the Code must begin no later than April 1 of the calendar year following the
calendar year in which you become age 70 1/2.
Periodic Withdrawals
You may request that all or part of the Annuity Account Value be applied to a
periodic withdrawal option. The amount applied to a periodic withdrawal is the
Annuity Account Value with any applicable MVA, less any applicable Surrender
Charge, less Premium Tax, if any.
In requesting periodic withdrawals, you must elect: o The withdrawal frequency
of either 1-, 3-, 6- or 12-month intervals o A minimum withdrawal amount of at
least $100 o The calendar day of the month on which withdrawals will be made
o One of the periodic withdrawal payout options discussed below-- you may
change the withdrawal option and/or the frequency once each calendar year
Your withdrawals may be prorated across the Guarantee Period Fund (if applicable
in proportion to their assets. Or, they can be made specifically from a
Guarantee Period(s) until they are depleted. Then, we will automatically prorate
the remaining withdrawals against any remaining Guarantee Period(s) assets
unless you request otherwise.
While periodic withdrawals are being received:
o You may continue to exercise all contractual rights, except that no
Contributions may be made. o A Market Value Adjustment, if applicable, will be
assessed for periodic withdrawals from Guarantee Periods six
or more months prior to its Guarantee Period Maturity Date.
o You may keep the same Guarantee Periods as were in force before periodic
withdrawals began. o Surrender Charges and/or any other charges and fees under
the Contract continue to apply. o Maturing Guarantee Periods renew into the
shortest Guarantee Period then available.
Periodic withdrawals will cease on the earlier of the date:
o the amount elected to be paid under the option selected has been reduced to
zero.
o the Annuity Account Value is zero.
o you request that withdrawals stop.
o the Owner or the Annuitant dies.
If periodic withdrawals stop, you may resume making Contributions. However, we
may limit the number of times you may restart a periodic withdrawal program.
Periodic withdrawals made for any purpose may be taxable, subject to withholding
and to the 10% federal penalty tax if you are younger than age 59 1/2. IRAs are
subject to complex rules with respect to restrictions on and taxation of
distributions, including penalty taxes.
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If you choose to receive payouts from your Contract through periodic
withdrawals, you may select from the following payout options: o Income for a
specified period (at least 36 months)--You elect the length of time over which
withdrawals will be
made. The amount paid will vary based on the duration you choose.
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o Income of a specified amount (at least 36 months)--You elect the dollar
amount of the withdrawals. Based on the amount elected, the duration may
vary.
- --------------------------------------------------------------------------------
o Interest only--Your withdrawals will be based on the amount of interest
credited to the Guarantee Period Fund between withdrawals.
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o Minimum distribution--If you are using this Contract as an IRA, you may
request minimum distributions as specified under Code Section 401(a)(9).
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o Any other form of periodic withdrawal acceptable to Great-West which is for a
period of at least 36 months.
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In accordance with the provisions outlined in this section, you may request a
periodic withdrawal to remit fees paid to your Investment Manager or Financial
Advisor. There may be income tax consequences to any periodic withdrawal made
for this purpose. Please see "Cash Withdrawals" on page 11.
Annuity Payout Information
You can choose the date you'd like annuity payouts to start either when you
purchase the Contract or at a later date. The date you choose must be at least
one year after your initial Contribution. If you do not select a payout start
date, payouts will begin on the first day of the month of the Annuitant's 91st
birthday. You can change your selection at any time up to 30 days before the
annuity date you selected.
If you have not elected a payout option within 30 days of the Annuity
Commencement Date, your Annuity Account Value will be paid out as a fixed life
annuity with a guarantee period of 20 years.
The amount to be paid out is the Annuity Account Value on the Annuity
Commencement Date. The minimum amount that may be withdrawn from the Annuity
Account Value to purchase an annuity payout option is $2,000 with a Market Value
Adjustment, if applicable. If after the Market Value Adjustment, your Annuity
Account Value is less than $2,000, we may pay the amount in a single sum subject
to the Contract provisions applicable to a partial withdrawal.
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You may select from the following payout options:
o Income of specified amount--The amount applied under this option may be
paid in equal annual, semi-annual, quarterly or monthly installments in the
dollar amount elected for not more than 240 months.
o Income for a specified period--Payouts are paid annually, semi-annually,
quarterly or monthly, as elected, for a selected number of years not to
exceed 240 months.
o Fixed life annuity with guaranteed period--This option provides monthly
payouts during a guaranteed period or for the lifetime of the Annuitant,
whichever is longer. The guaranteed period may be 5, 10, 15 or 20 years.
o Fixed life annuity--This option provides for monthly payouts during the
lifetime of the Annuitant. The annuity ends with the last payout due prior
to the death of the Annuitant. Since no minimum number of payouts is
guaranteed, this option may offer the maximum level of monthly payouts. It
is possible that only one payout may be made if the Annuitant died before
the date on which the second payout is due.
o Any other form of a fixed annuity acceptable to us.
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A portion or the entire amount of the annuity payouts may be taxable as ordinary
income. If, at the time the annuity payouts begin, we have not received a proper
written election not to have federal income taxes withheld, we must by law
withhold such taxes from the taxable portion of such annuity payouts and remit
that amount to the federal government (an election not to have taxes withheld is
not permitted for certain Qualified Contracts). State income tax withholding may
also apply. Please see "Federal Tax-Matters" below for details.
Annuity IRAs
The annuity date and options available for IRAs may be controlled by
endorsements, the plan documents, or applicable law.
Under the Code, a Contract purchased and used in connection with an Individual
Retirement Account or with certain other plans qualifying for special federal
income tax treatment is subject to complex "minimum distribution" requirements.
Under a minimum distribution plan, distributions must begin by a specific date
and the entire interest of the plan participant must be distributed within a
certain specified period of time. The application of the minimum distribution
requirements vary according to your age and other circumstances.
- --------------------------------------------------------------------------------
Seek Tax Advice
The following discussion of the federal income tax consequences is only a brief
summary and is not intended as tax advice. The federal income tax consequences
discussed here reflect our understanding of current law and the law may change.
Federal estate tax consequences and state and local estate, inheritance, and
other tax consequences of ownership or receipt of distributions under a Contract
depend on your individual circumstances or the circumstances of the person who
receives the distribution. A tax adviser should be consulted for further
information.
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Federal Tax Matters
The following discussion is a general description of federal income tax
considerations relating to the Contracts and is not intended as tax advice. This
discussion assumes that the Contract qualifies as an annuity contract for
federal income tax purposes. This discussion is not intended to address the tax
consequences resulting from all situations. If you are concerned about these tax
implications relating to the ownership or use of the Contract, you should
consult a competent tax adviser before initiating any transaction.
- --------------------------------------------------------------------------------
Because tax laws, rules and regulations are constantly changing, we do not make
any guarantees about the Contract's tax status.
- --------------------------------------------------------------------------------
This discussion is based upon our understanding of the present federal income
tax laws as they are currently interpreted by the Internal Revenue Service. No
representation is made as to the likelihood of the continuation of the present
federal income tax laws or of the current interpretation by the Internal Revenue
Service. Moreover, no attempt has been made to consider any applicable state or
other tax laws.
The Contract may be purchased on a non-tax qualified basis ("Non-Qualified
Contract") or purchased as an individual retirement annuity ("Annuity IRA"). The
ultimate effect of federal income taxes on the amounts held under a Contract, on
annuity payouts, and on the economic benefit to you, the Annuitant, or the
Beneficiary may depend on the type of Contract, and on the tax status of the
individual concerned.
Certain requirements must be satisfied in purchasing an Annuity IRA and
receiving distributions from an Annuity IRA in order to continue receiving
favorable tax treatment. As a result, purchasers of Annuity IRAs should seek
competent legal and tax advice regarding the suitability of the Contract for
their situation, the applicable requirements and the tax treatment of the rights
and benefits of the Contract. The following discussion assumes that an Annuity
IRA is purchased with proceeds and/or Contributions that qualify for the
intended special federal income tax treatment.
Taxation of Annuities
Section 72 of the Code governs the taxation of the Contracts. You, as a "natural
person" will not generally be taxed on increases, if any, in the value of your
Annuity Account Value until a distribution of all or part of the Annuity Account
Value occurs (for example, a withdrawal or an annuity payout under the annuity
payout option). However, an assignment, pledge, or agreement to assign or pledge
any portion of the Annuity Account Value of a Non-Qualified Contract will be
treated as a withdrawal of such portion. An Annuity IRA may not be assigned as
collateral. The taxable portion of a withdrawal (in the form of a single sum
payout or an annuity) is taxable as ordinary income.
As a general rule, if a Non-Qualified Contract is not owned by an entity that is
not a natural person (for example, a corporation or certain trusts), the
Contract will not be treated as an annuity contract for federal tax purposes.
Such an Owner generally must include in income any increase in the excess of the
Annuity Account Value over the "investment in the Contract" (discussed below)
during each taxable year. The rule does not apply where the non-natural person
is merely the nominal Owner that holds the Contract as an agent for a natural
person.
The rule also does not apply where: o The Contract is acquired by the estate of
a decedent. o The Contract is an Annuity IRA.
o The Contract is a qualified funding asset for a structured settlement. o The
Contract is purchased on behalf of an employee upon termination of a qualified
plan.
The following discussion generally applies to a Contract owned by a natural
person.
Withdrawals
In the case of a withdrawal under a Non-Qualified Contract, partial withdrawals,
including periodic withdrawals that are not part of an annuity payout, are
generally treated as taxable income and taxed at ordinary income tax rates to
the extent that the Annuity Account Value immediately before the withdrawal
exceeds the "investment in the Contract" at that time. The "investment in the
Contract" generally equals the amount of any nondeductible Contributions paid by
or on behalf of any individual less any withdrawals that were excludable from
income. Full surrenders are treated as taxable income to the extent that the
amount received exceeds the "investment in the Contract." The taxable portion of
any annuity payout is taxed at ordinary income tax rates.
In the case of a withdrawal under an Annuity IRA, including withdrawals under
the periodic withdrawal option, a portion of the amount received may be
non-taxable. The amount of the non-taxable portion is generally determined by
the ratio of the "investment in the Contract" to the individual's Annuity
Account Value .. Special tax rules may be available for certain distributions
from an Annuity IRA.
Annuity payouts
Although the tax consequences may vary depending on the annuity form elected
under the Contract, in general, only the portion of the annuity payout that
represents the amount by which the Annuity Account Value exceeds an allocable
portion of the "investment in the Contract" will be taxed. Once the investment
in the Contract has been fully recovered, the full amount of any additional
annuity payouts is taxable.
Penalty tax
For distributions from a Non-Qualified Contract, there may be a federal income
tax penalty imposed equal to 10% of the amount treated as taxable income. In
general, however, there is no penalty tax on distributions: o Made on or after
the date on which the Owner reaches age 59 1/2.
o Made as a result of death or disability of the Owner.
o Received in substantially equal periodic payouts (at least annually) for
your life (or life expectancy) or joint lives (or the joint life
expectancies) of you and the Beneficiary.
Other exceptions may apply to distributions from a Non-Qualified Contract.
Similar exceptions from the penalty tax on distributions are provided for
distributions from an Annuity IRA. For more details regarding these this penalty
tax and other exceptions that may be applicable, consult a competent tax
adviser.
Taxation of Death Benefit Proceeds
Amounts may be distributed from the Contract because of the death of an Owner or
the Annuitant. Generally such amounts are included in the income of the
recipient as follows:
If distributed in a lump sum, they are taxed in the same manner as a full
withdrawal, as described above.
If distributed under an annuity form, they are taxed in the same manner as
annuity payouts, as described above.
Distribution at death
In order to be treated as an annuity contract, the terms of the Contract must
provide the following two distribution rules:
If the Owner dies before the date annuity payouts start, your entire interest
must generally be distributed within five years after the date of your death. If
payable to a designated Beneficiary, the distributions may be paid over the life
of that designated Beneficiary or over a period not extending beyond the life
expectancy of that Beneficiary, so long as payouts start within one year of your
death. If the sole designated Beneficiary is your spouse, the Contract may be
continued in the name of the spouse as Owner.
If the Owner dies on or after the date annuity payouts start, and before the
entire interest in the Contract has been distributed, the remainder of your
interest will be distributed on the same or on a more rapid schedule than that
provided for in the method in effect on the date of death.
If the Owner is not an individual, then for purposes of the distribution at
death rules, the Primary Annuitant is considered the Owner. In addition, when
the Owner is not an individual, a change in the Primary Annuitant is treated as
the death of the Owner.
Distributions made to a Beneficiary upon the Owner's death from an Annuity IRA
must be made pursuant to the rules in Section 401(a)(9) of the Code.
Transfers, Assignments or Exchanges
A transfer of ownership of a Contract, the designation of an Annuitant, Payee or
other Beneficiary who is not also the Owner, or the exchange of a Contract may
result in adverse tax consequences that are not discussed in this Prospectus.
Multiple Contracts
All deferred, Non-Qualified Annuity Contracts that are issued by Great-West (or
our affiliates) to the same Owner during any calendar year will be treated as
one annuity contract for purposes of determining the taxable amount.
Withholding
Non-Qualified Annuity Contracts and Annuity IRA distributions generally are
subject to withholding at rates that vary according to the type of distribution
and the recipient's tax status. Recipients, however, generally are provided the
opportunity to elect not to have tax withheld from distributions. Certain
distributions from IRAs are subject to mandatory federal income tax withholding.
Section 1035 Exchanges
Section 1035 of the Code provides that no gain or loss shall be recognized on
the exchange of one insurance contract for another. Generally, contracts issued
in an exchange for another annuity contract are treated as new for purposes of
the penalty and distribution at death rules.
Individual Retirement Annuities
The Contract may be used with IRAs as described in Section 408 of the Code.
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an Individual Retirement Annuity. Also,
certain kinds of distributions from certain types of qualified and non-qualified
retirement plans may be "rolled over" into an Annuity IRA following the rules
set out in the Code. If you purchase this Contract for use with an IRA, you will
be provided with supplemental information. And, you have the right to revoke
your purchase within seven days of purchase of the IRA Contract.
If a Contract is purchased to fund an IRA, the Annuitant must also be the Owner.
In addition, if a Contract is purchased to fund an IRA, minimum distributions
must commence not later than April 1st of the calendar year following the
calendar year in which you attain age 70 1/2. You should consult your tax
adviser concerning these matters.
Various tax penalties may apply to Contributions in excess of specified limits,
distributions that do not satisfy specified requirements, and certain other
transactions. The Contract will be amended as necessary to conform to the
requirements of the Code if there is a change in the law. Purchasers should seek
competent advice as to the suitability of the Contract for use with IRAs.
When you make your initial Contribution, you must specify whether you are
purchasing a Non-Qualified Contract or an IRA. If the initial Contribution is
made as a result of an exchange or surrender of another annuity contract, we may
require that you provide information with regard to the federal income tax
status of the previous annuity contract.
We will require that you purchase separate Contracts if you want to invest money
qualifying for different annuity tax treatment under the Code. For each separate
Contract you will need to make the required minimum initial Contribution.
Additional Contributions under the Contract must qualify for the same federal
income tax treatment as the initial Contribution under the Contract. We will not
accept an additional Contribution under a Contract if the federal income tax
treatment of the Contribution would be different from the initial Contribution.
If a Contract is issued in connection with an employer's Simplified Employee
Pension plan, Owners, Annuitants and Beneficiaries are cautioned that the rights
of any person to any of the benefits under the Contract will be subject to the
terms and conditions of the plan itself, regardless of the terms and conditions
of the Contract.
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Assignments or Pledges
Generally, rights in the Non-Qualified Contract may be assigned or pledged for
loans at any time during the life of the Annuitant. However, if the Contract is
an IRA, you may not assign the Contract as collateral.
If a non-IRA Contract is assigned, the interest of the assignee has priority
over your interest and the interest of the Beneficiary. Any amount payable to
the assignee will be paid in a single sum.
A copy of any assignment must be submitted to the Annuity Administration
Department. All assignments are subject to any action taken or payout made by
Great-West before the assignment was processed. We are not responsible for the
validity or sufficiency of any assignment.
If any portion of the Annuity Account Value is assigned or pledged for a loan,
it will be treated as a withdrawal as discussed above under Taxation of
Annuities. Please consult a competent tax adviser for further information.
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Distribution of the Contracts
Schwab is the principal underwriter and distributor of the Contracts. Schwab is
registered with the Securities and Exchange Commission as a broker/dealer and is
a member of the National Association of Securities Dealers, Inc. (NASD). Its
principal offices are located at 101 Montgomery Street, San Francisco,
California 94104, telephone 800-838-0650.
Certain administrative services are provided by Schwab to assist Great-West in
processing the Contracts. These services are described in written agreements
between Schwab and Great-West. Great-West has agreed to indemnify Schwab (and
its agents, employees, and controlling persons) for certain damages arising out
of the sale of the Contracts, including those arising under the securities laws.
40
SELECTED FINANCIAL DATA
The following is a summary of certain financial data of the Company. This
summary has been derived in part from, and should be read in conjunction with,
the Company's Consolidated Financial Statements included within this Prospectus.
[Dollars in Millions]
Years Ended December 31,
--------------------------------------------------------------------
INCOME STATEMENT DATA 2000 1999 1998 1997 1996
------------ ------------ ----------- ---------- --------
Premiums $ 1,333 $ 1,163 $ 995 $ 833 $ 829
Fee income 872 635 516 420 347
Net investment income 931 876 897 882 835
Realized investment
gains (losses) 28 1 38 10 (21)
------------ ------------ ----------- ---------- --------
Total Revenues 3,164 2,675 2,446 2,145 1,990
Policyholder benefits 1,746 1,582 1,462 1,385 1,356
Operating expenses 1,025 804 688 552 469
------------ ------------ ----------- ---------- --------
Total benefits and
expenses 2,771 2,386 2,150 1,937 1,825
------------ ------------ ----------- ---------- --------
Income from operations 393 289 296 208 165
Income tax expense 134 83 99 49 30
---------- --------
------------ ------------ -----------
Net Income $ 259 $ 206 $ 197 $ 159 $ 135
============ ============ =========== ========== ========
Deposits for investment-
type contracts $ 835 $ 634 $ 1,344 $ 658 $ 815
Deposits to separate
accounts 3,105 2,583 2,208 2,145 1,438
Self-funded premium
equivalents 5,181 2,979 2,606 2,039 1,940
BALANCE SHEET DATA
Investment assets $ 13,689 $ 13,058 $ 13,671 $ 13,206 $ 12,717
Separate account assets 12,381 12,820 10,100 7,847 5,485
Total assets 27,897 27,530 25,123 22,078 19,351
Total policy benefit
Liabilities 12,757 12,341 12,583 11,706 11,600
Due toGreat-West Life 43 35 52 118 120
Due to GWL&A Financial Inc. 171 175
Total shareholder's equity 1,427 1,167 1,199 1,186 1,034
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company
The Company is a stock life insurance company originally organized in 1907. The
Company is domiciled in Colorado.
On December 31, 2000, the Company and certain affiliated companies completed a
corporate reorganization. Under the new structure, the Company continues to be a
wholly-owned subsidiary of GWL&A Financial Inc. ("GWL&A Financial"), a Delaware
holding company. The The Great-West Life Assurance Company ("Great-West Life")
will continue to be owned by Great-West Lifeco Inc. ("Lifeco"), a Canadian
holding company, will no longer hold an indirect equity interest in the Company.
The Company will continue to be indirectly owned by Lifeco. Lifeco is a
subsidiary of Power Financial Corporation ("Power Financial"), a Canadian
holding company with substantial interests in the financial services industry.
Power Corporation of Canada ("Power Corporation"), a Canadian holding and
management company, has voting control of Power Financial. Mr. Paul Desmarais,
through a group of private holding companies which he controls, has voting
control of Power Corporation.
Shares of Great-West Lifeco, Power Financial, and Power Corporation are traded
publicly in Canada.
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 conducts business in New York
through its subsidiary, First Great-West Life & Annuity Insurance Company. The
Company is also a licensed reinsurer in the State of New York. As of December
31, 1999, the Company ranked among the top 25 of all U.S. life insurance
companies in terms of admitted assets.
The Company operates in the following two business segments:
Employee Benefits - life, health and 401(k) products for group clients
Financial Services - savings products for both public and non-profit employers and
individuals (including 401, 403(b), 408 and 457 plans), and life
insurance products for individuals and businesses
The following discussion contains forward-looking statements. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments. In
particular, statements using verbs such as "expect," "anticipate," "believe" or
words of similar import generally involve forward-looking statements. Without
limiting the foregoing, forward-looking statements include statements which
represent the Company's beliefs concerning future or projected levels of sales
of the Company's products, investment spreads or yields, or the earnings or
profitability of the Company's activities. Forward-looking statements are
necessarily based upon estimates and assumptions that are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond the Company's control and many of which, with respect
to future business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company. Whether or not actual results differ materially from
forward-looking statements may depend on numerous foreseeable and unforeseeable
events or developments, some of which may be national in scope, such as general
economic conditions and interest rates, some of which may be related to the
insurance industry generally, such as pricing competition, regulatory
developments and industry consolidation, and others of which may relate to the
Company specifically, such as credit, volatility and other risks associated with
the Company's investment portfolio, and other factors. Readers are also directed
to consider other risks and uncertainties discussed in documents filed by the
Company and certain of its subsidiaries with the Securities and Exchange
Commission.
Management's discussion and analysis of financial condition and results of
operations of the Company for the three years ended December 31, 2000 follows.
A. COMPANY RESULTS OF OPERATIONS
-----------------------------
1. Consolidated Results
The Company's consolidated net income increased $53.4 million or 26% in 2000
when compared to 1999, reflecting improved results in both the Employee Benefits
and Financial Services segments. The Employee Benefits segment contributed $19.5
million and the Financial Services segment contributed $33.9 million to the
growth in net income. Of total consolidated net income in 2000 and 1999, the
Employee Benefits segment contributed 53% and 57%, respectively, while the
Financial Services segment contributed 47% and 43%, respectively.
The Company's consolidated net income increased $8.8 million or 5% in 1999 when
compared to 1998. In 1999, the Employee Benefits segment contributed $9.5
million to the improved consolidated results compared to the Financial Services
segment, which recorded a $0.7 million decrease.
Pursuant to a required change in accounting policy, the Company capitalized
$19.7 and $18.4 million of software development costs (see Note 1 to the
consolidated financial statements), which increased the 2000 and 1999
consolidated net income, respectively.
The Company's 1999 consolidated net income included $8.3 million due to changes
in income tax provisions for prior years. The current income tax provision was
decreased by $17.2 million in 1999 due to the release of a contingent liability
relating to taxes of Great-West Life's U.S. branch associated with the blocks of
business transferred from Great-West Life's U.S. branch to the Company, as
discussed below. Of the amount released in 1999, $8.9 million was attributable
to participating policyholders and, therefore, had no effect on the net income
of the Company.
In 2000, total revenues increased $488.6 million or 18% to $3.2 billion when
compared to 1999. The growth in revenues in 2000 was comprised of increased
premium income of $169.4 million, increased fee income of $236.5 million,
increased net investment income of $55.5 million and increased realized gains on
investments of $27.2 million. In 1999, total revenues increased $228.9 million
or 9% to $2.7 billion when compared to 1998. The growth in revenues in 1999 was
comprised of increased premium income of $168.3 million, increased fee income of
$119.1 million, decreased net investment income of $21.4 million and decreased
realized gains on investments of $37.1 million.
The increased premium income in 2000 was comprised of growth in Employee
Benefits premium income and Financial Services premium income of $151.7 million
and $17.7 million, respectively. The growth in premium income in the Employee
Benefits segment reflected $172.1 million of premium income derived from the
acquisition of the group life and health business from General American Life
Insurance Company ("General American") in 2000. The growth in premium income in
the Financial Services segment was primarily due to increased sales of the
variable annuity products. The increased premium income in 1999 was comprised of
growth in Employee Benefits premium income of $243.5 million, offset by a
decrease in Financial Services premium income of $75.2 million. The growth in
premium income in the Employee Benefits segment reflected an increase of $205.9
million of premium income derived from Alta Health & Life Insurance Company
("Alta"). The decrease of $75.2 million in Financial Services premium income was
due primarily to reinsurance transactions in 1998 of $46.2 million. There were
no significant reinsurance transactions in 1999.
The increase in fee income in 2000 was comprised of Employee Benefits fee income
and Financial Services fee income of $203.7 million and $32.8 million,
respectively. The growth in Employee Benefits fee income reflected $127.7
million of fee income derived from General American during 2000. The remaining
increase was the result of new group health sales and increased fees on 401(k)
variable funds related to growth in equity markets during the first part of
2000. The growth in Financial Services fee income in 2000 was primarily due to
new sales and increased fees in variable funds. The increased fee income in 1999
was comprised of growth in Employee Benefits fee income and Financial Services
fee income of $103.9 million and $15.2 million, respectively. The growth in
Employee Benefits fee income reflected an increase of $42.0 million of fee
income derived from Alta during 1999. The remaining increase was the result of
new group health sales and increased fees on 401(k) variable funds related to
growth in equity markets.
Realized investment gains increased from $1.1 million in 1999 to $28.3 million
in 2000. Realized investment gains were $38.2 million in 1998. The increase in
interest rates in the past two years contributed to $16.7 million and $7.8
million of fixed maturity losses in 2000 and 1999, while the decrease in
interest rates in 1998 resulted in gains on sales of fixed maturities totaling
$38.4 million in 1998. Decreases in the provision for asset losses of $8.9 and
$7.0 million, respectively, were recognized in 2000 and 1999.
Total benefits and expenses increased $384.4 million or 16% in 2000 when
compared to 1999. The increase in 2000 was due to General American group life
and health business, which resulted in an increase in benefits and expenses of
$296.6 million. Excluding General American benefits and expenses would have
increased $87.8 million or 4% in 2000. The total benefits and expenses increase
of $235.7 million from 1998 to 1999 was a combination of the acquisition of
Alta, which resulted in benefits and expenses increasing $245.3 million, offset
by a decrease in benefits and expenses due to the effect of a change in
accounting policy, which resulted in the capitalization of $18.4 million of
software costs in 1999.
Income tax expense increased $50.8 million or 61% in 2000 when compared to 1999.
This increase reflects higher pre-tax earnings in 2000 and the impact of the
1999 release of contingent tax liabilities. Income tax expense decreased $15.6
million or 16% in 1999 when compared to 1998. Excluding the contingent tax
release, the Company's income tax expense increased 2% in 1999. See Note 10 to
the Consolidated Financial Statements for a discussion of the Company's
effective tax rates.
In evaluating its results of operations, the Company also considers net changes
in deposits received for investment-type contracts, deposits to separate
accounts and self-funded equivalents. Self-funded equivalents represent paid
claims under minimum premium and administrative services only contracts, which
amounts approximate the additional premiums that would have been earned under
such contracts if they had been written as traditional indemnity or Health
Maintenance Organization ("HMO") programs.
Deposits for investment-type contracts increased $201.4 million or 32% in 2000
when compared to 1999. Deposits for investment-type contracts decreased $709.6
million or 53% in 1999 when compared to 1998. The increase in 2000 was primarily
attributable to the Financial Services segment, where the Company has
experienced growth in premium for fixed annuity products due to higher interest
crediting rates being offered to customers and the volatility in the variable
marketplace. The decrease in 1999 was primarily due to two indemnity reinsurance
agreements with Great-West Life whereby the Company reinsured by coinsurance
certain Great-West Life individual non-participating life insurance policies
during 1999. This transaction increased deposits by $519.6 million in 1998 and
accounted for 73% of the decrease in 1999.
Deposits for separate accounts increased $522 million or 20% in 2000 when
compared to 1999. This increase in 2000 is primarily due to Business Owned Life
Insurance ("BOLI") and 401(k) deposits, which increased from $200 million and
$1.7 billion, respectively, in 1999 to $365 million and $2.0 billion,
respectively, in 2000. Deposits for separate accounts increased $374.4 million
or 17% in 1999 when compared to 1998. This was due primarily to $200 million of
BOLI deposits associated with the variable life product, and a continuing
movement toward variable funds and away from guaranteed interest rate options.
Self-funded premium equivalents increased $2.2 billion or 74% in 2000 when
compared to 1999. The General American and Allmerica acquisitions resulted in an
increase of $1.7 billion for 2000. Self-funded premium equivalents increased
$372.7 million or 14% in 1999 when compared to 1998. The increase in 1999 was
primarily due to an increase in self-funded premium equivalents from Alta of
$155.2 million, with the remainder coming from the growth in business.
2. Other Matters
Effective January 1, 2000, the Company co-insured the majority of General
American Life Insurance Company's ("General American") group life and health
insurance business, which primarily consists of administrative services only and
stop loss policies. On January 1, 2000, the Company assumed approximately $150
million of policy reserves and miscellaneous liabilities in exchange for an
equal amount of cash and other assets from General American. The agreement
converted to an assumption reinsurance agreement on January 1, 2001. As of
December 31, 2000, this acquisition added over 1,008,700 medical members
representing approximately $2.3 billion of annual medical and non-medical
premium and premium equivalents.
On October 6, 1999, the Company entered into an agreement with Allmerica
Financial Corporation ("Allmerica") to acquire Allmerica's group life and health
insurance business on March 1, 2000. As of December 31, 2000, this acquisition
added 90,800 medical members and $279 million of annual medical and non-medical
premium and premium equivalents. This business primarily consists of
administrative services only and stop loss policies. The purchase price was
based on a percentage of the premium and administrative fees in force at March
1, 2000 and March 1, 2001.
On July 8, 1998, the Company acquired the outstanding common stock of Alta,
which was a subsidiary of Anthem, Inc. (the Blue Cross and Blue Shield licensee
for Indiana, Kentucky, Ohio, and Connecticut). The cost of the acquisition was
$82.7 million. The purchase price was based on adjusted book value and was
subject to further adjustments. The acquisition was accounted for as a purchase
and was financed through internally generated funds. The fair value of tangible
assets acquired and liabilities assumed was $379.9 million and $317.4 million,
respectively. The goodwill representing the purchase price in excess of fair
value of net assets acquired is included in other assets and is being amortized
over 30 years on a straight-line basis.
Life and health premium and fee income for Alta totaled $376.7 million and
$489.0 million for the years ended December 31, 2000 and 1999, respectively,
while self-funded premium equivalents were $480.4 million and $436.5 million for
the years ended December 31, 2000 and 1999, respectively. The results of Alta
since the date of acquisition are included in the Employee Benefits segment.
EMPLOYEE BENEFITS RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Employee Benefits
segment:
(Millions) Years Ended December 31,
----------------------------------------------
INCOME STATEMENT DATA 2000 1999 1998
------------- ------------ -----------
Premium income $ 1,142 $ 990 $ 747
Fee income 752 549 445
Net investment income 95 80 95
Realized investment gains (losses) (3) (1) 8
------------- ------------ -----------
Total Revenues 1,986 1,618 1,295
Policyholder benefits 923 789 590
Operating expenses 856 661 547
------------- ------------ -----------
------------- ------------ -----------
Total benefits and expenses 1,779 1,450 1,137
------------- ------------ -----------
Income from operations 206 168 158
Income tax expense 70 51 51
------------- ------------ -----------
Net Income $ 136 $ 117 $ 107
============= ============ ===========
Deposits for investment-type contracts $ 27 $ 26 $ 37
Deposits to separate accounts 1,951 1,745 1,568
Self-funded premium equivalents 5,181 2,979 2,606
During 2000, the Employee Benefits segment experienced:
o growth in 401(k) lives under administration,
o increased sales offset by some deterioration in customer retention in group
life and health, o favorable morbidity results, and o license approval for one
additional HMO subsidiary, for a total of 15 fully operational HMOs.
Net income for Employee Benefits increased 15% in 2000 and increased 9% in 1999.
The improvement in earnings in 2000 reflected favorable morbidity experience in
large case business, and the acquisition of General American's group life and
health business, which more than offset poor mortality experience. The
improvement in earnings in 1999 reflected increased fee income from variable
401(k) assets, improved group morbidity experience and the capitalization of
$17.1 million of software costs in 1999, offset by a decrease in realized
investment gains.
401(k) premiums and deposits for 2000 and 1999 increased 12% and 11%,
respectively, as the result of higher recurring deposits from existing customers
and new sales. The number of contributing participants increased from 501,000 at
December 31, 1999, to 551,000 at December 31, 2000. Assets under administration
(including third-party administration) in 401(k) decreased 9% over 1999 to $7.8
billion and increased 26% from 1998 to 1999. The decrease in 2000 was primarily
due to a weaker equity market, while the increase in 1999 was primarily due to a
stronger equity market.
Equivalent premium revenue and fee income for group life and health increased
23% from 1999 levels as the result of increased sales and the Alta and General
American acquisitions. From 1998 to 1999, equivalent premium revenue and fee
income increased 19% as a result of a combination of increased prices and the
Alta acquisition.
1. Group Life and Health
The Employee Benefits segment experienced a net increase of 107 group health
care customers (employer groups) during 2000 (versus a net increase of 468 in
1999). Much of the health care growth can be attributed to the Company's ability
to offer a choice of managed care products.
To position itself for the future, the Employee Benefits segment is focused on
putting in place the products, strategies and processes that will strengthen its
competitive position in the evolving managed care environment.
The Company experienced a 48% increase in total health care membership from
2,130,300 at the end of 1999 to 3,158,900 at year-end 2000. The General American
and Allmerica acquisitions added 1,099,500 medical members, offset by a decrease
of 70,900 in the remaining business. POS and HMO members grew 31% from 549,900
in 1999 to 718,400 in 2000. The Company expects this segment of the business to
grow as additional HMO licenses are obtained and additional Alta members are
converted.
The Company experienced a 6% decrease in total health care membership from
2,266,700 at the end of 1998 to 2,130,300 at year-end 1999 as the result of
certain large case terminations. POS and HMO members grew 5% from 522,300 in
1998 to 549,500 in 1999.
2. 401(k)
The number of new 401(k) case sales (employer groups), including third-party
administration business generated through the Company's marketing and
administration arrangement with New England, increased 973 or 19% in 2000 as
compared to 811 in 1999 (828 in 1998). The 401(k) block of business under
administration totaled 7,000 employer groups and 551,000 individual
participants, compared to 6,400 employer groups and more than 500,000 individual
participants in 1999, and 6,100 employer groups and 475,000 individual
participants in 1998.
During 2000, the in-force block of 401(k) business continued to perform well
with customer retention of 93.7% versus 92.9% in 1999.
In addition to the Company's internally-managed funds, the Company offers
externally-managed funds from recognized mutual funds companies such as AIM,
Fidelity, Putnam, American Century, Founders and T. Rowe Price. This strategy,
supported by participant education efforts, is validated by the fact that 99% of
assets contributed in 2000 were allocated to variable funds.
To promote long-term asset retention, the Company enhanced a number of products
and services including prepackaged "lifestyle" funds (The Profile Series),
expense reductions for high-balance accounts, a rollover IRA product, more
effective enrollment communications, one-on-one retirement planning assistance
and personal plan illustrations.
3. Outlook
The Alta, General American, and Allmerica acquisitions will continue to provide
the Company with critical mass to compete in the consolidating health care
insurance business. Through a combination of internal growth and new business
acquisitions, the Company has over 3.1 million medical members. This growth
presented service challenges that are being addressed. The Company is working to
ensure that its service levels are maintained at the level its customers expect.
In order to remain competitive with respect to our morbidity results, an
increased emphasis on our provider contracting is essential. Furthermore, the
Company will enhance its focus on expense economies and synergies to ensure
competitive administrative costs on a per member per month basis. The successful
consolidation of the benefit payment offices will remain an important
operational issue from both a cost and quality perspective.
The Company will continue to enhance its One Health Plan managed care
subsidiaries. In 2001, the total number of licensed One Health Plan HMOs is
expected to be 18. These HMO's will continue to provide current customers with a
comprehensive national managed care network. In 2000, the Company implemented an
Internet based disease management program for members with diabetes, asthma, or
coronary heart disease, which will continue in 2001, with expansion to include
new conditions.
Delivering cost-effective, value-added services via the Internet will continue
to be a main focus for the Company. The Company has implemented online
enrollment capabilities for 401(k) participants, as well as an online investment
advisor to provide 401(k) participants with personal investment advice via the
Internet. This action, combined with a competitive product portfolio, should
result in an increase in new case sales and cross sales. Online enrollment for
life and health members was introduced in 2000, and is scheduled for
implementation in 2001.
FINANCIAL SERVICES RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Financial Services
segment:
(Millions) Years Ended December 31,
-------------------------------------------------
INCOME STATEMENT DATA 2000 1999 1998
-------------- ------------ -------------
Premium income $ 191 $ 173 $ 248
Fee income 120 86 71
Net investment income 836 796 802
Realized investment gains 31 2 30
-------------- ------------ -------------
Total Revenues 1,178 1,057 1,151
Policyholder benefits 823 793 872
Operating expenses 168 143 141
-------------- ------------ -------------
Total benefits and expenses 991 936 1,013
-------------- ------------ -------------
Income from operations 187 121 138
Income tax expense 64 32 48
-------------- ------------ -------------
Net Income $ 123 $ 89 $ 90
============== ============ =============
Deposits for investment-type contracts $ 808 $ 608 $ 1,307
Deposits to separate accounts 1,154 838 640
During 2000, the Financial Services segment experienced:
o significant growth in participants and separate account deposits primarily
attributable to the public/non-profit business,
o very strong persistency in all lines of business, and o increased sales of
BOLI.
Net income for Financial Services increased 38% in 2000 and decreased 1% in
1999. The increase in earnings in 2000 reflected strong earnings from an
increased asset base, an increase in investment margins, and significant capital
gains on fixed maturities. The earnings in 1999 were favorably impacted by
improved investment margins and increased fee income, but were adversely
impacted by the large decrease in realized investment gains. The changes in
income tax provisions discussed above under "Company Results of Operations"
resulted in an increase in net income for the Financial Services segment of $3.6
million in 1999.
1. Savings
Premiums decreased $7.0 million or 49%, from $14.3 million in 1999 to $7.3
million in 2000. Premiums decreased $2.5 million or 14%, from $16.8 million in
1998 to $14.3 million in 1999. The decrease in both years is attributable to the
continuing trend of policyholders selecting variable annuity options (separate
accounts) as opposed to the more traditional fixed annuity products with life
contingencies.
Fee income increased $29.9 million or 37%, from $81.3 million in 1999 to $111.2
million in 2000. Fee income related to savings products increased $10.3 million
or 15%, from $71.0 million in 1998 to $81.3 million in 1999. The growth in fee
income in 2000 and 1999 was the result of new sales and increased fees on
variable funds related to significant growth in equity markets during the first
three quarters of 2000.
Deposits for investment-type contracts increased $200 million or 30%, from $608
million in 1999 to $808 million in 2000. This significant increase was the
result of several large case sales in the fixed portfolio products. Deposits for
investment-type contracts decreased $699 million or 50%, from $1.3 billion in
1998 to $608 million in 1999.
Deposits to separate accounts increased $316 million or 30%, from $838 million
in 1999 to $1.2 billion in 2000. Deposits to separate accounts increased $198
million or 30%, from $640 million in 1998 to $838 million in 1999. The increases
in 2000 and 1999 were primarily from an increase in single premiums.
The Financial Services segment's core savings business is in the
public/non-profit pension market. The assets of the public/non-profit business,
including separate accounts but excluding Guaranteed Investment Contracts
("GICs"), remained flat during 2000 and 1999 at $7.9 billion. In 2000, the drop
in the equity markets during the fourth quarter offset a large portion of the
new premiums in the variable annuity business. This, along with the reduction of
fixed premiums, resulted in a zero increase for the year in the total assets of
the public/non-profit business.
The Financial Services segment's savings business experienced strong growth in
2000. The number of new participants in 2000 was 233,000 compared to 214,100 in
1999 (151,300 in 1998), bringing the total lives under administration to
1,002,785 in 2000 and 834,725 in 1999.
The Financial Services segment again experienced a very high retention rate on
public/non-profit contract renewals, renewing nearly 100% of contracts that were
eligible for renewal during the year. Part of this customer loyalty comes from
initiatives to provide high-quality service while controlling expenses.
The Company continued to limit sales of GICs and to allow this block of business
to contract in response to the highly competitive GIC market. As a result, in
2000, GIC assets decreased 1.7% from 1999, to $103.0 million. GIC assets
decreased 62% in 1999, to $104.7 million.
Customer demand for investment diversification continued to grow during 2000.
New contributions to variable business represented 56% of the total premium
equivalents in 2000 versus 64% in 1999. The Company continues to expand the
investment products available through its in-house Maxim Series Fund, Inc., and
Orchard Series Fund, and through partnership arrangements with external fund
managers. Externally-managed funds offered to participants in 2000 included AIM,
American Century, Ariel, Fidelity, Founders, INVESCO, Janus, Loomis Sayles,
Templeton and T. Rowe Price.
Customer participation in guaranteed separate accounts increased, as many
customers prefer the security of fixed income securities and separate account
assets. Assets under management for guaranteed separate account funds were
$749.3 million in 2000, compared to $653.7 million in 1999 and $562.3 million in
1998.
FASCorp administered records for approximately 1,875,000 participants in 2000
versus 1,595,000 in 1999. FASCorp's fee income was $63.8 million, $53.8 million,
and $44.0 million for the years ending December 31, 2000, 1999 and 1998,
respectively.
2. Life Insurance
The Company continued its conservative approach to the design and distribution
of traditional life insurance products, while focusing on customer retention and
expense management.
Individual life insurance revenue premiums and deposits of $871.3 million in
2000 reflected an increase of 18% over 1999 premiums and deposits of $735.3
million. The increase was primarily due to significant BOLI separate account
deposits.
In 1996, the U.S. Congress enacted legislation to phase out the tax
deductibility of interest on policy loans on COLI products. Since then, renewal
premiums and deposits for COLI products have decreased to $84.1 million in 2000
from $128.5 million in 1999 and $139.8 million in 1998, and the Company expects
this decline to continue. As a result of these legislative changes, the Company
has shifted its emphasis from COLI to new sales in the BOLI market. This product
provides long-term benefits for bank employees and was not affected by the 1996
legislative changes. BOLI premiums and deposits were $581.9 million during 2000,
compared to $436.3 million in 1999 and $408.3 million in 1998. The Company
continues working closely with existing COLI customers to determine the options
available to them and is confident that the effect of the legislative changes
will not be material to the Company's operations.
3. Outlook
Increased emphasis on the employee's need for retirement funds in the maturing
government pension market is expected to continue the flow of deposits into the
retirement accounts of existing participants. The shortage of employees in the
job market has led the governments to introduce employer-matching plans, which
should also increase the number of potential government employees who will be
contributing to retirement plans. Current market trends are to replace the
existing defined benefit plans with defined contribution plans and this is
expected to provide marketing opportunities in the future.
Continued management emphasis on the reduction of unit costs in the FASCorp
administration arena are designed to allow the Company to remain competitive in
the recordkeeping market. The increase of 300,000 new lives under administration
in FASCorp in the year 2000 is indicative of this trend. This is expected to
continue in the future.
Individual annuities have experienced substantial growth in the variable market
with the Schwab qualified and non-qualified annuities. Sales are expected to
increase, as the Schwab annuity is a very competitively priced product that is
distributed through a well-known and respected broker.
Individual bank policy sales are expected to grow significantly in the year
2000. Distribution channels are presently established in three large banks and
management plans to expand into additional banks in 2001. BOLI sales are
expected to continue to be strong in the separate account market and also in the
small case BOLI market.
INVESTMENT OPERATIONS
The Company's primary investment objective is to acquire assets whose durations
and cash flows reflect the characteristics of the Company's liabilities, while
meeting industry, size, issuer and geographic diversification standards. Formal
liquidity and credit quality parameters have also been established.
The Company follows rigorous procedures to control interest rate risk and
observes strict asset and liability matching guidelines. These guidelines ensure
that even under changing market conditions, the Company's assets will meet the
cash flow and income requirements of its liabilities. Using dynamic modeling to
analyze the effects of a wide range of possible market changes upon investments
and policyholder benefits, the Company ensures that its investment portfolio is
appropriately structured to fulfill financial obligations to its policyholders.
A summary of the Company's general account invested assets follows:
[Millions] 2000 1999
------------ ------------
Fixed maturities, available for sale, at fair value $ 9,420 $ 6,728
Fixed maturities, held-to-maturity, at amortized cost 2,260
Mortgage loans 843 975
Real estate and common stock 202 173
Short-term investments 414 241
Policy loans 2,810 2,681
------------ ------------
Total invested assets $ 13,689 $ 13,058
============ ============
1. Fixed Maturities
Fixed maturity investments include public and privately placed corporate bonds,
government bonds and mortgage-backed and asset-backed securities. The Company's
strategy related to mortgage-backed and asset-backed securities is to focus on
those with lower volatility and minimal credit risk. The Company does not invest
in higher risk collateralized mortgage obligations such as interest-only and
principal-only strips, and currently has no plans to invest in such securities.
Private placement investments are generally less marketable than publicly traded
assets, yet they typically offer covenant protection which allows the Company,
if necessary, to take appropriate action to protect its investment. The Company
believes that the cost of the additional monitoring and analysis required by
private placements is more than offset by their enhanced yield.
One of the Company's primary objectives is to ensure that its fixed maturity
portfolio is maintained at a high average quality, so as to limit credit risk.
If not externally rated, the securities are rated by the Company on a basis
intended to be similar to that of the rating agencies.
During the fourth quarter of 2000, the Company transferred all securities
classified as held-to-maturity into the available-for-sale category. See Item 8
(Financial Statements and Supplementary Data), Note 6 for further discussion
related to this transfer.
The distribution of the fixed maturity portfolio by credit rating is summarized
as:
Credit Rating 2000 1999
-------------
----------------- -----------------
AAA 53.5% 48.9%
AA 10.2 8.9
A 16.2 19.6
BBB 19.0 22.3
BB and Below (non-investment grade) 1.1 0.3
----------------- -----------------
TOTAL 100.0% 100.0%
At December 31, 2000 and 1999, the Company had two bonds in default with a
carrying value of $10.7 million.
2. Mortgage Loans
During 2000, the mortgage portfolio declined 14% to $800 million, net of
impairment reserves. The Company has not actively sought new loan opportunities
since 1989 and, as such, has experienced an ongoing reduction in this
portfolio's balance.
The Company follows a comprehensive approach to the management of mortgage loans
which includes ongoing analysis of key mortgage characteristics such as debt
service coverage, net collateral cash flow, property condition, loan to value
ratios and market conditions. Collateral valuations are performed for those
mortgages which, after review, are determined by management to present possible
risks and exposures. These valuations are then incorporated into the
determination of the Company's allowance for credit losses.
The average balance of impaired loans decreased to $39.3 million in 2000
compared with $43.9 million in 1999, and there were $2.0 million of foreclosures
in 2000, compared to $0 in 1999. The low levels of problematic mortgages
relative to the Company's overall balance sheet are due to the ongoing decrease
in the size of the mortgage portfolio, the Company's active loan management
program and overall strength in market conditions.
Occasionally, the Company elects to restructure certain loans if the economic
benefits to the Company are believed to be more advantageous than those achieved
by acquiring the collateral through foreclosure. At December 31, 2000 and 1999,
the Company's loan portfolio included $73.5 million and $75.7 million,
respectively, of non-impaired restructured loans.
3. Real Estate and Common Stock
The Company's real estate portfolio is composed primarily of the Head Office
property ($102.8 million) and properties acquired through the foreclosure of
troubled mortgages ($2.1 million), which attempts to maximize the value of these
properties through rehabilitation, leasing and sale. The Company added a third
tower to its Head Office complex during the first quarter of 2000.
The common stock portfolio is composed of mutual fund seed money and public and
private equity investments. The Company anticipates a limited participation in
the stock markets in 2001.
4. Derivatives
The Company uses certain derivatives, such as futures, options and swaps, for
purposes of hedging interest rate and foreign exchange risk. These derivatives,
when taken alone, may subject the Company to varying degrees of market and
credit risk; however, when used for hedging, these instruments typically reduce
risk. The Company controls the credit risk of its financial contracts through
credit approvals, limits and monitoring procedures. The Company has also
developed controls within its operations to ensure that only Board authorized
transactions are executed. Note 1 to the Consolidated Financial Statements
contains a summary of the Company's outstanding financial hedging derivatives.
5. Outlook
The U.S. economy grew at a real rate of approximately 5% in 2000. The rate of
growth, however, slowed noticeably in the second half of the year, and several
factors suggest that the slowdown will be sustained. The Federal Reserve Board,
after 18 months of restrictive policy, on January 3, 2001 and January 31, 2001,
cut the Federal Funds rate by 50 basis points from 6.50% to 6.00% and from 6.00%
to 5.50%, respectively. The rate cut was in response to data releases indicating
that the economy was slowing more quickly than anticipated. The Federal Open
Market Committee bias is currently towards easing the interest rates. The
magnitude and timing of further rate cuts will be dependent on economic
conditions.
The Company's investment portfolio is well positioned for a potential declining
interest rate environment. The portfolio is diversified and is comprised of high
quality, stable assets. Asset acquisitions in 2001 will target investment grade
bonds appropriate for the expected economic and interest rate environment and
liability requirements. It is the Company's philosophy and intent to maintain
its proactive portfolio management policies in an ongoing effort to ensure the
quality and performance of its investments.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have liquidity requirements that vary among the
principal product lines. Life insurance and pension plan reserves are primarily
long-term liabilities. Accident and health reserves, including long-term
disability, consist of both short-term and long-term liabilities. Life insurance
and pension plan reserve requirements are usually stable and predictable, and
are supported primarily by long-term, fixed income investments. Accident and
health claim demands are stable and predictable but generally shorter term,
requiring greater liquidity.
Generally, the Company has met its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and utilizing
positive cash flows from operations. Liquidity for the Company has remained
strong, as evidenced by significant amounts of short-term investments and cash,
which totaled $568.4 million and $508.3 million as of December 31, 2000 and
1999, respectively.
Funds provided by premiums and fees, investment income and maturities of
investment assets are reasonably predictable and normally exceed liquidity
requirements for payment of claims, benefits and expenses. However, since the
timing of available funds cannot always be matched precisely to commitments,
imbalances may arise when demands for funds exceed those on hand. Also, a demand
for funds may arise as a result of the Company taking advantage of current
investment opportunities. The Company's capital resources represent funds
available for long-term business commitments and primarily consist of retained
earnings and proceeds from the issuance of commercial paper and equity
securities. Capital resources provide protection for policyholders and financial
strength to support the underwriting of insurance risks, and allow for continued
business growth. The amount of capital resources that may be needed is
determined by the Company's senior management and Board of Directors as well as
by regulatory requirements. The allocation of resources to new long-term
business commitments is designed to achieve an attractive return, tempered by
considerations of risk and the need to support the Company's existing business.
The Company's financial strength provides the capacity and flexibility to enable
it to raise funds in the capital markets through the issuance of commercial
paper. The Company continues to be well capitalized, with sufficient borrowing
capacity to meet the anticipated needs of its business. The Company had $97.6
million of commercial paper outstanding at December 31, 2000, compared with $0
million at December 31, 1999. The commercial paper has been given a rating of
A-1+ by Standard & Poor's Corporation and a rating of P-1 by Moody's Investors
Service, each being the highest rating available. In addition, the Company
issued a surplus note to GWL&A Financial in 1999. The surplus note bears
interest at 7.25% and is due June 30, 2048.
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities - A Replacement of FASB Statement No. 125", which revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral, and requires certain disclosures. Statement No. 140 will
be effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. However, certain disclosure
requirements under Statement No. 140 were effective December 15, 2000, and these
requirements have been incorporated in the Company's financial statements (see
Note 6 to the Consolidated Financial Statements). Management does not anticipate
that the adoption of the New Statement will have a significant effect on the
financial position or results of operations of the Company.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements", which
provides guidance with respect to revenue recognition issues and disclosures. As
amended by SAB No. 101 no later than the fourth quarter of the fiscal year
ending December 31, 2000. The adoption of SAB No. 101 did not affect the
Company's revenue recognition practices.
Effective January 1, 2001, the Company adopted FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" as amended by
FASB Statement No. 138. The Statements require that all derivative financial
instruments be recognized in the financial statements as assets or liabilities
and measured at fair value regardless of the purpose or intent for holding them.
Gains or losses resulting from changes in the fair value of derivatives are
accounted for depending on the intended use of the derivative and whether it
qualifies for hedge accounting. Upon adoption, a transition adjustment of
approximately $1 million increased accumulated comprehensive income.
See Note 1 to the Consolidated Financial Statements for additional information
regarding accounting pronouncements.
REGULATION
1. Insurance Regulation
The business of the Company is subject to comprehensive state and federal
regulation and supervision throughout the United States, which primarily
provides safeguards for policyholders rather than investors. The laws of the
various state jurisdictions establish supervisory agencies with broad
administrative powers with respect to such matters as admittance of assets,
premium rating methodology, policy forms, establishing reserve requirements and
solvency standards, maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, the type, amounts and
valuation of investments permitted and HMO operations.
The Company's operations and accounts are subject to examination by the Colorado
Insurance Division and other regulators at specified intervals. The latest
financial examination by the Colorado Insurance Division was completed in 1997,
and covered the five-year period ended December 31, 1995. This examination
produced no significant adverse findings regarding the Company. The next
examination by the Colorado Insurance Division is scheduled for 2001, and will
cover the five-year period ended December 31, 2000.
The National Association of Insurance Commissioners ("NAIC") has adopted
risk-based capital rules and other financial ratios for life insurance
companies. Based on the Company's December 31, 2000 statutory financial reports,
the Company has risk-based capital well in excess of that required and was
within the usual ranges of all ratios.
The NAIC has also adopted the Codification of Statutory Accounting Principles
("Codification"). The Codification, which is intended to standardize accounting
and reporting to state insurance departments, is effective January 1, 2001.
However, statutory accounting principles will continue to be established by
individual state laws and permitted practices. The Colorado Division of
Insurance will require adoption of Codification with certain modifications for
the preparation of statutory financial statements effective January 1, 2001 (see
Note 12 to the consolidated financial statements).
2. Insurance Holding Company Regulations
The Company and certain of its subsidiaries are subject to and comply with
insurance holding company regulations in the applicable states. These
regulations contain certain restrictions and reporting requirements for
transactions between affiliates, including the payments of dividends. They also
regulate changes in control of an insurance company.
3. Securities Laws
The Company is subject to various levels of regulation under federal securities
laws. The Company's broker-dealer subsidiaries are regulated by the Securities
and Exchange Commission ("SEC") and the National Association of Securities
Dealers, Inc. The Company's investment advisor subsidiary and transfer agent
subsidiary are regulated by the SEC. Certain of the Company's separate accounts,
mutual funds and variable insurance and annuity products are registered under
the Investment Company Act of 1940 and the Securities Act of 1933.
4. Guaranty Funds
Under insurance guaranty fund laws existing in all states, insurers doing
business in those states can be assessed (up to prescribed limits) for certain
obligations of insolvent insurance companies. The Company has established a
reserve of $7.1 million as of December 31, 1999 to cover future assessments of
known insolvencies of other companies. The Company has historically recovered
more than half of the guaranty fund assessments through statutorily permitted
premium tax offsets. The Company has a prepaid asset associated with guaranty
fund assessments of $2.0 million at December 31, 2000.
5. Potential Legislation
United States legislation developments in various areas, including pension
regulation, financial services regulation and health care legislation could
significantly and adversely affect the Company in the future. Congress has from
time to time considered legislation relating to health care reform and managed
care issues (including patients' rights, privacy of medical records and managed
care plan or enterprise liability), changes in the deferral of taxation on the
accretion of value within certain annuities and life insurance products, changes
in regulation for the Employee Retirement Income Security Act of 1974, as
amended, and changes to various features of retirement plans such as deferral
limits, distribution options, portability and catch-up. It is not possible to
predict whether future legislation or regulation adversely affecting the
business of the Company will be enacted and, if enacted, the extent to which
such legislation or regulation will have an effect on the Company and its
competitors.
RATINGS
The Company is rated by a number of nationally recognized rating agencies. The
ratings represent the opinion of the rating agencies on the financial strength
of the Company and its ability to meet the obligations of its insurance
policies.
Rating Agency Measurement Rating
- ------------------------------------------ ---------------------------------------------------------- -------------
A.M. Best Company Financial Strength and Operating Performance A++ *
Fitch, Inc. Claims Paying Ability AAA *
Standard & Poor's Corporation Financial Strength AA+ **
Moody's Investors Service Financial Strength Aa2 ***
* Highest ratings available.
** Second highest rating out of 21 rating categories. *** Third highest rating
out of 21 rating categories.
MISCELLANEOUS
No customer accounted for 10% or more of the Company's consolidated revenues in
2000 and 1999. In addition, no segment of the Company's business is dependent on
a single customer or a few customers, the loss of which would have a significant
effect on the Company or any of its business segments. 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 segments.
The Company had approximately 8,600 employees at December 31, 2000.
The Head Office of the Company consists of a 752,000 square foot office complex
located in Greenwood Village, Colorado. The Company leases sales and claims
offices throughout the United States.
DIRECTORS AND EXECUTIVE OFFICERS
Following is information concerning the Company's directors and executive
officers, together with their principal occupation for the past five years.
Unless otherwise indicated, all of the directors and executive officers have
been engaged for not less than five years in their present principal occupations
or in another executive capacity with the companies or firms identified.
Directors are elected annually to serve until the following annual meeting of
shareholders.
The appointments of executive officers are confirmed annually.
Served as Principal Occupation(s)
Director Age Director From For Last Five Years
- ------------------------------------- ---------- -------------------- ---------------------------------------
James Balog 72 1993 Company Director
(1)(2)
James W. Burns, O.C. 71 1991 Chairman of the Boards of Great-West
(1)(2)(4) Lifeco, Great-West Life, London
Insurance Group Inc. and London Life
Insurance Company; Deputy Chairman,
Power Corporation
Orest T. Dackow 64 1991 Company Director since April 2000;
(1)(2)(4) previously, President and Chief
Executive Officer, Lifeco
Andre Desmarais 44 1997 President and Co-Chief Executive
(1)(2)(4)(5) Officer, Power Corporation; Deputy
Chairman, Power Financial
Paul Desmarais, Jr. 46 1991 Chairman and Co-Chief Executive
(1)(2)(4)(5) Officer, Power Corporation; Chairman,
Power Financial
Robert Gratton 57 1991 Chairman of the Board of the Company;
(1)(2)(4) President and Chief Executive
Officer, Power Financial
Kevin P. Kavanagh 68 1986 Company Director; Chancellor, Brandon
(1)(3)(4) University
William Mackness 62 1991 Company Director
(1)(2)
William T. McCallum 58 1990 President and Chief Executive Officer
(1)(2)(4) of the Company; Co-President and
Chief Executive Officer, Great-West
Lifeco
Served as Principal Occupation(s)
Director Age Director From For Last Five Years
- ------------------------------------- ---------- -------------------- ---------------------------------------
Jerry E.A. Nickerson 64 1994 Chairman of the Board, H.B. Nickerson
(3)(4) & Sons Limited (a management and
holding company)
The Honourable 63 1991 Vice-Chairman, Power Corporation;
P. Michael Pitfield, P.C., Q.C. Member of the Senate of Canada
(1)(2)(4)
Michel Plessis-Belair, F.C.A. 58 1991 Vice-Chairman and Chief Financial
(1)(2)(3)(4) Officer, Power Corporation; Executive
Vice-President and Chief Financial
Officer, Power Financial
Brian E. Walsh 47 1995 Managing Partner, Veritas Capital
(1)(2)(3) Management, LLC (a merchant banking
company) since September 1997;
previously Partner, Trinity L.P. (an
investment company)
(1) Member of the Executive Committee
(2) Member of the Investment and Credit Committee
(3) Member of the Audit Committee
(4) Also a director of Great-West Life
(5) Mr. Andre Desmarais and Mr. Paul Desmarais, Jr. are brothers.
The following is a list of directorships held by the directors of the Company,
on companies whose securities are traded publicly in the United States or that
are investment companies registered under the Investment Company Act of 1940.
Transatlantic Holdings Inc.
J. Balog Phoenix-Zweig Advisers, LLC
Euclid Fund
Maxim Series Fund, Inc.
W.T. McCallum Orchard Series Fund
Great-West Variable Annuity Account A
IDENTIFICATION OF EXECUTIVE OFFICERS
Served as
Executive Principal Occupation(s)
Executive Officer Age Officer From For Last Five Years
- ------------------------------------- ---------- ------------------ -----------------------------------------
William T. McCallum President and 58 1984 President and Chief Executive Officer
Chief of the Company; Co-President and Chief
Executive Officer Executive Officer, Great-West Lifeco
Mitchell T.G. Graye 45 1997 Executive Vice President and Chief
Executive Vice President and Chief Financial Officer of the Company
Financial Officer
James D. Motz 51 1992 Executive Vice President, Employee
Executive Vice President, Benefits of the Company
Employee Benefits
Douglas L. Wooden 44 1991 Executive Vice President, Financial
Executive Vice President, Services of the Company
Financial Services
John A. Brown 53 1992 Senior Vice President, BenefitsCorp
Senior Vice President, BenefitsCorp Healthcare Markets of the Company
Healthcare Markets
Mark Corbett 41 2001 Senior Vice President, Investments of
Senior Vice President, Investments the Company
Donna A. Goldin 53 1996 Executive Vice President and Chief
Executive Vice President and Chief Operating Officer, One Corporation
Operating Officer, since June 1996; previously Executive
One Corporation Vice President and Chief Operating
Officer, Harris Methodist Health Plan
(a health maintenance organization)
Wayne T. Hoffmann 45 2001 Senior Vice President, Investments of
Senior Vice President, Investments the Company
Mark S. Hollen 42 2000 Senior Vice President, FASCorp of the
Senior Vice President, Company
FASCorp
D. Craig Lennox 53 1984 Senior Vice President, General Counsel
Senior Vice President, General and Secretary of the Company
Counsel and Secretary
Steve H. Miller 48 1997 Senior Vice President, Employee
Senior Vice President, Employee Benefits Sales of the Company
Benefits Sales
Charles P. Nelson 40 1998 President, BenefitsCorp
President, BenefitsCorp
Martin Rosenbaum 48 1997 Senior Vice President,
Senior Vice President, Employee Benefits Finance of the Company
Employee Benefits Finance
Gregory E. Seller 47 1999 Senior Vice President,
Senior Vice President, BenefitsCorp Government Markets of the
BenefitsCorp Government Markets Company
Robert K. Shaw 45 1998 Senior Vice President,
Senior Vice President, Individual Markets of the Company
Individual Markets
George D. Webb 57 1999 Senior Vice President of the Company
President, since July 1999; previously Principal,
Advised Assets Group, Inc. William M. Mercer Investment Consulting
Inc. (an investment consulting company)
Warren J. Winer 54 2001 Senior Vice President, Employee
Senior Vice President, Benefits of the Company
Employee Benefits
Jay W. Wright 49 2001 Senior Vice President,
Senior Vice President, Employee Benefits of the Company
Employee Benefits
EXECUTIVE COMPENSATION
The following table sets out all compensation paid by the Company to the
individuals who were, at December 31, 2000, the Chief Executive Officer and the
other four most highly compensated executive officers of the Company
(collectively the "Named Executive Officers") for the three most recently
completed financial years.
SUMMARY COMPENSATION TABLE
====================================== ============== ===================================== =======================================
Annual Compensation Long-term Compensation
Awards
-------------------------------------- -------------- ------------------------------------- ---------------------------------------
-------------------------------------- -------------- ----------------- ------------------- ---------------------------------------
Name and Year Salary Bonus Options(1)
Principal Position ($) ($) (#)
-------------------------------------- -------------- ----------------- ------------------- ---------------------------------------
W.T. McCallum 2000 871,500 (4) 450,001(2)
President and Chief 1999 834,659 680,000 100,000(2)
Executive Officer 1998 772,311 432,250 --
-------------------------------------- -------------- ----------------- ------------------- ---------------------------------------
-------------------------------------- -------------- ----------------- ------------------- ---------------------------------------
D.L. Wooden
2000 475,000 356,200 200,001(2)
Executive Vice President, 1999 365,000 219,000 --
Financial Services 1998 330,000 198,000 --
-------------------------------------- -------------- ----------------- ------------------- ---------------------------------------
-------------------------------------- -------------- ----------------- ------------------- ---------------------------------------
J.D. Motz 2000 475,000 (4) 200,001(2)
Executive Vice President, 1999 385,000 192,500 --
Employee Benefits 1998 350,000 157,500 --
-------------------------------------- -------------- ----------------- ------------------- ---------------------------------------
-------------------------------------- -------------- ----------------- ------------------- ---------------------------------------
J.T. Hughes 2000 352,955 157,500 --
Senior Vice President, 1999 350,000 185,500 --
Chief Investment Officer 1998 338,000 185,900 --
-------------------------------------- -------------- ----------------- ------------------- ---------------------------------------
-------------------------------------- -------------- ----------------- ------------------- ---------------------------------------
M.T.G. Graye 2000 375,000 253,200 125,001(2)
Executive Vice President, 1999 315,000 189,000 18,000(2)
and Chief Financial Officer 1998 275,000 151,250 18,000(3)
====================================== ============== ================= =================== =======================================
(1) The options set out are options for common shares of Great-West Lifeco
which are granted by Great-West Lifeco pursuant to the Great-West Lifeco
Stock Option Plan ("Lifeco Options").
(2) These Lifeco Options become exercisable on specified dates and expire ten
years after the date of the grant.
(3) All or portions of these Lifeco Options become exercisable if certain
financial targets are attained. If exercisable, the exercise period runs
from April 1, 2002 to June 26, 2007.
(4) The bonuses for W.T. McCallum and J.D. Motz are calculated on a formula
basis, the results of which were not determined as at the date hereof. The
bonuses will be reflected in next year's Form 10-K.
OPTIONS
The following table describes options granted to the Named Executive Officers
during the most recently completed fiscal year. All options are Lifeco Options
granted pursuant to the Great-West Lifeco Stock Option Plan. Lifeco Options are
issued with an exercise price in Canadian dollars. Canadian dollar amounts have
been translated to U.S. dollars at a rate of 1/1.50.
OPTION GRANTS IN LAST FISCAL YEAR
====================================================================================== ===================================
Potential realizable value at
Individual Grants assumed annual rates of stock
price appreciation for option term
- -------------------------------------------------------------------------------------- -----------------------------------
Name Options Percentage of Exercise or Expiration date 5% 10%
total options
granted to
employees in base price
Granted (#) fiscal year ($/share) ($) ($)
- --------------------- ------------ --------------- ----------------- ----------------- ----------------- -----------------
W.T. McCallum 450,001 12.42 14.85 April 26, 2010 4,202,600 10,650,204
- --------------------- ------------ --------------- ----------------- ----------------- ----------------- -----------------
- --------------------- ------------ --------------- ----------------- ----------------- ----------------- -----------------
D.L. Wooden 200,001 5.52 14.85 April 26, 2010 1,867,827 4,733,437
- --------------------- ------------ --------------- ----------------- ----------------- ----------------- -----------------
- --------------------- ------------ --------------- ----------------- ----------------- ----------------- -----------------
J.D. Motz 200,001 5.52 14.85 April 26, 2010 1,867,827 4,733,437
- --------------------- ------------ --------------- ----------------- ----------------- ----------------- -----------------
- --------------------- ------------ --------------- ----------------- ----------------- ----------------- -----------------
M.T.G. Graye 125,001 3.45 14.85 April 26, 2010 1,167,396 2,958,407
===================== ============ =============== ================= ================= ================= =================
Prior to April 24,1996, the Named Executive Officers participated in the Power
Financial Employee Share Option Plan pursuant to which options to acquire common
shares of Power Financial ("PFC Options") were granted. The following table
describes all PFC Options exercised in 2000, and all unexercised PFC Options
held as of December 31, 2000, by the Named Executive Officers. PFC Options are
issued with an exercise price in Canadian dollars. Canadian dollar amounts have
been translated to U.S. dollars at a rate of 1/1.50.
AGGREGATED PFC OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
======================= =============== ============= ================================= ==================================
Value of unexercised in-the-
Unexercised options at money options at fiscal year-
fiscal year-end end
(#) ($)
- ----------------------- --------------- ------------- --------------------------------- ----------------------------------
Shares
acquired Value
on exercise realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($)
- ----------------------- --------------- ------------- --------------- ----------------- ---------------- -----------------
D.L. Wooden 176,000 3,097,417 - - - -
- ----------------------- --------------- ------------- --------------- ----------------- ---------------- -----------------
M.T.G. Graye 70,000 - 1,389,354 -
======================= =============== ============= =============== ================= ================ =================
Commencing April 24,1996, the Named Executive Officers began participating in
the Great-West Lifeco Stock Option Plan. The following table describes all
Lifeco Options exercised in 2000, and all unexercised Lifeco Options held as of
December 31, 2000, by the Named Executive Officers. Lifeco Options are issued
with an exercise price in Canadian dollars. Canadian dollar amounts have been
translated to U.S. dollars at a rate of 1/1.50.
AGGREGATED LIFECO OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
======================= =============== =========== ================================ =====================================
Value of unexercised in-the-
Unexercised options at money options at fiscal year-
fiscal year-end end
(#) ($)
- ----------------------- --------------- ----------- -------------------------------- -------------------------------------
Shares
acquired Value
on exercise realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($)
- ----------------------- --------------- ----------- -------------- ----------------- --------------- ---------------------
W.T. McCallum - - 650,000 1,100,000 10,863,217 14,437,420
- ----------------------- --------------- ----------- -----------------
- ----------------------- --------------- ----------- -------------- ----------------- --------------- ---------------------
D.L. Wooden - - 160,000 540,001 3,058,343 6,931,760
- ----------------------- --------------- ----------- -----------------
- ----------------------- --------------- ----------- -------------- ----------------- --------------- ---------------------
J.D. Motz - - 220,000 580,001 4,094,055 7,622,235
- ----------------------- --------------- ----------- -----------------
- ----------------------- --------------- ----------- -------------- ----------------- --------------- ---------------------
J.T. Hughes - - 128,000 32,000 2,446,507 611,627
- ----------------------- --------------- ----------- -------------- ----------------- --------------- ---------------------
- ----------------------- --------------- ----------- -----------------
M.T.G. Graye - - 112,800 312,201 2,099,536
3,910,234
======================= =============== =========== ============== ================= =============== =====================
PENSION PLAN TABLE
The following table sets out the pension benefits payable to the Named Executive
Officers by Great-West Life or the Company.
PENSION PLAN TABLE
===================== ==================================================================================================
Years of Service
--------------------------------------------------------------------------------------------------
Remuneration
($) 15 20 25 30 35
- --------------------- ------------------ ------------------- ------------------ ------------------- --------------------
400,000 120,000 160,000 200,000 240,000 240,000
- --------------------- ------------------ ------------------- ------------------ ------------------- --------------------
500,000 150,000 200,000 250,000 300,000 300,000
- --------------------- ------------------ ------------------- ------------------ ------------------- --------------------
- --------------------- ------------------ ------------------- ------------------ ------------------- --------------------
600,000 180,000 240,000 300,000 360,000 360,000
- --------------------- ------------------ ------------------- ------------------ ------------------- --------------------
- --------------------- ------------------ ------------------- ------------------ ------------------- --------------------
700,000 210,000 280,000 350,000 420,000 420,000
- --------------------- ------------------ ------------------- ------------------ ------------------- --------------------
- --------------------- ------------------ ------------------- ------------------ ------------------- --------------------
800,000 240,000 320,000 400,000 480,000 480,000
- --------------------- ------------------ ------------------- ------------------ ------------------- --------------------
- --------------------- ------------------ ------------------- ------------------ ------------------- --------------------
900,000 270,000 360,000 450,000 540,000 540,000
- --------------------- ------------------ ------------------- ------------------ ------------------- --------------------
- --------------------- ------------------ ------------------- ------------------ ------------------- --------------------
1,000,000 300,000 400,000 500,000 600,000 600,000
===================== ================== =================== ================== =================== ====================
The Named Executive Officers have the following years of service.
Name Years of Service
- ---------------------------- --------------------------
W.T. McCallum 35
D.L. Wooden 10
J.D. Motz 30
J.T. Hughes 11
M.T.G. Graye 7
W.T. McCallum is entitled, upon election, to receive the benefits shown as of
December 31, 2000, with remuneration based on the average of the highest 36
consecutive months of compensation during the last 84 months of employment. For
M.T.G. Graye, J.T. Hughes, J.D. Motz and D.L. Wooden, the benefits shown are
payable upon the attainment of age 62, and remuneration is the average of the
highest 60 consecutive months of compensation during the last 84 months of
employment. Compensation includes salary and bonuses prior to any deferrals. The
normal form of pension is a life only annuity. Other optional forms of pension
payment are available on an actuarially equivalent basis. The benefits listed in
the table are subject to deduction for social security and other retirement
benefits.
COMPENSATION OF DIRECTORS
For each director of the Company who is not also a director of Great-West Life,
the Company pays an annual fee of $22,500, and a meeting fee of $1,500 for each
meeting of the Board of Directors or a committee thereof attended. For each
director of the Company who is also a director of Great-West Life, the Company
pays a meeting fee of $1,500 for each meeting of the Board of Directors, or a
committee thereof, attended which is not coincident with a Great-West Life
meeting. In addition, all directors are reimbursed for incidental expenses.
The above amounts are paid in the currency of the country of residence of the
director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Executive compensation is determined by the Company's Board of Directors. W.T.
McCallum, President and Chief Executive Officer of the Company, is a member of
the Board of Directors. Mr. McCallum participated in executive compensation
matters generally but was not present when his own compensation was discussed or
determined.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below is certain information, as of March 1, 2001, concerning
beneficial ownership of the voting securities of the Company by entities and
persons who beneficially own more than 5% of the voting securities of the
Company. The determinations of "beneficial ownership" of voting securities are
based upon Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). This rule provides that securities will be deemed to be
"beneficially owned" where a person has, either solely or in conjunction with
others, (1) the power to vote or to direct the voting of securities and/or the
power to dispose or to direct the disposition of, the securities or (2) the
right to acquire any such power within 60 days after the date such "beneficial
ownership" is determined.
(1) 100% of the Company's 7,032,000 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 GWL&A Financial (Nova Scotia)
Co., Suite 800, 1959 Upper Water Street, Halifax, Nova Scotia, Canada B3J 2X2.
(3) 100% of the outstanding common shares of GWL&A Financial (Nova Scotia) Co. are owned by GWL&A Financial
(Canada) Inc., 100 Osborne Street North, Winnipeg, Manitoba, Canada R3C 3A5.
(4) 100% of the outstanding common shares of GWL&A Financial (Canada) Inc. are owned by Great-West Lifeco
Inc., 100 Osborne Street North, Winnipeg, Manitoba, Canada R3C 3A5.
(5) 81.7% of the outstanding common shares of Great-West Lifeco Inc. are
controlled by Power Financial Corporation, 751 Victoria Square,
Montreal, Quebec, Canada H2Y 2J3, representing approximately 65% of the
voting rights attached to all outstanding voting shares of Great-West
Lifeco Inc.
(6) 67.4% of the outstanding common shares of Power Financial Corporation are owned by 171263 Canada Inc.,
751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3.
(7) 100% of the outstanding common shares of 171263 Canada Inc. are owned by 2795957 Canada Inc., 751
Victoria Square, Montreal, Quebec, Canada H2Y 2J3.
(8) 100% of the outstanding common shares of 2795957 Canada Inc. are owned by Power Corporation of Canada,
751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3.
(9) Mr. Paul Desmarais, 751 Victoria Square, Montreal, Quebec, Canada H2Y
2J3, through a group of private holding companies, which he controls,
has voting control of Power Corporation of Canada.
As a result of the chain of ownership described in paragraphs (1) through (9)
above, each of the entities and persons listed in paragraphs (1) through (9)
would be considered under Rule 13d-3 of the Exchange Act to be a "beneficial
owner" of 100% of the outstanding voting securities of the Company.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets out the number of equity securities, and exercisable
options (including options which will become exercisable within 60 days) for
equity securities, of the Company or any of its parents or subsidiaries,
beneficially owned, as of February 1, 2001, by (i) the directors of the Company;
(ii) the Named Executive Officers; and (iii) the directors and executive
officers of the Company as a group.
- ------------------------------- ----------------------- -------------------------------- -------------------------------
Great-West Lifeco Power Financial Corporation Power Corporation of Canada
Inc.
- ------------------------------- ----------------------- -------------------------------- -------------------------------
- ------------------------------- ----------------------- -------------------------------- -------------------------------
(1) (2) (3)
- ------------------------------- ----------------------- -------------------------------- -------------------------------
- ------------------------------- ----------------------- -------------------------------- -------------------------------
Directors
- ------------------------------- ----------------------- -------------------------------- -------------------------------
- ------------------------------- ----------------------- -------------------------------- -------------------------------
J. Balog - - -
- ------------------------------- ----------------------- -------------------------------- -------------------------------
- ------------------------------- ----------------------- -------------------------------- -------------------------------
J. W. Burns 153,659 8,000 400,640
200,000 options
- ------------------------------- ----------------------- -------------------------------- -------------------------------
- ------------------------------- ----------------------- -------------------------------- -------------------------------
O.T. Dackow 79,973 - -
200,000 options
- ------------------------------- ----------------------- -------------------------------- -------------------------------
- ------------------------------- ----------------------- -------------------------------- -------------------------------
A. Desmarais 51,659 21,600 142,333
2,088,000 options
- ------------------------------- ----------------------- -------------------------------- -------------------------------
- ------------------------------- ----------------------- -------------------------------- -------------------------------
P. Desmarais, Jr. 43,659 - 1,533
1,878,000 options
- ------------------------------- ----------------------- -------------------------------- -------------------------------
- ------------------------------- ----------------------- -------------------------------- -------------------------------
R. Gratton 330,000 310,000 7,851
6,780,000 options
- ------------------------------- ----------------------- -------------------------------- -------------------------------
- ------------------------------- ----------------------- -------------------------------- -------------------------------
K. P. Kavanagh 18,500 - -
- ------------------------------- ----------------------- -------------------------------- -------------------------------
- ------------------------------- ----------------------- -------------------------------- -------------------------------
W. Mackness - - -
- ------------------------------- ----------------------- -------------------------------- -------------------------------
- ------------------------------- ----------------------- -------------------------------- -------------------------------
W.T. McCallum 55,874 19,500 -
650,000 options
- ------------------------------- ----------------------- -------------------------------- -------------------------------
- ------------------------------- ----------------------- -------------------------------- -------------------------------
J.E.A. Nickerson - 4,000 4,000
- ------------------------------- ----------------------- -------------------------------- -------------------------------
- ------------------------------- ----------------------- -------------------------------- -------------------------------
P.M. Pitfield 90,000 75,000 100,000
309,000 options
- ------------------------------- ----------------------- -------------------------------- -------------------------------
- ------------------------------- ----------------------- -------------------------------- -------------------------------
M. Plessis-Belair 20,000 3,000 16,984
223,300 options
- ------------------------------- ----------------------- -------------------------------- -------------------------------
- ------------------------------- ----------------------- -------------------------------- -------------------------------
B.E. Walsh - - -
- ------------------------------- ----------------------- -------------------------------- -------------------------------
- ------------------------------- ---------------------- --------------------------------- -------------------------------
Named Executive Officers
- ------------------------------- ---------------------- --------------------------------- -------------------------------
- ------------------------------- ---------------------- --------------------------------- -------------------------------
W.T. McCallum 55,874 19,500 -
650,000 options
- ------------------------------- ---------------------- --------------------------------- -------------------------------
- ------------------------------- ---------------------- --------------------------------- -------------------------------
D.L. Wooden 160,000 options 113,000 -
- ------------------------------- ---------------------- --------------------------------- -------------------------------
- ------------------------------- ---------------------- --------------------------------- -------------------------------
J.D. Motz 13,159 - -
220,000 options
- ------------------------------- ---------------------- --------------------------------- -------------------------------
- ------------------------------- ---------------------- --------------------------------- -------------------------------
M.T.G. Graye 1,047 50,000 -
112,800 options 70,000 options
- ------------------------------- ---------------------- --------------------------------- -------------------------------
- ------------------------------- ---------------------- --------------------------------- -------------------------------
J.T. Hughes 11,024 - -
128,000 options
- ------------------------------- ---------------------- --------------------------------- -------------------------------
- ------------------------------- ---------------------- --------------------------------- -------------------------------
Directors and Executive
Officers as a Group
- ------------------------------- ---------------------- --------------------------------- -------------------------------
- ------------------------------- ---------------------- --------------------------------- -------------------------------
918,887 554,100 674,141
1,918,600 options 6,850,000 options 4,698,300 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.
The number of common shares and exercisable options for common shares of Power
Financial Corporation held by R. Gratton represents 2.0% of the total number of
common shares and exercisable options for common shares of Power Financial
Corporation outstanding. The number of common shares and exercisable options for
common shares of Power Financial Corporation held by the directors and executive
officers as a group represents 2.1% of the total number of common shares and
exercisable options for common shares of Power Financial Corporation
outstanding.
The number of subordinate voting shares and exercisable options for subordinate
voting shares of Power Corporation of Canada held by A. Desmarais represents
1.1% of the total number of subordinate voting shares and exercisable options
for subordinate voting shares of Power Corporation of Canada outstanding. The
number of subordinate voting shares and exercisable options for subordinate
voting shares of Power Corporation of Canada held by the directors and executive
officers as a group represents 2.7 % of the total number of subordinate voting
shares and exercisable options for subordinate voting shares of Power
Corporation of Canada outstanding.
None of the remaining holdings set out above exceed 1% of the total number of
shares and exercisable options for shares of the class outstanding.
- --------------------------------------------------------------------------------
Rights Reserved by Great-West
We reserve the right to make certain changes we believe would best serve the
interests of Owners and Annuitants or would be appropriate in carrying out the
purposes of the Contracts. Any changes will be made only to the extent and in
the manner permitted by applicable laws. Also, when required by law, we will
obtain your approval of the changes and approval from any appropriate regulatory
authority. Approval may not be required in all cases, however. Examples of the
changes we may make include:
To make any changes required by the Code or by any other applicable law in order
to continue treatment of the Contract as an annuity.
To change the time or time of day at which a valuation date is deemed to have
ended.
To make any other necessary technical changes in the Contract in order to
conform with any action the above provisions permit us to take, including
changing the way we assess charges, without increasing them for any outstanding
Contract beyond the aggregate amount guaranteed.
- --------------------------------------------------------------------------------
Legal Proceedings
Great-West is not currently a party to, and its property is not currently
subject to, any material legal proceedings. The lawsuits to which Great-West is
a party are, in the opinion of management, in the ordinary course of business,
and are not expected to have a material adverse effect on the financial results,
conditions or prospects of Great-West.
- --------------------------------------------------------------------------------
Legal Matters
Advice regarding certain legal matters concerning the federal securities laws
applicable to the issue and sale of the Contract has been provided by Jorden
Burt LLP.
- --------------------------------------------------------------------------------
Experts
The consolidated financial statements of Great-West Life & Annuity Insurance
Company at December 31, 2000 and 1999, and for each of the three years in the
period ended December 31, 2000 included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein, and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
- --------------------------------------------------------------------------------
Available Information
We have filed a registration statement ("Registration Statement") with the
Commission under the 1933 Act relating to the Contracts offered by this
Prospectus. This Prospectus has been filed as a part of the Registration
Statement and does not contain all of the information contained in the
Registration Statement and its exhibits. Additionally, statements in this
Prospectus about the content of the Contract and other legal instruments are
summaries. Please refer to the Registration Statement and its exhibits for
further information. Great-West is also subject to the informational
requirements of the Securities Exchange Act of 1934, as amended and in
accordance with that act Great-West has filed reports and other information with
the Commission. You can review the Registration Statement and its exhibits and
other reports and information filed with the Commission at the Commission's
Public Reference Room located at 450 Fifth Street, N.W., Washington, D.C. You
may obtain information on the operation of the Public Reference Room by calling
the Commission at 1-800-SEC-0330. The Commission maintains a web site that
contains reports and information statements and other information regarding
Great-West, at the following address http://www.sec.gov.
- --------------------------------------------------------------------------------
Appendix A--Market Value Adjustments
The amount available for a full surrender, partial withdrawal or Transfer equals
the amount requested plus the Market Value Adjustment (MVA). The MVA is
calculated by multiplying the amount requested by the Market Value Adjustment
Factor (MVAF).
The MVA formula
The MVA is determined using the following formula:
MVA = (amount applied) X (Market Value Adjustment Factor) The Market Value
Adjustment Factor is:
{[(1 + i)/(1 + j +.10%)] N/12} - 1
Where:
i is the U.S. Treasury Strip ask side yield as published in the Wall Street
Journal on the last business day of the week prior to the date the stated rate
of interest was established for the Guarantee Period. The term of i is measured
in years and equals the term of the Guarantee Period
j is the U.S. Treasury Strip ask side yield as published in the Wall Street
Journal on the last business day of the week prior to the week the Guarantee
Period is broken. The term of j equals the remaining term to maturity of the
Guarantee Period, rounded up to the higher number of years
N is the number of complete months remaining until maturity
The MVA will equal 0 if:
if i and j differ by less than .10%
N is less than 6.
Examples
Following are four examples of Market Value Adjustments illustrating (1)
increasing interest rates, (2) decreasing interest rates, (3) flat interest
rates (i and j are within .10% of each other), and (4) less than 6 months to
maturity.
Example 1--Increasing Interest Rates
- ------------------------- -------------------------------------
- ------------------------ $25,000 on November 1, 1996
Deposit
- ------------------------- -------------------------------------
- ------------------------- -------------------------------------
Maturity date December 31, 2005
- ------------------------- -------------------------------------
- ------------------------- -------------------------------------
Interest Guarantee 10 years
Period
- ------------------------- -------------------------------------
- ------------------------- -------------------------------------
i assumed to be 6.15%
- ------------------------- -------------------------------------
- ------------------------- -------------------------------------
Surrender date July 1, 2000
- ------------------------- -------------------------------------
- ------------------------- -------------------------------------
j 7.00%
- ------------------------- -------------------------------------
- ------------------------- -------------------------------------
Amount surrendered $10,000
- ------------------------- -------------------------------------
- ------------------------- -------------------------------------
N 65
- ------------------------- -------------------------------------
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1
= {[1.0615/1.071]65/12} - 1
= .952885 - 1
= -.047115
MVA = (amount transferred or surrendered) x MVAF = $10,000 x - .047115 = -
$471.15
Surrender Value = (amount transferred or surrendered + MVA)
= ($10,000 + - $471.15)
= $9,528.85
Example 2--Decreasing Interest Rates
- -------------------------- ------------------------------------
Deposit $25,000 on November 1, 1996
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Maturity date December 31, 2005
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Interest Guarantee Period 10 years
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
i assumed to be 6.15%
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Surrender date July 1, 2000
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
j 5.00%
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Amount surrendered $10,000
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
N 65
- -------------------------- ------------------------------------
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1
= {[1.0615/1.051]65/12} - 1
= .055323
MVA = (amount transferred or surrendered) x MVAF = $10,000 x .0055323 =
$553.23
Surrender Value = (amount transferred or surrendered + MVA)
= ($10,000 + $553.23)
= $10,553.23
Example 3--Flat Interest Rates (i and j are within .10% of each other)
- -------------------------- ------------------------------------
Deposit $25,000 on November 1, 1996
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Maturity date December 31, 2005
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Interest Guarantee Period 10 years
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
i assumed to be 6.15%
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Surrender date July 1, 2000
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
j 6.24%
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Amount surrendered $10,000
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
N 65
- -------------------------- ------------------------------------
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1
= {[1.0615/1.0634]65/12} - 1
= .99036 - 1
= -.00964
However, [i-j] <.10%, so MVAF = 0
MVA = (amount transferred or surrendered) x MVAF = $10,000 x 0 = $0
Surrender Value = (amount transferred or surrendered + MVA)
= ($10,000 + $0)
= $10,000
Example 4--N equals less than 6 months to maturity
- -------------------------- ------------------------------------
Deposit $25,000 on November 1, 1996
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Maturity date December 31, 2005
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Interest Guarantee Period 10 years
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
i assumed to be 6.15%
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Surrender date July 1, 2005
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
j 7.00%
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Amount surrendered $10,000
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
N 5
- -------------------------- ------------------------------------
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1
= {[1.0615/1.071]5/12} - 1
= .99629 - 1
= -.00371
However, N<6, so MVAF = 0
MVA = (amount transferred or surrendered) x MVAF = $10,000 x 0 = $0
Surrender Value = (amount transferred or surrendered + MVA)
= ($10,000 + $0)
= $10,000
44
- --------------------------------------------------------------------------------
Consolidated Financial Statements and Independent Auditors' Report
On the following pages, you will find the consolidated financial statements and
the Independent Auditors' Report for Great-West Life & Annuity Insurance Company
for the years ended December 2000, 1999 and 1998.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY (A
wholly-owned subsidiary of GWL&A Financial Inc.)
Consolidated Financial Statements for the Years Ended
December 31, 2000, 1999, and 1998 and
Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Great-West Life & Annuity Insurance Company:
We have audited the accompanying consolidated balance sheets of Great-West Life
& Annuity Insurance Company and subsidiaries as of December 31, 2000 and 1999,
and the related consolidated statements of income, stockholder's equity, and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Great-West Life & Annuity Insurance
Company and subsidiaries as of December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1999, the Company adopted Statement of Position No. 98-1, "Accounting
for the Cost of Computer Software Developed or Obtained for Internal Use" and,
accordingly, changed its method of accounting for software development costs.
DELOITE & TOUCHE LLP
Denver, Colorado
January 29, 2001
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
==============================================================================================
(Dollars in Thousands)
2000 1999
------------------- -------------------
ASSETS
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost (fair value
$2,238,581) $ $ 2,260,581
Available-for-sale, at fair value (amortized cost
$9,372,009 and $6,953,383) 9,419,865 6,727,922
Common stock, at fair value (cost $68,472 and
$43,978) 95,036 69,240
Mortgage loans on real estate, net 843,371 974,645
Real estate 106,690 103,731
Policy loans 2,809,973 2,681,132
Short-term investments, available-for-sale (cost
approximates fair value) 414,382 240,804
------------------- -------------------
Total Investments 13,689,317 13,058,055
OTHER ASSETS:
Cash 153,977 267,514
Reinsurance receivable
Related party 4,297 5,015
Other 229,671 168,307
Deferred policy acquisition costs 279,688 282,295
Investment income due and accrued 139,152 137,810
Amounts receivable related to uninsured accident
and health plan claims (net of allowances of
$34,700 and $31,200) 227,803 150,133
Other assets 503,533 308,419
Premiums in course of collection (net of
allowances of $18,700 and $13,900) 149,969 79,299
Deferred income taxes 138,842 253,323
SEPARATE ACCOUNT ASSETS 12,381,137 12,819,897
------------------- -------------------
TOTAL ASSETS $ 27,897,386 $ 27,530,067
=================== ===================
(Continued)
==============================================================================================
2000 1999
--------------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves
Related party $ 547,558 $ 555,783
Other 11,497,442 11,181,900
Policy and contract claims 441,326 346,868
Policyholders' funds 197,941 185,623
Provision for policyholders' dividends 72,716 70,726
GENERAL LIABILITIES:
Due to GWL 43,081 35,979
Due to GWL&A Financial 171,347 175,035
Repurchase agreements 80,579
Commercial paper 97,631
Other liabilities 854,024 780,476
Undistributed earnings on participating business 165,754 130,638
SEPARATE ACCOUNT LIABILITIES 12,381,137 12,819,897
--------------- --------------
Total Liabilities 26,469,957 26,363,504
--------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Preferred stock, $1 par value, 50,000,000 shares
authorized,
0 shares issued and outstanding
Common stock, $1 par value; 50,000,000 shares
authorized; 7,032,000 shares issued and outstanding 7,032 7,032
Additional paid-in capital 717,704 700,316
Accumulated other comprehensive income (loss) 33,672 (84,861)
Retained earnings 669,021 544,076
--------------- --------------
Total Stockholder's Equity 1,427,429 1,166,563
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 27,897,386 $ 27,530,067
=============== ==============
See notes to consolidated financial statements. (Concluded)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
==============================================================================================
(Dollars in Thousands)
2000 1999 1998
------------- -------------- -------------
REVENUES:
Premiums
Related party $ $ $ 46,191
Other (net of premiums ceded totaling
$115,404, $85,803, and $86,511) 1,332,566 1,163,183 948,672
Fee income 871,627 635,147 516,052
Net investment (loss) income
Related party (14,517) (10,923) (9,416)
Other 945,958 886,869 906,776
Net realized gains on investments 28,283 1,084 38,173
------------- -------------- -------------
3,163,917 2,675,360 2,446,448
------------- -------------- -------------
BENEFITS AND EXPENSES:
Life and other policy benefits (net of
reinsurance recoveries totaling $62,803,
$80,681, and $81,205) 1,122,560 970,250 768,474
Increase in reserves
Related party 46,191
Other 53,550 33,631 78,851
Interest paid or credited to contractholders 490,131 494,081 491,616
Provision for policyholders' share of earnings
on participating business 5,188 13,716 5,908
Dividends to policyholders 74,443 70,161 71,429
------------- -------------- -------------
1,745,872 1,581,839 1,462,469
Commissions 204,444 173,405 144,246
Operating (income) expenses:
Related party (704) (768) (5,094)
Other 775,885 593,575 518,228
Premium taxes 45,286 38,329 30,848
------------- -------------- -------------
2,770,783 2,386,380 2,150,697
INCOME BEFORE INCOME TAXES 393,134 288,980 295,751
------------- -------------- -------------
PROVISION FOR INCOME TAXES:
Current 108,509 72,039 81,770
Deferred 25,531 11,223 17,066
------------- -------------- -------------
134,040 83,262 98,836
------------- -------------- -------------
NET INCOME $ 259,094 $ 205,718 $ 196,915
============= ============== =============
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
==============================================================================================
(Dollars in Thousands)
Accumulated
Additional Other
Preferred Stock Common Stock Paid-in Comprehensive Retained
------------------------ -------------------------
Shares Amount Shares Amount Capital Income (Loss) Earnings Total
------------ ----------- -------------------- ----------- -------------- ----------- -----------
BALANCE, JANUARY 1, 1998 2,000,800 121,800 7,032,000 7,032 690,748 52,807 313,532 1,185,919
Net income 196,915 196,915
Other comprehensive income 8,753 8,753
-----------
Total comprehensive income 205,668
-----------
Capital contributions 8,808 8,808
Dividends (80,036) (80,036)
Purchase of preferred shares (2,000,800) (121,800) (121,800)
------------ ----------- -------------------- ----------- -------------- ----------- -----------
BALANCE, DECEMBER 31, 1998 0 0 7,032,000 7,032 699,556 61,560 430,411 1,198,559
Net income 205,718 205,718
Other comprehensive loss (146,421) (146,421)
-----------
Total comprehensive income 59,297
-----------
Dividends (92,053) (92,053)
Income tax benefit on stock
Compensation 760 760
------------ ----------- -------------------- ----------- -------------- ----------- -----------
BALANCE, DECEMBER 31, 1999 0 0 7,032,000 7,032 700,316 (84,861) 544,076 1,166,563
Net income 259,094 259,094
Other comprehensive income 118,533 118,533
-----------
Total comprehensive income 377,627
-----------
Dividends (134,149) (134,149)
Capital contributions -
Parent stock options 15,052 15,052
Income tax benefit on stock
Compensation 2,336 2,336
------------ ----------- -------------------- ----------- -------------- ----------- -----------
BALANCE, DECEMBER 31, 2000 0 $ 0 7,032,000 $ 7,032 $ 717,704 $ 33,672 $ 669,021 $ 1,427,429
============ =========== =========== ========= =========== ============== =========== ===========
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
==============================================================================================
(Dollars in Thousands)
2000 1999 1998
------------- -------------- -------------
OPERATING ACTIVITIES:
Net income $ 259,094 $ 205,718 $ 196,915
Adjustments to reconcile net income to net
cash provided by operating activities:
Earnings allocated to participating
Policyholders 5,188 13,716 5,908
Amortization of investments (62,428) (22,514) (15,068)
Net realized gains on investments (28,283) (1,084) (38,173)
Depreciation and amortization 41,693 47,339 55,550
Deferred income taxes 25,531 11,223 17,066
Changes in assets and liabilities, net of effects from acquisitions:
Policy benefit liabilities 310,511 650,959 938,444
Reinsurance receivable (35,368) 19,636 (43,643)
Receivables (128,382) (37,482) 28,467
Other, net (103,169) (136,476) (184,536)
------------- -------------- -------------
Net cash provided by operating activities 284,387 751,035 960,930
------------- -------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to maturity
Sales 8,571 9,920
Maturities and redemptions 323,728 520,511 471,432
Available-for-sale
Sales 1,460,672 3,176,802 6,169,678
Maturities and redemptions 887,420 822,606 1,268,323
Mortgage loans 139,671 165,104 211,026
Real estate 8,910 5,098 16,456
Common stock 61,889 18,116 3,814
Purchases of investments:
Fixed maturities
Held-to-maturity (100,524) (563,285) (584,092)
Available-for-sale (2,866,228) (4,019,465) (7,410,485)
Mortgage loans (4,208) (2,720) (100,240)
Real estate (20,570) (41,482) (4,581)
Common stock (52,972) (19,698) (10,020)
Acquisitions, net of cash acquired 82,214 (82,669)
------------- -------------- -------------
Net cash (used in) provided by
investing activities $ (71,427) $ 61,587 $ (41,438)
============= ============== =============
(Continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
==============================================================================================
(Dollars in Thousands)
2000 1999 1998
------------- -------------- -------------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (220,167) $ (583,900) $ (507,237)
Due to GWL 7,102 (16,898) (73,779)
Due to GWL&A Financial 3,665 175,035
Dividends paid (134,149) (92,053) (80,036)
Net commercial paper borrowings
(repayments) 97,631 (39,731) (14,327)
Net repurchase agreements repayments (80,579) (163,680) (81,280)
Capital contributions 8,808
Purchase of preferred shares (121,800)
------------- -------------- -------------
Net cash used in financing activities (326,497) (721,227) (869,651)
------------- -------------- -------------
NET (DECREASE) INCREASE IN CASH (113,537) 91,395 49,841
CASH, BEGINNING OF YEAR 267,514 176,119 126,278
------------- -------------- -------------
CASH, END OF YEAR $ 153,977 $ 267,514 $ 176,119
============= ============== =============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 78,510 $ 76,150 $ 111,493
Interest 21,060 14,125 13,849
Non-cash financing activity:
Capital contributions - Parent stock options 15,052
See notes to consolidated financial statements. (Concluded)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
================================================================================
(Amounts in Thousands, except Share Amounts)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Great-West Life & Annuity Insurance Company (the Company)
is a wholly-owned subsidiary of GWL&A Financial Inc., a holding company
formed in 1998 (GWL&A Financial). The Company offers a wide range of
life insurance, health insurance, and retirement and investment products
to individuals, businesses, and other private and public organizations
throughout the United States.
On December 31, 2000, the Company and certain affiliated companies
completed a corporate reorganization. Prior to December 31, 2000, GWL&A
Financial, was an indirect wholly-owned subsidiary of The Great-West
Life Assurance Company (GWL). Under the new structure, GWL&A Financial
and GWL each continue to be indirectly and directly, respectively, owned
by Great-West Lifeco Inc., a Canadian holding company (the Parent or
LifeCo), but GWL no longer holds an equity interest in the Company or
GWL&A Financial.
Basis of Presentation - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The consolidated financial statements include the accounts of
the Company and its subsidiaries. All material inter-company
transactions and balances have been eliminated in consolidation.
Certain reclassifications have been made to the 1999 and 1998 financial
statements to conform to the 2000 presentation. Most significantly,
amounts receivable related to uninsured accident and health plan claims
and the related allowance for doubtful accounts and the allowance for
doubtful accounts for premiums in course of collection were previously
included in liabilities. This change in classification has no effect on
previously reported stockholder's equity or net income.
Investments - Investments are reported as follows:
1. Management determines the classification of fixed maturities at
the time of purchase. Fixed maturities are classified as
held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost unless fair value is less
than cost and the decline is deemed to be other than temporary, in
which case they are written down to fair value and a new cost
basis is established (See Note 6).
Fixed maturities not classified as held-to-maturity are classified
as available-for-sale. Available-for-sale securities are carried
at fair value, with the net unrealized gains and losses reported
as accumulated other comprehensive income (loss) in stockholder's
equity. The net unrealized gains and losses on derivative
financial instruments used to hedge available-for-sale securities
are also included in other comprehensive income (loss).
The amortized cost of fixed maturities classified as
held-to-maturity or available-for-sale is adjusted for
amortization of premiums and accretion of discounts using the
effective interest method over the estimated life of the related
bonds. Such amortization is included in net investment income.
Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net realized gains (losses)
on investments.
2. Mortgage loans on real estate are carried at their unpaid balances
adjusted for any unamortized premiums or discounts and any
valuation reserves. Interest income is accrued on the unpaid
principal balance. Discounts and premiums are amortized to net
investment income using the effective interest method. Accrual of
interest is discontinued on any impaired loans where collection of
interest is doubtful.
The Company maintains an allowance for credit losses at a level
that, in management's opinion, is sufficient to absorb credit
losses on its impaired loans. Management's judgement is based on
past loss experience, current and projected economic conditions,
and extensive situational analysis of each individual loan. The
measurement of impaired loans is based on the fair value of the
collateral.
3. Real estate is carried at cost. The carrying value of real estate
is subject to periodic evaluation of recoverability.
4. Investments in common stock are carried at fair value.
5. Policy loans are carried at their unpaid balances.
6. Short-term investments include securities purchased with initial
maturities of one year or less and are carried at amortized cost.
The Company considers short-term investments to be
available-for-sale and amortized cost approximates fair value.
7. Gains and losses realized on disposal of investments are
determined on a specific identification basis.
Cash - Cash includes only amounts in demand deposit accounts.
Internal Use Software - Effective January 1, 1999, the Company adopted
Statement of Position (SOP) No. 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use". The Company
capitalized $19,709 and $18,373 in internal use software development
costs for the years ended December 31, 2000 and 1999, respectively.
Deferred Policy Acquisition Costs - Policy acquisition costs, which
primarily consist of sales commissions and costs associated with the
Company's group sales representatives related to the production of new
and renewal business, have been deferred to the extent recoverable.
These costs are variable in nature and are dependent upon sales volume.
Deferred costs associated with the annuity products are being amortized
over the life of the contracts in proportion to the emergence of gross
profits. Retrospective adjustments of these amounts are made when the
Company revises its estimates of current or future gross profits.
Deferred costs associated with traditional life insurance are amortized
over the premium paying period of the related policies in proportion to
premium revenues recognized. Amortization of deferred policy acquisition
costs totaled $36,834, $43,512, and $51,724 in 2000, 1999, and 1998,
respectively.
Separate Accounts - Separate account assets and related liabilities are
carried at fair value. The Company's separate accounts invest in shares
of Maxim Series Fund, Inc. and Orchard Series Fund, Inc., open-end
management investment companies which are affiliates of the Company,
shares of other external mutual funds, and government and corporate
bonds. Investment income and realized capital gains and losses of the
separate accounts accrue directly to the contractholders and, therefore,
are not included in the Company's statements of income. Revenues to the
Company from the separate accounts consist of contract maintenance fees,
administrative fees, and mortality and expense risk charges.
Life Insurance and Annuity Reserves - Life insurance and annuity policy
reserves with life contingencies of $7,762,065 and $7,169,885 at
December 31, 2000 and 1999, respectively, are computed on the basis of
estimated mortality, investment yield, withdrawals, future maintenance
and settlement expenses, and retrospective experience rating premium
refunds. Annuity contract reserves without life contingencies of
$4,189,716 and $4,468,685 at December 31, 2000 and 1999, respectively,
are established at the contractholder's account value.
Reinsurance - Policy reserves ceded to other insurance companies are
carried as a reinsurance receivable on the balance sheet. The cost of
reinsurance related to long-duration contracts is accounted for over the
life of the underlying reinsured policies using assumptions consistent
with those used to account for the underlying policies.
Policy and Contract Claims - Policy and contract claims include
provisions for reported life and health claims in process of settlement,
valued in accordance with the terms of the related policies and
contracts, as well as provisions for claims incurred and unreported
based primarily on prior experience of the Company.
Participating Fund Account - Participating life and annuity policy
reserves are $4,557,599 and $4,297,823 at December 31, 2000 and 1999,
respectively. Participating business approximates 28.6%, 31.0%, and
32.7% of the Company's ordinary life insurance in force and 85.2%,
94.0%, and 71.9% of ordinary life insurance premium income for the years
ended December 31, 2000, 1999, and 1998, respectively.
The amount of dividends to be paid from undistributed earnings on
participating business is determined annually by the Board of Directors.
Earnings allocable to participating policyholders are consistent with
established Company practice.
The Company has established a Participating Policyholder Experience
Account (PPEA) for the benefit of all participating policyholders which
is included in the accompanying consolidated balance sheet. Earnings
associated with the operation of the PPEA are credited to the benefit of
all participating policyholders. In the event that the assets of the
PPEA are insufficient to provide contractually guaranteed benefits, the
Company must provide such benefits from its general assets.
The Company has also established a Participation Fund Account (PFA) for
the benefit of the participating policyholders previously transferred to
the Company from GWL under an assumption reinsurance transaction. The
PFA is part of the PPEA. Earnings derived from the operation of the PFA
net of a management fee paid to the Company accrue solely for the
benefit of the transferred participating policyholders.
Revenue Recognition - In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements," which provides guidance with
respect to revenue recognition issues and disclosures. As amended by SAB
No. 101B, the Company was required to implement the provisions of SAB
No. 101 no later than the fourth quarter of the fiscal year ending
December 31, 2000. The adoption of SAB No. 101 did not affect the
Company's revenue recognition practices.
Recognition of Premium and Fee Income and Benefits and Expenses - Life
insurance premiums are recognized when due. Annuity premiums with life
contingencies are recognized as received. Accident and health premiums
are earned on a monthly pro rata basis. Revenues for annuity and other
contracts without significant life contingencies consist of contract
charges for the cost of insurance, contract administration, and
surrender fees that have been assessed against the contract account
balance during the period and are recognized when earned. Fee income is
derived primarily from contracts for claim processing or other
administrative services related to uninsured business and from assets
under management. Fees from contracts for claim processing or other
administrative services are recorded as the services are provided. Fees
from assets under management, which consist of contract maintenance
fees, administration fees and mortality and expense risk charges, are
recognized when due. Benefits and expenses on policies with life
contingencies are associated with earned premiums so as to result in
recognition of profits over the life of the contracts. This association
is accomplished by means of the provision for future policy benefit
reserves. The average crediting rate on annuity products was
approximately 6.2%, 6.2%, and 6.3% in 2000, 1999, and 1998.
Income Taxes - Income taxes are recorded using the asset and liability
approach, which requires, among other provisions, the recognition of
deferred tax assets and liabilities for expected future tax consequences
of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, all
expected future events (other than the enactments or changes in the tax
laws or rules) are considered. Although realization is not assured,
management believes it is more likely than not that the deferred tax
asset, net of a valuation allowance, will be realized.
Repurchase Agreements and Securities Lending - The Company enters into
repurchase agreements with third-party broker/dealers in which the
Company sells securities and agrees to repurchase substantially similar
securities at a specified date and price. Such agreements are accounted
for as collateralized borrowings. Interest expense on repurchase
agreements is recorded at the coupon interest rate on the underlying
securities. The repurchase fee received or paid is amortized over the
term of the related agreement and recognized as an adjustment to
investment income.
The Company receives collateral for lending securities that are held as
part of its investment portfolio. The company requires collateral in an
amount greater than or equal to 102% of the market 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.
Derivatives - The Company makes limited use of derivative financial
instruments to manage interest rate, market, and foreign exchange risk
associated with invested assets, and therefore, are held for purposes
other than trading. Such derivative instruments consist of interest rate
swap agreements, interest rate floors and caps, foreign currency
exchange contracts, options, interest rate futures, and equity swaps.
The settlements paid or received under these contracts is deferred and
recognized as an adjustment to net investment income on the accrual
method. Gains and losses on foreign exchange contracts are deferred and
recognized in net investment income when the hedged transactions are
realized.
Interest rate swap agreements are used to convert the interest rate on
certain debt securities from a floating rate to a fixed rate or vice
versa, to convert from a fixed rate to floating rate. Interest rate
floors and caps are interest rate protection instruments that require
the payment by a counterparty to the Company of an interest rate
differential only if interest rates fall or rise to certain levels. The
differential represents the difference between current interest rates
and an agreed-upon rate, the strike rate, applied to a notional
principal amount. Foreign currency exchange contracts are used to hedge
the foreign exchange rate risk associated with bonds denominated in
other than U.S. dollars. Written call options are used in conjunction
with interest rate swap agreements to effectively convert convertible,
fixed rate bonds to non-convertible variable rate bonds as part of the
Company's overall asset-liability maturity program. Futures are used to
hedge the interest rate risks of forecasted acquisitions of fixed rate
fixed maturity investments. Equity swap transactions generally involve
the exchange of variable market performance of a basket of securities
for a fixed interest rate.
Although derivative financial instruments taken alone may expose the
Company to varying degrees of market and credit risk in excess of
amounts recognized in the financial statements, when used for hedging
purposes, these instruments typically reduce overall market, foreign
exchange, and interest rate risk. The Company controls the credit risk
of its financial contracts through credit approvals, limits, and
monitoring procedures. As the Company generally enters into derivative
transactions only with high quality institutions, no losses associated
with non-performance on derivative financial instruments have occurred
or are expected to occur.
Effective January 1, 2001, the Company adopted FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" as
amended by FASB Statement No. 138. The Statements require that all
derivative financial instruments be recognized in the financial
statements as assets or liabilities and measured at fair value
regardless of the purpose or intent for holding them. Gains or losses
resulting from changes in the fair value of derivatives are accounted
for depending on the intended use of the derivative and whether it
qualifies for hedge accounting. Upon adoption, a transition adjustment
of approximately $1,000 increased accumulated comprehensive income.
Stock Options - The Company applies the intrinsic value measurement
approach under APB Opinion No. 25, "Accounting for Stock Issued to
Employees", to stock-based compensation awards to employees, as
interpreted by AIN-APB 25 as it relates to accounting for stock options
granted by the Parent to Company employees (See Note 13).
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - The Financial Accounting Standards Board (FASB) has issued
Statement No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities - A replacement of FASB
Statement No. 125", which revises the standards for accounting for
securitizations and other transfers of financial assets and collateral,
and requires certain disclosures. Statement No. 140 will be effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. However, certain disclosure
requirements under statement No. 140 were effective December 15, 2000,
and these requirements have been incorporated in the Company's financial
statements (see Note 6). Management does not anticipate that the
adoption of the new Statement will have a significant effect on the
financial position or results of operations of the Company.
2. ACQUISITIONS
On July 8, 1998, the Company paid $82,669 in cash to acquire all of the
outstanding shares of Alta Health & Life Insurance Company (Alta),
formerly known as Anthem Health & Life Insurance Company. The purchase
price was based on Alta's adjusted book value, and was subject to
further minor adjustments. The results of Alta's operations have been
combined with those of the Company since the date of acquisition.
The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to the net
assets acquired based on their estimated fair values. The fair value of
tangible assets acquired and liabilities assumed was $379,934 and
$317,440, respectively. The goodwill representing the purchase price in
excess of fair value of net assets acquired is included in other assets
and is being amortized over 30 years on a straight-line basis.
Assuming the Alta acquisition had been effective on January 1, 1998, pro
forma 1998 revenues would have been $2,671,361 and pro forma 1998 net
income would have been $191,552. The pro forma financial information is
not necessarily indicative of either the results of operations that
would have occurred had this agreement been effective on January 1,
1998, or of future operations.
Effective January 1, 2000, the Company coinsured the majority of General
American Life Insurance Company's (General American) group life and
health insurance business which primarily consists of administrative
services only and stop loss policies. The agreement converted to an
assumption reinsurance agreement January 1, 2001. The Company assumed
approximately $150,000 of policy reserves and miscellaneous liabilities
in exchange for $150,000 of cash and miscellaneous assets from General
American.
Assuming the reinsurance agreement had been effective on January 1,
1999, pro forma 1999 revenues would have been $2,973,247 and pro forma
1999 net income would have been $199,782. The pro forma financial
information is not necessarily indicative of either the results of
operations that would have occurred had this agreement been effective on
January 1, 1999, or of future operations.
On October 6, 1999, the Company entered into a purchase and sale
agreement with Allmerica Financial Corporation (Allmerica) to acquire
via assumption reinsurance Allmerica's group life and health insurance
business on March 1, 2000. This business primarily consists of
administrative services only and stop loss policies. The in-force
business was immediately coinsured back to Allmerica and is expected to
be underwritten and retained by the Company upon each policy renewal
date. The effect of this transaction was not material to the Company's
results of operations or financial position.
3. RELATED-PARTY TRANSACTIONS
On December 31, 1998, the Company and GWL entered into an Indemnity
Reinsurance Agreement pursuant to which the Company reinsured by
coinsurance certain GWL individual non-participating life insurance
policies. The Company recorded $859 in premium income and increase in
reserves, associated with certain policies, as a result of this
transaction. Of the $137,638 in reserves that was recorded as a result
of this transaction, $136,779 was recorded under SFAS No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale
of Investments" ("SFAS No. 97"), accounting principles. The Company
recorded, at the GWL's carrying amount, which approximated fair value,
the following at December 31, 1998 as a result of this transaction:
Assets Liabilities and Stockholder's Equity
Cash $ 24,600 Policy reserves $ 137,638
Deferred income taxes 3,816
Policy loans 82,649
Due from Parent Corporation 19,753
Other 6,820
----------- -----------
$ 137,638 $ 137,638
=========== ===========
================================================================================
In connection with this transaction, GWL made a capital contribution of
$5,608 to the Company.
On September 30, 1998, the Company and GWL entered into an Indemnity
Reinsurance Agreement pursuant to which the Company reinsured by
coinsurance certain GWL individual non-participating life insurance
policies. The Company recorded $45,332 in premium income and increase in
reserves as a result of this transaction. Of the $428,152 in reserves
that was recorded as a result of this transaction, $382,820 was recorded
under SFAS No. 97 accounting principles. The Company recorded, at the
Parent Corporation's carrying amount, which approximated fair value, the
following at September 30, 1998 as a result of this transaction:
Assets Liabilities and Stockholder's Equity
Bonds $ 147,475 Policy reserves $ 428,152
Mortgages 82,637 Due to Parent Corporation 20,820
Cash 134,900
Deferred policy acquisition costs 9,724
Deferred income taxes 15,762
Policy loans 56,209
Other 2,265
----------- -----------
$ 448,972 $ 448,972
=========== ===========
In connection with this transaction, GWL made a capital contribution of
$3,200 to the Company.
On September 30, 1998, the Company purchased furniture, fixtures and
equipment from GWL for $25,184.
The Company performs administrative services for the U.S. operations of
GWL. The following represents revenue from GWL for services provided
pursuant to these service agreements. The amounts recorded are based
upon management's best estimate of actual costs incurred and resources
expended based upon number of policies and/or certificates in force.
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
Investment management revenue $ 120 $ 130 $ 475
Administrative and underwriting revenue 704 768 5,094
At December 31, 2000 and 1999, due to GWL includes $17,743 and $10,641
due on demand and $25,338 and $25,338 of notes payable which bear
interest and mature on October 1, 2006. These notes may be prepaid in
whole or in part at any time without penalty; the issuer may not demand
payment before the maturity date. The amounts due on demand to GWL bear
interest at the public bond rate (7.0% and 6.7% at December 31, 2000 and
1999, respectively) while the note payable bears interest at 5.4%.
On May 4, 1999, the Company issued a $175,000 subordinated note to GWL&A
Financial, the proceeds of which were used for general corporate
purposes. The subordinated note bears interest at 7.25% and is due June
30, 2048. Payments of principal and interest under this subordinated
note shall be made only with prior written approval of the Commissioner
of Insurance of the State of Colorado. Payments of principal and
interest on this subordinated note are payable only out of surplus funds
of the Company and only at such time as the financial condition of the
Company is such that at the time of payment of principal or interest,
its surplus after the making of any such payment would exceed the
greater of $1,500 or 1.25 times the company action level amount as
required by the most recent risk based capital calculations.
Interest expense attributable to these related party obligations was
$14,637, $11,053, and $9,891 for the years ended December 31, 2000,
1999, and 1998, respectively.
4. REINSURANCE
In the normal course of business, the Company seeks to limit its
exposure to loss on any single insured and to recover a portion of
benefits paid by ceding risks to other insurance enterprises under
excess coverage and co-insurance contracts. The Company retains a
maximum of $1.5 million of coverage per individual life.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk
arising from similar geographic regions, activities, or economic
characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. At December 31, 2000 and
1999, the reinsurance receivable had a carrying value of $233,968 and
$173,322, respectively.
The following schedule details life insurance in force and life and
accident/health premiums:
Ceded Assumed Percentage
Primarily to Primarily of Amount
Gross the Parent from Other Net Assumed
Amount Corporation Companies Amount to Net
------------- ------------- ------------- ------------- -----------
December 31, 2000:
Life insurance in force:
Individual $ 39,067,268 $ 5,727,745 $ 7,563,302 $ 40,902,825 18.5%
Group 75,700,120 20,610,896 96,311,016 21.4%
------------- ------------- ------------- -------------
Total $ 114,767,388 $ 5,727,745 $ 28,174,198 $ 137,213,841
============= ============= ============= =============
Premium Income:
Life insurance $ 349,097 $ 35,448 $ 88,994 $ 402,643 22.1%
827,044 79,705 175,294 922,633 19.0%
Accident/health
------------- ------------- ------------- -------------
Total $ 1,176,141 $ 115,153 $ 264,288 $ 1,325,276
============= ============= ============= =============
December 31, 1999:
Life insurance in force:
Individual $ 35,362,934 $ 5,195,961 $ 8,467,877 $ 38,634,850 21.9%
Group 80,717,198 2,212,741 82,929,939 2.7%
------------- ------------- ------------- -------------
Total $ 116,080,132 $ 5,195,961 $ 10,680,618 $ 121,564,789
============= ============= ============= =============
Premium Income:
Life insurance $ 306,101 $ 27,399 $ 46,715 $ 325,417 14.4%
801,755 58,247 79,753 823,261 9.7%
Accident/health
------------- ------------- ------------- -------------
Total $ 1,107,856 $ 85,646 $ 126,468 $ 1,148,678
============= ============= ============= =============
December 31, 1998:
Life insurance in force:
Individual $ 34,017,379 $ 4,785,079 $ 8,948,442 $ 38,180,742 23.4%
Group 81,907,539 2,213,372 84,120,911 2.6%
------------- ------------- ------------- -------------
Total $ 115,924,918 $ 4,785,079 $ 11,161,814 $ 122,301,653
============= ============= ============= =============
Premium Income:
Life insurance $ 352,710 $ 24,720 $ 65,452 $ 393,442 16.6%
571,992 61,689 74,284 584,587 12.7%
Accident/health
------------- ------------- ------------- -------------
Total $ 924,702 $ 86,409 $ 139,736 $ 978,029
============= ============= ============= =============
5. NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS
Net investment income is summarized as follows:
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
Investment income:
Fixed maturities and short-term investments $ 676,784 $ 636,946 $ 638,079
Mortgage loans on real estate 80,775 88,033 110,170
Real estate 22,068 19,618 20,019
Policy loans 191,320 167,109 180,933
Other 120 138 285
------------- ------------- -------------
971,067 911,844 949,486
Investment expenses, including interest on
amounts charged by the related parties
of $14,637, $11,053, and $9,891 39,626 35,898 52,126
------------- ------------- -------------
Net investment income $ 931,441 $ 875,946 $ 897,360
============= ============= =============
Net realized gains on investments are as follows:
Years Ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -------------
Realized gains (losses):
Fixed maturities $ (16,752) $ (8,321) $ 36,944
Stocks 33,411 463 1,447
Mortgage loans on real estate 2,207 1,429 424
Real estate 490 513
Provisions 8,927 7,000 (642)
------------- ------------- -------------
Net realized gains on investments $ 28,283 $ 1,084 $ 38,173
============= ============= =============
6. SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 2000 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ----------- ----------- ----------- -----------
Available-for-Sale:
U.S. Government Agencies $ 1,115,926 $ 14,528 $ 3,483 $ 1,126,971 $1,126,971
Collateralized mortgage
Obligations 708,707 8,592 7,201 710,098 710,098
Public utilities 654,729 13,251 7,063 660,917 660,917
Corporate bonds 3,036,921 66,903 85,559 3,018,265 3,018,265
Foreign governments 49,505 1,019 376 50,148 50,148
State and municipalities 815,246 20,424 6,502 829,168 829,168
Direct mortgage pass-
through certificates 356,975 2,719 1,091 358,603 358,603
Mortgage backed 100,786 5,401 363 105,824 105,824
securities
Asset backed securities 2,533,214 46,602 19,945 2,559,871 2,559,871
----------- ----------- ----------- ----------- -----------
$ 9,372,009 $ 179,439 $ 131,583 $ 9,419,865 $9,419,865
=========== =========== =========== =========== ===========
Fixed maturities owned at December 31, 1999 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ----------- ----------- ----------- -----------
Held-to-Maturity:
U.S. Government $ 178,801 $ 448 $ 10,047 $ 169,202 $ 178,801
Agencies
Collateralized mortgage
Obligations 5,452 19 5,471 5,452
Public utilities 281,308 3,956 5,195 280,069 281,308
Corporate bonds 1,450,576 15,840 22,654 1,443,762 1,450,576
Foreign governments 10,000 213 10,213 10,000
State municipalities 123,160 691 1,494 122,357 123,160
Direct mortgage pass-
through certificates
Mortgage backed
securities
Asset backed securities 211,284 2,184 5,961 207,507 211,284
----------- ----------- ----------- ----------- -----------
$ 2,260,581 $ 23,351 $ 45,351 $ 2,238,581 $2,260,581
=========== =========== =========== =========== ===========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ----------- ----------- ----------- -----------
Available-for-Sale:
U.S. Government Agencies $ 942,341 $ 2,370 $ 22,871 $ 921,840 $ 921,840
Collateralized mortgage
Obligations 862,250 1,215 38,061 825,404 825,404
Public utilities 479,868 1,158 13,369 467,657 467,657
Corporate bonds 1,836,482 19,120 79,079 1,776,523 1,776,523
Foreign governments 37,864 642 856 37,650 37,650
State and municipalities 359,367 94 17,598 341,863 341,863
Direct mortgage pass-
through certificates 304,099 1,419 11,704 293,814 293,814
Mortgage backed 51,809 18 1,900 49,927 49,927
securities
Asset backed securities 2,079,303 5,140 71,199 2,013,244 2,013,244
----------- ----------- ----------- ----------- -----------
$ 6,953,383 $ 31,176 $ 256,637 $ 6,727,922 $6,727,922
=========== =========== =========== =========== ===========
The collateralized mortgage obligations consist primarily of sequential
and planned amortization classes with final stated maturities of two to
thirty years and average lives of less than one to fifteen years.
Prepayments on all mortgage-backed securities are monitored monthly and
amortization of the premium and/or the accretion of the discount
associated with the purchase of such securities is adjusted by such
prepayments.
See Note 8 for additional information on policies regarding estimated
fair value of fixed maturities.
The amortized cost and estimated fair value of fixed maturity
investments at December 31, 2000, by projected maturity, are shown
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.
Available-for-Sale
-------------------------------
Amortized Estimated
Cost Fair Value
-------------- --------------
Due in one year or less $ 518,895 $ 527,576
Due after one year
through five years 2,480,365 2,487,423
Due after five years
through ten years 1,167,364 1,172,556
Due after ten years 772,208 760,118
Mortgage-backed
Securities 1,899,963 1,912,319
Asset-backed securities 2,533,214 2,559,873
-------------- --------------
$ 9,372,009 $ 9,419,865
============== ==============
Proceeds from sales of securities available-for-sale were $1,460,672,
$3,176,802, and $6,169,678 during 2000, 1999, and 1998, respectively.
The realized gains on such sales totaled $5,845, $10,080, and $41,136
for 2000, 1999, and 1998, respectively. The realized losses totaled
$20,562, $19,720, and $8,643 for 2000, 1999, and 1998, respectively.
During the years 2000, 1999, and 1998, held-to-maturity securities with
amortized cost of $8,571, $0, and $9,920 were sold due to credit
deterioration with insignificant gains and losses.
During the fourth quarter of 2000, the Company transferred all
securities classified as held-to-maturity into the available-for-sale
category. The Company recorded a $19,908 unrealized gain associated with
this transfer in other comprehensive income, net of tax.
At December 31, 2000 and 1999, pursuant to fully collateralized
securities lending arrangements, the Company had loaned $208,702 and $0
of fixed maturities, respectively. The fair value of collateral held by
the Company at December 31, 2000, that can be sold or repledged is
$212,876. No portion of the collateral had been sold or repledged at
December 31, 2000.
The Company engages in hedging activities to manage interest rate,
market and foreign exchange risk. The following table summarizes the
2000 financial hedge instruments:
Notional Strike/Swap
December 31, 2000 Amount Rate Maturity
------------------------ --------------- -------------------------- ----------------------
Interest Rate Futures $ 171,800 5.17% - 5.68% 3/01
Interest Rate Caps 1,562,000 7.64% - 11.82% (CMT) 6/00 - 12/06
Interest Rate Swaps 300,041 4.995% - 8.620% 1/01 - 12/06
Foreign Currency
Exchange Contracts 18,371 N/A 6/05 - 7/06
Options 111,400 Various 5/01 - 11/05
The following table summarizes the 1999 financial hedge instruments:
Notional Strike/Swap
December 31, 1999 Amount Rate Maturity
------------------------ -------------- -------------------------- ----------------------
Interest Rate Caps $ 1,362,000 7.64% - 11.82% (CMT) 6/00 - 12/04
Interest Rate Swaps 217,528 4.94%-6.8% 02/00 - 12/06
Foreign Currency
Exchange Contracts 19,478 N/A 03/00 - 07/06
Equity Swap 104,152 5.15% - 5.93% 01/01
Options 54,100 Various 01/02 - 12/02
LIBOR - London Interbank Offered Rate
CMT - Constant Maturity Treasury Rate
The Company has established specific investment guidelines designed to
emphasize a diversified and geographically dispersed portfolio of
mortgages collateralized by commercial and industrial properties located
in the United States. The Company's policy is to obtain collateral
sufficient to provide loan-to-value ratios of not greater than 75% at
the inception of the mortgages. At December 31, 2000, approximately 32%
of the Company's mortgage loans were collateralized by real estate
located in California.
The following is information with respect to impaired mortgage loans:
2000 1999
=======================================================--------------------
Loans, net of related allowance for credit losses of
$12,777 and $14,727 $ 21,893 $ 25,877
Loans with no related allowance for credit losses 12,954 17,880
Average balance of impaired loans during the year 39,321 43,866
Interest income recognized (while impaired) 1,648 1,877
Interest income received and recorded (while impaired)
using the cash basis method of recognition 1,632 1,911
As part of an active loan management policy and in the interest of
maximizing the future return of each individual loan, the Company may
from time to time modify the original terms of certain loans. These
restructured loans, all performing in accordance with their modified
terms, aggregated $73,518 and $75,691 at December 31, 2000 and 1999,
respectively.
The following table presents changes in the allowance for credit losses:
2000 1999 1998
------------- ------------- -------------
Balance, beginning of year $ 77,416 $ 83,416 $ 83,416
Provision for loan losses (8,927) (7,000) 642
Charge-offs (7,247) - (787)
Recoveries - 1,000 145
------------- ------------- -------------
Balance, end of year $ 61,242 $ 77,416 $ 83,416
============= ============= =============
7. COMMERCIAL PAPER
The Company has a commercial paper program that is partially supported
by a $50,000 standby letter-of-credit. At December 31, 2000, commercial
paper outstanding of $97,631 had maturities ranging from 11 to 46 days
and interest rates ranging from 6.59% to 6.62%. At December 31, 1999, no
commercial paper was outstanding.
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
December 31,
-----------------------------------------------------------
2000 1999
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- ------------- ------------- -------------
ASSETS:
Fixed maturities and
short-term investments $ 9,834,247 $ 9,834,247 $ 9,229,307 $ 9,207,307
Mortgage loans on real
estate 843,371 856,848 974,645 968,964
Policy loans 2,809,973 2,809,973 2,681,132 2,681,132
Common stock 95,036 95,036 69,240 69,240
LIABILITIES:
Annuity contract reserves
without life 4,189,716 4,204,907 4,468,685 4,451,465
contingencies
Policyholders' funds 197,941 197,941 185,623 185,623
Due to GWL 43,081 41,332 35,979 33,590
Due to GWL&A Financial 171,347 158,222 175,035 137,445
Repurchase agreements 80,579 80,579
Commercial paper 97,631 97,631 - - - -
HEDGE CONTRACTS:
Interest rate futures (1,442) (1,442) 1,015 1,015
Interest rate caps 405 405 4,140 4,140
Interest rate swaps 9,232 9,232 (1,494) (1,494)
Foreign currency exchange
contracts 1,079 1,079 (10) (10)
Equity swap - - - - (7,686) (7,686)
Options (3,528) (3,528) (6,220) (6,220)
The estimated fair values of financial instruments have been determined
using available information and appropriate valuation methodologies.
However, considerable judgement is required to interpret market data to
develop estimates of fair value. Accordingly, the estimates presented
are not necessarily indicative of the amounts the Company could realize
in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
The estimated fair-value of fixed maturities that are publicly traded
are obtained from an independent pricing service. To determine fair
value for fixed maturities not actively traded, the Company utilized
discounted cash flows calculated at current market rates on investments
of similar quality and term.
Mortgage loan fair value estimates generally are based on discounted
cash flows. A discount rate "matrix" is incorporated whereby the
discount rate used in valuing a specific mortgage generally corresponds
to that mortgage's remaining term and credit quality. The rates selected
for inclusion in the discount rate "matrix" reflect rates that the
Company would quote if placing loans representative in size and quality
to those currently in the portfolio.
Policy loans accrue interest generally at variable rates with no fixed
maturity dates and, therefore, estimated fair value approximates
carrying value.
The fair value of annuity contract reserves without life contingencies
is estimated by discounting the cash flows to maturity of the contracts,
utilizing current crediting rates for similar products.
The estimated fair value of policyholders' funds is the same as the
carrying amount as the Company can change the crediting rates with 30
days notice.
The estimated fair value of due to GWL is based on discounted cash flows
at current market rates on high quality investments.
The fair value of due to GWL&A Financial reflects the last trading price
of the subordinated notes in the public market at December 31, 2000.
The carrying value of repurchase agreements and commercial paper is a
reasonable estimate of fair value due to the short-term nature of the
liabilities.
The estimated fair value of financial hedge instruments, all of which
are held for other than trading purposes, is the estimated amount the
Company would receive or pay to terminate the agreement at each
year-end, taking into consideration current interest rates and other
relevant factors. Included in the net loss position for interest rates
swaps are $1,858 and $772 of unrealized losses in 2000 and 1999,
respectively. Included in the net gain position for foreign currency
exchange contracts are $0 and $518 of loss exposures in 2000 and 1999,
respectively.
9. EMPLOYEE BENEFIT PLANS
The following table summarizes changes for the years ended December 31,
2000, 1999, and 1998, in the benefit obligations and in plan assets for
the Company's defined benefit pension plan and post-retirement medical
plan. There is no additional minimum pension liability required to be
recognized. There were no amendments to the plans due to the acquisition
of Alta.
Post-Retirement
Pension Benefits Medical Plan
---------------------------- -----------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
Change in benefit obligation
Benefit obligation at $ 126,130 $ 131,305 $ 115,057 $ 29,228 $ 19,944 $ 19,454
beginning of year
Service cost 7,062 7,853 6,834 2,305 2,186 1,365
Interest cost 9,475 8,359 7,927 2,167 1,652 1,341
Addition of former Alta 4,155
employees
Actuarial loss (gain) 2,510 (22,363) 5,117 3,616 (1,613)
Prior service for former
Alta
Employees 2,471
Benefits paid (4,614) (3,179) (3,630) (682) (641) (603)
-------- -------- -------- -------- -------- --------
Benefit obligation at end $ 140,563 $ 126,130 $ 131,305 $ 33,018 $ 29,228 $ 19,944
of year
-------- -------- -------- -------- -------- --------
Change in plan assets
Fair value of plan assets
at
Beginning of year $ 192,093 $ 183,136 $ 162,879 $ $ $
Actual return on plan assets 6,032 12,055 23,887
Addition of former Alta
employees
and other adjustments 81
Benefits paid (4,614) (3,179) (3,630)
-------- -------- -------- -------- -------- --------
Fair value of plan assets 193,511 192,093 183,136
at end of year
-------- -------- -------- -------- -------- --------
Funded (unfunded) status 52,948 65,963 51,831 (33,018) (29,228) (19,944)
Unrecognized net actuarial (15,239) (30,161) (11,405) 3,430 3,464 (113)
(gain) loss
Unrecognized prior service 3,073 3,614 2,148 2,310
cost
Unrecognized net (asset)
obligation or
at transition (16,655) (18,170) (19,684) 12,928 13,736 14,544
-------- -------- -------- -------- -------- --------
Prepaid (accrued) benefit $ 24,127 $ 21,246 $ 20,742 $ (14,512)$ (9,718) $ (5,513)
cost
======== ======== ======== ======== ======== ========
Components of net periodic
benefit cost
Service cost $ 7,062 $ 7,853 $ 6,834 $ 2,305 $ 2,186 $ 1,365
Interest cost 9,475 8,360 7,927 2,167 1,652 1,341
Expected return on plan (17,567) (15,664) (13,691)
assets
Amortization of transition (1,514) (1,514) (1,514) 808 808 808
obligation
Amortization of
unrecognized prior
service cost 541 541 162 162
Amortization of gain from
earlier
periods (879) (80) 34 38
-------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Net periodic (benefit) cost $ (2,882) $ (504) $ (444) $ 5,476 $ 4,846 $ 3,514
======== ======== ======== ======== ======== ========
Weighted-average
assumptions as
of December 31
Discount rate 7.50% 7.50% 6.50% 7.50% 7.50% 6.50%
Expected return on plan 9.25% 8.50% 8.50% 9.25% 8.50% 8.50%
assets
Rate of compensation 5.00% 5.00% 4.00% 5.00% 5.00% 4.00%
increase
The Company-sponsored post-retirement medical plan (medical plan)
provides health benefits to retired employees. 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 made no
contributions to this plan in 2000, 1999, or 1998.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the medical plan. For measurement purposes, a 7.5%
annual rate of increase in the per capita cost of covered health care
benefits was assumed. A one-percentage-point change in assumed health
care cost trend rates would have the following effects:
1-Percentage 1-Percentage
Point Point
Increase Decrease
------------ ---------------
Increase (decrease) on total of service and
interest cost on components $ 1,189 $ (812)
Increase (decrease) on post-retirement benefit 7,220 (5,517)
obligation
The Company sponsors a defined contribution 401(k) retirement plan which
provides eligible participants with the opportunity to defer up to 15%
of base compensation. The Company matches 50% of the first 5% of
participant pre-tax contributions. For employees hired after January 1,
1999, the Company matches 50% of the first 8% of participant pre-tax
contributions. Company contributions for the years ended December 31,
2000, 1999, and 1998 totaled $6,130, $5,504, and $3,915, respectively.
The Company has a deferred compensation plan providing key executives
with the opportunity to participate in an unfunded, deferred
compensation program. Under the program, participants may defer base
compensation and bonuses, and earn interest on their deferred amounts.
The program is not qualified under Section 401 of the Internal Revenue
Code. Participant deferrals, which are reflected in other liabilities,
are $19,264, $17,367, and $16,102 for years ending December 31, 2000,
1999, and 1998, respectively. The participant deferrals earn interest at
a rate based on the average ten-year composite government securities
rate plus 1.5%. The interest expense related to the plan for the years
ending December 31, 2000, 1999, and 1998 was $1,358, $1,231, and $1,185,
respectively.
The Company also provides a supplemental executive retirement plan
(SERP) to certain key executives. This plan provides 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 each employee covered by this plan. The Company
is the owner and beneficiary of the insurance contracts. The expense for
this plan for 2000, 1999, and 1998 was $3,023, $3,002, and $2,840,
respectively. The total liability of $18,794 and $14,608 as of December
31, 2000 and 1999 is included in other liabilities.
10. FEDERAL INCOME TAXES
The following is a reconciliation between the federal income tax rate
and the Company's effective income tax rate:
2000 1999 1998
---------- ----------- -----------
Federal tax rate 35.0 % 35.0 % 35.0 %
Change in tax rate resulting from:
Settlement of GWL tax exposures (5.9)
Other, net (0.9) (0.3) (1.6)
---------- ----------- -----------
Total 34.1 % 28.8 % 33.4 %
========== =========== ===========
The Company's income tax provision was favorably impacted in 1999 by
the release of contingent liabilities relating to taxes of the GWL's
U.S. branch associated with blocks of business that were transferred
from GWL's U.S. branch to the Company from 1989 to 1993; the Company had
agreed to the transfer of these tax liabilities as part of the transfer
of this business. The release recorded in 1999 reflected the resolution
of certain tax issues with the Internal Revenue Service (IRS), and
totaled $17,150; however, $8,900 of the release was attributable to
participating policyholders and therefore had no effect on the net
income of the Company since that amount was credited to the provision
for policyholders' share of earnings on participating business in the
accompanying 1999 statement of income.
Excluding the effect of the 1999 tax item discussed above, the effective
tax rate for 1999 was 35.2%.
Temporary differences which give rise to the deferred tax assets and
liabilities as of December 31, 2000 and 1999 are as follows:
2000 1999
-------------------------- -------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
----------- ------------ ----------- ------------
Policyholder reserves $ 114,074 $ 131,587
Deferred policy acquisition costs $ 48,543 $ 49,455
Deferred acquisition cost
proxy tax 110,239 103,529
Investment assets 35,714 69,561
Net operating loss carryforwards 444 444
Other 103 582
----------- ------------ ----------- ------------
Subtotal 224,860 84,257 305,121 50,037
Valuation allowance (1,761) (1,761)
----------- ------------ ----------- ------------
Total Deferred Taxes $ 223,099 $ 84,257 $ 303,360$ 50,037
=========== ============ =========== ============
Amounts included in investment assets above include $21,228 and
$(58,711) related to the unrealized gains (losses) on the Company's
fixed maturities available-for-sale at December 31, 2000 and 1999,
respectively.
The Company will file a consolidated tax return for 2000. Losses
incurred by subsidiaries in prior years cannot be offset against
operating income of the Company. At December 31, 2000, the Company's
subsidiaries had approximately $1,267 of net operating loss
carryforwards, expiring through the year 2015. The tax benefit of
subsidiaries' net operating loss carryforwards are included in the
deferred tax assets at December 31, 2000 and 1999, respectively.
The Company's valuation allowance was decreased in 2000, 1999, and 1998
by $0, $(17), and $(1,792), respectively, as a result of the
re-evaluation by management of future estimated taxable income in its
subsidiaries.
Under pre-1984 life insurance company income tax laws, a portion of life
insurance company gain from operations was not subject to current income
taxation but was accumulated, for tax purposes, in a memorandum account
designated as "policyholders' surplus account." The aggregate
accumulation in the account is $7,742 and the Company does not
anticipate any transactions, which would cause any part of the amount to
become taxable. Accordingly, no provision has been made for possible
future federal income taxes on this accumulation.
11. COMPREHENSIVE INCOME
Other comprehensive income at December 31, 2000 is summarized as
follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
========================================= --------------- -------------- --------------
Unrealized gains on available-for-sale
securities:
Unrealized holding gains (losses)
arising
during the period $ 204,274 $ (71,495) $ 132,779
Less: reclassification adjustment
for
losses (gains) realized in net 9,436 (3,303) 6,133
income
--------------- -------------- --------------
Net unrealized gains 213,710 (74,798) 138,912
========================================= ============ =============== ==========
Reserve and DAC adjustment (31,352) 10,973 (20,379)
--------------- -------------- --------------
--------------- -------------- --------------
Other comprehensive income $ 182,358 $ (63,825) $ 118,533
========================================= =============== ============== ==============
Other comprehensive loss at December 31, 1999 is summarized as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
========================================= --------------- -------------- --------------
Unrealized gains on available-for-sale
securities:
Unrealized holding (losses) gains
arising ring the period $ (303,033) $ 106,061 $ (196,972)
Less: reclassification adjustment
for (gains) losses realized in net (9,958) 3,485 (6,473)
income
--------------- -------------- --------------
Net unrealized (losses) gains (312,991) 109,546 (203,445)
Reserve and DAC adjustment 87,729 (30,705) 57,024
--------------- -------------- --------------
--------------- -------------- --------------
Other comprehensive loss $ (225,262) $ 78,841 $ (146,421)
========================================= =============== ============== ==============
Other comprehensive income at December 31, 1998 is summarized as
follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
--------------- -------------------------------
Unrealized gains on available-for-sale securities:
Unrealized holding gains (losses)
arising
during the period $ 39,430 $ (13,800) $ 25,630
Less: reclassification adjustment
for
(gains) losses realized in net (14,350) 5,022 (9,328)
income
--------------- -------------- --------------
Net unrealized gains (losses) 25,080 (8,778) 16,302
Reserve and DAC adjustment (11,614) 4,065 (7,549)
--------------- -------------- --------------
--------------- -------------- --------------
Other comprehensive income $ 13,466 $ (4,713) $ 8,753
=============== ============== ==============
12. STOCKHOLDER'S EQUITY, DIVIDEND RESTRICTIONS, AND OTHER MATTERS
At December 31, 2000 and 1999, the Company has 1,500 authorized shares
each of Series A, Series B, Series C and Series D cumulative preferred
stock; and 2,000,000 authorized shares of non-cumulative preferred
stock.
Dividends of $0, $0, and $6,692 were paid on preferred stock in 2000,
1999, and 1998, respectively. In addition, dividends of $134,149,
$92,053, and $73,344 were paid on common stock in 2000, 1999, and 1998,
respectively. Dividends are paid as determined by the Board of
Directors, subject to restrictions as discussed below.
The Company's net income and capital and surplus, as determined in
accordance with statutory accounting principles and practices for
December 31 are as follows:
2000 1999 1998
-------------- --------------- -------------
(Unaudited)
Net income $ 293,521 $ 253,123 $ 225,863
Capital and surplus 1,083,718 1,004,745 727,124
In March 1998, the National Association of Insurance Commissioners
adopted the Codification of Statutory Accounting Principles
(Codification). The Codification, which is intended to standardize
accounting and reporting to state insurance departments, is effective
January 1, 2001. However, statutory accounting principles will continue
to be established by individual state laws and permitted practices. The
Colorado Division of Insurance will require adoption of Codification
with certain modifications for the preparation of statutory financial
statements effective January 1, 2001. The Company estimates that the
adoption of Codification as modified by the Colorado Division of
Insurance will increase statutory net worth as of January 1, 2001, by
approximately $105,760 [Unaudited]. (The modifications adopted by the
Colorado Division of Insurance had no effect on statutory net worth).
The maximum amount of dividends which can be paid to stockholders by
insurance companies domiciled in the State of Colorado are subject to
restrictions relating to statutory surplus and statutory net gain from
operations. Statutory surplus and net gains from operations at December
31, 2000 were $1,083,718 and $275,231 [Unaudited], respectively. The
Company should be able to pay up to $275,231[Unaudited] of dividends in
2001.
13. STOCK OPTIONS
The Parent has a stock option plan (the Lifeco plan) that provides for
the granting of options on common shares of Lifeco to certain officers
and employees of Lifeco and its subsidiaries, including the Company.
Options may be awarded with exercise prices of no less than the market
price on the date of the grant. Termination of employment prior to
vesting results in forfeiture of the options, unless otherwise
determined by a committee that administers the Lifeco plan. As of
December 31, 2000, 1999, and 1998, stock available for award to Company
employees under the Lifeco plan aggregated 4,808,047, 885,150, and
1,424,400 shares.
The plan provides for the granting of options with varying terms and
vesting requirements. The majority of basic options under the plan vest
and become exercisable twenty percent per year commencing on the first
anniversary of the grant and expire ten years from the date of grant.
Other basic options vest and become exercisable one-third per year
commencing on various dates from December 31, 2000 to September 30, 2002
and expire ten years from the date of grant. Variable options granted to
Company employees totaling 278,000 and 1,832,000 in 1998 and 1997,
respectively, become exercisable if certain cumulative financial targets
are attained by the end of 2001. If exercisable, the exercise period
runs from April 1, 2002 to June 26, 2007. During 2000, the Company
determined that it was probable that certain of these options would
become exercisable and, accordingly, recorded compensation expense of
$15,052 with a corresponding credit to additional paid-in capital as
prescribed by AIN-APB 25.
Additional variable options granted in 1998 and 2000 totaling 380,000
and 120,000, respectively, become exercisable if certain sales or
financial targets are attained. During 2000, 1999, and 1998, 13,250,
11,250, and 30,000 of these options vested and accordingly, the Company
recognized compensation expense of $151, $23, and $116, respectively. If
exercisable, the exercise period expires ten years from the date of
grant.
The following table summarizes the status of, and changes in, Lifeco
options granted to Company employees, which are outstanding and the
weighted-average exercise price (WAEP) for 2000, 1999, and 1998. As the
options granted relate to Canadian stock, the values, which are
presented in U.S. dollars, will fluctuate as a result of exchange rate
fluctuations:
2000 1999 1998
--------------------- ---------------------- ----------------------
Options WAEP Options WAEP Options WAEP
----------- -------- ----------- --------- ----------- ---------
Outstanding, Jan. 1 6,567,098 $ 9.04 6,544,824 $ 8.07 5,736,000 $ 7.71
Granted 1,386,503 14.88 575,500 16.48 988,000 13.90
Exercised 351,300 6.77 234,476 5.69 99,176 5.93
Expired or 120,750 12.10 318,750 13.81 80,000 13.05
canceled
----------- -------- ----------- --------- ----------- ---------
Outstanding, Dec. 31 7,481,551 $ 9.83 6,567,098 $ 9.04 6,544,824 $ 8.07
=========== ======== =========== ========= =========== =========
Options exercisable
at year-end 2,889,848 $ 7.23 2,215,998 $ 6.31 1,652,424 $ 5.72
=========== ======== =========== ========= =========== =========
Weighted average
fair
value of options
granted during year $ 4.38 $ 5.23 $ 4.46
=========== =========== ===========
The following table summarizes the range of exercise prices for
outstanding Lifeco common stock options granted to Company employees at
December 31, 2000:
Outstanding Exercisable
=================== ----------------------------------------- ----------------------------
Average Average
===================
Exercise Average Exercise Exercise
===================
Price Range Options Life Price Options Price
------------------- -------------- ----------- ------------ -------------- -----------
$ 5.65 - 7.50 3,223,248 5.65 $ 5.72 2,514,448 $ 5.70
$10.82 - 15.21 4,096,803 7.66 $ 12.77 350,300 $ 14.28
$15.91 - 17.95 161,500 8.18 $ 17.33 25,100 $ 17.74
Of the exercisable Lifeco options, 2,845,348 relate to basic option
grants and 44,500 relate to variable grants.
Power Financial Corporation (PFC), which is the parent corporation of
Lifeco, has a stock option plan (the PFC plan) that provides for the
granting of options for common shares of PFC to key employees of PFC and
its affiliates. Prior to the creation of the Lifeco plan in 1996,
certain officers of the Company participated in the PFC plan in Canada.
Under the PFC plan, options may be awarded with exercise price no less
than the market price on the date of the grant. Termination of
employment prior to vesting results in forfeiture of the options, unless
otherwise determined by a committee that administers the PFC plan. As of
December 31, 2000, 1999, and 1998, stock available for award under the
PFC plan aggregated 2,790,800, 4,340,800, and 4,400,800 shares.
Options granted to officers of the Company under the PFC plan become
exercisable twenty percent per year commencing on the date of the grant
and expire ten years from the date of grant.
The following table summarizes the status of, and changes in, PFC
options granted to Company officers, which remain outstanding and the
weighted-average exercise price (WAEP) for 2000, 1999, and 1998. As the
options granted relate to Canadian stock, the values, which are
presented in U.S. dollars, will fluctuate as a result of exchange rate
fluctuations:
2000 1999 1998
--------------------- ---------------------- ----------------------
Options WAEP Options WAEP Options WAEP
----------- -------- ----------- --------- ----------- ---------
Outstanding, Jan. 1, 285,054 $ 3.23 355,054 $ 2.89 1,076,000 $ 3.05
Exercised 215,054 3.30 70,000 2.28 720,946 2.98
----------- -------- ----------- --------- ----------- ---------
Outstanding, Dec. 70,000 $ 2.29 285,054 $ 3.23 355,054 $ 2.89
31,
=========== ======== =========== ========= =========== =========
Options exercisable
at year-end 70,000 $ 2.29 285,054 $ 3.23 355,054 $ 2.89
=========== ======== =========== ========= =========== =========
As of December 31, 2000, the PFC options outstanding have an exercise
price of $2.29 and a weighted-average remaining contractual life of 3.33
years.
The Company accounts for stock-based compensation using the intrinsic
value method prescribed by APB 25 under which compensation expenses for
stock options are generally not recognized for stock option awards
granted at or above fair market value. Had compensation expense for the
Company's stock option plan been determined based upon fair value at the
grant dates for awards under the plan in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company's net income
would have been reduced by $1,147, $1,039, and $727, in 2000, 1999, and
1998, respectively. The fair value of each option grant was estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for those options granted in
2000, 1999, and 1998, respectively: dividend yields of 4.06%, 3.63%, and
3.0%, expected volatility of 30.1%, 32.4%, and 34.05%, risk-free
interest rates of 6.61%, 6.65%, and 4.79% and expected lives of 7.5
years.
14. SEGMENT INFORMATION
The Company has two reportable segments: Employee Benefits and Financial
Services. The Employee Benefits segment markets group life and health
and 401(k) products to small and mid-sized corporate employers. The
Financial Services segment markets and administers savings products to
public and not-for-profit employers and individuals and offers life
insurance products to individuals and businesses. The Company's
reportable segments are strategic business units that offer different
products and services. They are managed separately as each segment has
unique distribution channels.
The accounting policies of the segments are the same as those described
in Note 1. The Company evaluates performance based on profit or loss
from operations after income taxes.
The Company's operations are not materially dependent on one or a few
customers, brokers or agents.
Summarized segment financial information for the year ended and as of
December 31 was as follows:
Year ended December 31, 2000
Operations:
Employee Financial
Benefits Services Total
======================================== -------------- -------------- ---------------
Revenue:
Premium income $ 1,142,136 $ 190,430 $ 1,332,566
Fee income 752,309 119,318 871,627
Net investment income 94,800 836,641 931,441
Realized investment (losses) gains (3,572) 31,855 28,283
======================================== -------------- -------------- ---------------
Total revenue 1,985,673 1,178,244 3,163,917
Benefits and Expenses:
Benefits 922,925 822,946 1,745,871
Operating expenses 856,463 168,449 1,024,912
======================================== -------------- -------------- ---------------
Total benefits and expenses 1,779,388 991,395 2,770,783
======================================== -------------- -------------- ---------------
-------------- -------------- ---------------
Net operating income before income 206,285 186,849 393,134
taxes
========================================
Income taxes 70,197 63,843 134,040
-------------- -------------- ---------------
Net income $ 136,088 $ 123,006 $ 259,094
======================================== ============== ============== ===============
Assets:
Employee Financial
Benefits Services Total
======================================== -------------- -------------- ---------------
Investment assets $ 1,438,650 $ 12,239,947 $ 13,678,597
Other assets 980,245 857,407 1,837,652
Separate account assets 6,537,095 5,844,042 12,381,137
======================================== -------------- -------------- ---------------
Total assets $ 8,955,990 $ 18,941,396 $ 27,897,386
======================================== ============== ============== ===============
Year ended December 31, 1999
Operations:
Employee Financial
========================================
Benefits Services Total
======================================== -------------- -------------- ---------------
Revenue:
========================================
Premium income $ 990,449 $ 172,734 $ 1,163,183
========================================
Fee income 548,580 86,567 635,147
========================================
Net investment income 80,039 795,907 875,946
========================================
Realized investment (losses) gains (1,224) 2,308 1,084
======================================== -------------- -------------- ---------------
Total revenue 1,617,844 1,057,516 2,675,360
========================================
Benefits and Expenses:
========================================
Benefits 789,084 792,755 1,581,839
========================================
Operating expenses 661,119 143,422 804,541
======================================== -------------- -------------- ---------------
Total benefits and expenses 1,450,203 936,177 2,386,380
======================================== -------------- -------------- ---------------
-------------- -------------- ---------------
========================================
========================================
Net operating income before income 167,641 121,339 288,980
taxes
========================================
Income taxes 51,003 32,259 83,262
-------------- -------------- ---------------
Net income $ 116,638 $ 89,080 $ 205,718
======================================== ============== ============== ===============
Assets:
Employee Financial
Benefits Services Total
======================================== -------------- -------------- ---------------
Investment assets $ 1,464,111 $ 11,593,944 $ 13,058,055
Other assets 741,438 910,677 1,652,115
Separate account assets 7,244,145 5,575,752 12,819,897
======================================== -------------- -------------- ---------------
Total assets $ 9,449,694 $ 18,080,373 $ 27,530,067
======================================== ============== ============== ===============
Year ended December 31, 1998
Operations:
Employee Financial
Benefits Services Total
======================================== -------------- -------------- ---------------
Revenue:
Premium income $ 746,898 $ 247,965 $ 994,863
Fee income 444,649 71,403 516,052
Net investment income 95,118 802,242 897,360
Realized investment gains 8,145 30,028 38,173
======================================== -------------- -------------- ---------------
Total revenue 1,294,810 1,151,638 2,446,448
Benefits and Expenses:
Benefits 590,058 872,411 1,462,469
Operating expenses 546,959 141,269 688,228
======================================== -------------- -------------- ---------------
Total benefits and expenses 1,137,017 1,013,680 2,150,697
======================================== -------------- -------------- ---------------
-------------- -------------- ---------------
Net operating income before income 157,793 137,958 295,751
taxes
Income taxes 50,678 48,158 98,836
-------------- -------------- ---------------
Net income $ 107,115 $ 89,800 $ 196,915
======================================== ============== ============== ===============
The following table, which summarizes premium and fee income by segment,
represents supplemental information.
2000 1999 1998
=============================== --------------- -------------- --------------
Premium Income:
Employee Benefits
Group Life & Health $ 1,142,136 $ 990,449 $ 746,898
=============================== --------------- -------------- --------------
Total Employee 1,142,136 990,449 746,898
Benefits
--------------- -------------- --------------
--------------- -------------- --------------
Financial Services
Savings 7,253 14,344 16,765
Individual Insurance 183,177 158,390 231,200
--------------- -------------- --------------
--------------- -------------- --------------
Total Financial 190,430 172,734 247,965
Services
=============================== --------------- -------------- --------------
Total premium income $ 1,332,566 $ 1,163,183 $ 994,863
=============================== =============== ============== ==============
Fee Income:
Employee Benefits
Group Life & Health $ 648,328 $ 454,071 $ 366,805
(uninsured plans)
401(k) 103,981 94,509 77,844
=============================== --------------- -------------- --------------
--------------- -------------- --------------
Total Employee 752,309 548,580 444,649
Benefits
=============================== --------------- -------------- --------------
--------------- -------------- --------------
Financial Services
Savings 111,201 81,331 71,403
Individual Insurance 8,117 5,236
--------------- -------------- --------------
--------------- -------------- --------------
Total Financial 119,318 86,567 71,403
Services
=============================== --------------- -------------- --------------
Total fee income $ 871,627 $ 635,147 $ 516,052
=============================== =============== ============== ==============
15. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings, which arise in the
ordinary course of its business. In the opinion of management, after
consultation with counsel, the resolution of these proceedings should
not have a material adverse effect on its financial position or results
of operations.
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Back Cover
The Securities and Exchange Commission maintains an Internet web site
(http://www.sec.gov) that contains additional information about Great-West Life
& Annuity Insurance Company, and the Contract which may be of interest to you.