The Schwab Fixed Annuity(R)
A flexible premium deferred fixed annuity
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the amount Transferred or withdrawn from the value of a Guarantee Period if the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withdrawn in the first three years.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 9 and
"Market Value Adjustment" on page 9.
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, 2003.
1
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Table of Contents
Definitions...............................................4
Summary...................................................6
How to contact Schwab..................................6
Fee Table.................................................7
Great-West Life & Annuity Insurance
Company...................................................8
The Guarantee Period Fund.................................8
Investments of the Guarantee Period Fund...............8
Subsequent Guarantee Periods...........................9
Breaking a Guarantee Period............................9
Interest Rates.........................................9
Market Value Adjustment................................9
Application and Initial Contributions....................10
Free Look Period.........................................10
Subsequent Contributions.................................10
Annuity Account Value....................................10
Transfers................................................10
Possible Restrictions.................................11
Cash Withdrawals.........................................11
Withdrawals to Pay Investment Manager or
Financial Advisor Fees................................11
Tax Consequences of Withdrawals.......................11
Telephone Transactions...................................12
Death Benefit............................................12
Beneficiary...........................................12
Distribution of Death Benefit.........................13
Charges and Deductions...................................13
Transfer Fees.........................................13
Premium Tax...........................................13
Other Taxes...........................................13
Payout Options...........................................14
Periodic Withdrawals..................................14
Periodic Withdrawal Payout Options....................15
Annuity Payout Information...............................15
Annuity IRAs..........................................16
Seek Tax Advice..........................................16
Federal Tax Matters......................................16
Taxation of Annuities.................................16
Individual Retirement Annuities.......................18
Assignments or Pledges...................................19
Distribution of the Contracts............................19
Selected Financial Data..................................20
Management's Discussion and Analysis of Financial
Conditions and Results of Operations
Rights Reserved by Great-West............................
Legal Proceedings........................................
Legal Matters............................................
Experts..................................................
Available Information....................................
Appendix A--Market Value Adjustments.....................
Consolidated Financial Statements and Independent Auditor's Report
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 12.
There is no annual contract maintenance charge.
You may cancel your Contract during the "free look period" by sending it to the
Annuity Administration Department. If you are replacing an existing insurance
contract with the Contract, the free look period may be extended based on your
state of residence. We will refund the greater of:
o Contributions received, less surrenders, withdrawals and distributions, or
o The Annuity Account Value.
This summary highlights some of the more significant aspects of The Schwab Fixed
Annuity. You'll find more detailed information about these topics throughout the
prospectus and in your Contract. Please keep them both for future reference.
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Fee Table
The purpose of this table is to help you understand the various costs and
expenses in connection with investing in the Contract. The information set forth
should be considered together with the narrative provided under the heading
"Charges and Deductions." In addition to the expenses listed below, Premium Tax
may be applicable.
Sales load None
Surrender fee Maximum 3%
Annual Contract Maintenance Charge None
Transfer fee $10.00
(no transfer fee is charged for the
first 12 transfers in any calendar year)
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Great-West Life & Annuity Insurance Company
Great-West is a stock life insurance company that was originally organized under
the laws of the state of Kansas as the National Interment Association. Our name
was changed to Ranger National Life Insurance Company in 1963 and to
Insuramerica Corporation, prior to changing to our current name in 1982. In
September of 1990, we re-domesticated under the laws of the state of Colorado.
We are authorized to do business in 49 states, the District of Columbia, Puerto
Rico, U.S. Virgin Islands and Guam.
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The Guarantee Period Fund
Amounts allocated to the Guarantee Period Fund will be deposited to, and
accounted for, in a non-unitized market value separate account. As a result, you
do not participate in the performance of the assets through unit values.
The assets accrue solely to the benefit of Great-West and any gain or loss in
the 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 one to ten years are offered
only in those states where the Guarantee Period Fund is available. The Guarantee
Periods may change in the future, but this will not have an impact on any
Guarantee Period already in effect.
The value of amounts in each Guarantee Period equals Contributions plus interest
earned, less any Premium Tax, amounts distributed, withdrawn (in whole or in
part), amounts Transferred or applied to an annuity option, periodic withdrawals
and charges deducted under the Contract. If a Guarantee Period is broken, a
Market Value Adjustment may be assessed (please see "Breaking a Guarantee
Period" on page 9). Any amount withdrawn or Transferred prior to the Guarantee
Period Maturity Date will be paid in accordance with the Market Value Adjustment
formula. You can read more about Market Value Adjustments on page 9.
Investments of the Guarantee Period Fund
We use various techniques to invest in assets that have similar characteristics
to our general account assets--especially cash flow patterns. We will primarily
invest in investment-grade fixed income securities including:
o Securities issued by the U.S. Government or its agencies or
instrumentalities, which may or may not be guaranteed by the U.S.
Government.
o Debt securities which have an investment grade, at the time of purchase,
within the four highest grades assigned by Moody's Investment Services,
Inc. (Aaa, Aa, A or Baa), Standard & Poor's Corporation (AAA, AA, A or BBB)
or any other nationally recognized rating service.
o Other debt instruments, including, but not limited to, issues of banks or
bank holding companies and of corporations, which obligations--although not
rated by Moody's, Standard & Poor's, or other nationally recognized rating
firms--are deemed by us to have an investment quality comparable to
securities which may be purchased as stated above.
o Commercial paper, cash or cash equivalents and other short-term investments
having a maturity of less than one year which are considered by us to have
investment quality comparable to securities which may be purchased as
stated above.
In addition, we may invest in futures and options solely for non-speculative
hedging purposes. We may sell a futures contract or purchase a put option on
futures or securities to protect the value of securities held in or to be sold
for the general account or the non-unitized 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 9. If you request in advance to Transfer amounts
from a maturing Guarantee Period upon maturity, your Transfer will not count
toward the 12 free Transfers and no Transfer fees will be charged.
Possible Restrictions
We reserve the right without prior notice to modify, restrict, suspend or
eliminate the Transfer privileges (including telephone Transfers) at any time.
We reserve the right to require that all Transfer requests be made by you and
not by your designee and to require that each Transfer request be made by a
separate communication to us. We also reserve the right to require that each
Transfer request be submitted in writing and be signed by you
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Cash Withdrawals
You may withdraw all or part of your Annuity Account Value at any time during
the life of the Annuitant and prior to the 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 9.
Partial withdrawals are unlimited. However, you must specify the Guarantee
Period(s) from which the withdrawal is to be made. After any partial withdrawal,
if your remaining Annuity Account Value is less than $2,000, then a full
surrender may be required. The minimum partial withdrawal (before application of
the MVA) is $500.
The following terms apply to withdrawals:
o Partial withdrawals or surrenders are not permitted after the 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 16.
If you are interested in this Contract as an IRA, please refer to Section 408 of
the Code for limitations and restrictions on cash withdrawals.
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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 six 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.
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Charges and Deductions
No amounts will be deducted from your Contributions except for any applicable
Premium Tax. As a result, the full amount of your Contributions (less any
applicable Premium Tax) are invested in the Contract.
As more fully described below, charges under the Contract are assessed only as
deductions for:
o Certain Transfers,
o Surrender Charges, and
o Premium Tax, if applicable.
Transfer Fee
There will be a $10 charge for each Transfer in excess of 12 Transfers in any
calendar year. We do not expect a profit from the Transfer fee.
Surrender Charge
We may deduct a maximum Surrender Charge of three percent (3%) from amounts
withdrawn or distributed within the first three Contract years. The Surrender
Charge applies to the amounts withdrawn or distributed after they have been
adjusted by any applicable Market Value Adjustment. The applicable Surrender
Charge will decrease over time as indicated in the table below.
Years Completed Percentage of
Distribution
- -------------------------- -----------------------
1 3%
2 2%
3 1%
4+ 0%
Premium Tax
We may be required to pay state Premium Taxes or retaliatory taxes currently
ranging from 0% to 3.5% in connection with Contributions or values under the
Contracts. Depending upon applicable state law, we will deduct charges for the
Premium Taxes we incur with respect to your Contributions, from amounts
withdrawn, or from amounts applied on the Payout Commencement Date. In some
states, charges for both direct Premium Taxes and retaliatory Premium Taxes may
be imposed at the same or different times with respect to the same Contribution,
depending on applicable state law.
Other Taxes
Under present laws, we will incur state or local taxes (in addition to the
Premium Tax described above) in several states. No charges are currently made
for taxes other than Premium Tax. However, we reserve the right to deduct
charges in the future for federal, state, and local taxes or the economic burden
resulting from the application of any tax laws that we determine to be
attributable to the Contract.
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Payout Options
During the 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 at least $100.
o The calendar day of the month on which withdrawals will be made.
o One of the periodic withdrawal payout options discussed below-- you may
change the withdrawal option and/or the frequency once each calendar year.
Your withdrawals may be prorated across the Guarantee Period Fund 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.
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If you choose to receive payouts from your Contract through periodic
withdrawals, you may select from the following payout options:
o Income for a specified period (at least 36 months)--You elect the length
of time over which withdrawals will be made. The amount paid will vary
based on the duration you choose.
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.
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In accordance with the provisions outlined in this section, you may request a
periodic withdrawal to remit fees paid to your Investment Manager or Financial
Advisor. There may be income tax consequences to any periodic withdrawal made
for this purpose. Please see "Cash Withdrawals" on page 11 and "Federal Tax
Matters" on page .
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 which 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.
- --------------------------------------------------------------------------------
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.
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Assignments or Pledges
Generally, rights in the Non-Qualified Contract may be assigned or pledged for
loans at any time during the life of the Annuitant. However, if the Contract is
an IRA, you may not assign the Contract as collateral.
If a Non-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
BenefitsCorp Equities, Inc. ("BCE") is the principal underwriter and distributor
of the Contracts. BCE 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 8515 East Orchard
Road, Greenwood Village, Colorado, telephone 800-537-2033.
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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.
Years Ended December 31,
------------------------------------------------------------------------
INCOME STATEMENT
DATA 2002 2001 2000 1999 1998
------------------------------- ----------- ----------- ------------ ----------- -----------
[millions]
Premium income $ 1,120 $ 1,203 $ 1,332 $ 1,163 $ 995
Fee income 884 947 872 635 516
Net investment income 919 935 925 876 897
Net realized investment
gains 42 47 28 1 38
----------- ----------- ------------ ----------- -----------
Total revenues 2,965 3,132 3,157 2,675 2,446
Policyholder benefits 1,593 1,696 1,746 1,582 1,462
Operating expenses 958 1,021 1,018 804 688
----------- ----------- ------------ ----------- -----------
Total benefits and
expenses excluding
special charges 2,551 2,717 2,764 2,386 2,150
Income tax expense 130 141 134 83 99
----------- ----------- ------------ ----------- -----------
Net income before
special charges 284 274 259 206 197
Special charges (net) 81
----------- ----------- ------------ ----------- -----------
Net income $ 284 $ 193 $ 259 $ 206 $ 197
=========== =========== ============ =========== ===========
Deposits for investment-
type contracts $ 691 $ 627 $ 835 $ 634 $ 1,344
Deposits to separate
accounts 2,461 3,240 3,105 2,583 2,208
Self-funded premium
equivalents 5,228 5,721 5,181 2,979 2,606
BALANCE SHEET Years Ended December 31,
------------------------------------------------------------------------
DATA 2002 2001 2000 1999 1998
------------------------------- ----------- ----------- ------------ ----------- -----------
[millions]
Investment assets $ 14,556 $ 14,240 $ 13,689 $ 13,058 $ 13,671
Separate account assets 11,338 12,585 12,381 12,820 10,100
Total assets 27,656 28,818 27,897 27,530 25,123
Total policy benefit
liabilities 13,007 12,931 12,825 12,341 12,583
Due to GWL 34 42 43 35 52
Due to GWL&A Financial 171 215 171 175
Total shareholder's
equity 1,664 1,470 1,427 1,167 1,199
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ORGANIZATION AND CORPORATE STRUCTURE
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 operates in the U.S. through the Company and in Canada through
its wholly owned subsidiary, The Great-West Life Assurance Company (Great-West
Life). 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.
BUSINESS OF THE COMPANY
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, 2001 data, the Company ranks 29th in terms of
admitted assets of all U.S. life insurance companies.
The Company operates in the following two business segments:
Employee Benefits - Life and health products for group clients.
Financial Services - Savings products for public,
private and non-profit employers,
corporations and individuals (including
401, 401(k), 403(b), 408, and 457 plans),
and life insurance products for
individuals and businesses.
Prior to 2002, the Employee Benefits segment marketed and administered the
Company's 401(k) product. In 2002, the Financial Services division assumed
responsibility for this product. The 2001 and 2000 segment information has been
reclassified to account for this change.
On February 17, 2003, Great-West Lifeco announced a definitive agreement to
acquire Canada Life Financial Corporation for $7.3 billion (Canadian). Canada
Life is a Canadian based insurance company with business principally in Canada,
the United Kingdom, the United States and Ireland. In the United States, Canada
Life sells individual and group insurance and annuity products. Subject to
required shareholder and regulatory approvals, the transaction is expected to
close on July 10, 2003.
Canada Life's U.S. operations represented approximately $1.6 billion in annual
revenue in 2002 and $7.4 billion in assets as of December 31, 2002. If the
transaction proceeds, Canada Life's U.S. operations will be integrated with the
Company's operations. The details of the integration are still to be determined.
The 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, 2002 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 decreased $8.8 million or 3.0% in 2002
when compared to 2001 (before one-time charges in 2001 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 is
transitioning Alta business to other Company products. All Alta sales and
administration staff have become employees of the Company and the underwriting
functions are conducted by the underwriting staff of the Company.
The Employee Benefits segment contributed $136.3 million and the Financial
Services segment contributed $147.2 million to net income. Of total consolidated
net income in 2002 and 2001 (before one-time charges and operating losses of
Alta), the Employee Benefits segment contributed 48% and 56%, respectively,
while the Financial Services segment contributed 52% and 44%, respectively.
In 2002, total revenues decreased $167.8 million or 5.4% to $3.0 billion when
compared to 2001. The decline in revenues in 2002 was comprised of decreased
premium income of $83.5 million, decreased fee income of $63.7 million,
decreased net investment income of $15.4 million, and a $5.2 million decrease in
realized investment gains. In 2001, total revenues decreased $25.0 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 $9.8 million and increased
realized gains on investments of $18.5 million.
The decreased premium income in 2002 was comprised of a decline in Employee
Benefits premium income and Financial Services premium income of $73.7 million
and $9.8 million, respectively. The decline in premium income in the Employee
Benefits segment reflected a 15.4% decline in medical members from 2.6 million
in 2001 to 2.2 million in 2002. Financial Services experienced lower sales and
higher terminations in 2002. 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.
Fee income in 2002 was comprised of Employee Benefits fee income and Financial
Services fee income of $660.4 million and $223.1 million, respectively. The $5.2
million or 7.4% decline in Employee Benefits fee income is due to the decline in
medical members. The $11 million or 4.7% decline in Financial Services fee
income was primarily the result of weak U.S. equity markets. The increase in fee
income in 2001 was comprised of Employee Benefits fee income and Financial
Services fee income of $65.0 million and $10.7 million, respectively. The 10%
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.
Total benefits decreased $103.8 million or 6.1% in 2002 when compared to 2001,
reflecting lower group life and health claims primarily as a result of the
decline in membership in the Employee Benefits segment. The decline from 2000 to
2001 was also the result of lower claims as a result of declining membership.
Total expenses decreased $63.0 million or 6.2% in 2002 when compared to 2001,
before special charges, as the Company remains focused on reducing
administrative costs. During 2002, Employee Benefits' operating expenses
decreased $41 million due primarily to reduced administrative costs and medical
membership. Financial Services' operating expenses decreased $22 million due
primarily to decreased sales and lower premium income.
Income tax expense before special charges decreased $10.9 million or 7.7% in
2002 when compared to 2001. The decrease reflects a reduction in the liability
for tax contingencies due to the completion of the 1994 - 1996 Internal Revenue
Service examination. Income tax expense increased before special charges of $7.1
million or 5% in 2001 when compared to 2000. The increase reflects higher
pre-tax earnings in 2001. 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. These
amounts approximate the additional premiums which would have been earned under
such contracts if they had been written as traditional indemnity or HMO
programs.
Deposits for investment-type contracts increased $161.2 million or 25.7% in 2002
when compared to 2001. Deposits for investment-type contracts decreased $208
million or 25% in 2001 when compared to 2000. The increase in 2002 was primarily
attributable to one large case sale in the Financial Services segment. 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).
Deposits for separate accounts decreased $778.8 million or 24.0% in 2002 when
compared to 2001. This decrease in 2002 is primarily due to a combination of
lower 401(K) sales and higher 401(K) terminations as well as a decline in BOLI
sales due to the nature of the BOLI business. 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.
Self-funded premium equivalents decreased $492.4 million or 8.6% in 2002 when
compared to 2001. This decrease was due to the membership decline in the
Employee Benefits segment. 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.
Historically, the 401(k) business unit had been included with the Employee
Benefits segment. In order to capitalize on administrative system efficiencies
and group pension expertise, the 401(k) business is now administered by the
Financial Services segment. As a result, prior period segment results have been
reclassified to conform with this change.
2. Other Matters
On February 17, 2003, Great-West Lifeco announced a definitive agreement to
acquire Canada Life Financial Corporation for $7.3 billion (Canadian). Canada
Life is a Canadian based insurance company with business principally in Canada,
the United Kingdom, the United States and Ireland. In the United States, Canada
Life sells individual and group insurance and annuity products. Subject to
required shareholder and regulatory approvals, the transaction is expected to
close on July 10, 2003.
Canada Life's U.S. operations represented approximately $1.6 billion in annual
revenue in 2002 and $7.4 billion in assets as of December 31, 2002. If the
transaction proceeds, Canada Life's U.S. operations will be integrated with the
Company's operations. The details of the integration are still to be determined.
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 of 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 2002 2001 2000
--------------------------------------------- ----------------- ----------------- ----------------
[millions]
Premiums $ 960 $ 1,033 $ 1,142
Fee income 661 713 648
Net investment income 68 66 71
Net realized investment gains (losses) 9 16 (3)
----------------- ----------------- ----------------
Total revenues 1,698 1,828 1,858
Policyholder benefits 762 859 915
Operating expenses 733 774 780
----------------- ----------------- ----------------
Total benefits and expenses
before special charges 1,495 1,633 1,695
Income tax expense 67 68 57
----------------- ----------------- ----------------
Net income excluding special charges 136 127 106
Special charges (net) 81
----------------- ----------------- ----------------
Net income $ 136 $ 46 $ 106
================= ================= ================
Self-funded premium equivalents $ 5,228 $ 5,721 $ 5,181
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
under-pricing 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.
The Company established a premium deficiency reserve of $46 million (included in
special charges previously discussed) on the Alta block of business in 2001.
Releases of $18.7 million in 2001, $6.2 million in the first quarter of 2002,
and $2.1 million in the second quarter of 2002 were made to offset the
underwriting losses incurred on the under-priced block of business. During the
first quarter of 2002 the reserve was reduced by $15 million ($9.8 million net
of tax) and during the second quarter of 2002 the reserve was reduced by $4
million ($2.6 million, net of tax) based on an analysis of emerging experience
which was more favorable than originally estimated. The balance of the premium
deficiency reserve at December 31, 2002 was zero.
Net income, excluding special charges of $80.9 million after tax, increased 7.1%
in 2002 and increased 20% in 2001. The improvement in earnings in 2002 reflected
improved morbidity margins. 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.
Equivalent premium revenue and fee income for group life and health decreased
8.3% from 2001 levels as the result of continued membership decline. This
reduction is partially offset by increased pricing actions. Equivalent premium
revenue and fee income for group life and health decreased 2.4% in 2001 from
2000 levels as the result of a decline in membership.
Group Life and Health
In 2002, the sales and administration functions of the Company's 401(k) product
was transferred from the Employee Benefits division to the Financial Services
division. The Company's 40l(k) business and customers are discussed in the
Financial Services Results of Operations which follows.
The Employee Benefits segment experienced a net decrease of 1,766 group health
care customers (employer groups) during 2002. There was a 14.8% decrease in
total health care membership from 2.6 million at the end of 2001 to 2.2 million
at year-end 2002. POS and HMO members decreased 30.7% from 500,600 in 2001 to
346,900 in 2002.
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 3.2 million at the end of 2000 to 2.6
million 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 2002 and 2001 can be attributed to
terminations resulting from aggressive pricing related to target margins as well
as a decrease in the employee base for existing group health care customers and
the general decline in the economy. In 2001, 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.
Outlook
The Company knows remaining competitive means focusing on the core disciplines
that provide value to our clients, specifically: health care cost management,
underwriting and product design management and sales force management. The
Company also knows administration costs must remain at levels consistent with
industry standards.
Medical service provider contracting efforts are critical to the Company's value
equation in an environment of escalating medical costs. In 2003, the Company
will increase spending to evaluate provider networks and provider recontracting.
The Company will also continue to expand health care management and disease
management programs for members with diabetes, asthma, coronary heart disease
and other chronic illnesses.
The Company has expanded medical underwriting to ensure pricing is consistent
with health care risk; an item that is difficult to estimate on smaller cases.
Therefore, the Company is reducing its focus on cases with fewer than 50 members
in 2003.
The Company continues to evaluate product design. The three-tier prescription
drug program launched in 2001 proved very attractive to its clients and will
continue in 2003. The Company reaffirmed its commitment to traditional,
self-funded health plans.
The sales force reorganization will continue in 2003. The Company has
discontinued new sales under the Alta, GenAm and New England names and has
combined these teams with its own sales force to create a unified sales force
organized along distribution channels. Resources will also be invested to
enhance a unified brand identity.
The Company remains focused on reducing administrative costs. In 2002, the
Employee Benefits segment achieved three main productivity improvements: 1)
reduced the number of employees from approximately 6,600 in 2001 to fewer than
4,900 in 2002; 2) enhanced efficiencies through online billing and other
internet-enabled functions; and 3) established significant claims payment
efficiencies. The Company anticipates similar productivity strides in 2003 as a
result of ongoing investments in process improvement and continued sales and
claims payment offices consolidation.
In 2003, along with all other carriers in the industry, the Company will incur
significant implementation and administrative costs associated with
Administrative Simplification compliance federally mandated in HIPAA (the Health
Insurance Portability and Accountability Act of 1996).
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 2002 2001 2000
--------------------------------------------- ----------------- ----------------- ----------------
[millions]
Premiums $ 160 $ 170 $ 190
Fee income 223 234 224
Net investment income 851 869 854
Net realized investment gains 33 31 31
----------------- ----------------- ----------------
Total revenues 1,267 1,304 1,299
Policyholder benefits 831 837 831
Operating expenses 225 247 238
----------------- ----------------- ----------------
Total benefits and expenses 1,056 1,084 1,069
----------------- ----------------- ----------------
Income from operations 211 220 230
Income tax expense 63 73 77
----------------- ----------------- ----------------
Net income $ 148 $ 147 $ 153
================= ================= ================
Deposits for investment-type
contracts $ 691 $ 627 $ 835
Deposits to separate accounts 2,461 3,240 3,105
Net income for Financial Services remained stable in 2002 but decreased 4% in
2001. The decrease in earnings from $153 million in 2000 to $147 million in 2001
reflects the reduction in earnings on the 401(k) product due to weak U.S. equity
markets and higher terminations offset by increased investment income and
improved mortality in the other product areas.
During 2002, the Company experienced lower sales in most of its product areas
and higher termination rates. The Company was also negatively impacted by the
weak U.S. equity markets. Offsetting these challenges was a decrease in
operating expenses and effective management of investment margins on products
which resulted in a relatively flat net income for the year.
Prior to 2002, the Employee Benefits segment marketed and administered corporate
savings products (401(k) plans). In 2002, the Financial Services segment assumed
responsibility for these products. The segment information above has been
adjusted for this change.
1. Savings
The Financial Services segment's savings business is focused on group and
individual fixed and variable annuities with a marketing emphasis on the
public/non-profit pension market.
Premiums and deposits for investment-type contracts and separate accounts have
increased $227.6 million or 17% from 2001 to 2002. The in-year growth was
attributable primarily to a $115.3 million increase in deposits for
investment-type contracts and a $121.2 million increase in deposits to separate
accounts. The growth was primarily related to one large case sale.
Fee income decreased $1.8 million or 1.5% from $119.8 million in 2001 to $118.0
million in 2002. The decline in fee income in 2002 was the result of lower asset
values in the separate accounts due to weak U.S. equity markets and higher
terminations of participants in FASCorp. Fee income increased $8.6 million or 8%
from $111.2 million in 2000 to $119.8 million in 2001. 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 weak equity markets.
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),
decreased $92.5 million or 1.1% from $8.2 billion in 2001 to $8.1 billion in
2002. The decline was primarily the result of customers choosing alternative
fixed income investment products.
The Financial Services segment's public/non-profit pension business experienced
lower growth in 2002. The number of new participants in 2002 was 163,000
compared to 339,000 in 2001 and 233,000 in 2000. Terminations increased in 2002
to 101,000 compared to 72,000 and 63,000 in 2001 and 2000, respectively. This
brings the total lives under administration to 1,331,100 in 2002 and 1,268,500
in 2001.
Customer demand for investment diversification continued during 2002 in spite of
weak U.S. equity markets. New contributions to separate account business
represented 62% of the total premium equivalents in 2002 versus 63% in 2001. The
Company continues to expand the fund options available through its subsidiary
Maxim Series Fund and through arrangements with external fund managers.
Externally-managed funds offered to participants in 2002 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
$1,649.6 million in 2002 compared to $1,214.4 million in 2001 and $755.7 million
in 2000.
FASCorp administered records for approximately 2,159,900 participants in 2002
versus 2,191,000 in 2001. FASCorp's fee income (including fee income from
related parties) was $89.8 million, $72.4 million, and $63.8 million for the
years ended, December 31, 2002, 2001, and 2000, respectively.
2. Life Insurance
The Company continued its approach to the design and distribution of traditional
life insurance products, focusing on customer retention and expense management.
At the same time, the Company continues to evaluate new individual markets. In
2002, the Company continued its efforts to partner with large financial
institutions to deliver term life insurance to the mass market.
Individual life insurance revenue premiums and deposits for investment-type
contract and separate accounts of $434.3 million in 2002 reflected a decrease of
55% or $527.6 million from 2001 levels. The decrease was primarily due to
decreased BOLI separate account deposits.
In 1996, the U.S. Congress enacted legislation to phase out the tax
deductibility of interest on policy loans on COLI products. Since then, renewal
premiums and deposits for COLI products have decreased to $82.2 million in 2002
from $83.1 million in 2001 and $84.1 million in 2000 and the Company expects
this decline to continue. The Company continues working closely with existing
COLI customers to determine the options available to them.
As a result of these legislative changes, the Company has shifted its sales
emphasis 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 $170.9 million during 2002 compared to $547.9 million
in 2001 and $581.9 million in 2000. The decrease in BOLI premiums and deposits
in 2002 was the result of the lower fixed interest rates and recent negative
publicity regarding this type of insurance product.
The term life insurance product marketed through banks and other financial
institutions has experienced significant growth over the past several years.
Policies sold totaled 53,400, 37,500 and 17,400 in the years 2002, 2001 and
2000, respectively. Although the sales of term life insurance were improved in
2002 and 2001, the premiums on these policies are smaller and, therefore, were
not a significant offset to the large decrease in BOLI premiums.
Fee income for the individual lines in 2002 was $18.1 million compared to $17.9
million in 2001 and $8.2 million in 2000. The increase relates to strong sales
of BOLI separate accounts in prior years.
3. 401(k)
401(k) premiums and deposits for investment-type contracts and separate accounts
decreased 23% in 2002 to $1.4 billion compared to a 7% decrease in 2001 as a
result of lower sales and higher terminations in both years.
The 401(k) block of business under administration totaled 6,012 employer groups
and 477,300 individual participants in 2002, compared to 6,447 employer groups
and 545,800 individual participants in 2001 and 6,514 employer groups and
551,000 individual participants in 2000.
In addition to the Company's affiliate-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. Assets under
administration in 401(k) decreased 15% in 2002 to $6.4 billion and decreased 7%
from 2000 to 2001. The decrease in both years was due to the impact of lower
U.S. equity markets and the reduction in the number of participants.
To promote long-term asset retention, the Company in 2002 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 and one-on-one retirement planning
assistance.
4. Outlook
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.
Continued management emphasis on the reduction of unit costs in the FASCorp
administration is designed to allow the Company to remain competitive in the
recordkeeping market.
Individual insurance policy sales through banks are expected to increase in the
year 2003. Distribution channels are presently established and management plans
to expand with additional bank partners in 2003.
In 2002, the Financial Services division assumed responsibility for the
development and administration of the Company's 401(k) product. At the end of
2002, the division established a new, focused marketing strategy for the 401(k)
product. A new customer relationship management group has also been established
with the goal of establishing stronger relationships with existing 401(k)
customers and improving persistency.
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 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] 2002 2001
---------------------------------------------------------------- ----------------- -----------------
Fixed maturities, available-for-sale, at fair value $ 10,371 $ 10,116
Mortgage loans 417 613
Real estate and common stock 94 85
Short-term investments 710 425
Policy loans 2,964 3,001
----------------- -----------------
Total invested assets $ 14,556 $ 14,240
================= =================
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 enhanced covenant protection that allows the
Company, if necessary, to take appropriate action to protect its investment. The
Company believes that the cost of the additional monitoring and analysis
required by private 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 the
Company's Financial Statements, Note 7 for further discussion related to this
transfer.
At December 31, 2002, the Company had four bonds in default representing a
carrying value of $24.3 million (0.2% of the total fixed maturity investment
portfolio), compared to nine bonds representing $71.1 million (0.7% of the total
fixed maturity investment portfolio), for 2001.
The distribution of the fixed maturity portfolio by credit rating is summarized
as follows:
Credit Rating 2002 2001
------------------------------------------------- ------------------ -----------------
AAA 58.9% 57.9%
AA 8.9 9.2
A 15.2 14.2
BBB 14.4 16.4
BB and below (non-investment grade) 2.6 2.3
------------------ -----------------
TOTAL 100.0% 100.0%
================== =================
2. Mortgage Loans
During 2002, the mortgage loan portfolio declined 32% to $417 million, net of
impairment reserves. The Company has not actively sought new mortgage 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 $31.2 million in 2002
compared with $31.6 million in 2001, and there were no foreclosures in 2002,
compared to $10.6 million in 2001. The low levels of problematic mortgage loans
relative to the Company's overall balance sheet are due to the ongoing decrease
in the size of the mortgage loan portfolio, the Company's active loan management
program and overall strength in market conditions.
Occasionally, the Company elects to restructure certain mortgage 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, 2002
and 2001, the Company's loan portfolio included $40.3 million and $56.3 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, market and foreign exchange risks. 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 established credit approvals, limits, and monitoring
procedures. The Company has also developed controls within its operations to
ensure that only Board authorized derivative transactions are executed. In
addition, the Company uses derivatives to synthetically create investments that
are either more expensive to acquire, or otherwise unavailable, in the cash
markets. Note 1 to the Consolidated Financial Statements contains a discussion
of the Company's outstanding derivatives.
4. Outlook
The U.S. economic recovery is proving to be sluggish and uneven. The Company
expects growth to be below trend for the next few quarters, gaining momentum
through the second half of 2003. Currently, economic indicators are mixed.
Expectations are for domestic real GDP growth in 2002 and 2003 of approximately
2.5%. Globally, economies remain weak with the exception of China.
The Federal Reserve Board responded aggressively to weaker than expected
economic data with a 50 basis point cut in the Fed Funds rate to 1.25% at the
November 2002 meeting. While stimulative policy and strong underlying
productivity growth were expected to restore the economy to a sustainable trend
rate of growth, persistent stock market weakness has undercut monetary policy
stimulus and economic risks are biased to a below potential growth scenario.
Interest rates across the curve bottomed in early October after declining to
levels not experienced since the 1960's, rising modestly since then. It is
likely that inflation and yields will stay relatively low over the intermediate
term, providing the Federal Reserve Board significant latitude to allow the
economy to gain some momentum before they begin to resume an upward bias.
The Company's investment portfolio is well positioned for the current interest
rate environment. The portfolio is well diversified and comprised of high
quality, relatively stable assets. The Company opportunistically added exposure
in investment grade corporate securities at historically wide spreads in 2002 in
addition to investing in structured securities with moderate interest rate
sensitivity. 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 its
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 $864.4 million and $638.4 million as of December 31, 2002 and 2001,
respectively. In addition, as of December 31, 2002 and 2001, 97% and 98%,
respectively, of the bond portfolio carried an investment grade rating, thereby
providing significant liquidity to the Company's overall investment portfolio.
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
situations include 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 $96.6
million of commercial paper outstanding at December 31, 2002 compared with $97.0
million at December 31, 2001. 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.
OBLIGATIONS RELATING TO DEBT AND LEASES
The Company's obligations relating to debt and leases at December 31, 2002 were
as follows:
2003 2004 2005 2006 2007 Thereafter
---------- --------- ---------- ---------- --------- -------------
Related party note $ $ $ $ 25.0 $ $ 175.0
Operating leases 26.3 23.5 22.1 20.6 15.4 33.1
---------- --------- ---------- ---------- --------- -------------
Total contractual
obligations $ 26.3 $ 23.5 $ 22.1 $ 45.6 $ 15.4 $ 208.1
========== ========= ========== ========== ========= =============
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 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 133 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 2001 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 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, ceased upon adoption of this statement. The
Company implemented SFAS No. 142 on January 1, 2002. Adoption of this statement
did 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 superceded prior
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.
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS No.
145). FASB No. 4 required all gains or losses from extinguishment of debt to be
classified as extraordinary items net of income taxes. SFAS No. 145 requires
that gains and losses from extinguishment of debt be evaluated under the
provision of Accounting Principles Board Opinion No. 30, and be classified as
ordinary items unless they are unusual or infrequent or meet the specific
criteria for treatment as an extraordinary item. This statement is effective
January 1, 2003. The Company does not expect this statement to have a material
effect on the Company's financial position or results of operations.
In July 2002, the FASB issued Statement No. 146 " Accounting for Costs
Associated With Exit or Disposal Activities" (SFAS No. 146). This statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This statement requires
recognition of a liability for a cost associated with an exit or disposal
activity when the liability is incurred, as opposed to when the entity commits
to an exit plan under EITF 94-3. SFAS No. 146 is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002. The Company does
not expect this statement to 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. 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
Division of Insurance and other regulators at specified intervals. A financial
examination by the Colorado Division of Insurance 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 Division of Insurance is in progress and will cover
the five-year period ended December 31, 2000. Field work has been completed and
the Company is awaiting the final report.
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, 2002 statutory financial reports
the Company has risk-based capital well in excess of that required by
regulators.
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 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 (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 $1.3 million as of December 31, 2002 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 $1.9 million at December 31, 2002.
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.
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.
CURRENT 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. In connection with the announcement by Great-West Lifeco
regarding the acquisition of Canada Life, the Company's ratings are under review
with negative implications. Upon completion of the acquisition of Canada Life by
Great-West Lifeco, Standard & Poor's Corporation has indicated it is likely that
the Company's rating will be lowered one notch and a negative outlook
maintained.
Rating Agency Measurement Current Rating
------------------------------------- ---------------------------------- ---------------------
A.M. Best Company, Inc. Financial strength, operating A++ (1)
performance and
business profile
Fitch, Inc. Financial strength AA+ (2)
Moody's Investors Service Financial strength Aa2 (3)
Standard & Poor's Corporation Financial strength AA+ (4)
(1) Superior (highest rating out of nine categories) (2) Very Strong
(second 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
2002, 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 6,800 employees at December 31, 2002.
EQUITY SECURITY HOLDERS AND MARKET INFORMATION
There is no established public trading market for the Company's common equity.
DIVIDENDS
In the two most recent fiscal years the Company has paid quarterly dividends on
its common shares. Dividends on common stock totaled $170.6 million in 2002 and
$187.6 million in 2001.
Under Colorado law the Company cannot, without the approval of the Colorado
Commissioner of Insurance, pay a dividend if as a result of such payment, the
total of all dividends paid in the preceding twelve months, would exceed the
greater of (i) 10% of the Company's statutory surplus as regards policyholders
as at the preceding December 31; or (ii) the Company's statutory net gain from
operations as at the preceding December 31.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2002 to a vote of security
holders
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
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 investment 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
liabilities' projected 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 denominated investments 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 on its investments of interest
rate changes at December 31, 2002. If interest rates increased by 100 basis
points (1%), the fair value of the fixed income assets would decrease by
approximately $326 million. This calculation uses projected asset cash flows,
discounted back to December 31, 2002. The cash flow projections are shown in the
table below. The table below shows cash flows rather than expected maturity
dates because many of the Company's assets have substantial expected principal
payments prior to the final maturity date. The fair value shown in the table
below was calculated using spot discount interest rates that varied by the year
in which the cash flows were expected to be received. These spot rates in the
benchmark calculation ranged from 2.77% to 7.70%.
Projected Cash Flows by Calendar Year
[$ millions] There- Undiscounted Fair
2003 2004 2005 2006 2007 after Total Value
-------- -------- --------- ------- -------- -------- --------------- ---------
Benchmark 2,271 2,044 1,988 1,347 1,384 3,374 12,409 10,588
Interest rates
up 1% 2,044 1,926 2,016 1,408 1,379 3,829 12,601 10,262
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 $8.5 million per year.
DIRECTORS AND EXECUTIVE OFFICERS
Served as
Director Principal Occupation(s)
Director Age from: for last Five Years
------------------------------ ------- ------------- ----------------------------------------------
James Balog 74 1993 Company Director
(1)(2)
James W. Burns, O.C. 73 1991 Director Emeritus, Power Corporation
(1)(2)(4)
Orest T. Dackow 66 1991 Company Director since April 2000;
(1)(2)(4) previously President and Chief
Executive Officer, Great-West Lifeco
Andre Desmarais 46 1997 President and Co-Chief Executive
(1)(2)(4)(5) Officer, Power Corporation; Deputy
Chairman, Power Financial
Paul Desmarais, Jr. 48 1991 Chairman and Co-Chief Executive
(1)(2)(4)(5) Officer, Power Corporation; Chairman,
Power Financial
Robert Gratton 59 1991 Chairman of the Board of the Company;
(1)(2)(4) President and Chief Executive Officer,
Power Financial; Chairman of the Boards
of Great-West Lifeco, Great-West Life,
London Insurance Group Inc. and London
Life Insurance Company
Kevin P. Kavanagh 70 1986 Company Director; Chancellor Emeritus,
(1)(3)(4) Brandon University
William Mackness 64 1991 Company Director
(1)(2)
William T. McCallum 60 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 66 1994 Chairman of the Board, H.B. Nickerson
(3)(4) & Sons Limited (a management and
holding company)
The Honourable 65 1991 Vice Chairman, Power Corporation;
P. Michael Pitfield, Member of the Senate of Canada
P.C., Q.C. (1)(2)(4)
Michel Plessis-Belair, 60 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 49 1995 Managing Partner, QVan Capital,
(1)(2)(3) LLC (a merchant banking 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.
Unless otherwise indicated, all of the directors 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 following is a list of directorships held by the directors of the Company,
on companies whose securities are traded publicly in the United States or that
are investment companies registered under the Investment Company Act of 1940.
J. Balog Transatlantic Holdings, Inc.
Phoenix Investment
Partners Phoenix Euclid Fund
P.Desmarais, Jr. SUEZ TotalFinaElf
W.T. McCallum Maxim Series Fund, Inc.
Orchard Series Fund
Variable Annuity Account A
B.E. Walsh Offshore Systems Inc.
EXECUTIVE OFFICERS
Served as
Executive
Officer Principal Occupation(s)
Executive Officer Age from: for last Five Years
------------------------------ ------- ------------- ----------------------------------------------
William T. McCallum 60 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 47 1997 Executive Vice President and Chief
Executive Vice Financial Officer of the Company
President and Chief
Financial Officer
Richard F. Rivers 49 2002 Executive Vice-President, Employee
Executive Vice President Benefits of the Company since August
Employee Benefits 2002; previously Chief Executive Officer,
PacifiCare Health System
Douglas L. Wooden 46 1991 Executive Vice President, Financial
Executive Vice Services of the Company
President,
Financial Services
John A. Brown 55 1992 Senior Vice President, Healthcare Markets
Senior Vice President, Financial Services of the Company
Healthcare Markets
Financial Services
Mark S. Corbett 43 2001 Senior Vice President,
Senior Vice President, Investments of the Company
Investments
John R. Gabbert 48 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 55 1996 Senior Vice President, Healthcare
Senior Vice President, Operations of the Company
Healthcare Operations
Wayne T. Hoffmann 47 2001 Senior Vice President,
Senior Vice President, Investments of the Company
Investments
D. Craig Lennox 55 1984 Senior Vice President, General Counsel
Senior Vice President, and Secretary of the Company
General Counsel and
Secretary
James C. Matura 56 2002 Senior Vice President, Commercial Sales
Senior Vice President of the Company since September 2002;
Commercial Sales previously Regional Vice President
Sales, PacifiCare Health System
Charles P. Nelson 42 1998 President, BenefitsCorp
President,
BenefitsCorp
Deborah L. Origer 41 2002 Senior Vice President, Healthcare
Senior Vice President, Management of the Company since
Healthcare Management November 2002; previously Chief Strategy
Officer, Providence Health System
Martin Rosenbaum 50 1997 Senior Vice President, Employee
Senior Vice President, Benefits of the Company
Employee Benefits
Gregory E. Seller 49 1999 Senior Vice President,
Senior Vice President, Government Markets of the Company
Government Markets
Robert K. Shaw 47 1998 Senior Vice President,
Senior Vice President, Individual Markets of the Company
Individual Markets
George D. Webb 59 1999 Senior Vice President, P/NP Operations
Senior Vice-President, of the Company since July 1999; previously
P/NP Operations Principal, William M. Mercer
Investment Consulting Inc. (an investment
consulting company)
Jay W. Wright 51 2001 Senior Vice President, Employee
Senior Vice President, Benefits of the Company since January
Employee Benefits 2001; previously Senior Vice President,
New England Financial
Unless otherwise indicated, all of the 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.
The appointments of executive officers are confirmed annually.
EXECUTIVE COMPENSATION
The following table sets out all compensation paid by the Company to the
individuals who were, at December 31, 2002, 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 fiscal years.
------------------------------------ ------------ ------------- ------------------ ----------------------
Long-term
Annual Compensation Compensation
Awards
------------------------------------ ------------ ------------- ------------------ ----------------------
Name and Year Salary Bonus Options(1)
Principal Position ($) ($) (#)
------------------------------------ ------------ ------------- ------------------ ----------------------
W.T. McCallum 2002 880,000 --- ---
President and Chief 2001 880,000 --- ---
Executive Officer 2000 871,500 --- 450,001
------------------------------------ ------------ ------------- ------------------ ----------------------
D.L. Wooden 2002 550,000 343,750 ---
Executive Vice President 2001 525,000 393,750 ---
Financial Services 2000 475,000 356,250 200,001
------------------------------------ ------------ ------------- ------------------ ----------------------
M.T.G. Graye 2002 457,000 237,500 ---
Executive Vice President 2001 415,000 75,000(2) 40,000
Chief Financial Officer 2000 375,000 253,200 125,001
------------------------------------ ------------ ------------- ------------------ ----------------------
Charles P. Nelson 2002 312,000 181,900 ---
President 2001 300,000 150,000 60,000
BenefitsCorp 2000 270,400 202,435 ---
------------------------------------ ------------ ------------- ------------------ ----------------------
R.F. Rivers(3) 2002 185,600(4) 225,000(5) 120,000
Executive Vice President 2001 --- --- ---
Employee Benefits 2000 --- --- ---
------------------------------------ ------------ ------------- ------------------ ----------------------
(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) Special bonus paid in 2002, for performance in 2001.
(3) Mr. Rivers became an employee and senior officer of the Company effective
August 19, 2002.
(4) Mr. Rivers' annualized salary for 2002 was $500,000.
(5) Amount represents a one time bonus incident to Mr. Rivers' commencement
of employment.
OPTIONS
The following table describes options granted to the Named Executive Officers
during the most recently completed fiscal year. All options are Lifeco Options
granted pursuant to the Great-West Lifeco Stock Option Plan. Lifeco Options are
issued with an exercise price in Canadian dollars. Canadian dollar amounts have
been translated to U.S. dollars at a rate of 1/1.58.
OPTION GRANTS IN LAST FISCAL YEAR
--------------------- ------------- -------------- ------------ ----------------- -----------------------------
Potential realized value
at assumed annual rates
Individual Grants of stock price
appreciation for option term
--------------------- ------------- -------------- ------------ ----------------- -----------------------------
Percentage
of total
options
granted to Exercise
Options employees or base
Granted in fiscal price Expiration 5% 10%
Name (#) year ($/share) date ($) ($)
--------------------- ------------- -------------- ------------ ----------------- ------------- ---------------
R.F. Rivers 120,000 68.77 21.77 Aug. 19, 2012 1,642,912 4,163,382
--------------------- ------------- -------------- ------------ ----------------- ------------- ---------------
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 2002, and all unexercised PFC Options
held as of December 31, 2002, 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 1/1.58.
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 1,540,180
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
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 2002, and all unexercised Lifeco Options held as of
December 31, 2002, 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 1/1.58.
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 380,800 6,992,018 629,200 40,000 7,011,057 382,873
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
D.L. Wooden 0 0 246,667 133,334 3,026,320 1,264,037
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
M.T.G. Graye 0 0 196,067 118,934 2,964,820 873,055
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
C.P. Nelson 0 0 84,000 48,000 797,572 90,195
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
R.F. Rivers 0 0 0 20,000 0 216,668
-------------------- ----------- ------------- ------------- ---------------- ------------- ---------------
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, 2002.
- ------------------------------------------------------
Name Years of Service
- ------------------------------------------------------
W.T. McCallum 37
- ------------------------------------------------------
D.L. Wooden 12
- ------------------------------------------------------
M.T.G. Graye 9
- ------------------------------------------------------
C.P. Nelson 19
- ------------------------------------------------------
R.F. Rivers 1
- ------------------------------------------------------
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 D.L. Wooden, M.T.G.
Graye, C.P. Nelson, and R.F. Rivers, 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. At their option, in lieu of cash payments, directors may receive
deferred share units under The Great-West Life Assurance Company Deferred Share
Unit Plan. 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, 2003, 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) 82.9% of the outstanding common shares of Great-West Lifeco Inc. are
controlled by Power Financial Corporation, 751 Victoria Square, Montreal,
Quebec, Canada H2Y 2J3, representing approximately 65% of the voting
rights attached to all outstanding voting shares of Great-West Lifeco Inc.
(6) 67.4% of the outstanding common shares of Power Financial Corporation are
owned by 171263 Canada Inc., 751 Victoria Square, Montreal, Quebec, Canada
H2Y 2J3.
(7) 100% of the outstanding common shares of 171263 Canada Inc. are owned by
2795957 Canada Inc., 751 Victoria Square, Montreal, Quebec, Canada H2Y
2J3.
(8) 100% of the outstanding common shares of 2795957 Canada Inc. are owned by
Power Corporation of Canada, 751 Victoria Square, Montreal, Quebec, Canada
H2Y 2J3.
(9) Mr. Paul Desmarais, 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3,
through a group of private holding companies, which he controls, has
voting control of Power Corporation of Canada.
As a result of the chain of ownership described in paragraphs (1) through (9)
above, each of the entities and persons listed in paragraphs (1) through (9)
would be considered under Rule 13d-3 of the Exchange Act to be a "beneficial
owner" of 100% of the outstanding voting securities of the Company.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets out the number of equity securities, and exercisable
options (including options that will become exercisable within 60 days) for
equity securities, of the Company or any of its parents or subsidiaries,
beneficially owned, as of December 31, 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 8,000 385,640
200,000 options
-------------------------- --------------------------- --------------------------- ------------------------
O.T. Dackow 82,892
100,000 options
-------------------------- --------------------------- --------------------------- ------------------------
A. Desmarais 51,659 21,600 146,999
1,946,500 options
------------------- ------- --------------------------- --------------------------- ------------------------
P. Desmarais, Jr. 43,659 5,698
1,821,500 options
-------------------------- --------------------------- --------------------------- ------------------------
R. Gratton 332,496 310,000 12,965
5,880,000 options
-------------------------- --------------------------- --------------------------- ------------------------
K.P. Kavanagh 10,052
-------------------------- --------------------------- --------------------------- ------------------------
W. Mackness
-------------------------- --------------------------- --------------------------- ------------------------
W.T. McCallum 216,193 19,500
629,200 options
-------------------------- --------------------------- --------------------------- ------------------------
J.E.A. Nickerson 4,000 4,000
-------------------------- --------------------------- --------------------------- ------------------------
P.M. Pitfield 46,200 67,800 60,000
269,000 options
-------------------------- --------------------------- --------------------------- ------------------------
M. Plessis-Belair 20,000 3,000 20,199
347,125 options
-------------------------- --------------------------- --------------------------- ------------------------
B.E. Walsh 1,000
-------------------------- --------------------------- --------------------------- ------------------------
Great-West Lifeco Inc. Power Financial Power Corporation
Corporation of Canada
-------------------------- --------------------------- --------------------------- ------------------------
Named Executive (1) (2) (3)
Officers
-------------------------- --------------------------- --------------------------- ------------------------
W.T. McCallum 216,193 19,500
629,200 options
-------------------------- --------------------------- --------------------------- ------------------------
D.L. Wooden 246,667 options 113,000
-------------------------- --------------------------- --------------------------- ------------------------
M.T.G. Graye 1,514 50,000
196,067 options
-------------------------- --------------------------- --------------------------- ------------------------
C.P. Nelson 24,779
84,000 options
-------------------------- --------------------------- --------------------------- ------------------------
R.F. Rivers
-------------------------- --------------------------- --------------------------- ------------------------
Great-West Lifeco Inc. Power Financial Power Corporation
Corporation of Canada
-------------------------- --------------------------- --------------------------- ------------------------
Directors and (1) (2) (3)
Executive Officers
as a Group
-------------------------- --------------------------- --------------------------- ------------------------
1,175,774 688,100 637,301
1,745,402 options 5,880,000 options 4,584,125 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 1.8% 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 1.9% 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%
of the total number of subordinate voting shares and exercisable options for
subordinate voting shares of Power Corporation of Canada outstanding. The number
of subordinate voting shares and exercisable options for subordinate voting
shares of Power Corporation of Canada held by the directors and executive
officers as a group represents 2.5% 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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
CONTROLS AND PROCEDURES
Based on their evaluation as of January 22, 2003, the Chief Executive Officer
and Chief Financial Officer have concluded that the Company's Disclosure
Controls and Procedures are effective in ensuring that information relating to
the Company and its subsidiaries which is required to be disclosed in reports
filed under the Exchange Act is (i) accumulated, processed and reported in a
timely manner; and (ii) communicated to the Company's senior management,
including the President and Chief Executive Officer and the Executive Vice
President and Chief Financial Officer, so that timely decisions may be made
regarding disclosure.
The Chief Executive Officer and Chief Financial Officer hereby confirm that,
since the date of their evaluation on January 22, 2003, there were no
significant changes in the Company's internal controls or in other factors that
could significantly affect these internal controls including any corrective
actions with regard to significant deficiencies and material weaknesses.
- --------------------------------------------------------------------------------
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:
Any changes required by the Code or by any other applicable law in order to
continue treatment of the Contract as an annuity.
The time or time of day at which a valuation date is deemed to have ended.
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, 2002 and 2001, and for each of the three years
in the period ended December 31, 2002 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 the SEC'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
- -------------------------- ------------------------------------
Deposit $25,000 on November 1, 1996
- -------------------------- ------------------------------------
- ------------------------- -------------------------------------
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 2002, 2001 and 2000.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(A wholly-owned subsidiary of GWL&A Financial Inc.)
Consolidated Financial Statements for the Years Ended
December 31, 2002, 2001, and 2000 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, 2002 and 2001,
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, 2002.
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, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
January 27, 2003
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
====================================================================================================================================
(Dollars in Thousands)
2002 2001
----------------------- ----------------------
ASSETS
INVESTMENTS:
Fixed maturities, available-for-sale, at fair value
(amortized cost $9,910,662 and $9,904,453) $ 10,371,152 $ 10,116,175
Common stock, at fair value (cost $102,862 and
$74,107 ) 90,188 73,344
Mortgage loans on real estate (net of allowances
of $55,654 and $57,654) 417,412 613,453
Real estate 3,735 11,838
Policy loans 2,964,030 3,000,441
Short-term investments, available-for-sale (cost
$709,592 and $427,398) 709,804 424,730
----------------------- ----------------------
Total Investments 14,556,321 14,239,981
OTHER ASSETS:
Cash 154,600 213,731
Reinsurance receivable
Related party 3,104 3,678
Other 238,049 278,674
Deferred policy acquisition costs 267,846 275,570
Investment income due and accrued 133,166 130,775
Amounts receivable related to uninsured accident
and health plan claims (net of allowances of
$42,144 and $53,431) 86,228 132,988
Premiums in course of collection (net of
allowances of $12,011 and $22,217) 54,494 99,811
Deferred income taxes 69,016 112,912
Other assets 754,869 745,617
SEPARATE ACCOUNT ASSETS 11,338,376 12,584,661
----------------------- ----------------------
TOTAL ASSETS $ 27,656,069 $ 28,818,398
======================= ======================
(Continued)
====================================================================================================================================
2002 2001
----------------- -----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves
Related party $ 518,587 $ 532,374
Other 11,732,627 11,679,122
Policy and contract claims 378,995 401,389
Policyholders' funds 299,730 242,916
Provision for policyholders' dividends 76,983 74,740
Undistributed earnings on participating business 170,456 163,086
GENERAL LIABILITIES:
Due to GWL 33,841 41,874
Due to GWL&A Financial 171,416 214,831
Repurchase agreements 323,200 250,889
Commercial paper 96,645 97,046
Other liabilities 850,757 1,064,996
SEPARATE ACCOUNT LIABILITIES 11,338,376 12,584,661
----------------- -----------------
Total Liabilities 25,991,613 27,347,924
----------------- -----------------
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 719,709 712,801
Accumulated other comprehensive income 150,616 76,507
Retained earnings 787,099 674,134
----------------- -----------------
Total Stockholder's Equity 1,664,456 1,470,474
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 27,656,069 $ 28,818,398
================= =================
See notes to consolidated financial statements. (Concluded)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
====================================================================================================================================
(Dollars in Thousands)
2002 2001 2000
---------------- ----------------- -----------------
REVENUES:
Premiums
Related party $ 16,715 $ 18,144 $ 20,853
Other (net of premiums ceded totaling
$83,789, $82,028, and $115,404) 1,103,380 1,185,495 1,311,713
Fee income 883,562 947,255 871,627
Net investment income (expense)
Related party (14,818) (14,546) (14,517)
Other 934,183 949,302 939,550
Net realized gains on investments 41,626 46,825 28,283
---------------- ----------------- -----------------
---------------- ----------------- -----------------
2,964,648 3,132,475 3,157,509
BENEFITS AND EXPENSES:
Life and other policy benefits (net of
reinsurance recoveries totaling $50,974,
$40,144, and $62,803) 936,215 1,029,495 1,122,560
Increase in reserves 71,348 58,433 53,550
Interest paid or credited to contractholders 498,549 530,027 490,131
Provision for policyholders' share of earnings
on participating business 7,790 2,182 5,188
Dividends to policyholders 78,851 76,460 74,443
---------------- ----------------- -----------------
---------------- ----------------- -----------------
1,592,753 1,696,597 1,745,872
Commissions 185,450 197,099 204,444
Operating expenses (income):
Related party (861) (1,043) (704)
Other 742,840 788,153 769,477
Premium taxes 30,714 36,911 45,286
Special charges 127,040
---------------- ----------------- -----------------
---------------- ----------------- -----------------
2,550,896 2,844,757 2,764,375
INCOME BEFORE INCOME TAXES 413,752 287,718 393,134
PROVISION FOR INCOME TAXES:
Current 126,222 136,965 108,509
Deferred 3,993 (41,993) 25,531
---------------- ----------------- -----------------
---------------- ----------------- -----------------
130,215 94,972 134,040
---------------- ----------------- -----------------
NET INCOME $ 283,537 $ 192,746 $ 259,094
================ ================= =================
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
===================================================================================================================
(Dollars in Thousands)
Accumulated Other
Comprehensive
Income (Loss)
-----------------------------------------
Additional Unrealized Minimum
Preferred Common Paid-in Gains (Losses) Pension Liability
Stock Stock Capital on Securities Adjustment
------------ -------------- ------------ ------------------ ------------------
BALANCES, JANUARY 1, 2000 $ 0 $ 7,032 $ 700,316 $ (84,861) $ 0
Net income
Other comprehensive income 118,533
Total comprehensive income
Dividends
Capital contributions -
Parent stock options 15,052
Income tax benefit on stock
compensation 2,336
------------ -------------- ------------ ------------------ ------------------
BALANCES, DECEMBER 31, 2000 0 7,032 717,704 33,672 0
------------ -------------- ------------ ------------------ ------------------
Net income
Other comprehensive income 42,835
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 7,032 712,801 76,507 0
------------ -------------- ------------ ------------------ ------------------
Net income
Other comprehensive income 86,993 (12,884)
Total comprehensive income
Dividends
Income tax benefit on stock
compensation 6,908
------------ -------------- ------------ ------------------ ------------------
BALANCES, DECEMBER 31, 2002 $ 0 $ 7,032 $ 719,709 $ 163,500 $ (12,884)
============ ============== ============ ================== ==================
Retained
Earnings Total
-------------- -------------
BALANCES, JANUARY 1, 2000 $ 544,076 $ 1,166,563
Net income 259,094 259,094
Other comprehensive income 118,533
-------------
Total comprehensive income 377,627
-------------
Dividends (134,149) (134,149)
Capital contributions -
Parent stock options 15,052
Income tax benefit on stock
compensation 2,336
-------------- -------------
BALANCES, DECEMBER 31, 2000 669,021 1,427,429
-------------- -------------
Net income 192,746 192,746
Other comprehensive income 42,835
-------------
Total comprehensive income 235,581
-------------
Dividends (187,633) (187,633)
Capital contributions adjustment -
Parent stock options (12,098)
Income tax benefit on stock
compensation 7,195
-------------- -------------
BALANCES, DECEMBER 31, 2001 674,134 1,470,474
-------------- -------------
Net income 283,537 283,537
Other comprehensive income 74,109
-------------
Total comprehensive income 357,646
-------------
Dividends (170,572) (170,572)
Income tax benefit on stock
compensation 6,908
-------------- -------------
BALANCES, DECEMBER 31, 2002 $ 787,099 $ 1,664,456
============== =============
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
====================================================================================================================================
(Dollars in Thousands)
2002 2001 2000
----------------- ----------------- -----------------
OPERATING ACTIVITIES:
Net income $ 283,537 $ 192,746 $ 259,094
Adjustments to reconcile net income to net
Cash provided by operating activities:
Earnings allocated to participating
Policyholders 7,790 2,182 5,188
Amortization of investments (76,002) (82,955) (62,428)
Net realized gains on investments (41,626) (46,825) (28,283)
Depreciation and amortization (including
Goodwill impairment in 2001) 37,639 62,101 41,693
Deferred income taxes 3,993 (41,993) 25,531
Stock compensation (adjustment) (12,098) 15,052
Changes in assets and liabilities, net of Effects from acquisitions:
Policy benefit liabilities 622,854 334,025 310,511
Reinsurance receivable 41,199 (48,384) (35,368)
Receivables 89,686 153,350 (128,382)
Bank overdrafts (41,901) (29,121) 102,073
Other, net (159,562) 157,228 (119,359)
----------------- ----------------- -----------------
Net cash provided by operating activities 767,607 640,256 385,322
----------------- ----------------- -----------------
(Continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(Dollars in Thousands)
====================================================================================================================================
2002 2001 2000
----------------- ----------------- -----------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to-maturity
Sales 8,571
Maturities and redemptions 323,728
Available-for-sale
Sales 5,729,919 5,201,692 1,460,672
Maturities and redemptions 1,456,176 1,244,547 887,420
Mortgage loans 210,224 224,810 139,671
Real estate 3,570 8,910
Common stock 2,798 38,331 61,889
Purchases of investments:
Fixed maturities
Held-to-maturity (100,524)
Available-for-sale (7,369,364) (6,878,213) (2,866,228)
Mortgage loans (4,208)
Real estate (2,768) (3,124) (20,570)
Common stock (29,690) (27,777) (52,972)
Corporate owned life insurance (100,000)
Other, net (77,769) 95,808 (100,935)
Acquisitions, net of cash acquired 82,214
----------------- ----------------- -----------------
Net cash used in investing activities $ (76,904) $ (203,926) $ (172,362)
================= ================= =================
(Continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000,
====================================================================================================================================
(Dollars in Thousands)
2002 2001 2000
----------------- ---------------- -----------------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (599,724) $ (483,285) $ (220,167)
Due to GWL (8,033) (1,207) 7,102
Due to GWL&A Financial (43,415) 45,245 3,665
Dividends paid (170,572) (187,633) (134,149)
Net commercial paper borrowings
(repayments) (401) (585) 97,631
Net repurchase agreements borrowings
(repayments) 72,311 250,889 (80,579)
----------------- ---------------- -----------------
Net cash used in financing activities (749,834) (376,576) (326,497)
----------------- ---------------- -----------------
NET (DECREASE) INCREASE IN CASH (59,131) 59,754 (113,537)
CASH, BEGINNING OF YEAR 213,731 153,977 267,514
----------------- ---------------- -----------------
CASH, END OF YEAR $ 154,600 $ 213,731 $ 153,977
================= ================ =================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 164,863 $ 59,895 $ 78,510
Interest 16,697 17,529 21,060
Non-cash financing activity:
Effect on 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, 2002, 2001, AND 2000
================================================================================
(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. (GWL&A Financial), a
holding company formed in 1998. 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. The Company is an insurance company
domiciled in the State of Colorado, and is subject to regulation by the
Colorado Division of Insurance.
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 2001 and 2000 financial
statements and related footnotes to conform to the 2002 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 (net of deferred taxes) 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 with net
unrealized gains and losses (net of deferred taxes) reported as
accumulated other comprehensive income (loss) in stockholder's
equity.
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 $55,363 and $44,914 are included in other assets at December 31,
2002, and 2001, respectively. The Company capitalized, net of
depreciation, $10,448, $6,896 and $17,309 of internal use software
development costs for the years ended December 31, 2002, 2001 and 2000,
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
$38,707, $44,096, and $36,834 in 2002, 2001, and 2000, 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 $8,029,337 and $7,941,905 at December
31, 2002 and 2001, 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 $4,152,594 and
$4,188,553 at December 31, 2002 and 2001, 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 $4,947,081 and $4,844,214 at December 31, 2002 and 2001,
respectively. Participating business approximates 24.8%, 25.8%, and 28.6%
of the Company's ordinary life insurance in force and 80.2%, 85.4%, and
85.2% of ordinary life insurance premium income for the years ended
December 31, 2002, 2001, and 2000, 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 of
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, credit default swaps, 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. Credit default
swaps may be used in conjunction with another purchased security to
reproduce the investment characteristics of a cash investment in the same
credit. 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.
The Company also uses derivatives to synthetically create investments
that are either more expensive to acquire or otherwise unavailable in the
cash markets. These securities, called replication synthetic asset
transactions (RSAT's), are a combination of a derivative and a cash
security to synthetically create a third replicated security. As of
December 31, 2002, the Company has one such security that has been
created through the combination of a credit default swap and U.S.
Government Agency security. These derivatives do not qualify as hedges
and therefore, changes in fair value are recorded in earnings.
Effective January 1, 2001, the Company adopted Financial Accounting
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." The adoption of SFAS 133 resulted in an
approximate $1,000 after-tax increase to accumulated comprehensive
income, which has been included in the 2001 change in other comprehensive
income in the Statement of Stockholder's Equity.
The Statements require 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 and changes in fair value of derivatives not qualifying
for hedge accounting are recognized in earnings.
The Company occasionally purchases a financial instrument that contains a
derivative instrument that is "embedded" in the financial instrument.
Upon purchasing the instrument, the Company assesses whether the economic
characteristics of the embedded derivative are clearly and closely
related to the economic characteristics of the remaining component of the
financial instrument (i.e, the host contract) and whether a separate
instrument with the same terms as the embedded instrument could meet the
definition of a derivative instrument. When it is determined that (1) the
embedded derivative possesses economic characteristics that are not
clearly and closely related to the economic characteristics of the host
contract, and (2) a separate instrument with the same terms would qualify
as a derivative instrument, the embedded derivative is separated from the
host contract, carried at fair value, and changes in its fair value are
included in earnings.
Hedge ineffectiveness of $177 and $907, determined in accordance with
SFAS No. 133, was recorded as a decrease to net investment income for the
years ended December 31, 2002 and 2001, respectively.
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 $563 and $469 were reclassified to net investment income in 2002
and 2001, respectively. The Company estimates that $837 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 5.9%, 6.1%, and 6.2% in 2002, 2001,
and 2000.
Income Taxes - Income taxes are recorded using the asset and liability
approach, which requires, among other provisions, the recognition of
deferred tax assets and liabilities for expected future tax consequences
of events that have been recognized in the Company's financial statements
or tax returns. In estimating future tax consequences, all expected
future events (other than the enactments or changes in the tax laws or
rules) are considered. Although realization is not assured, management
believes it is more likely than not that the deferred tax asset 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, ceased upon adoption of this statement. The Company
implemented SFAS No. 142 on January 1, 2002. Adoption of this Statement
did not have 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 did 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.
Technical Corrections - April 2002, the FASB issued Statement No. 145
"Rescission of FASB No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections" (SFAS No. 145). FASB No. 4 required all gains
or losses from extinguishment of debt to be classified as extraordinary
items net of income taxes. SFAS No. 145 requires that gains and losses
from extinguishment of debt be evaluated under the provision of
Accounting Principles Board Opinion No. 30, and be classified as ordinary
items unless they are unusual or infrequent or meet the specific criteria
for treatment as an extraordinary item. This statement is effective
January 1, 2003. The Company does not expect this statement to have a
material effect on the Company's financial position or results of
operations.
Costs Associated With Exit or Disposal Activities - In July 2002, the
FASB issued Statement No. 146 "Accounting for Costs Associated With Exit
or Disposal Activities" (SFAS No. 146). This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
This statement requires recognition of a liability for a cost associated
with an exit or disposal activity when the liability is incurred, as
opposed to when the entity commits to an exit plan under EITF 94-3. SFAS
No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company does not expect this
statement 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.
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 and, beginning in 2002, performs investment services for London
Reinsurance Group, an indirect subsidiary of GWL. The following
represents revenue from related parties 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, certificates in force and/or
administered assets.
Years Ended December 31,
----------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
Investment management revenue $ 892 $ 186 $ 120
Administrative and underwriting revenue 860 1,043 704
At December 31, 2002 and 2001, due to GWL includes $8,503 and $16,536 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 (4.75% and 6.0% at December 31, 2002 and 2001,
respectively) while the note payable bears interest at 5.4%.
At December 31, 2002 and 2001, due to GWL&A Financial includes $(3,619)
and $39,796 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 (4.75% and 6.0% at December 31,
2002 and 2001, respectively) while the note payable bears interest at
7.25%.
Interest expense attributable to these related party obligations was
$14,976, $14,732, and $14,637 for the years ended December 31, 2002,
2001, and 2000, respectively.
4. ALLOWANCES ON POLICYHOLDER RECEIVABLES
Amounts receivable for accident and health plan claims and premiums in
the course of collection are generally uncollateralized. Such receivables
are from policyholders dispersed throughout the United States and
throughout many industry groups.
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.
Activity in the allowance for amounts receivable related to uninsured
accident and health plan claims is as follows:
2002 2001 2000
-------------- --------------- ---------------
Balance, beginning of year $ 53,431 $ 34,700 $ 31,200
Amounts acquired by reinsurance 6,207
Provisions charged (reversed) to operations (7,544) 50,500 7,700
Amounts written off - net (9,950) (31,769) (4,200)
-------------- --------------- ---------------
Balance, end of year $ 42,144 $ 53,431 $ 34,700
============== =============== ===============
Activity in the allowance for premiums in course of collection is as
follows:
2002 2001 2000
-------------- --------------- ---------------
Balance, beginning of year $ 22,217 $ 18,700 $ 13,900
Amounts acquired by reinsurance 1,600
Provisions charged (reversed) to operations (5,729) 29,642 14,500
Amounts written off - net (6,077) (26,125) (9,700)
-------------- --------------- ---------------
Balance, end of year $ 12,011 $ 22,217 $ 18,700
============== =============== ===============
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, 2002 and 2001, the
reinsurance receivable had a carrying value of $241,153 and $282,352,
respectively.
The following schedule details life insurance in force and life and
accident/health premiums:
Percentage
of Amount
Reinsurance Reinsurance Assumed
Direct Ceded Assumed Net to Net
--------------- ---------------- ---------------- --------------- -------------
December 31, 2002:
Life insurance in force:
Individual $ 43,324,059 $ 12,786,783 $ 7,280,731 37,818,007 19.3%
Group 51,385,610 7,186,698 58,572,308 12.3%
--------------- ---------------- ---------------- ----------------
Total $ 94,709,669 $ 12,786,783 $ 14,467,429 $ 96,390,315
=============== ================ ================ ================
Premium Income:
Life insurance $ 312,388 $ 40,582 $ 41,245 $ 313,051 13.2%
Accident/health 728,972 43,047 128,820 814,745 15.8%
--------------- ---------------- ---------------- ----------------
Total $ 1,041,360 $ 83,629 $ 170,065 $ 1,127,796
=============== ================ ================ ================
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
=============== ================ ================ ================
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
=============== ================ ================ ================
6. NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS
Net investment income is summarized as follows:
Years Ended December 31,
----------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
Investment income:
Fixed maturities and short-term
Investments $ 673,825 $ 693,573 $ 675,200
Common stock 3,272 4,882 1,584
Mortgage loans on real estate 48,625 69,237 80,775
Real estate 2,815 1,113 1,863
Policy loans 209,608 200,533 191,320
Other 5,236 3,766 120
--------------- --------------- ---------------
943,381 973,104 950,862
Investment expenses, including interest on
amounts charged by the related parties
of $14,976, $14,732, and $14,637 24,016 38,348 25,829
--------------- --------------- ---------------
Net investment income $ 919,365 $ 934,756 925,033
=============== =============== ===============
Net realized gains (losses) on investments are as follows:
Years Ended December 31,
----------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
Realized gains (losses):
Fixed maturities $ 33,455 $ 32,116 $ (16,752)
Common stock 1,639 13,052 33,411
Mortgage loans on real estate 1,493 1,657 2,207
Real estate 490
Provisions 5,039 8,927
--------------- --------------- ---------------
Net realized gains on investments $ 41,626 $ 46,825 $ 28,283
=============== =============== ===============
7. SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 2002 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------------------------- ------------ ------------ ------------ ------------ ------------
U.S. Government CMO $ 1,304,614 $ 43,929 $ $ 1,348,543 $ 1,348,543
U.S. Government ABS 491,183 16,310 1,785 505,708 505,708
U.S. Government MBS 385,764 5,957 149 391,572 391,572
U.S. Government Other 445,281 19,589 4 464,866 464,866
Credit tenant loans 104,648 11,081 115,729 115,729
State and municipalities 1,019,049 100,256 194 1,119,111 1,119,111
Foreign government 42,182 1,038 61 43,159 43,159
Corporate bonds 2,771,977 182,787 53,534 2,901,230 2,901,230
Mortgage-backed
securities - CMO 96,776 16,170 18 112,928 112,928
Public utilities 698,365 44,334 11,369 731,330 731,330
Asset-backed securities 2,138,025 86,261 27,089 2,197,197 2,197,197
Derivatives (3,422) 15,343 11,921 11,921
Collateralized mortgage
obligation 416,220 11,638 427,858 427,858
------------ ------------ ------------ ------------ ------------
$ 9,910,662 $ 554,693 $ 94,203 $ 10,371,152 $ 10,371,152
============ ============ ============ ============ ============
Fixed maturities owned at December 31, 2001 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------------------------- ------------ ------------ ------------ ------------ ------------
U.S. Government CMO $ 1,182,723 $ 18,025 $ 5,767 $ 1,194,981 $ 1,194,981
U.S. Government ABS 463,028 11,422 1,153 473,297 473,297
U.S. Government MBS 345,979 2,537 2,840 345,676 345,676
U.S. Government Other 559,932 8,878 1,810 567,000 567,000
State and municipalities 935,758 35,462 3,955 967,265 967,265
Foreign government 26,466 1,824 28,290 28,290
Corporate bonds 2,943,635 114,871 71,504 2,987,002 2,987,002
Mortgage-backed
securities - CMO 97,136 7,020 104,156 104,156
Public utilities 647,754 22,823 5,997 664,580 664,580
Asset-backed securities 2,265,033 64,765 11,336 2,318,462 2,318,462
Derivatives 1,935 18,682 20,617 20,617
Collateralized mortgage
obligation 435,074 9,900 125 444,849 444,849
------------ ------------ ------------ ------------ ------------
$ 9,904,453 $ 316,209 $ 104,487 $ 10,116,175 $ 10,116,175
============ ============ ============ ============ ============
The collateralized mortgage obligations consist primarily of sequential
and planned amortization classes with final stated maturities of two to
thirty years and expected 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, 2002, 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 $ 592,856 615,583
Due after one year through five years 2,509,745 2,684,171
Due after five years through ten years 1,144,037 1,238,155
Due after ten years 857,672 875,859
Mortgage-backed securities 2,177,144 2,254,479
Asset-backed securities 2,629,208 2,702,905
---------------- ----------------
$ 9,910,662 10,371,152
================ ================
Proceeds from sales of securities available-for-sale were $5,729,919,
$5,201,692, and $1,460,672 during 2002, 2001, and 2000, respectively. The
realized gains on such sales totaled $45,315, $42,299, and $8,015 for
2002, 2001, and 2000, respectively. The realized losses totaled $10,410,
$10,186, and $24,053 for 2002, 2001, and 2000, respectively. During the
years 2002, 2001, and 2000, held-to-maturity securities with amortized
cost of $0, $0, and $8,571 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, 2002 and 2001, pursuant to fully collateralized
securities lending arrangements, the Company had loaned $284,990 and
$278,471 of fixed maturities, respectively.
The Company engages in hedging activities to manage interest rate,
market, credit and foreign exchange risk.
The following table summarizes the 2002 financial hedge instruments:
Notional Strike/Swap
December 31, 2002 Amount Rate Maturity
------------------------------- --------------- ------------------------------ --------------------
Interest Rate Caps $ 1,122,000 7.64% - 11.65% (CMT) 02/03 - 01/05
Interest Rate Swaps 400,188 2.62% - 7.32% 02/03 - 11/09
Credit Default Swaps 128,157 N/A 02/03 - 11/07
Foreign Currency
Exchange Contracts 27,585 N/A 06/05 - 11/06
Options Calls 191,200 Various 05/04 - 06/07
Puts 15,000 Various 03/07 - 03/07
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
CMT - Constant Maturity Treasury Rate
The Company no longer actively invests in mortgage loans. The following
is information with respect to impaired mortgage loans:
2002 2001
---------------- ----------------
Loans, net of related allowance for credit losses of
$20,917 and $13,018 $ 8,200 $ 6,300
Loans with no related allowance for credit losses 2,638 5,180
Average balance of impaired loans during the year 31,243 31,554
Interest income recognized (while impaired) 2,007 1,617
Interest income received and recorded (while impaired)
using the cash basis method of recognition 2,249 1,744
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 $40,302 and $56,258 at December 31, 2002 and 2001,
respectively.
The following table presents changes in the allowance for credit losses:
2002 2001 2000
--------------- --------------- ---------------
Balance, beginning of year $ 57,654 $ 61,242 $ 77,416
Provision for loan losses (3,588) (8,927)
Charge-offs (139) (3,588) (7,247)
Recoveries 1,727
--------------- --------------- ---------------
Balance, end of year $ 55,654 $ 57,654 $ 61,242
=============== =============== ===============
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, 2002, commercial
paper outstanding of $96,645 had maturities ranging from 3 to 66 days and
interest rates ranging from 1.40% to 1.88%. At December 31, 2001,
commercial paper outstanding of $97,046 had maturities from 4 to 63 days
and an interest rates ranging from 1.91% to 2.55%.
9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
December 31,
-----------------------------------------------------------------------
2002 2001
---------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- --------------- -------------- ---------------
ASSETS:
Fixed maturities and
short-term investments $ 11,080,956 $ 11,080,956 $ 10,540,905 $ 10,540,905
Mortgage loans on real
estate 417,412 429,907 613,453 624,102
Policy loans 2,964,030 2,964,030 3,000,441 3,000,441
Common stock 90,188 90,188 73,344 73,344
LIABILITIES:
Annuity contract reserves
without life contingencies 4,152,594 4,228,080 4,188,553 4,210,759
Policyholders' funds 299,730 299,730 242,916 242,916
Due to GWL 33,841 32,366 41,874 41,441
Due to GWL&A Financial 171,416 173,376 214,831 214,831
Commercial paper 96,645 96,645 97,046 97,046
Repurchase agreements 323,200 323,200 250,889 250,889
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
$11,921 and $20,617 at December 31, 2002 and 2001, 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, 2002.
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 $1,488 and $33 of liabilities in 2002 and 2001,
respectively. Included in the net asset position for foreign currency
exchange contracts are $2,518 and $127 of liabilities in 2002 and 2001,
respectively.
10. EMPLOYEE BENEFIT PLANS
The following table summarizes changes for the years ended December 31,
2002, 2001, and 2000 in the benefit obligations and in plan assets for
the Company's defined benefit pension plan and post-retirement medical
plan. Based on an accumulated pension benefit obligation of $167,552 at
December 31, 2002, an additional minimum liability of $22,549 was
recorded resulting in a net accrued benefit liability of $4,236 as of
December 31, 2002. There was no additional minimum pension liability
required to be recognized as of December 31, 2001 or 2000.
Post-Retirement
Pension Benefits Medical Plan
---------------------------------- ---------------------------------
2002 2001 2000 2002 2001 2000
--------- --------- --------- --------- --------- --------
Change in projected benefit
obligation
Benefit obligation at beginning $ 150,521 $ 140,563 $ 126,130 $ 57,861 $ 33,018 $ 29,228
of year
Service cost 8,977 8,093 7,062 3,516 3,331 2,305
Interest cost 11,407 9,718 9,475 3,138 3,303 2,167
Acquisition of new employees 7,823
Amendments 827 (22,529)
Actuarial (gain) loss 20,679 (2,640) 2,510 (9,814) 11,401
Benefits paid (6,364) (5,213) (4,614) (930) (1,015) (682)
--------- --------- --------- --------- --------- --------
Benefit obligation at end of year $ 186,047 $ 150,521 $ 140,563 $ 31,242 $ 57,861 $ 33,018
--------- --------- --------- --------- --------- --------
Change in plan assets
Fair value of plan assets at
beginning of year $ 187,661 $ 193,511 $ 192,093 $ $ $
Actual return on plan assets (17,979) (637) 6,032
Benefits paid (6,364) (5,213) (4,614)
--------- --------- --------- --------- --------- --------
Fair value of plan assets at end 163,318 187,661 193,511
of year
--------- --------- --------- --------- --------- --------
Funded (unfunded) status (22,729) 37,140 52,948 (31,242) (57,861) (33,018)
Unrecognized net actuarial (gain) 51,943 (1,499) (15,239) 4,361 14,659 3,430
loss
Unrecognized prior service cost 2,727 2,533 3,073 (9,392) 9,326 2,148
Unrecognized net obligation or
(asset)
at transition (13,628) (15,142) (16,655) 12,120 12,928
Acquisition of GenAm employees (7,823)
--------- --------- --------- --------- --------- --------
Prepaid (accrued) benefit cost 18,313
Additional minimum liability (22,549)
--------- --------- --------- --------- --------- --------
Prepaid benefit cost/
(accrued benefit liability) (4,236) 23,032 24,127 (36,273) (29,579) (14,512)
Intangible asset 2,727
Accumulated other comprehensive
income adjustments 19,822
--------- --------- --------- --------- --------- --------
Net amount recognized $ 18,313 $ 23,032 $ 24,127 $ (36,273) $ (29,579) $ (14,512)
========= ========= ========= ========= ========= ========
Post-Retirement
Pension Benefits Medical Plan
---------------------------------- ---------------------------------
2002 2001 2000 2002 2001 2000
--------- --------- --------- --------- --------- --------
Components of net periodic
benefit cost
Service cost $ 8,977 $ 8,093 $ 7,062 $ 3,516 $ 3,331 $ 2,305
Interest cost 11,406 9,718 9,475 3,138 3,303 2,167
Expected return on plan assets (14,782) (15,276) (17,567)
Amortization of transition (1,514) (1,514) (1,514) 808 808 808
obligation
Amortization of unrecognized prior
service cost 632 541 541 161 645 162
Amortization of unrecognized
prior service cost - GenAm (484)
Amortization of gain from earlier
periods (467) (879) 172 34
--------- --------- --------- --------- --------- --------
Net periodic (benefit) cost $ 4,719 $ 1,095 $ (2,882) $ 7,623 $ 7,775 $ 5,476
========= ========= ========= ========= ========= ========
Weighted-average assumptions as
of December 31
Discount rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50%
Expected return on plan assets 8.00% 8.00% 9.25% 8.00% 8.00% 9.25%
Rate of compensation increase 3.92% 4.00% 5.00% 3.92% 4.00% 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 2002, 2001, or 2000.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the medical plan. For measurement purposes, a 9.5%
annual rate of increase in the per capita cost of covered health care
benefits was assumed and that the rate would gradually decrease to a
level of 5.25% by 2011. Additionally, it was assumed that the Company's
cost for retirees eligible for health care benefits under Medicare would
be limited to an increase of 3% starting in 2003, due to a plan change. A
one-percentage-point change in assumed health care cost trend rates would
have the following effects:
1-Percentage 1-Percentage
Point Point
Increase Decrease
-------------------- --------------------
Increase (decrease) on total of service and
interest cost on components $ 1,506 $ (1,166)
Increase (decrease) on post-retirement benefit
obligation 2,221 (1,907)
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, 2002, 2001, and
2000 totaled $7,257, $7,773, and $6,130, 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 $20,606 and
$20,033 as of December 31, 2002 and 2001, respectively. The participant
deferrals earn interest at 7.3% at December 31, 2002, 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,
2002, 2001, and 2000 was $1,459, $1,434, and $1,358, 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 2002, 2001, and 2000 was $2,527, $2,726, and $3,023,
respectively. The total liability of $20,037 and $20,881 as of December
31, 2002 and 2001 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:
2002 2001 2000
------------ ------------ ------------
Federal tax rate 35.0 % 35.0 % 35.0 %
Reduction in tax contingency (3.3)
Investment income not subject
to federal tax (1.3) (1.7) (0.9)
Other, net 1.1 (0.3)
------------ ------------ ------------
Total 31.5 % 33.0 % 34.1 %
============ ============ ============
The Company has reduced its liability for tax contingencies due to the
completion of the 1994 - 1996 Internal Revenue Service examination. The
amount released was $13,810; however, $4,000 of the release was
attributable to participating policyholders and therefore, had no affect
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 2002 statement of income.
Temporary differences which give rise to the deferred tax assets and
liabilities as of December 31, 2002 and 2001 are as follows:
2002 2001
------------------------------- ------------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
------------- -------------- ------------- -------------
Policyholder reserves $ 231,679 $ $ 219,227 $
Deferred policy acquisition costs 94,018 96,567
Deferred acquisition cost
proxy tax 109,779 119,052
Investment assets 149,958 67,136
Other 28,466 61,664
------------- -------------- ------------- -------------
Total deferred taxes $ 341,458 $ 272,442 $ 338,279 $ 225,367
============= ============== ============= =============
Amounts included for investment assets above include $86,907 and $40,122
related to the unrealized gains on the Company's fixed maturities
available-for-sale at December 31, 2002 and 2001, respectively.
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, 2002 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 $ (7,486) $ 2,620 $ (4,866)
Unrealized holding gains (losses) arising
during the period 192,079 (67,290) 124,789
Less: reclassification adjustment for
(gains) losses realized in net income (8,004) 2,802 (5,202)
----------------- ---------------- -----------------
Net unrealized gains 176,589 (61,868) 114,721
Reserve and DAC adjustment (42,681) 14,953 (27,728)
----------------- ---------------- -----------------
----------------- ---------------- -----------------
Net unrealized gains (losses) $ 133,908 $ (46,915) $ 86,993
----------------- ---------------- -----------------
----------------- ---------------- -----------------
Minimum pension liability adjustment (19,822) 6,938 (12,884)
----------------- ---------------- -----------------
Other comprehensive income 114,086 (39,977) 74,109
================= ================ =================
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 (losses) 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
================= ================ =================
13. STOCKHOLDER'S EQUITY, DIVIDEND RESTRICTIONS, AND OTHER MATTERS
At December 31, 2002 and 2001, 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 2002, 2001, and 2000,
respectively. Dividends of $170,572, $187,633, and $134,149 were paid on
common stock in 2002, 2001, and 2000, 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:
2002 2001 2000
---------------- ---------------- ---------------
(Unaudited)
Net income $ 205,749 $ 266,398 $ 293,521
Capital and surplus 1,292,292 1,200,372 1,083,718
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. (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, 2002 were $1,292,292 and $208,194 [Unaudited], respectively. The
Company should be able to pay up to $208,194 [Unaudited] of dividends in
2003.
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. As of December 31, 2002,
2001, and 2000, stock available for award to Company employees under the
Lifeco plan aggregated 3,917,344, 3,278,331, and 4,808,047 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, 2004,
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, became exercisable, if certain cumulative financial targets
were attained by the end of 2001. A total of 175,511 options vested and
became exercisable. The exercise period runs from 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 2001, 2000, and 1998 totaling
80,000, 120,000 and 380,000 respectively, become exercisable if certain
sales or financial targets are attained. During 2002, 2001, and 2000, 0,
7,750, and 13,250 of these options vested and accordingly, the Company
recognized compensation expense of $0, $48, and $151, 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 2002, 2001, and 2000. 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:
2002 2001 2000
------------------------- ------------------------- -------------------------
Options WAEP Options WAEP Options WAEP
------------ ---------- ------------ ---------- ----------- ----------
Outstanding, Jan. 1 6,398,149 $ 11.66 7,675,551 $ 9.91 6,867,098 $ 9.20
Granted 174,500 22.16 947,500 22.28 1,386,503 14.88
Exercised 1,359,491 7.16 1,534,568 5.87 451,300 7.74
Expired or
canceled 766,013 11.02 690,334 11.24 126,750 12.17
------------ ---------- ------------ ---------- ----------- ----------
Outstanding, Dec 31 4,447,145 $ 13.66 6,398,149 $ 11.66 7,675,551 $ 9.91
============ ========== ============ ========== =========== ==========
Options
exercisable
at year-end 2,121,638 $ 11.67 2,602,480 $ 8.08 3,077,998 $ 7.11
============ ========== ============ ========== =========== ==========
Weighted average
fair value of
options granted
during year $ 7.46 $ 7.10 $ 5.00
============ ============ ===========
The following table summarizes the range of exercise prices for
outstanding Lifeco common stock options granted to Company employees at
December 31, 2002:
Outstanding Exercisable
------------------------------------------------- ---------------------------------
Average Average
Exercise Average Exercise Exercise
Price Range Options Life Price Options Price
--------------------- ---------------- ------------ ------------- ---------------- -------------
$5.37 - 7.13 696,076 3.55 $ 5.43 696,076 $ 5.43
$10.27 - 17.04 2,735,569 5.88 $ 12.67 1,256,325 $ 13.74
$21.70 - 23.66 1,015,500 8.79 $ 21.96 169,237 $ 21.94
Of the exercisable Lifeco options, 1,941,364 relate to fixed option
grants and 180,274 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.
The following table summarizes the status of, and changes in, PFC options
granted to Company officers, which remain outstanding and WAEP for 2002,
2001, and 2000. 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:
2002 2001 2000
-------------------------- -------------------------- --------------------------
Options WAEP Options WAEP Options WAEP
------------- --------- ------------- --------- ------------- ----------
Outstanding, Jan.1, 70,000 $ 2.16 70,000 $ 2.29 285,054 $ 3.23
Exercised 70,000 2.21 215,054 3.30
------------- --------- ------------- --------- ------------- ----------
Outstanding, Dec 31, 0 $ 0.00 70,000 $ 2.16 70,000 $ 2.29
============= ========= ============= ========= ============= ==========
Options exercisable
at year-end 0 $ 0.00 70,000 $ 2.16 70,000 $ 2.29
============= ========= ============= ========= ============= ==========
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 $2,364, $2,092, and $1,799, in 2002, 2001, and 2000,
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
2002, 2001, and 2000, respectively: dividend yields of 2.453%, 2.27%, and
2.44%, expected volatility of 31.67%, 28.56%, and 29.57%, risk-free
interest rates of 5.125%, 5.30%, and 6.61% and expected lives of 7 years.
15. SEGMENT INFORMATION
The Company has two reportable segments: Employee Benefits and Financial
Services. The Employee Benefits segment markets group life and health to
small and mid-sized corporate employers. The Financial Services segment
markets and administers savings products to public and not-for-profit
employers, corporations, 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. Prior to 2002, the Employee Benefits segment marketed and
administered corporate savings products (401(k) plans). In 2002 the
Financial Services segment assumed responsibility for these products. The
2001 and 2000 segment information has been reclassified to account for
this change.
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, 2002
Operations: Employee Financial
Benefits Services Total
----------------- ----------------- -----------------
Revenue:
Premium income $ 960,191 $ 159,904 $ 1,120,095
Fee income 660,423 223,139 883,562
Net investment income 67,923 851,442 919,365
Realized investment gains 8,918 32,708 41,626
----------------- ----------------- -----------------
Total revenue 1,697,455 1,267,193 2,964,648
Benefits and Expenses:
Benefits 761,481 831,272 1,592,753
Operating expenses 732,472 225,671 958,143
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Total benefits and expenses 1,493,953 1,056,943 2,550,896
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Net operating income before income taxes 203,502 210,250 413,752
Income taxes 67,198 63,017 130,215
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Net income $ 136,304 $ 147,233 $ 283,537
================= ================= =================
Assets: Employee Financial
Benefits Services Total
----------------- ----------------- -----------------
Investment assets $ 1,491,857 $ 13,064,464 $ 14,556,321
Other assets 605,029 1,156,343 1,761,372
Separate account assets 11,338,376 11,338,376
----------------- ----------------- -----------------
Total assets $ 2,096,886 $ 25,559,183 $ 27,656,069
================= ================= =================
Year ended December 31, 2001
Operations: Employee Financial
Benefits Services Total
----------------- ----------------- -----------------
Revenue:
Premium income $ 1,033,886 $ 169,753 $ 1,203,639
Fee income 713,297 233,958 947,255
Net investment income 65,474 869,282 934,756
Realized investment gains (losses) 15,638 31,087 46,825
----------------- ----------------- -----------------
Total revenue 1,828,295 1,304,180 3,132,475
Benefits and Expenses:
Benefits 858,945 837,652 1,696,597
Operating expenses 775,018 246,102 1,021,120
----------------- ----------------- -----------------
Total benefits and expenses 1,633,963 1,083,754 2,717,717
Income taxes 67,771 73,341 141,112
----------------- ----------------- -----------------
Net income before special charges 126,561 147,085 273,646
Special charges (net of tax) 80,900 80,900
----------------- ----------------- -----------------
Net income $ 45,661 $ 147,085 $ 192,746
================= ================= =================
Assets: Employee Financial
Benefits Services Total
----------------- ----------------- -----------------
Investment assets $ 1,080,974 $ 13,159,007 $ 14,239,981
Other assets 792,383 1,201,373 1,993,756
Separate account assets 12,584,661 12,584,661
----------------- ----------------- -----------------
Total assets $ 1,873,357 $ 26,945,041 $ 28,818,398
================= ================= =================
Year ended December 31, 2000
Operations: Employee Financial
Benefits Services Total
----------------- ----------------- -----------------
Revenue:
Premium income $ 1,142,319 $ 190,247 $ 1,332,566
Fee income 648,329 223,298 871,627
Net investment income 70,932 854,101 925,033
Realized investment gains (losses) (2,998) 31,281 28,283
----------------- ----------------- -----------------
Total revenue 1,858,582 1,298,927 3,157,509
Benefits and Expenses:
Benefits 914,730 831,142 1,745,872
Operating expenses 780,281 238,222 1,018,503
----------------- ----------------- -----------------
Total benefits and expenses 1,695,011 1,069,364 2,764,375
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Net operating income before income taxes 163,571 229,563 393,134
Income taxes 57,078 76,962 134,040
----------------- ----------------- -----------------
Net income $ 106,493 $ 152,601 $ 259,094
================= ================= =================
The following table, which summarizes premium and fee income by segment,
represents supplemental information.
2002 2001 2000
----------------- ---------------- ----------------
Premium Income:
Employee Benefits
Group Life & Health $ 960,191 $ 1,033,886 $ 1,142,319
----------------- ---------------- ----------------
Total Employee Benefits 960,191 1,033,886 1,142,319
----------------- ---------------- ----------------
----------------- ---------------- ----------------
Financial Services
Savings 1,382 8,429 7,253
Individual Insurance 158,423 161,227 182,957
401(K) 99 97 37
---------------- ----------------
-----------------
Total Financial Services 159,904 169,753 190,247
-----------------
---------------- ----------------
Total premium income $ 1,120,095 $ 1,203,639 $ 1,332,566
================= ================ ================
Fee Income:
Employee Benefits
Group Life & Health
(uninsured plans) $ 660,423 $ 713,297 $ 648,329
----------------- ---------------- ----------------
Total Employee Benefits 660,423 713,297 648,329
----------------- ---------------- ----------------
----------------- ---------------- ----------------
Financial Services
Savings 117,952 119,793 111,201
Individual Insurance 18,152 17,888 8,117
401(k) 87,035 96,277 103,980
----------------- ---------------- ----------------
----------------- ---------------- ----------------
Total Financial Services 223,139 233,958 223,298
----------------- ---------------- ----------------
Total fee income $ 883,562 $ 947,255 $ 871,627
================= ================ ================
16. OBLIGATIONS RELATING TO DEBT AND LEASES:
The Company enters into operating leases primarily for office space. As of
December 31, 2002, minimum annual rental commitments on operating leases
having initial or remaining non-cancellable lease terms in excess of one
year during the years 2003 through 2007 were $26,323.4, $23,525.5,
$22,069.9, $20,584.4 and $15,443.2, respectively, with $33,105.2 in
minimum commitments thereafter.
2003 2004 2005 2006 2007 Thereafter
---------- ----------- ---------- ---------- ----------- -------------
Related party notes
$ $ $ $ 25,000.0 $ $ 175,000.0
Operating leases 26,323.4 23,525.5 22,069.9 20,584.4 15,443.2 33,105.2
---------- ----------- ---------- ---------- ----------- -------------
Total contractual
obligations $ 26,323.4 $ 23,525.5 $ 22,069.9 $ 45,584.4 $ 15,443.2 $ 208,105.2
========== =========== ========== ========== =========== =============
17. 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.