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the amount Transferred or withdrawn from the value of a Guarantee Period if the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withdrawn in the first three years.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 more information, see "Breaking a Guarantee Period" on page 8 and
"Market Value Adjustment" on page 8.
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 ("SEC") 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
commissions has approved or disapproved these securities or passed upon the
accuracy or adequacy of this 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 Contracts 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, 2002.
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Table of Contents
Definitions...............................................4
Summary...................................................5
How to contact Schwab..................................5
Fee Table.................................................6
Great-West Life & Annuity Insurance
Company...................................................7
The Guarantee Period Fund.................................7
Investments of the Guarantee Period Fund...............7
Subsequent Guarantee Periods...........................7
Breaking a Guarantee Period............................8
Interest Rates.........................................8
Market Value Adjustment................................8
Application and Initial Contributions.....................8
Free Look Period..........................................9
Subsequent Contributions..................................9
Annuity Account Value.....................................9
Transfers.................................................9
Possible Restrictions.................................10
Cash Withdrawals.........................................10
Withdrawals to Pay Investment Manager or
Financial Advisor Fees................................10
Tax Consequences of Withdrawals.......................10
Telephone Transactions...................................11
Death Benefit............................................11
Beneficiary...........................................11
Distribution of Death Benefit.........................11
Charges and Deductions...................................12
Transfer Fees.........................................12
Premium Tax...........................................13
Other Taxes...........................................13
Payout Options...........................................13
Periodic Withdrawals..................................13
Periodic Withdrawal Payout Options....................14
Annuity Payout Information...............................14
Annuity IRAs..........................................14
Seek Tax Advice..........................................15
Federal Tax Matters......................................15
Taxation of Annuities.................................15
Individual Retirement Annuities.......................17
Assignments or Pledges...................................17
Distribution of the Contracts............................17
Selected Financial Data..................................18
Management's Discussion and Analysis of Financial
Conditions and Results of Operations..................19
Rights Reserved by Great-West............................45
Legal Proceedings........................................45
Legal Matters............................................45
Experts..................................................45
Available Information....................................45
Appendix A--Market Value Adjustments.....................46
Consolidated Financial Statements and Independent
Auditor's Report.........................................48
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.
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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 Charles Schwab & Co., Inc. ("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 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. Eastern time 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 ("NYSE") 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:
Schwab Insurance Services
P.O. Box 7666
San Francisco, CA 94120-7666
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 11.
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 non-unitized market value 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 8). 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 8.
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 market value separate account 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 following its Guarantee Period Maturity Date, the matured value will be
transferred to a 2-year Guarantee Period.
Breaking a Guarantee Period
In general, 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 and Mississippi, 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 a
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 single sum 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, or
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 at the
Annuity Administration Department, 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
Prior to the Annuity Commencement Date, your Annuity Account Value is the sum of
your Fixed Account Value 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. Requests received after 4:00 p.m. Eastern time will be effective
on the next business day we and the NYSE are open for business. Under current
tax law, there will not be any tax liability to you if you make a Transfer.
We will use reasonable procedures to confirm that Requests 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.
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 8. 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 Annuity Commencement Date by
submitting a written withdrawal Request to the Annuity Administration
Department. Withdrawal Requests are not permitted by telephone. 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 withdrawal, less any
applicable Premium Tax. No withdrawals may be made after the Annuity
Commencement 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 8.
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 Annuity
Commencement Date.
o A partial withdrawal or surrender will be effective upon the Transaction
Date.
o A partial withdrawal or surrender may be subject to the Market Value
Adjustment provisions, and the Guarantee Period Fund provisions of the
Contract.
o A partial withdrawal or surrender 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 surrender 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 15.
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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Death Benefit
Before the Annuity Commencement 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 a
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,
o payout under any of the annuity options provided under this Contract that
may be subject to a Market Value Adjustment, or
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 Annuity Commencement Date 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.
- --------------------------------------------------------------------------------
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 the Annuity Commencement Date 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.
- --------------------------------------------------------------------------------
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.
Percentage of
Years Completed 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.
- --------------------------------------------------------------------------------
Payout Options
During the period beginning on and following the Payout Commencement Date, you
can choose to receive payouts in three ways--through periodic withdrawals, fixed
annuity payouts or in a single, lump-sum payment. The Payout Commencement Date
must be at least one year after the Effective Date of the Contract.
If you do not select a Payout Commencement Date, payouts will begin on the first
day of the month of the Annuitant's 91st birthday.
You may change the Payout Commencement Date within 30 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 atleast $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 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 made six or more months prior to their
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 you purchase an annuity, or 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.
- --------------------------------------------------------------------------------
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 whichwithdrawals will be made. The amount paid will vary based on
the duration you choose.
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.
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).
o Any other form of periodic withdrawal acceptable to Great-West which is for
a period of at least 36 months.
- --------------------------------------------------------------------------------
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 10 and "Federal Tax
Matters" on page 15.
Annuity Payout Information
You can choose the Annuity Commencement Date either when you purchase the
Contract or at a later date. The date you choose must be at least one year after
the Effective Date of theContract.
If you do not select an Annuity Commencement 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 Commencement 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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 distributions from 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 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 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, the entire interest in
the Contract must generally be distributed within five years after the date of
you're the Owner's 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 you're the Owner's 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 the
interest in the Contract 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 which
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, your
Contract and IRA endorsement. 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.
- --------------------------------------------------------------------------------
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-Qualified 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.
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. Note 1 in the financial statements
discusses the significant accounting policies of the Company. Significant
estimates are required to account for policy reserves, allowances for credit
losses, deferred policy acquisition costs, and valuation of privately placed
fixed maturities. Actual results could differ from those estimates.
INCOME STATEMENT Years Ended December 31,
------------------------------------------------------------------------
DATA 2001 2000 1999 1998 1997
------------------------------- ----------- ----------- ------------ ----------- -----------
[millions]
Premium income $ 1,204 $ 1,333 $ 1,163 $ 995 $ 833
Fee income 947 872 635 516 420
Net investment income 941 931 876 897 882
Net realized investment
gains 47 28 1 38 10
----------- ----------- ------------ ----------- -----------
Total revenues 3,139 3,164 2,675 2,446 2,145
Policyholder benefits 1,696 1,746 1,582 1,462 1,385
Operating expenses 1,028 1,025 804 688 552
----------- ----------- ------------ ----------- -----------
Total benefits and
expenses excluding
special charges 2,724 2,771 2,386 2,150 1,937
Income tax expense 141 134 83 99 49
----------- ----------- ------------ ----------- -----------
Net income before
special charges 274 259 206 197 159
Special charges (net) 81
----------- ----------- ------------ ----------- -----------
Net income $ 193 $ 259 $ 206 $ 197 $ 159
=========== =========== ============ =========== ===========
Deposits for investment-
type contracts $ 627 $ 835 $ 634 $ 1,344 $ 658
Deposits to separate
accounts 3,240 3,105 2,583 2,208 2,145
Self-funded premium
equivalents 5,721 5,181 2,979 2,606 1,940
BALANCE SHEET Years Ended December 31,
------------------------------------------------------------------------
DATA 2001 2000 1999 1998 1997
------------------------------- ----------- ----------- ------------ ----------- -----------
[millions]
Investment assets $ 14,341 $ 13,689 $ 13,058 $ 13,671 $ 13,206
Separate account assets 12,585 12,381 12,820 10,100 7,847
Total assets 28,811 27,897 27,530 25,123 22,078
Total policy benefit
liabilities 12,931 12,825 12,341 12,583 11,706
Due to GWL 42 43 35 52 118
Due to GWL&A Financial 251 171 175
Total shareholder's
equity 1,470 1,427 1,167 1,199 1,186
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.
The Company is a wholly-owned subsidiary of GWL&A Financial Inc. (GWL&A
Financial), a Delaware holding company. The Company is indirectly owned by
Great-West Lifeco Inc. (Great-West Lifeco), a Canadian holding company.
Great-West 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 that 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. Based on the
latest available December 31, 2000 data, the Company ranks 31st in terms of
admitted assets of all U.S. life insurance companies.
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.
This following discussion contains forward-looking statements. Forward-looking
statements are statements not based on historical information and that relate to
future operations, strategies, financial results, or other developments. In
particular, statements using verbs such as "expected", "anticipate", "believe",
or words of similar import generally involve forward-looking statements. Without
limiting the foregoing, forward-looking statements include statements that
represent the Company's beliefs concerning future or projected levels of sales
of 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 matters, including any 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 conditions and results of
operations of the Company for the three years ended December 31, 2001 follows.
This management discussion and analysis should be read in conjunction with the
financial data contained in the Selected Financial Data and the Company's
Consolidated Financial Statements.
Company Results of Operations
1. Consolidated Results
The Company's consolidated net income increased $33.4 million or 13% in 2001
when compared to 2000, before one-time charges of $80.9 million and operating
losses of $18.7 million, net of tax, related to the Alta Health & Life Insurance
Company (Alta) business. Alta was acquired by the Company on July 8, 1998.
During 2001 and 2000 the Alta business continued to be run as a free-standing
unit but was converted to the Company's systems and accounting processes. This
conversion program resulted in significant issues related to pricing,
underwriting, and administration of the business. The Company has decided to
transition Alta business to other Company products. All Alta sales and
administration staff have become employees of the Company and the underwriting
functions will be conducted by the underwriting staff of the Company.
The Employee Benefits segment contributed $28.9 million and the Financial
Services segment contributed $4.5 million to the growth in net income. Of total
consolidated net income in 2001 and 2000 (before one-time charges and operating
losses of Alta), the Employee Benefits segment contributed 56% and 53%,
respectively, while the Financial Services segment contributed 44% and 47%,
respectively.
In 2001, total revenues decreased $24.9 million or 0.8% to $3.1 billion when
compared to 2000. The decline in revenues in 2001 was comprised of decreased
premium income of $128.9 million, increased fee income of $75.6 million,
increased net investment income of $9.9 million and increased realized gains on
investments of $18.5 million. 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.
The decreased premium income in 2001 was comprised of a decline in Employee
Benefits premium income and Financial Services premium income of $108.1 million
and $20.8 million, respectively. The decline in premium income in the Employee
Benefits segment reflected a 18% decline in medical members from 3.2 million in
2000 to 2.6 million in 2001.
The decline in premium income in the Financial Services segment was primarily
due to lapses in the closed block of traditional life business. 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 in 2000. The growth
in premium income in the Financial Services segment was primarily due to
increased sales of the annuity products.
The increase in fee income in 2001 was comprised of Employee Benefits fee income
and Financial Services fee income of $57.2 million and $18.4 million,
respectively. The 8% growth in Employee Benefits fee income reflects a
combination of an amendment to the New England reinsurance contract, significant
price increases in the overall group health block of business, and fee increases
from service providers. The growth in Financial Services fee income in 2001 was
primarily the result of new sales and the increase in revenue from additional
new participants in FASCorp. These increases more than offset the decreased fees
on variable funds related to the weakness in the equity markets. 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.
Realized investment gains increased from $28.3 million in 2000 to $46.8 million
in 2001. Realized investment gains were $1.1 million in 1999. The decrease in
interest rates in 2001 and 2000 contributed to $32.1 million and $5.4 million of
fixed maturity gains, respectively. The increase in interest rates in 1999
contributed to $8.3 million of fixed maturity losses. The Company experienced
$22.2 million of fixed maturity credit losses in 2000. Although the Company
experienced stock gains in 2001, 2000 and 1999, 2000 stock gains were $20.3
million higher than 2001 and $32.9 million higher than 1999. The Company also
experienced provisions for asset losses of $0, $8.9 and $7.0 million for 2001,
2000 and 1999, respectively.
Total benefits and expenses decreased $46.5 million or 2% in 2001 when compared
to 2000. The decrease in 2001 was primarily in the Employee Benefits segment
reflecting lower claims associated with a decrease in membership. The 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 that 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.
Income tax expense increased before special charges $7.1 million or 5% in 2001
when compared to 2000. The increase reflects higher pre-tax earnings in 2001.
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 liabilities. See Note 11 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 of which
amounts approximate the additional premiums that would have been earned under
such contracts if they had been written as traditional indemnity or HMO
programs.
Deposits for investment-type contracts decreased $208 million or 25% in 2001
when compared to 2000. Deposits for investment-type contracts increased $201.4
million or 32% in 2000 when compared to 1999. The decrease in 2001 was primarily
attributable to the Financial Services segment, due to a drop in demand for
fixed BOLI contracts due to low interest rates. This was replaced by the BOLI
business moving to the separate account product (see below). The increase in
2000 was primarily attributable to the Financial Services segment, where the
Company had 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.
Deposits for separate accounts increased $135 million or 4% in 2001 when
compared to 2000. This increase in 2001 is primarily due to an increase in BOLI
single premiums which was offset somewhat by lower 401(k) deposits. Deposits for
separate accounts increased $522 million or 20% in 2000 when compared to 1999.
This increase in 2000 is primarily due to BOLI and 401(k) deposits that
increased from $200 million and $1.7 billion, respectively, in 1999 to $365
million and $2.0 billion, respectively, in 2000.
Self-funded premium equivalents increased $540 million or 10% in 2001 when
compared to 2000. This increase was due to the General American business ($307
million), Allmerica business ($166 million) and higher overall claims volume for
the self-funded business. 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.
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. The agreement converted to an assumption reinsurance
agreement January 1, 2001. The Company assumed approximately $150 million of
policy reserves and miscellaneous liabilities in exchange for $150 million of
cash and miscellaneous assets from General American.
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 co-insured back to
Allmerica and then underwritten and retained by the Company upon each policy
renewal date.
EMPLOYEE BENEFITS RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Employee Benefits
segment:
Years Ended December 31,
---------------------------------------------------------
INCOME STATEMENT DATA 2001 2000 1999
--------------------------------------------- ----------------- ----------------- ----------------
[millions]
Premiums $ 1,034 $ 1,142 $ 990
Fee income 809 752 549
Net investment income 91 95 80
Net realized investment gains (losses) 18 (3) (1)
----------------- ----------------- ----------------
Total revenues 1,952 1,986 1,618
Policyholder benefits 867 923 789
Operating expenses 863 857 661
----------------- ----------------- ----------------
Total benefits and expenses
before special charges 1,730 1,780 1,450
Income tax expense 76 70 51
----------------- ----------------- ----------------
Net income excluding special charges 146 136 117
Special charges (net) 81
----------------- ----------------- ----------------
Net income $ 65 $ 136 $ 117
================= ================= ================
Deposits for investment-type
Contracts $ 26 $ 27 $ 26
Deposits to separate accounts 1,806 1,951 1,745
Self-funded premium equivalents 5,721 5,181 2,979
In the second quarter of 2001, the Company recorded a $127 million special
charge ($80.9 million, net of tax), related to Alta. The principal components of
the charge include a $46 million premium deficiency reserve related to
underpricing on the block of business, a $29 million reserve for doubtful
premium receivables, a $28 million reserve for doubtful accident and health plan
claim receivables, and a $24 million decrease in goodwill and other.
Net income, excluding special charges of $80.9 million for Employee Benefits
after tax, increased 7% in 2001 and increased 15% in 2000. The improvement in
earnings in 2001 reflected favorable experience in realized investment gains,
expense gains associated with higher fee income partially offset by a
deterioration in morbidity (which negatively impacted stop-loss coverages),
decreases in premiums due to membership declines, and increased bad debts due to
the impact of the economic slowdown. During 2001, the Employee Benefits segment
experienced increased medical costs and utilization trends which contributed to
the deterioration in morbidity experience. 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.
401(k) premiums and deposits for 2001 and 2000 decreased 7% and increased 12%,
respectively, as the result of lower than expected new case sales in 2001 and
higher recurring deposits from existing customers and new sales in 2000. The
number of contributing participants decreased from 551,000 at December 31, 2000
to 546,000 at December 31, 2001. Assets under administration (including
third-party administration) in 401(k) decreased 7% in 2001 to $7.6 billion and
decreased 5% from 1999 to 2000. The decrease in 2001 was primarily due to the
impact of lower U.S equity markets.
Equivalent premium revenue and fee income for group life and health decreased 3%
from 2000 levels as the result of a decline in membership. From 1999 to 2000,
equivalent premium revenue and fee income increased 23% as a result of increased
sales and the Allmerica and General American acquisitions.
1. Group Life and Health
The Employee Benefits segment experienced a net decrease of 1,232 group health
care customers (employer groups) during 2001. There was an 18% decrease in total
health care membership from 3,158,900 at the end of 2000 to 2,587,900 at
year-end 2001. POS and HMO members decreased 30% from 718,400 in 2000 to 500,600
in 2001.
Much of the health care decline in 2001 can be attributed to terminations
resulting from aggressive pricing related to target margins. The decline in
membership was also, in part, due to difficulties with the implementation of a
systems enhancement, which was resolved by the end of 2001; a decrease in the
employee base for existing group health care customers; and the general decline
in the economy.
There was a net increase of 107 group healthcare customers (employer groups)
during 2000. 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.
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, decreased 39% to 598 in 2001 as
compared to 973 in 2000, an increase of 20% as compared to 811 in 1999. The
401(k) block of business under administration totaled 6,900 employer groups and
546,000 individual participants in 2001, compared to 7,000 employer groups and
551,000 individual participants in 2000 and 6,400 employer groups and 501,000
individual participants in 1999.
During 2001, the in force block of 401(k) business declined slightly with
customer retention falling to 89.9% from 91.5% in 2000 reflecting the impact of
health care terminations.
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 97% of
assets contributed in 2001 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. Competition
The employee benefits industry is highly competitive. The United States health
care industry continues to experience mergers and consolidations. A number of
larger carriers have dropped out of the group health market entirely. Although
there are still many different carriers in the marketplace, it has become
dominated by an increasingly smaller number of carriers, including the Company.
The highly competitive marketplace creates pricing pressures that encourage
employers to seek competitive bids each year. Although most employers are
looking for affordably priced employee benefits products, they also want to
offer product choices because employee needs differ. In many cases it is more
cost-effective and efficient for an employer to contract with a carrier such as
the Company that offers multiple product lines and centralized administration.
In addition to price there are a number of other factors that influence employer
decision-making. These factors include; quality of services; scope,
cost-effectiveness and quality of provider networks; product responsiveness to
customers' needs; cost-containment services; and effectiveness of marketing and
sales.
4. Outlook
To position itself for the future, the Employee Benefits segment is focused on
putting in place the products, strategies and processes that will improve its
competitive position in the evolving managed care environment.
A focus on provider contracting continues to be essential to ensuring strong
morbidity results. Sales efforts will be streamlined and concentrated on
self-funded products. Continued emphasis will be placed on expense economies and
synergies to ensure competitive administrative costs. Efficiency and customer
service will be improved through implementation of various system initiatives
and through process redesign.
The Company will continue to enhance its One Health Plan managed care program
with emphasis on medical claims management. In 2001, the Company began
converting to a three tier prescription drug program that has different levels
of co-payments. This conversion will continue into 2002 and will help to reduce
drug costs. The Company will continue to develop its Internet based disease
management program for members with diabetes, asthma, coronary heart disease and
other chronic illnesses.
Online enrollment for life and health members was implemented in 2001. As a
further enhancement to our Internet services, online billing is scheduled for
implementation in 2002 and will provide our customers with improved service, as
well as generate cost savings to the Company.
FINANCIAL SERVICES RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Financial Services
segment:
Years Ended December 31,
---------------------------------------------------------
INCOME STATEMENT DATA 2001 2000 1999
--------------------------------------------- ----------------- ----------------- ----------------
[millions]
Premiums $ 170 $ 191 $ 173
Fee income 138 120 86
Net investment income 850 836 796
Net realized investment gains 29 31 2
----------------- ----------------- ----------------
Total revenues 1,187 1,178 1,057
Policyholder benefits 829 823 793
Operating expenses 165 168 143
----------------- ----------------- ----------------
Total benefits and expenses 994 991 936
----------------- ----------------- ----------------
Income from operations 193 187 121
Income tax expense 65 64 32
----------------- ----------------- ----------------
Net income $ 128 $ 123 $ 89
================= ================= ================
Deposits for investment-type
contracts $ 601 $ 808 $ 608
Deposits to separate accounts 1,434 1,154 838
During 2001, the Financial Services segment experienced continued significant
growth of participants in the public non-profit business due to several large
case sales, significant separate account sales due to large case sales in the
BOLI line of business, and strong persistency in all lines of business.
Net income for Financial Services increased 4% in 2001 and increased 38% in
2000. The increase in earnings in 2001 reflected higher earnings from an
increase in investment margins, additional fee income from new third-party
administration cases, and improved mortality. This growth in the fees was
somewhat suppressed by the impact of the significant decrease in the equity
markets. The earnings in 2000 reflected strong earnings from an increased asset
base, an increase in investment margins, and significant capital gains on fixed
maturities.
1. Savings
Premiums increased $1.2 million or 16% from $7.3 million in 2000 to $8.5 million
in 2001. Premiums decreased $7.0 million or 49% from $14.3 million in 1999 to
$7.3 million in 2000. The decrease in 2000 was 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.
This trend changed in 2001 as the drop in the equity markets increased the flow
into the fixed products as participants moved towards the more stable
investments.
Fee income increased $8.6 million or 8% from $111.2 million in 2000 to $119.8
million in 2001. Fee income increased $29.9 million or 37% from $81.3 million in
1999 to $111.2 million in 2000. The growth in fee income in 2001 was the result
of new sales and the increase in revenue from additional new participants in
FASCorp. These increases more than offset the decreased fees on variable funds
related to the weakness in the equity markets. The growth in fee income in 2000
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 decreased $207 million or 26% from $808
million in 2000 to $601 million in 2001. This decrease was the result of lower
demand for small BOLI fixed business due to lower fixed interest rates. Deposits
for investment-type contracts increased $200 million or 30% from $608 million in
1999 to $808 million 2000. This significant increase was the result of several
large case sales in the fixed portfolio products.
Deposits to separate accounts increased $280 million or 24% from $1.1 billion in
2000 to $1.4 billion in 2001. Deposits to separate accounts increased $316
million or 30% from $838 million in 1999 to $1.1 billion in 2000. The increases
in 2001 and 2000 were primarily from the sale of large BOLI single premium
cases.
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 (GIC),
increased $300 million or 4% from $7.9 billion in 2000 to $8.2 billion in 2001.
The majority of this growth occurred in the stable value funds, which resulted
from large case sales, as new investments moved to the more stable fixed
separate accounts due to the instability in the equity markets in 2001.
The Financial Services segment's savings business experienced strong growth in
2001. The number of new participants in 2001 was 339,000 compared to 233,000 in
2000 and 214,100 in 1999, bringing the total lives under administration to
1,268,549 in 2001 and 1,002,785 in 2000.
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
2001, GIC assets decreased 13.4% from 2000 to $89.2 million. GIC assets
decreased 1.7% in 2000 to $103.0 million.
Customer demand for investment diversification continued to grow during 2001.
New contributions to variable business represented 56% of the total premium
equivalents in 2001 versus 51% in 2000. 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 2001 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
$1,207.9 million in 2001 compared to $749.3 million in 2000 and $653.7 million
in 1999.
FASCorp administered records for approximately 2,191,000 participants in 2001
versus 1,875,000 in 2000. FASCorp's fee income was $72.4 million, $63.8 million,
and $53.8 million for the years ended December 31, 2001, 2000, and 1999,
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 $179.1 million in
2001 reflected a decrease of 6% over 2000 premiums and deposits of $191.3
million. The decrease was primarily due to the reduction of the traditional
policies due to lapses. The term life business marketed through banks and other
financial institutions has experienced significant growth over the past several
years. Policies sold were 37,480, 17,367 and 9,000 in the years 2001, 2000 and
1999.
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 $83.1 million in 2001
from $84.1 million in 2000 and $128.5 million in 1999 and the Company expects
this decline to continue. As a result of these legislative changes, the Company
has shifted its emphasis in new sales from COLI to the BOLI market. This product
provides long-term benefits for employees and was not affected by the 1996
legislative changes. BOLI premiums and deposits were $547.9 million during 2001
compared to $581.9 million in 2000 and $436.3 million in 1999. 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. Competition
The life insurance, savings, and investments marketplace is highly competitive.
The Company's competitors include mutual fund companies, insurance companies,
banks, investment advisors, and certain service and professional organizations.
No one competitor or small number of competitors is dominant. Competition
focuses on service, technology, cost, variety of investment options, investment
performance, product features, price, and financial strength as indicated by
ratings issued by nationally recognized agencies. For more information on the
Company's ratings, see "Ratings" below.
4. 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. Market pressures have led the
government agencies to introduce employer-matching plans that 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. There was an increase of 316,000 new lives under
administration in FASCorp in the year 2001, and growth is expected to continue
in the future.
Individual annuities have experienced sales 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 policy sales through banks are expected to increase in the year 2002.
Distribution channels are presently established in five large banks and
management plans to expand into additional banks in 2002. BOLI sales are
expected to continue to be strong in the separate account market.
In 2002, the Financial Services division will assume responsibility for the
development and administration of the Company's 401(k) product. The Employee
Benefits division will continue to provide sales and marketing support for the
product.
INVESTMENT OPERATIONS
The Company's primary investment objective is to acquire assets with duration
and cash flow characteristics reflective 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] 2001 2000
---------------------------------------------------------------- ----------------- -----------------
Fixed maturities, available-for-sale, at fair value $ 10,116 $ 9,420
Mortgage loans 613 843
Real estate and common stock 186 202
Short-term investments 425 414
Policy loans 3,001 2,810
----------------- -----------------
Total invested assets $ 14,341 $ 13,689
================= =================
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 that allows the Company, if
necessary, to take appropriate action to protect its investment. The Company
believes that the cost of the additional monitoring and analysis required by
private placements is more than offset by their enhanced yield.
One of the Company's primary objectives is to ensure that its fixed maturity
portfolio is maintained at a high average quality, so as to limit credit risk.
If not externally rated, the securities are rated by the Company on a basis
intended to be similar to that of 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 7 for further discussion
related to this transfer. The distribution of the fixed maturity portfolio by
credit rating is summarized as:
Credit Rating 2001 2000
----------------------------------------------------------- ----------------- -----------------
AAA 57.9% 53.5%
AA 9.2 10.2
A 14.2 16.2
BBB 16.4 19.0
BB and below (non-investment grade) 2.3 1.1
----------------- -----------------
TOTAL 100.0% 100.0%
================= =================
At December 31, 2001, the Company had nine bonds in default with a carrying
value of $71.1 million, compared to two bonds for $10.7 million for 2000.
2. Mortgage Loans
During 2001, the mortgage portfolio declined 27% to $613 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
that 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 that 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 $31.6 million in 2001
compared with $39.3 million in 2000, and there were $10.6 million of
foreclosures in 2001, compared to $2.0 in 2000. 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, 2001 and 2000,
the Company's loan portfolio included $56.3 million and $73.5 million,
respectively, of non-impaired restructured loans.
3. 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.
4. Outlook
A global economic slowdown was the theme of 2001. Policy makers, both
domestically and internationally, cut short rates through 2001 as growth slowed
or contracted. A very moderate upturn in U.S. economic growth is expected in the
second half of 2002; foreign economies are expected to lag a U.S. economic
turnaround by at least one quarter. Ultimately, very aggressive monetary and
fiscal policy should provide support for the U.S. economy.
In the U.S., the Federal Reserve Board cut short rates eleven times over the
course of the year, from 6.50% to the current rate of 1.75%. Interest rates
across the curve established lows in early November and have been trading in a
range since then. It is likely that yields will decline again as inflation slows
further in the first part of the recovery, and then resume an upward bias.
The Company's investment portfolio is well positioned for a rising interest rate
environment pending economic recovery. The portfolio is well diversified and
comprised of high quality, relatively stable assets. We have taken advantage of
wide spreads across asset classes, opportunistically adding exposure to
investment grade bonds appropriate for the expected economic and interest rate
environment as well as 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
that totaled $638.4 million and $568.4 million as of December 31, 2001 and 2000,
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 sources of the funds that may be required in such
events include retained earnings, and 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 $97.0
million of commercial paper outstanding at December 31, 2001 compared with $97.6
million at December 31, 2000. The commercial paper has been given a rating of
A-1+ by Standard & Poors' Corporation and a rating of P-1 by Moody's Investors
Services, 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" (SFAS No. 140), which
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral, and requires certain disclosures. SFAS No. 140
was effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. Certain
disclosure requirements under SFAS No. 140 were effective December 15, 2000, and
these requirements have been incorporated in the Company's financial statements.
The adoption of SFAS No. 140 did not have a material 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" that
provides guidance with respect to revenue recognition issues and disclosures. As
amended by SAB No. 101B, "Second Amendment: Revenue Recognition in Financial
Statements," the Company implemented the provisions of SAB 101 during the fourth
quarter of 2000. The adoption of SAB No. 101 did not affect the Company's
revenue recognition practices.
Effective January 1, 2001, the Company adopted Financial Account Standards Board
(FASB) Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133), as amended by FASB Statement No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities." SFAS 138
requires all derivatives, whether designated in hedging relationships or not, to
be recorded on the balance sheet at fair value. If the derivative is designated
as a fair value hedge, the changes in the fair value of the derivative and of
the hedged item attributable to the hedged risk are recognized in earnings. If
the derivative is designated as a cash flow hedge, the effective portions of the
changes in the fair value of the derivative are recorded in accumulated other
comprehensive income and are recognized in the income statement when the hedged
item affects earnings. Ineffective portions of changes in the fair value of cash
flow hedges are recognized in earnings. The adoption of SFAS No. 133 resulted in
an approximate $1.0 million after-tax increase to accumulated other
comprehensive income, which has been included in the current year change in
other comprehensive income in the Statement of Stockholder's Equity. This amount
is not material to the Company's financial position or results of operations.
Effective April 1, 2001, the Company adopted Emerging Issues Task Force Issue
No. 99-20, "Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interest in Securitized Financial Assets" (EITF 99-20). This
pronouncement requires investors in certain asset-backed securities to record
changes in their estimated yield on a prospective basis and to apply specific
evaluation methods to these securities for an other-than-temporary decline in
value. The adoption of EITF 99-20 did not have a material impact on the
Company's financial position or results of operations.
On June 29, 2001 Statement of Financial Accounting Standards (SFAS) FAS No.141,
"Business Combinations" (SFAS No. 141) was approved by the FASB. SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. The Company implemented SFAS No. 141
on July 1, 2001. Adoption of the Statement did not have a material impact on the
Company's financial position or results of operations.
On June 29, 2001, Statement No. 142, "Goodwill and Other Intangible Assets"
(SFAS No. 142) was approved by the FASB. SFAS No. 142 changes the accounting for
goodwill and certain other intangibles from an amortization method to an
impairment-only approach. Amortization of goodwill, including goodwill recorded
in past business combinations, will cease upon adoption of this statement. The
Company implemented SFAS No. 142 on January 1, 2002 and, although it is still
reviewing the provisions of this Statement, management's preliminary assessment
is that the Statement will not have a material impact on the Company's financial
position or results of operations.
In August 2001, the FASB issued Statement No.144 "Accounting for the Impairment
or Disposal of Long-Lived Assets" (SFAS No.144). SFAS No.144 supercedes current
accounting guidance relating to impairment of long-lived assets and provides a
single accounting methodology for long-lived assets to be disposed of, and also
supercedes existing guidance with respect to reporting the effects of the
disposal of a business. SFAS No.144 was adopted January 1, 2002 without a
material impact on the Company's financial position or results of operations.
In July 2001, the SEC released Staff Accounting Bulletin No. 102, Selected Loan
Loss Allowance Methodology and Documentation Issues (SAB 102). SAB 102
summarizes certain of the SEC's views on the development, documentation and
application of a systematic methodology for determining allowances for loan and
lease losses. Adoption of SAB 102 by the Company did not have a material impact
on the Company's financial position or results of operations.
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 that 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. A 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 latest financial
examination by the Colorado Insurance Division is in progress 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, 2001 statutory financial reports
the Company has risk-based capital well in excess of that required.
The NAIC has also adopted the Codification of Statutory Accounting Principles
(Codification). The Codification that 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 required
adoption of Codification with certain modifications for the preparation of
statutory financial statements effective January 1, 2001 (see Note 13 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 $3.4 million as of December 31, 2001 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, 2001.
5. Potential Legislation
United States legislative 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 continues
to consider legislation relating to health care reform and managed care issues
(including patients' rights, mental health parity and managed care or enterprise
liability). Congress is also considering changes to various features of
retirement plans such as the holding of company stock, diversification rights,
imposition of transaction restrictions, expanded disclosure requirements and
greater access to investment advice for participants.
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 regarding the financial
strength of the Company and its ability to meet ongoing obligations to
policyholders.
Rating Agency Measurement Rating
------------------------------------- ----------------------------------------------------- ---------
A.M. Best Company, Inc. Financial strength, operating performance and A++(1)
market profile
Fitch, Inc. Financial strength AAA(2)
Moody's Investors Service Financial strength Aa2(3)
Standard & Poor's Corporation Financial strength AA+(4)
(1) Superior (highest rating out of six categories)
(2) Exceptionally Strong (highest rating out of twelve categories)
(3) Excellent (second highest rating out of nine categories)
(4) Very strong (second highest rating out of nine categories)
MISCELLANEOUS
No customer accounted for 10% or more of the Company's consolidated revenues in
2001 or 2000. 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 8,200 employees at December 31, 2001.
The Head Office of the Company consists of a 752,000 square foot complex located
in Greenwood Village, Colorado. The Company leases sales and claims offices
throughout the United States.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
In the two most recent fiscal years or any subsequent interim period, there has
been no change in the Company's independent accountants or resulting
disagreements on accounting and financial disclosure.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's assets are purchased to fund future benefit payments to its
policyholders and contractholders. The primary risk of these assets is exposure
to rising interest rates. The Company's exposure to foreign currency exchange
rate fluctuations is minimal as only nominal foreign investments are held.
To manage interest rate risk, the Company invests in assets that are suited to
the products that it sells. For products with fixed and highly predictable
benefit payments such as certificate annuities and payout annuities, the Company
invests in fixed income assets with cash flows that closely match the liability
product cash flows. The Company is then protected against interest rate changes,
as any change in the fair value of the assets will be offset by a similar change
in the fair value of the liabilities. For products with uncertain timing of
benefit payments such as portfolio annuities and life insurance, the Company
invests in fixed income assets with expected cash flows that are earlier than
the expected timing of the benefit payments. The Company can then react to
changing interest rates sooner as these assets mature for reinvestment.
The Company also manages risk with interest rate derivatives such as interest
rate caps that would pay the Company investment income if interest rates rise
above the level specified in the cap. These derivatives are only used to reduce
risk and are not used for speculative purposes.
To manage foreign currency exchange risk, the Company uses currency SWAPS to
convert foreign currency back to United States dollars. These SWAPS are
purchased each time a foreign currency denominated asset is purchased.
The Company has estimated the possible effects of interest rate changes at
December 31, 2001. If interest rates increased by 100 basis points (1%), the
fair value of the fixed income assets would decrease by approximately $364
million. This calculation uses projected asset cash flows, discounted back to
December 31, 2001. The cash flow projections are shown in the table below. The
table below shows cash flows rather than expected maturity dates because many of
the Company's assets have substantial expected principal payments prior to the
final maturity date. The fair value shown in the table below was calculated
using spot discount interest rates that varied by the year in which the cash
flows were expected to be received. These spot rates in the benchmark
calculation ranged from 3.62% to 8.85%.
Projected Cash Flows by Calendar Year
[$ millions] There- Undiscounted Fair
2002 2003 2004 2005 2006 after Total Value
-------- ------- ------- ------- ------- -------- ---------------- ---------
Benchmark 2,066 2,026 1,800 1,590 1,271 3,986 12,740 10,239
Interest rates
up 1% 1,871 1,758 1,771 1,667 1,338 4,596 13,001 9,875
The Company administers separate account variable annuities for retirement
savings products. The Company collects a fee from each account, and this fee is
a percentage of the account balance. There is a market risk of lost fee revenue
to the Company if equity and bond markets decline. If the equity and bond
portfolios decline by 10%, the Company's fee revenue would decline by
approximately $13.0 million per year.
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.
Directors
Served as
Director Principal Occupation(s)
Director Age from: for last Five Years
------------------------------ ------- ------------- ----------------------------------------------
James Balog 73 1993 Company Director
(1)(2)
James W. Burns, O.C. 72 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 65 1991 Company Director since April 2000;
(1)(2)(4) previously President and Chief
Executive Officer, Great-West Lifeco
Andre Desmarais 45 1997 President and Co-Chief Executive
(1)(2)(4)(5) Officer, Power Corporation; Deputy
Chairman, Power Financial
Paul Desmarais, Jr. 47 1991 Chairman and Co-Chief Executive
(1)(2)(4)(5) Officer, Power Corporation; Chairman,
Power Financial
Robert Gratton 58 1991 Chairman of the Board of the Company;
(1)(2)(4) President and Chief Executive Officer,
Power Financial
Kevin P. Kavanagh 69 1986 Company Director; Chancellor, Brandon
(1)(3)(4) University
William Mackness 63 1991 Company Director
(1)(2)
William T. McCallum 59 1990 President and Chief Executive Officer of
(1)(2)(4) the Company; Co-President and Chief
Executive Officer, Great-West Lifeco
Jerry E.A. Nickerson 65 1994 Chairman of the Board, H.B. Nickerson
(3)(4) & Sons Limited (a management and
holding company)
The Honourable 64 1991 Vice Chairman, Power Corporation;
P. Michael Pitfield, Member of the Senate of Canada
P.C., Q.C. (1)(2)(4)
Michel Plessis-Belair, 59 1991 Vice Chairman and Chief Financial
F.C.A. (1)(2)(3)(4) Officer, Power Corporation; Executive
Vice President and Chief Financial
Officer, Power Financial
Brian E. Walsh 48 1995 Managing Partner, QVan Capital,
(1)(2)(3) 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 registered pursuant to section12 or subject to
the requirements of section 15(d) of the Securities Exchange Act of 1934 or that
are investment companies registered under the Investment Company Act of 1940.
J. Balog Transatlantic Holdings, Inc.
Phoenix/Zweig Holdings LLC
Euclid Advisers LLC
W.T. McCallum Maxim Series Fund, Inc.
Orchard Series Fund
Great-West Variable Annuity Account A
Executive Officers
Served as
Executive
Officer Principal Occupation(s)
Executive Officer Age from: for last Five Years
------------------------------ ------- ------------- ----------------------------------------------
William T. McCallum 59 1984 President and Chief Executive Officer
President and Chief of the Company; Co-President
Executive Officer and Chief Executive Officer,
Great-West Lifeco
Mitchell T.G. Graye 46 1997 Executive Vice President and Chief
Executive Vice Financial Officer of the Company
President and Chief
Financial Officer
Douglas L. Wooden 45 1991 Executive Vice President, Financial
Executive Vice Services of the Company
President,
Financial Services
John A. Brown 54 1992 Senior Vice President, BenefitsCorp
Senior Vice President, Healthcare Markets of the Company
BenefitsCorp
Healthcare Markets
Mark S. Corbett 42 2001 Senior Vice President,
Senior Vice President, Investments of the Company
Investments
John R. Gabbert 47 2001 Senior Vice President and Chief
Senior Vice President Information Officer, Employee Benefits
and Chief Information of the Company since April 2000;
Officer, previously Vice President, Information
Employee Benefits Technology, AT&T Broadband
Donna A. Goldin 54 1996 Executive Vice President and Chief
Executive Vice Operating Officer, One Benefits, Inc.
President and Chief
Operating Officer,
One Benefits, Inc.
Wayne T. Hoffmann 46 2001 Senior Vice President,
Senior Vice President, Investments of the Company
Investments
D. Craig Lennox 54 1984 Senior Vice President, General Counsel
Senior Vice President, and Secretary of the Company
General Counsel and
Secretary
Steve H. Miller 49 1997 Senior Vice President, Employee
Senior Vice President, Benefits Sales of the Company
Employee Benefits
Sales
Charles P. Nelson 41 1998 President, BenefitsCorp
President,
BenefitsCorp
Martin Rosenbaum 49 1997 Senior Vice President, Employee
Senior Vice President, Benefits Finance of the Company
Employee Benefits
Finance
Gregory E. Seller 48 1999 Senior Vice President,
Senior Vice President, BenefitsCorp Government Markets
BenefitsCorp of the Company
Government Markets
Robert K. Shaw 46 1998 Senior Vice President,
Senior Vice President, Individual Markets of the Company
Individual Markets
George D. Webb 58 1999 Senior Vice President of the Company
President, since July 1999; previously Principal,
Advised Assets William M. Mercer Investment
Group, Inc. Consulting Inc. (an investment
consulting company)
Warren J. Winer 55 2001 Senior Vice President, Employee
Senior Vice President, Benefits of the Company since January
Employee Benefits 2001; previously Executive Vice
President, General American Life
Insurance Company
Jay W. Wright 50 2001 Senior Vice President, Employee
Senior Vice President, Benefits of the Company
Employee Benefits since January 2001; previously Senior
Vice President, New England Financial
EXECUTIVE COMPENSATION
The following table sets out all compensation paid by the Company to the
individuals who were, at December 31, 2001, 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 statements.
------------------------------------ ------------ ------------- ------------------ ----------------------
Long-term
Annual Compensation Compensation
Awards
------------------------------------ ------------ ------------- ------------------ ----------------------
Name and Year Salary Bonus Options (1)
Principal Position ($) ($) (#)
------------------------------------ ------------ ------------- ------------------ ----------------------
W.T. McCallum 2001 880,000 --- ---
President and Chief 2000 871,500 --- 450,001
Executive Officer 1999 834,659 680,000 100,000
------------------------------------ ------------ ------------- ------------------ ----------------------
D.L. Wooden 2001 525,000 393,750 ---
Executive Vice President 2000 475,000 356,250 200,001
Financial Services 1999 365,000 219,000
------------------------------------ ------------ ------------- ------------------ ----------------------
Charles P. Nelson 2001 300,000 150,000 60,000
President 2000 270,400 202,435 ---
BenefitsCorp 1999 257,500 135,386 ---
------------------------------------ ------------ ------------- ------------------ ----------------------
Warren J. Winer(2) 2001 325,000 121,875 65,000
Senior Vice President 2000 --- --- ---
Employee Benefits 1999 --- --- ---
------------------------------------ ------------ ------------- ------------------ ----------------------
M.T.G. Graye 2001 415,000 --- 40,000
Executive Vice President 2000 375,000 253,200 125,001
Chief Financial Officer 1999 315,000 189,000 ---
------------------------------------ ------------ ------------- ------------------ ----------------------
(1) The options set out are options for common shares of Great-West Lifeco that
are granted by Great-West Lifeco pursuant to the Great-West Lifeco Stock Option
Plan (Lifeco Options). Lifeco Options become exercisable on specified dates and
expire ten years after the date of the grant.
(2) Mr. Winer became an employee and senior officer of the Company effective
January 1, 2001.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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 1/1.59.
OPTION GRANTS IN LAST FISCAL YEAR
--------------------- ------------- -------------- ------------ ----------------- -----------------------------
Potential realized value
at assumed annual rates
Individual Grants of stock price apprecia-
tion for option term
--------------------- ------------- -------------- ------------ ----------------- -----------------------------
Percentage
of total
options
granted to Exercise
Options employees or base
Granted in fiscal price Expiration 5% 10%
Name (#) year ($/share) date ($) ($)
--------------------- ------------- -------------- ------------ ----------------- ------------- ---------------
C.P. Nelson 60,000 4.41 21.56 Dec. 3, 2011 817,800 2,061,600
--------------------- ------------- -------------- ------------ ----------------- ------------- ---------------
W.J. Winer 65,000 4.77 22.05 Apr. 25, 2011 901,550 2,284,100
--------------------- ------------- -------------- ------------ ----------------- ------------- ---------------
M.T.G. Graye 40,000 2.94 22.05 Apr. 25,2011 554,800 1,405,600
--------------------- ------------- -------------- ------------ ----------------- ------------- ---------------
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 2001, and all unexercised PFC Options
held as of December 31, 2001, 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 1/1.59.
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
fiscal year-end year-end
(#) ($)
- ------------------- -------------- ------------ ---------------------------------- ----------------------------------
Shares
acquired
on Value
exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($)
- ------------------- -------------- ------------ --------------- ------------------ --------------- ------------------
M.T.G. Graye 70,000 1,453,793
- ------------------- -------------- ------------ --------------- ------------------ --------------- ------------------
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 2001, and all unexercised Lifeco Options held as of
December 31, 2001, 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 1/1.59.
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
fiscal year-end year-end
(#) ($)
-------------------- ----------- ------------- ------------------------------ -----------------------------
Shares
acquired
on Value
exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($)
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
W.T. McCallum 100,000 1,986,312 840,000 810,000 10,695,943 8,411,767
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
D.L. Wooden 200,000 3,144,466 --- 500,001 --- 4,921,860
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
C.P. Nelson 80,000 1,387,671 --- 180,000 --- 1,061,654
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
W.J. Winer --- --- --- 65,000 --- ---
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
M.T.G. Graye --- --- 142,800 322,201 2,239,194 2,668,335
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
PENSION PLAN TABLE
The following table sets out the pension benefits payable to the Named Executive
Officers.
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, as of December
31, 2001.
------------------------------------------------------ ----------------------------------------------------
Name Years of Service
------------------------------------------------------ ----------------------------------------------------
W.T. McCallum 36
------------------------------------------------------ ----------------------------------------------------
D.L. Wooden 11
------------------------------------------------------ ----------------------------------------------------
C.P. Nelson 18
------------------------------------------------------ ----------------------------------------------------
W.J. Winer 1
------------------------------------------------------ ----------------------------------------------------
M.T.G. Graye 8
------------------------------------------------------ ----------------------------------------------------
W.T. McCallum is entitled, upon election, to receive the benefits shown, 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, C.P.
Nelson, W.J. Winer 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 that 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, 2002, 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) 82.2% 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) 67.5% 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 that 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, 2002, 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 Inc. Power Financial Power Corporation
Corporation of Canada
-------------------------- --------------------------- --------------------------- ------------------------
Directors (1) (2) (3)
-------------------------- --------------------------- --------------------------- ------------------------
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 21,600 144,929
2,554,000 options
-------------------------- --------------------------- --------------------------- ------------------------
P. Desmarais, Jr. 43,624 178,221
2,379,000 options
-------------------------- --------------------------- --------------------------- ------------------------
R. Gratton 331,846 310,000 10,460
6,780,000 options
-------------------------- --------------------------- --------------------------- ------------------------
K.P. Kavanagh 18,500
-------------------------- --------------------------- --------------------------- ------------------------
W. Mackness
-------------------------- --------------------------- --------------------------- ------------------------
W.T. McCallum 84,474 19,500
840,000 options
-------------------------- --------------------------- --------------------------- ------------------------
J.E. A. Nickerson 4,000 4,000
-------------------------- --------------------------- --------------------------- ------------------------
P.M. Pitfield 55,000 75,000 70,000
269,000 options
-------------------------- --------------------------- --------------------------- ------------------------
M. Plessis-Belair 20,000 3,000 18,836
484,500 options
-------------------------- --------------------------- --------------------------- ------------------------
B.E. Walsh 2,000
-------------------------- --------------------------- --------------------------- ------------------------
-------------------------- --------------------------- --------------------------- ------------------------
Great-West Lifeco Inc. Power Financial Power Corporation
Corporation of Canada
-------------------------- --------------------------- --------------------------- ------------------------
Named Executive (1) (2) (3)
Officers
-------------------------- --------------------------- --------------------------- ------------------------
W.T. McCallum 84,474
840,000 options
-------------------------- --------------------------- --------------------------- ------------------------
D.L. Wooden 113,000
-------------------------- --------------------------- --------------------------- ------------------------
C.P. Nelson 62,000
-------------------------- --------------------------- --------------------------- ------------------------
W.J. Winer
-------------------------- --------------------------- --------------------------- ------------------------
M.T.G. Graye 50,000
142,800 options 70,000 options
-------------------------- --------------------------- --------------------------- ------------------------
-------------------------- --------------------------- --------------------------- ------------------------
Great-West Lifeco Inc. Power Financial Power Corporation
Corporation of Canada
-------------------------- --------------------------- --------------------------- ------------------------
Directors and (1) (2) (3)
Executive Officers
as a Group
-------------------------- --------------------------- --------------------------- ------------------------
1,073,878 604,100 829,886
2,549,680 options 6,850,000 options 5,886,500 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
1.3% 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 P.Desmarais, Jr. represents
1.3% 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 3.3% 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 exceeds 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, 2001 and 2000, and for each of the three years in the
period ended December 31, 2001 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 SEC
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 SEC. You can review and copy the Registration
Statement and its exhibits and other reports and information filed with the SEC
at theSEC's Public Reference Room located at 450 Fifth Street, N.W., Washington,
D.C 20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site that
contains reports, proxy and information statements and other information
regarding Great-West, and other issuers that file electronically with the SEC,
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 or minus 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
- --------------------------------------------------------------------------------
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 2001, 2000 and 1999.
- --------------------------------------------------------------------------------
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(A wholly-owned subsidiary of GWL&A Financial Inc.)
Consolidated Financial Statements for the Years Ended
December 31, 2001, 2000, and 1999 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, 2001 and 2000,
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, 2001.
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, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
Denver, Colorado
January 28, 2002
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
================================================================================
(Dollars in Thousands)
2001 2000
----------------------- ----------------------
ASSETS
INVESTMENTS:
Fixed maturities, available-for-sale, at fair value
(amortized cost $9,904,453 and $9,372,009) $ 10,116,175 $ 9,419,865
Common stock, at fair value (cost $74,107 and
$68,472) 73,344 95,036
Mortgage loans on real estate (net of allowances
of $57,654 and $61,242) 613,453 843,371
Real estate 112,681 106,690
Policy loans 3,000,441 2,809,973
Short-term investments, available-for-sale (cost
$427,398 and $414,382) 424,730 414,382
----------------------- ----------------------
Total Investments 14,340,824 13,689,317
OTHER ASSETS:
Cash 213,731 153,977
Reinsurance receivable
Related party 3,678 4,297
Other 278,674 229,671
Deferred policy acquisition costs 275,570 279,688
Investment income due and accrued 130,775 139,152
Amounts receivable related to uninsured accident
and health plan claims (net of allowances of
$53,431 and $34,700) 89,533 227,803
Premiums in course of collection (net of
allowances of $22,217 and $18,700) 99,811 190,987
Deferred income taxes 149,140 138,842
Other assets 644,774 462,515
SEPARATE ACCOUNT ASSETS 12,584,661 12,381,137
----------------------- ----------------------
TOTAL ASSETS $ 28,811,171 $ 27,897,386
======================= ======================
(Continued)
====================================================================================================================================
2001 2000
----------------- -----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves
Related party $ 532,374 $ 547,558
Other 11,679,122 11,497,442
Policy and contract claims 401,389 441,326
Policyholders' funds 242,916 266,235
Provision for policyholders' dividends 74,740 72,716
Undistributed earnings on participating business 163,086 165,754
GENERAL LIABILITIES:
Due to GWL 41,874 43,081
Due to GWL&A Financial 251,059 171,347
Repurchase agreements 250,889
Commercial paper 97,046 97,631
Other liabilities 1,021,541 785,730
SEPARATE ACCOUNT LIABILITIES 12,584,661 12,381,137
----------------- -----------------
Total Liabilities 27,340,697 26,469,957
----------------- -----------------
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 712,801 717,704
Accumulated other comprehensive income 76,507 33,672
Retained earnings 674,134 669,021
----------------- -----------------
Total Stockholder's Equity 1,470,474 1,427,429
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 28,811,171 $ 27,897,386
================= =================
See notes to consolidated financial statements. (Concluded)
3
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
====================================================================================================================================
(Dollars in Thousands)
2001 2000 1999
---------------- ----------------- -----------------
REVENUES:
Premiums
Related party $ 18,144 $ 20,853 $ 23,233
Other (net of premiums ceded totaling
$82,028, $115,404, and $85,803) 1,185,495 1,311,713 1,139,950
Fee income 947,255 871,627 635,147
Net investment income (expense)
Related party (14,546) (14,517) (10,923)
Other 955,880 945,958 886,869
Net realized gains on investments 46,825 28,283 1,084
---------------- ----------------- -----------------
---------------- ----------------- -----------------
3,139,053 3,163,917 2,675,360
BENEFITS AND EXPENSES:
Life and other policy benefits (net of
reinsurance recoveries totaling $40,144,
$62,803, and $80,681) 1,029,495 1,122,560 970,250
Increase in reserves 58,433 53,550 33,631
Interest paid or credited to contractholders 530,027 490,131 494,081
Provision for policyholders' share of earnings
on participating business 2,182 5,188 13,716
Dividends to policyholders 76,460 74,443 70,161
---------------- ----------------- -----------------
---------------- ----------------- -----------------
1,696,597 1,745,872 1,581,839
Commissions 197,099 204,444 173,405
Operating expenses (income):
Related party (1,043) (704) (768)
Other 794,731 775,885 593,575
Premium taxes 36,911 45,286 38,329
Special charges 127,040
---------------- ----------------- -----------------
---------------- ----------------- -----------------
2,851,335 2,770,783 2,386,380
INCOME BEFORE INCOME TAXES 287,718 393,134 288,980
PROVISION FOR INCOME TAXES:
Current 136,965 108,509 72,039
Deferred (41,993) 25,531 11,223
---------------- ----------------- -----------------
---------------- ----------------- -----------------
94,972 134,040 83,262
---------------- ----------------- -----------------
---------------- ----------------- -----------------
NET INCOME $ 192,746 $ 259,094 $ 205,718
================ ================= =================
================ ================= =================
See notes to consolidated financial statements.
4
- ------------------------------------------------------------------------------------------------------------------------------------
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
====================================================================================================================================
(Dollars in Thousands)
Additional
Preferred Stock Common Stock Paid-in
----------------------------- -----------------------------
Shares Amount Shares Amount Capital
-------------- ------------ ------------- ------------ -------------
BALANCES, JANUARY 1, 1999 0 $ 0 7,032,000 $ 7,032 $ 699,556 $
Net income
Other comprehensive loss
Total comprehensive income
Dividends
Income tax benefit on stock
compensation 760
-------------- ------------ ------------- ------------ -------------
BALANCES, DECEMBER 31, 1999 0 0 7,032,000 7,032 700,316
Net income
Other comprehensive income
Total comprehensive income
Dividends
Capital contributions -
Parent stock options 15,052
Income tax benefit on stock
compensation 2,336
-------------- ------------ ------------- ------------ -------------
BALANCES, DECEMBER 31, 2000 0 $ 0 7,032,000 $ 7,032 $ 717,704 $
Net income
Other comprehensive income
Total comprehensive income
Dividends
Capital contributions adjustment -
Parent stock options (12,098)
Income tax benefit on stock
compensation 7,195
-------------- ------------ ------------- ------------ -------------
BALANCES, DECEMBER 31, 2001 0 $ 0 7,032,000 $ 7,032 $ 712,801
============== ============ ============= ============ =============
Accumulated
Other
Comprehensive Retained
Income (Loss) Earnings Total
----------------- ------------ ---------------
61,560 $ 430,411 $ 1,198,559
205,718 205,718
(146,421) (146,421)
---------------
59,297
---------------
(92,053) (92,053)
760
----------------- ------------ ---------------
(84,861) 544,076 1,166,563
259,094 259,094
118,533 118,533
---------------
377,627
---------------
(134,149) (134,149)
15,052
2,336
----------------- ------------ ---------------
33,672 $ 669,021 $ 1,427,429
192,746 192,746
42,835 42,835
---------------
235,581
---------------
(187,633) (187,633)
(12,098)
7,195
----------------- ------------ ---------------
$ 76,507 $ 674,134 $ 1,470,474
================= ============ ===============
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
====================================================================================================================================
(Dollars in Thousands)
2001 2000 1999
----------------- ----------------- -----------------
OPERATING ACTIVITIES:
Net income $ 192,746 $ 259,094 $ 205,718
Adjustments to reconcile net income to net
cash provided by operating activities:
Earnings allocated to participating
policyholders 2,182 5,188 13,716
Amortization of investments (82,955) (62,428) (22,514)
Net realized gains on investments (46,825) (28,283) (1,084)
Depreciation and amortization (including
goodwill impairment) 62,101 41,693 47,339
Deferred income taxes (41,993) 25,531 11,223
Stock compensation (adjustment) (12,098) 15,052
Changes in assets and liabilities, net of effects from acquisitions:
Policy benefit liabilities 334,025 310,511 650,959
Reinsurance receivable (48,384) (35,368) 19,636
Receivables 196,805 (128,382) (37,482)
Other, net 44,232 (118,221) (136,476)
----------------- ----------------- -----------------
Net cash provided by operating activities 599,836 284,387 751,035
----------------- ----------------- -----------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to-maturity
Sales 8,571
Maturities and redemptions 323,728 520,511
Available-for-sale
Sales 5,201,692 1,460,672 3,176,802
Maturities and redemptions 1,244,547 887,420 822,606
Mortgage loans 224,810 139,671 165,104
Real estate 8,910 5,098
Common stock 38,331 61,889 18,116
Purchases of investments:
Fixed maturities
Held-to-maturity (100,524) (563,285)
Available-for-sale (6,878,213) (2,866,228) (4,019,465)
Mortgage loans (4,208) (2,720)
Real estate (3,124) (20,570) (41,482)
Common stock (27,777) (52,972) (19,698)
Acquisitions, net of cash acquired 82,214
----------------- ----------------- -----------------
Net cash provided by (used in)
investing activities $ (199,734) $ (71,427) $ 61,587
================= ================= =================
(Continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
====================================================================================================================================
(Dollars in Thousands)
2001 2000 1999
----------------- ---------------- -----------------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (483,285) $ (220,167) $ (583,900)
Due to GWL (1,207) 7,102 (16,898)
Due to GWL&A Financial 81,473 3,665 175,035
Dividends paid (187,633) (134,149) (92,053)
Net commercial paper borrowings
(repayments) (585) 97,631 (39,731)
Net repurchase agreements borrowings
(repayments) 250,889 (80,579) (163,680)
----------------- ---------------- -----------------
Net cash used in financing activities (340,348) (326,497) (721,227)
----------------- ---------------- -----------------
NET INCREASE (DECREASE) IN CASH 59,754 (113,537) 91,395
CASH, BEGINNING OF YEAR 153,977 267,514 176,119
----------------- ---------------- -----------------
CASH, END OF YEAR $ 213,731 $ 153,977 $ 267,514
================= ================ =================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 59,895 $ 78,510 $ 76,150
Interest 17,529 21,060 14,125
Non-cash financing activity:
Effect of capital - Parent stock options (12,098) 15,052
See notes to consolidated financial statements. (Concluded)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
================================================================================
(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. Significant estimates are required to account for
policy reserves, allowances for credit losses, deferred policy
acquisition costs, and valuation of privately placed fixed maturities.
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 2000 and 1999 financial
statements to conform to the 2001 presentation. These changes in
classification had no effect on previously reported stockholder's equity
or net income.
Investments - Investments are reported as follows:
1. Management has classified its fixed maturities as available for
sale and carries them at fair value with the net unrealized gains
and losses reported as accumulated other comprehensive income
(loss) in stockholder's equity.
Premiums and discounts are recognized as a component of net
investment income using the effective interest method. 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
allowances for uncollectible accounts. 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 fair value. The
Company considers short-term investments to be available-for-sale.
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 - Capitalized internal use software development
costs of $44,914 and $35,409 are included in other assets at December 31,
2001, and 2000, respectively. The Company capitalized, net of
depreciation, $6,896, $17,309 and $18,099 of internal use software
development costs for the years ended December 31, 2001, 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
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
$44,096, $36,834, and $43,512 in 2001, 2000, and 1999, 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, open-end management
investment companies which are affiliates of the Company, shares of other
non-affiliated 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 $7,941,905 and $7,762,065 at December
31, 2001 and 2000, 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 $4,188,553 and
$4,189,716 at December 31, 2001 and 2000, 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 (see Note 5).
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 $4,837,611 and $4,557,599 at December 31, 2001 and 2000,
respectively. Participating business approximates 25.8%, 28.6%, and 31.0%
of the Company's ordinary life insurance in force and 85.4%, 85.2%, and
94.0% of ordinary life insurance premium income for the years ended
December 31, 2001, 2000, and 1999, 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 sheets. 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.
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 is amortized over the term of the related
agreement and recognized as an adjustment to net 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. The Company's securitized lending transactions are accounted
for as collateralized borrowings.
Derivatives - The Company makes limited use of derivative financial
instruments to manage interest rate, market, and foreign exchange risk
associated with invested assets. Derivatives are not used for speculative
purposes. 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.
Derivative instruments typically used consist of interest rate swap
agreements, interest rate floors and caps, foreign currency exchange
contracts, options, and interest rate futures.
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 a floating rate. Interest rate
floors and caps are interest rate protection instruments that require the
payment by a counter-party 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 matching program. Purchased put options are used to
protect against significant drops in equity markets. Interest rate
futures are used to hedge the interest rate risks of forecasted
acquisitions of fixed rate fixed maturity investments.
Effective January 1, 2001, the Company adopted Financial Account
Standards Board (FASB) Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), as amended by FASB
Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." SFAS 138 requires all derivatives, whether
designated in hedging relationships or not, to be recorded on the balance
sheet at fair value. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and of the hedged
item attributable to the hedged risk are recognized in earnings. If the
derivative is designated as a cash flow hedge, the effective portions of
the changes in the fair value of the derivative are recorded in
accumulated other comprehensive income and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of
changes in the fair value of cash flow hedges are recognized in earnings.
The adoption of SFAS No. 133 resulted in an approximate $1,000 after-tax
increase to accumulated other comprehensive income, which has been
included in the current year change in other comprehensive income in the
Statement of Stockholder's Equity.
Hedge ineffectiveness of $907, determined in accordance with SFAS No.
133, was recorded as a decrease to net investment income for the year
ended December 31, 2001.
Derivative gains and losses included in accumulated other comprehensive
income (OCI) are reclassified into earnings at the time interest income
is recognized or interest receipts are received on bonds. Derivative
gains of $469 were reclassified to net investment income in 2001. The
Company estimates that $563 of net derivative gains included in OCI will
be reclassified into net investment income within the next twelve months.
Revenue Recognition - In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition
in Financial Statements (SAB No. 101)," which provides guidance with respect to
revenue recognition issues and disclosures. As amended by SAB No. 101B, "Second
Amendment: Revenue Recognition in Financial Statements," the Company implemented
the provisions of SAB No. 101 during the fourth quarter of 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 6.1%, 6.2%, and 6.2% in 2001, 2000,
and 1999.
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) is considered. Although realization is not assured, management
believes it is more likely than not that the deferred tax asset will be
realized.
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 14).
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - 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" (SFAS No. 140),
which revises the standards for accounting for securitizations and other
transfers of financial assets and collateral, and requires certain
disclosures. SFAS 140 was effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March
31, 2001. Certain disclosure requirements under SFAS No. 140 were
effective December 15, 2000, and these requirements have been
incorporated in the Company's financial statements. The adoption of SFAS
No. 140 did not have a significant effect on the financial position or
results of operations of the Company.
Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interest in Securitized Financial Assets - Effective April 1,
2001, the Company adopted Emerging Issues Task Force Issue No. 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interest in Securitized Financial Assets" (EITF 99-20). This
pronouncement requires investors in certain asset-backed securities to
record changes in their estimated yield on a prospective basis and to
apply specific evaluation methods to these securities for an
other-than-temporary decline in value. The adoption of EITF 99-20 did not
have a material impact on the Company's financial position or results of
operations.
Business Combinations - On June 29, 2001 Statement of Financial Accounting
Standards (SFAS) FAS No.141, "Business Combinations" (SFAS No. 141) was approved
by the FASB. SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. The Company
implemented SFAS No. 141 on July 1, 2001. Adoption of the Statement did not have
a material impact on the Company's financial position or results of operations.
Goodwill and Other Intangible Assets - On June 29, 2001, SFAS No. 142,
"Goodwill and Other Intangible Assets" (SFAS No. 142) was approved by the
FASB. SFAS No. 142 changes the accounting for goodwill and certain other
intangibles from an amortization method to an impairment-only approach.
Amortization of goodwill, including goodwill recorded in past business
combinations, will cease upon adoption of this statement. The Company
implemented SFAS No. 142 on January 1, 2002 and, although it is still
reviewing the provisions of this Statement, management's preliminary
assessment is that the Statement will not have a material impact on the
Company's financial position or results of operations.
Long Lived Assets - In August 2001, the FASB issued SFAS No.144
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
No.144). SFAS No.144 supercedes current accounting guidance relating to
impairment of long-lived assets and provides a single accounting
methodology for long-lived assets to be disposed of, and also supercedes
existing guidance with respect to reporting the effects of the disposal
of a business. SFAS No.144 was adopted January 1, 2002 without a material
impact on the Company's financial position or results of operations.
Selected Loan Loss Allowance Methodology - In July 2001, the SEC
released Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance
Methodology and Documentation Issues (SAB 102). SAB 102 summarizes
certain of the SEC's views on the development, documentation and
application of a systematic methodology for determining allowances for
loan and lease losses. Adoption of SAB 102 by the Company is not
expected to have a material impact on the Company's financial position
or results of operations.
2. ACQUISITIONS AND SPECIAL CHARGES
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. 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 co-insured back to Allmerica and then
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.
Alta Health & Life Insurance Company (Alta) was acquired by the Company
on July 8, 1998. During 1999 and 2000 the Alta business continued to be
run as a free-standing unit but was converted to the Company's system and
accounting processes. This conversion program resulted in significant
issues related to pricing, underwriting, and administration of the
business. The Company has decided to discontinue writing new Alta
business and all Alta customers will be moved to the Company's contracts
over time. All Alta sales and administration staff have become employees
of the Company and the underwriting functions are being conducted by the
underwriting staff of the Company. In the second quarter of 2001, the
Company recorded a $127 million special charge ($80.9 million, net of
tax), related to its decision to cease marketing the Alta products. The
principal components of the charge include $46 million from premium
deficiency reserves, $29 million from premium receivables, $28 million
from uninsured accident and health plan claim receivables and $24 million
from goodwill and other.
3. RELATED-PARTY TRANSACTIONS
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,
----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Investment management revenue $ 186 $ 120 $ 130
Administrative and underwriting revenue 1,043 704 768
At December 31, 2001 and 2000, due to GWL includes $16,536 and $17,743
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 (6.0% and 7.0% at December 31, 2001 and
2000, respectively) while the note payable bears interest at 5.4%.
At December 31, 2001 and 2000, due to GWL&A Financial includes $76,024
and $(3,688) due on demand and $175,035 and $175,035 of subordinated
notes payable. The notes, which were issued in 1999 and used for general
corporate purposes, bear interest and mature on 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 statutory 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. The amounts due on demand to GWL&A Financial
bear interest at the public bond rate (6.0% and 7.0% at December 31, 2001
and 2000, respectively) while the note payable bears interest at 7.25%.
Interest expense attributable to these related party obligations was
$14,732, $14,637, and $11,053 for the years ended December 31, 2001,
2000, and 1999, respectively.
4. ALLOWANCES ON POLICYHOLDER RECEIVABLES
The Company maintains an allowance for credit losses at a level that, in
management's opinion, is sufficient to absorb credit losses on its
amounts receivable related to uninsured accident and health plan claims
and premiums in course of collection. Management's judgement is based on
past loss experience and current and projected economic conditions.
Allowances for amounts receivable related to uninsured accident and
health plan claims:
2001 2000 1999
-------------- --------------- ---------------
Balance, beginning of year $ 34,700 $ 31,200 $ 31,200
Provisions charged to operations 50,500 7,700 4,500
Amounts written off - net (31,769) (4,200) (4,500)
-------------- --------------- ---------------
Balance, end of year $ 53,431 $ 34,700 $ 31,200
============== =============== ===============
Allowances for premiums in course of collection:
2001 2000 1999
-------------- --------------- ---------------
Balance, beginning of year $ 18,700 $ 13,900 $ 13,900
Provisions charged to operations 29,642 14,500 2,500
Amounts written off - net (26,125) (9,700) (2,500)
-------------- --------------- ---------------
Balance, end of year $ 22,217 $ 18,700 $ 13,900
============== =============== ===============
5. 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, 2001 and 2000, the
reinsurance receivable had a carrying value of $282,352 and $233,968,
respectively.
The following schedule details life insurance in force and life and
accident/health premiums:
Assumed Percentage
Ceded Primarily of Amount
Gross Primarily to From Other Net Assumed
Amount GWL Companies Amount to Net
--------------- ---------------- ---------------- --------------- -------------
December 31, 2001:
Life insurance in force:
Individual $ 43,370,006 $ 8,330,282 $ 7,399,250 42,438,974 17.4%
Group 56,650,090 9,888,796 66,538,886 14.9%
--------------- ---------------- ---------------- ----------------
Total $ 100,020,096 $ 8,330,282 $ 17,288,046 $ 108,977,860
=============== ================ ================ ================
Premium Income:
Life insurance $ 384,688 $ 32,820 $ 37,442 $ 389,310 9.6%
Accident/health 830,970 49,001 42,750 824,719 5.2%
--------------- ---------------- ---------------- ----------------
Total $ 1,215,658 $ 81,821 $ 80,192 $ 1,214,029
=============== ================ ================ ================
Assumed Percentage
Ceded Primarily of Amount
Gross Primarily to From Other Net Assumed
Amount GWL 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%
Accident/health 827,044 79,705 175,294 922,633 19.0%
--------------- ---------------- ---------------- ----------------
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%
Accident/health 801,755 58,247 79,753 823,261 9.7%
--------------- ---------------- ---------------- ----------------
Total $ 1,107,856 $ 85,646 $ 126,468 $ 1,148,678
=============== ================ ================ ================
6. NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS
Net investment income is summarized as follows:
Years Ended December 31,
----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Investment income:
Fixed maturities and short-term
Investments $ 693,573 $ 675,200 $ 635,601
Common stock 4,882 1,584 1,345
Mortgage loans on real estate 69,237 80,775 88,033
Real estate 22,335 22,068 19,618
Policy loans 204,198 191,320 167,109
Other 101 120 138
--------------- --------------- ---------------
994,326 971,067 911,844
Investment expenses, including interest on
amounts charged by the related parties
of $14,732, $14,637, and $11,053 52,992 39,626 35,898
--------------- --------------- ---------------
Net investment income $ 941,334 $ 931,441 $ 875,946
=============== =============== ===============
Net realized gains (losses) on investments are as follows:
Years Ended December 31,
----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Realized gains (losses):
Fixed maturities $ 32,116 $ (16,752) $ (8,321)
Common stock 13,052 33,411 463
Mortgage loans on real estate 1,657 2,207 1,429
Real estate 490 513
Provisions 8,927 7,000
--------------- --------------- ---------------
Net realized gains on investments $ 46,825 $ 28,283 $ 1,084
=============== =============== ===============
7. SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 2001 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
------------ ------------ ------------ ------------ ------------
Available-for-Sale:
U.S. Government
Agencies $ 1,744,590 $ 45,585 $ 7,577 $ 1,782,598 $ 1,782,598
Collateralized mortgage
obligations 435,074 9,900 125 444,849 444,849
Public utilities 647,754 22,823 5,997 664,580 664,580
Corporate bonds 2,943,635 114,871 71,504 2,987,002 2,987,002
Foreign governments 26,466 1,824 28,290 28,290
State and municipalities 935,758 35,462 3,955 967,265 967,265
Direct mortgage pass-
through certificates 345,979 2,537 2,840 345,676 345,676
Mortgage-backed
Securities - other 97,136 7,020 104,156 104,156
Asset backed securities 2,728,061 76,187 12,489 2,791,759 2,791,759
------------ ------------ ------------ ------------ ------------
$ 9,904,453 $ 316,209 $ 104,487 $ 10,116,175 $ 10,116,175
============ ============ ============ ============ ============
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
Securities - other 100,786 5,401 363 105,824 105,824
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
============ ============ ============ ============ ============
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 9 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, 2001, 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.
Amortized Estimated
Cost Fair Value
---------------- ----------------
Due in one year or less $ 614,336 $ 627,259
Due after one year
through five years 2,481,589 2,579,308
Due after five years
through ten years 1,171,127 1,189,693
Due after ten years 848,427 838,494
Mortgage-backed
Securities 2,060,913 2,089,662
Asset-backed securities 2,728,061 2,791,759
---------------- ----------------
$ 9,904,453 $ 10,116,175
================ ================
Proceeds from sales of securities available-for-sale were $5,201,737,
$1,460,672, and $3,176,802 during 2001, 2000, and 1999, respectively. The
realized gains on such sales totaled $42,343, $8,015, and $10,080 for
2001, 2000, and 1999, respectively. The realized losses totaled $10,186,
$24,053, and $19,720 for 2001, 2000, and 1999, respectively. During the
years 2001, 2000, and 1999, held-to-maturity securities with amortized
cost of $0, $8,571, and $0 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, 2001 and 2000, pursuant to fully collateralized
securities lending arrangements, the Company had loaned $278,471 and
$208,702 of fixed maturities, respectively.
The Company engages in hedging activities to manage interest rate, market
and foreign exchange risk.
The following table summarizes the 2001 financial hedge instruments:
Notional Strike/Swap
December 31, 2001 Amount Rate Maturity
------------------------------- --------------- ------------------------------ --------------------
Interest Rate Caps $ 1,402,000 6.75% - 11.65% (CMT) 01/02 - 01/05
Interest Rate Swaps 365,018 3.13% - 7.32% 01/02- 12/06
Foreign Currency
Exchange Contracts 13,585 N/A 06/05 - 07/06
Options Calls 191,300 Various 01/02 - 01/06
Puts 131,000 Various 12/01 - 12/02
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 5.00% - 8.62% 1/01 - 12/06
Foreign Currency
Exchange Contracts 18,371 N/A 6/05 - 7/06
Options Calls 111,400 Various 5/01 - 11/05
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, 2001, approximately 29% of
the Company's mortgage loans were collateralized by real estate located
in California.
The following is information with respect to impaired mortgage loans:
2001 2000
---------------- ----------------
Loans, net of related allowance for credit losses of
$13,018 and $12,777 $ 6,300 $ 9,116
Loans with no related allowance for credit losses 5,180 12,954
Average balance of impaired loans during the year 31,554 39,321
Interest income recognized (while impaired) 1,617 1,648
Interest income received and recorded (while impaired)
Using the cash basis method of recognition 1,744 1,632
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 $56,258 and $73,518 at December 31, 2001 and 2000,
respectively.
The following table presents changes in the allowance for credit losses:
2001 2000 1999
--------------- --------------- ---------------
Balance, beginning of year $ 61,242 $ 77,416 $ 83,416
Provision for loan losses (8,927) (7,000)
Charge-offs (3,588) (7,247)
Recoveries 1,000
--------------- --------------- ---------------
Balance, end of year $ 57,654 $ 61,242 $ 77,416
=============== =============== ===============
8. COMMERCIAL PAPER
The Company has a commercial paper program that is partially supported by
a $50,000 standby letter-of-credit. At December 31, 2001, commercial
paper outstanding of $97,046 had a maturity of 4 days and an interest
rate of 2.55%. 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%.
9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
December 31,
-----------------------------------------------------------------------
2001 2000
---------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- --------------- -------------- ---------------
ASSETS:
Fixed maturities and
short-term investments $ 10,540,905 $ 10,540,905 $ 9,834,247 $ 9,834,247
Mortgage loans on real
estate 613,453 624,102 843,371 856,848
Policy loans 3,000,441 3,000,441 2,809,973 2,809,973
Common stock 73,344 73,344 95,036 95,036
LIABILITIES:
Annuity contract reserves
without life contingencies 4,188,553 4,210,759 4,189,716 4,204,907
Policyholders' funds 242,916 242,916 266,235 266,235
Due to GWL 41,874 41,441 43,081 41,332
Due to GWL&A Financial 251,059 251,059 171,347 158,222
Commercial paper 97,046 97,046 97,631 97,631
Repurchase agreements 250,889 250,889
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 and common stocks that are
publicly traded are obtained from an independent pricing service. To
determine fair value for fixed maturities not actively traded, the
Company utilizes discounted cash flows calculated at current market rates
on investments of similar quality and term. Fair values of derivatives of
$20,617 and $7,188 at December 31, 2001 and 2000, respectively,
consisting principally of interest rate swaps are included in fixed
maturities.
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 estimated 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, 2001.
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 derivatives, primarily consisting of interest
rate swaps 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 asset position for
interest rates swaps are $33 and $1,858 of liabilities in 2001 and 2000,
respectively. Included in the net asset position for foreign currency
exchange contracts are $127 and $0 of liabilities in 2001 and 2000,
respectively.
10. EMPLOYEE BENEFIT PLANS
The following table summarizes changes for the years ended December 31,
2001, 2000, and 1999 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.
Post-Retirement
Pension Benefits Medical Plan
---------------------------------- ---------------------------------
2001 2000 1999 2001 2000 1999
--------- --------- --------- --------- --------- --------
Change in benefit obligation
Benefit obligation at beginning $ 140,563 $ 126,130 $ 131,305 $ 33,018 $ 29,228 $ 19,944
of year
Service cost 8,093 7,062 7,853 3,331 2,305 2,186
Interest cost 9,718 9,475 8,359 3,303 2,167 1,652
Acquisition of new employees 4,155 7,823
Actuarial (gain) loss (2,640) 2,510 (22,363) 11,401 3,616
Prior service for former Alta
employees 2,471
Benefits paid (5,213) (4,614) (3,179) (1,015) (682) (641)
--------- --------- --------- --------- --------- --------
Benefit obligation at end of year $ 150,521 $ 140,563 $ 126,130 $ 57,861 $ 33,018 $ 29,228
--------- --------- --------- --------- --------- --------
Change in plan assets
Fair value of plan assets at
beginning of year $ 193,511 $ 192,093 $ 183,136 $ $ $
Actual return on plan assets (637) 6,032 12,055
Addition of former Alta employees
and other adjustments 81
Benefits paid (5,213) (4,614) (3,179)
--------- --------- --------- --------- --------- --------
Fair value of plan assets at end 187,661 193,511 192,093
of year
--------- --------- --------- --------- --------- --------
Funded (unfunded) status 37,140 52,948 65,963 (57,861) (33,018) (29,228)
Unrecognized net actuarial (gain) (1,499) (15,239) (30,161) 14,659 3,430 3,464
loss
Unrecognized prior service cost 2,533 3,073 3,614 9,326 2,148 2,310
Unrecognized net obligation or
(asset)
at transition (15,142) (16,655) (18,170) 12,120 12,928 13,736
--------- --------- --------- --------- --------- --------
Prepaid (accrued) benefit cost $ 23,032 $ 24,127 $ 21,246 $ (21,756) $ (14,512) $ (9,718)
========= ========= ========= ========= ========= ========
Components of net periodic
benefit cost
Service cost $ 8,093 $ 7,062 $ 7,853 $ 3,331 $ 2,305 $ 2,186
Interest cost 9,718 9,475 8,360 3,303 2,167 1,652
Expected return on plan assets (15,276) (17,567) (15,664)
Amortization of transition (1,514) (1,514) (1,514) 808 808 808
obligation
Amortization of unrecognized prior
service cost 541 541 541 645 162 162
Amortization of gain from earlier
periods (467) (879) (80) 172 34 38
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------- --------
Net periodic (benefit) cost $ 1,095 $ (2,882) $ (504) $ 8,259 $ 5,476 $ 4,846
========= ========= ========= ========= ========= ========
Weighted-average assumptions as
of December 31
Discount rate 7.25% 7.50% 7.50% 7.25% 7.50% 7.50%
Expected return on plan assets 8.00% 9.25% 8.50% 8.00% 9.25% 8.50%
Rate of compensation increase 4.00% 5.00% 5.00% 4.00% 5.00% 5.00%
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 2001, 2000, or 1999.
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 $ 2,246 $ (1,465)
Increase (decrease) on post-retirement benefit 12,877 (9,914)
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, 2001, 2000, and
1999 totaled $7,773, $6,130, and $5,504, 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 $20,033,
$19,264, and $17,367 for years ending December 31, 2001, 2000, and 1999,
respectively. The participant deferrals earn interest at 7.2% at December
31, 2001, 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, 2001, 2000, and 1999 was $1,434, $1,358, and $1,231,
respectively.
The Company also provides a supplemental executive retirement plan 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 2001, 2000, and 1999 was $2,726, $3,023, and $3,002,
respectively. The total liability of $20,881 and $18,794 as of December
31, 2001 and 2000 is included in other liabilities.
11. FEDERAL INCOME TAXES
The following is a reconciliation between the federal income tax rate and
the Company's effective income tax rate:
2001 2000 1999
------------ ------------ ------------
Federal tax rate 35.0 % 35.0 % 35.0 %
Change in tax rate resulting from:
Settlement of GWL tax exposures (5.9)
Investment income not subject
to federal tax (1.7) (0.9)
Other, net (0.3) (0.3)
------------ ------------ ------------
Total 33.0 % 34.1 % 28.8 %
============ ============ ============
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 of which give rise to the deferred tax assets and
liabilities as of December 31, 2001 and 2000 are as follows:
2001 2000
------------------------------- ------------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
------------- -------------- ------------- -------------
Policyholder reserves $ 157,703 $ $ 114,074 $
Deferred policy acquisition costs 47,101 48,543
Deferred acquisition cost
proxy tax 113,505 110,239
Investment assets 88,595 35,714
Allowance for uncollectibles 10,570
Net operating loss carryforwards 444 444
Other 2,614 103
------------- -------------- ------------- -------------
Subtotal 284,836 135,696 224,860 84,257
Valuation allowance (1,761)
------------- -------------- ------------- -------------
Total Deferred Taxes $ 284,836 $ 135,696 $ 223,099 $ 84,257
============= ============== ============= =============
Amounts included in investment assets above include $40,122 and $21,228
related to the unrealized gains on the Company's fixed maturities
available-for-sale at December 31, 2001 and 2000, respectively.
The Company will file a consolidated tax return for 2001. Losses incurred
by subsidiaries in prior years cannot be offset against operating income
of the Company. At December 31, 2001, the Company's subsidiaries had
approximately $1,269 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, 2001 and 2000, respectively.
The Company's valuation allowance was decreased in 2001, 2000, and 1999
by $1,761, $0, and $(17), 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.
12. OTHER COMPREHENSIVE INCOME
Other comprehensive income for the year ended December 31, 2001 is
summarized as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
----------------- ---------------- -- -----------------
Unrealized gains on available-for-sale securities:
Net changes during the year related to cash
flow hedges $ 12,637 $ (4,423) $ 8,214
Unrealized holding gains (losses) arising
during the period 112,544 (39,397) 73,147
Less: reclassification adjustment for
(gains) losses realized in net income (15,912) 5,569 (10,343)
----------------- ---------------- -----------------
Net unrealized gains 109,269 (38,251) 71,018
Reserve and DAC adjustment (43,358) 15,175 (28,183)
----------------- ---------------- -----------------
----------------- ---------------- -----------------
Other comprehensive income $ 65,911 $ (23,076) $ 42,835
================= ================ =================
Other comprehensive income for the year ended 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
(gains) losses realized in net income 9,436 (3,303) 6,133
----------------- ---------------- -----------------
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 for the year ended 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 gains (losses) arising
during the period $ (303,033) $ 106,061 $ (196,972)
Less: reclassification adjustment for
(gains) losses realized in net income (9,958) 3,485 (6,473)
----------------- ---------------- -----------------
Net unrealized gains (losses) (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)
================= ================ =================
13. STOCKHOLDER'S EQUITY, DIVIDEND RESTRICTIONS, AND OTHER MATTERS
At December 31, 2001 and 2000, 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.
No dividends were paid on preferred stock in 2001, 2000, and 1999,
respectively. In addition, dividends of $187,633, $134,149, and $92,053
were paid on common stock in 2001, 2000, and 1999, 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:
2001 2000 1999
---------------- ---------------- ---------------
(Unaudited)
Net income $ 266,398 $ 293,521 $ 253,123
Capital and surplus 1,200,372 1,083,718 1,004,745
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, was 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 required adoption of Codification with
certain modifications for the preparation of statutory financial
statements effective January 1, 2001. The adoption of Codification as
modified by the Colorado Division of Insurance increased 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, 2001 were $1,200,372 and $272,138 [Unaudited], respectively. The
Company should be able to pay up to $272,138 [Unaudited] of dividends in
2002.
14. 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, 2001,
2000, and 1999, stock available for award to Company employees under the
Lifeco plan aggregated 3,278,331, 4,808,047, and 885,150 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, accrued compensation expense of $15,052
with a corresponding credit to additional paid-in capital as prescribed
by AIN-APB 25. During 2001, the Company released $12,098 of this accrual
when certain financial targets were not attained.
Additional variable options granted in 1998, 2000, and 2001 totaling
380,000, 120,000, and 80,000 respectively, become exercisable if certain
sales or financial targets are attained. During 2001, 2000, and 1999,
7,750, 13,250, and 11,250 of these options vested and accordingly, the
Company recognized compensation expense of $48, $151, and $23,
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 2001, 2000, and 1999. 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:
2001 2000 1999
-------------------------- ------------------------- -------------------------
Options WAEP Options WAEP Options WAEP
------------- ---------- ------------ ---------- ----------- ----------
Outstanding, Jan. 1 7,675,551 $ 9.91 6,867,098 $ 9.20 6,744,824 $ 8.15
Granted 947,500 22.28 1,386,503 14.88 675,500 16.29
Exercised 1,463,588 5.89 451,300 7.74 234,476 5.69
Expired or
canceled 690,334 11.24 126,750 12.17 318,750 13.81
------------- ---------- ------------ ---------- ----------- ----------
Outstanding,
Dec. 31 6,469,129 $ 11.59 7,675,551 $ 9.91 6,867,098 $ 9.20
============= ========== ============ ========== =========== ==========
Options
exercisable
at year-end 2,673,460 $ 8.01 3,077,998 $ 7.11 2,503,998 $ 7.00
============= ========== ============ ========== =========== ==========
Weighted average
fair value of
options granted
during year $ 4.22 $ 4.38 $ 5.16
============= ============ ===========
The following table summarizes the range of exercise prices for
outstanding Lifeco common stock options granted to Company employees at
December 31, 2001:
Outstanding Exercisable
------------------------------------------------- ---------------------------------
Average Average
Exercise Average Exercise Exercise
Price Range Options Life Price Options Price
--------------------- ---------------- ------------ ------------- ---------------- -------------
$ 5.32 - 7.07 1,823,560 4.68 $ 5.42 1,803,560 $ 5.40
$10.19 - 16.90 3,775,569 6.73 $ 12.22 867,400 $ 13.40
$21.52 - 22.23 870,000 9.66 $ 21.77 2,500 $ 22.01
Of the exercisable Lifeco options, 2,623,960 relate to fixed option
grants and 49,500 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, 2001,
2000, and 1999, stock available for award under the PFC plan aggregated
2,710,800, 2,790,800, and 4,340,800 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 WAEP for 2001,
2000, and 1999. 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:
2001 2000 1999
-------------------------- -------------------------- --------------------------
Options WAEP Options WAEP Options WAEP
------------- --------- ------------- --------- ------------- ----------
Outstanding, Jan.1, 70,000 $ 2.29 285,054 $ 3.23 355,054 $ 2.89
Exercised 215,054 3.30 70,000 2.28
------------- --------- ------------- --------- ------------- ----------
Outstanding, Dec 31, 70,000 $ 2.16 70,000 $ 2.29 285,054 $ 3.23
============= ========= ============= ========= ============= ==========
Options exercisable
at year-end 70,000 $ 2.16 70,000 $ 2.29 285,054 $ 3.23
============= ========= ============= ========= ============= ==========
As of December 31, 2001, the PFC options outstanding have an exercise
price of $2.16 and a weighted-average remaining contractual life of 1.36
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 $1,801, $1,686, and $1,039, in 2001, 2000, and 1999,
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
2001, 2000, and 1999, respectively: dividend yields of 3.84%, 3.95%, and
3.63%, expected volatility of 20.1%, 30.1%, and 32.4%, risk-free interest
rates of 5.30%, 6.61%, and 6.65% and expected lives of 7.5 years.
15. 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, 2001
Operations: Employee Financial
Benefits Services Total
----------------- ----------------- -----------------
Revenue:
Premium income $ 1,033,983 $ 169,656 $ 1,203,639
Fee income 809,574 137,681 947,255
Net investment income 90,720 850,614 941,334
Realized investment gains 17,881 28,944 46,825
----------------- ----------------- -----------------
Total revenue 1,952,158 1,186,895 3,139,053
Benefits and Expenses:
Benefits 867,031 829,566 1,696,597
Operating expenses 863,021 164,677 1,027,698
----------------- ----------------- -----------------
Total benefits and expenses 1,730,052 994,243 2,724,295
Income taxes 75,962 65,150 141,112
----------------- ----------------- -----------------
Net income before special charges 146,144 127,502 273,646
Special charges (net) 80,900 80,900
----------------- ----------------- -----------------
Net income $ 65,244 $ 127,502 $ 192,746
================= ================= =================
Assets: Employee Financial
Benefits Services Total
----------------- ----------------- -----------------
Investment assets $ 1,497,077 $ 12,843,747 $ 14,340,824
Other assets 912,653 973,033 1,885,686
Separate account assets 5,854,652 6,730,009 12,584,661
----------------- ----------------- -----------------
Total assets $ 8,264,382 $ 20,546,789 $ 28,811,171
================= ================= =================
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 gains (losses) (3,572) 31,855 28,283
----------------- ----------------- -----------------
Total revenue 1,985,673 1,178,244 3,163,917
Benefits and Expenses:
Benefits 922,925 822,947 1,745,872
Operating expenses 856,463 168,448 1,024,911
----------------- ----------------- -----------------
Total benefits and expenses 1,779,388 991,395 2,770,783
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Net operating income before income taxes 206,285 186,849 393,134
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 $ 12,250,667 $ 13,689,317
Other assets 980,245 846,687 1,826,932
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 gains (losses) (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 taxes 167,641 121,339 288,980
Income taxes 51,003 32,259 83,262
----------------- ----------------- -----------------
Net income $ 116,638 $ 89,080 $ 205,718
================= ================= =================
The following table, which summarizes premium and fee income by segment,
represents supplemental information.
2001 2000 1999
----------------- ---------------- ----------------
-----------------
Premium Income:
Employee Benefits
Group Life & Health $ 1,033,983 $ 1,142,136 $ 990,449
----------------- ---------------- ----------------
Total Employee Benefits 1,033,983 1,142,136 990,449
----------------- ---------------- ----------------
----------------- ---------------- ----------------
Financial Services
Savings 8,429 7,253 14,344
Individual Insurance 161,227 183,177 158,390
----------------- ---------------- ----------------
----------------- ---------------- ----------------
Total Financial Services 169,656 190,430 172,734
----------------- ---------------- ----------------
Total premium income $ 1,203,639 $ 1,332,566 $ 1,163,183
================= ================ ================
Fee Income:
Employee Benefits
Group Life & Health $ 713,296 $ 648,328 $ 454,071
(uninsured plans)
401(k) 96,278 103,981 94,509
----------------- ---------------- ----------------
----------------- ---------------- ----------------
Total Employee Benefits 809,574 752,309 548,580
----------------- ---------------- ----------------
----------------- ---------------- ----------------
Financial Services
Savings 119,793 111,201 81,331
Individual Insurance 17,888 8,117 5,236
----------------- ---------------- ----------------
----------------- ---------------- ----------------
Total Financial Services 137,681 119,318 86,567
----------------- ---------------- ----------------
Total fee income $ 947,255 $ 871,627 $ 635,147
================= ================ ================
16. 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.