UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 333-1173
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
COLORADO 84-0467907
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
8515 EAST ORCHARD ROAD, GREENWOOD VILLAGE, CO 80111
(Address of principal executive offices)
(303) 737-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act.
Yes [ ] No [X ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
[X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer as defined in Rule 12b-2 of the
Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company as defined in
Rule 12b-2 of the Act.
Yes [ ] No [X ]
As of June 30, 2005, the aggregate market value of the registrant's voting stock
held by non-affiliates of the registrant was $0.
As of March 1, 2006, 7,032,000 shares of the registrant's common stock were
outstanding, all of which were owned by the registrant's parent company.
NOTE: This Form 10-K is filed by the registrant only as a consequence of
the sale by the registrant of a market value adjusted annuity
product.
TABLE OF CONTENTS
Page
Part I Item 1. Business .....................................................................................3.
1.1 Organization and Corporate Structure .........................................................3.
1.2 Business of the Company ......................................................................3.
1.3 Great-West Healthcare ........................................................................5.
1.4 Financial Services ...........................................................................7.
1.5 Investment Operations .......................................................................11.
1.6 Regulation ..................................................................................13.
1.7 Ratings .....................................................................................14.
1.8 Miscellaneous ...............................................................................15.
Item 1A. Risk Factors ................................................................................15.
Item 2. Properties ..................................................................................17.
Item 3. Legal Proceedings ......................................................................... 18.
Item 4. Submission of Matters to a Vote of Security Holders .........................................18.
Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .......................18.
5.1 Equity Security Holders and Market Information ..............................................18.
5.2 Dividends ...................................................................................18.
Item 6. Selected Financial Data .....................................................................18.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................................................19.
7.1 Executive Summary ...........................................................................20.
7.2 Critical Accounting Policies and Estimates ..................................................21.
7.3 Company Results of Operations ...............................................................24.
7.4 Great-West Healthcare Results of Operations .................................................27.
7.5 Financial Services Results of Operations ....................................................31.
7.6 Investment Operations .......................................................................35.
7.7 Liquidity and Capital Resources .............................................................38.
7.8 Contractual Obligations and Off-Balance Sheet Arrangements ..................................39.
7.9 Application of Recent Accounting Pronouncements .............................................39.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..................................40.
Item 8. Financial Statements and Supplementary Data .................................................42.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures................................................................85.
Item 9A. Controls and Procedures......................................................................85.
Item 9B. Other Information............................................................................85.
Part III Item 10. Directors and Executive Officers of the Registrant ..........................................85.
10.1 Identification of Directors .................................................................85.
10.2 Identification of Executive Officers ........................................................87.
10.3 Code of Ethics ..............................................................................89.
10.4 Audit Committee Financial Expert ............................................................89.
Item 11. Executive Compensation ......................................................................90.
11.1 Summary Compensation Table ..................................................................90.
11.2 Options .....................................................................................91.
11.3 Pension Plan Table ..........................................................................92.
11.4 Compensation of Directors ...................................................................92.
11.5 Compensation Committee Interlocks and Insider Participation .................................93.
Item 12. Security Ownership of Certain Beneficial Owners and Management...............................93.
12.1 Security Ownership of Certain Beneficial Owners .............................................93.
12.2 Security Ownership of Management ............................................................94.
Item 13. Certain Relationships and Related Transactions...............................................95.
Item 14. Principal Accounting Fees and Services ......................................................95.
14.1 Principal Accounting Fees ...................................................................95.
14.2 Pre-Approval Policies and Procedures ........................................................96.
Part IV Item 15. Exhibits and Financial Statement Schedules...................................................96.
15.1 Index to Financial Statements ...............................................................96.
15.2 Index to Exhibits ...........................................................................97.
Signatures ..................................................................................99.
PART I
ITEM 1. BUSINESS
1.1 ORGANIZATION AND CORPORATE STRUCTURE
Great-West Life & Annuity Insurance Company (the "Company") is a stock
life insurance company originally organized on March 28, 1907. Great-West
Life & Annuity Insurance 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. ("Lifeco"), a Canadian holding company. Lifeco
operates in the United States primarily through the Company and in Canada
and Europe through The Great-West Life Assurance Company ("Great-West
Life") and its subsidiaries, London Life Insurance Company and The Canada
Life Assurance Company ("CLAC"). 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 Lifeco, Power Financial, and Power Corporation are traded
publicly in Canada.
1.2 BUSINESS OF THE COMPANY
The Company is authorized to engage in the sale of life insurance,
accident and health insurance and annuities. It is licensed to do
business in all states in the United States, the District of Columbia,
Puerto Rico, Guam, and the U.S. Virgin Islands.
The Company operates the following two business segments:
Great-West HealthcareSM - Markets life and health insurance plans and
services for group clients, including self-funded health plans,
consumer-driven health models, flexible spending accounts, life and
disability insurance, and dental and vision coverage.
Financial Services - Markets and administers savings, administrative
and record-keeping services for public, private and non-profit
employers, corporations and individuals, including 401(a), 401(k),
403(b), 408 and 457 plans and life insurance products for individuals
and businesses.
On July 10, 2003, Lifeco completed its acquisition of Canada Life
Financial Corporation ("CLFC"), the parent company of CLAC, Canada Life
Insurance Company of America ("CLICA") and Canada Life Insurance Company
of New York ("CLINY"). Immediately thereafter, Lifeco transferred all of
the common shares of CLFC it acquired to its subsidiary, Great-West Life.
On December 31, 2003, CLAC transferred all of the outstanding common
shares of CLICA and CLINY owned by it to the Company. These acquisitions
have been accounted for as a "reorganization of businesses under common
control" and, accordingly, the assets and liabilities of CLICA and CLINY
were recorded at Lifeco's cost basis, and the results of operations of
CLICA and CLINY subsequent to July 10, 2003 are included in the Company's
consolidated statements of income. On December 31, 2005, First Great-West
Life & Annuity Insurance Company, a wholly-owned subsidiary of the
Company, merged with and into CLINY. Upon completion of the merger,
CLINY's name was changed to First Great-West Life & Annuity Insurance
Company.
Sales of new individual life and annuity products in the United States by
CLAC, CLICA and CLINY were discontinued during 2003, shortly after the
acquisition of CLFC by Lifeco. On February 29, 2004 and August 31, 2004,
respectively, CLAC's and CLINY's United States group life and health
businesses, excluding medical stop-loss policies, were sold to an
unrelated third party. The Company manages CLAC's existing individual
insurance and annuity business in the United States. In connection with
this management, the Company provides certain corporate and operational
administrative services on behalf of CLAC, for which it receives a fee.
On December 30, 2005, Great-West Life & Annuity Insurance Company of
South Carolina ("GWSC"), a wholly owned subsidiary of CLICA, was licensed
as a special purpose financial captive insurance company. Following
licensure, CLAC retroceded, on a funds withheld basis, a particular block
of United States term life insurance business to GWSC, where the excess
of U.S. Statutory reserves over funds withheld will be backed by a letter
of credit. A second letter of credit funds $50,000,000 of capital in
GWSC.
On August 31, 2003, the Company and CLAC entered into an Indemnity
Reinsurance Agreement pursuant to which the Company reinsured 80% (45%
coinsurance and 35% coinsurance with funds withheld) of certain United
States life, health, and annuity business of CLAC's United States branch.
The table that follows summarizes the Company's premiums and deposits for
the years ended December 31, 2005, 2004 and 2003. For further
consolidated financial information concerning the Company, see Item 6,
Selected Financial Data and Item 8, Financial Statements and
Supplementary Data. For commentary on the information in the following
table, see Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Year Ended December 31,
---------------------------------------------------------
(In millions) (1) 2005 2004 2003
----------------------------------------------------- ----------------- -------------- ----------------
Premium Income:
Great-West Healthcare:
Group life & health $ 678 $ 262 $ 838
----------------- -------------- ----------------
Total Great-West Healthcare 678 262 838
----------------- -------------- ----------------
Financial Services:
Retirement Services 6 2 -
Individual Markets 541 407 1,415
----------------- -------------- ----------------
Total Financial Services 547 409 1,415
----------------- -------------- ----------------
Total premium income $ 1,225 $ 671 $ 2,253
================= ============== ================
Fee Income:
Great-West Healthcare:
Group life & health $ 664 $ 649 $ 607
----------------- -------------- ----------------
Total Great-West Healthcare 664 649 607
----------------- -------------- ----------------
Financial Services:
Retirement Services 258 227 200
Individual Markets 43 40 33
----------------- -------------- ----------------
Total Financial Services 301 267 233
----------------- -------------- ----------------
Total fee income $ 965 $ 916 $ 840
================= ============== ================
Deposits for investment-type contracts:
Financial Services (2) $ 1,159 $ 711 $ 676
Deposits to Separate Accounts:
Financial Services 2,125 1,979 2,217
Self-funded equivalents:
Great-West Healthcare (3) 4,612 4,706 4,674
(1) All information in the preceding table and other tables herein is
derived from information that has been prepared in conformity with
accounting principles generally accepted in the United States of
America.
(2) Investment-type contracts are contracts that include significant
cash build-up features, as discussed in Statement of Financial
Accounting Standards No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for
Realized Gains and Losses from the Sale of Investments".
(3) Self-funded equivalents generally represent paid claims under
minimum premium and administrative services only contracts, which
amounts approximate the additional premiums that could have been
earned under such contracts if they had been written as
traditional indemnity or health maintenance organization ("HMO")
programs.
1.3 GREAT-WEST HEALTHCARE
1. Principal Products
The Great-West Healthcare segment provides services for approximately
5,200 employers. It is a national employee benefits provider with
expertise in self-funding and innovative healthcare management solutions.
The Company considers itself to be an industry leader in self-funded and
health insurance solutions for companies with less than 250 employees.
The Company provides employers in the United States with a comprehensive
line of employee benefit products and services, including health plans,
flexible spending account administration, dental and vision plans, life
insurance benefits, and short and long-term disability insurance
coverage. Insurance products offered include traditional and managed plan
designs, consumer-driven health plans and tiered benefit options. The
Company's products include state-of-the-art cost and care management
procedures as well as comprehensive networks that help ensure quality
healthcare.
The Great-West Healthcare division operations are organized in the
following market segments: (i) select markets, focusing on employers with
less than 250 employees; (ii) mid-market, focusing on employers with
250-2,500 employees; (iii) national accounts, focusing on employers with
over 2,500 employees and (iv) specialty-risk, a market segment which
distributes medical stop loss coverage, access to a national provider
network, and medical and disease management through third party
administrators and smaller health insurance carriers.
During 2003, the Company adopted the brand name, "Great-West Healthcare,"
which refers to all employee benefit products and services offered by the
Company. The name has been successful in eliminating market confusion
over different carriers and networks. Efforts to enhance brand awareness
continue. The theme of the Company's targeted advertising campaign
introduced in 2004, "New Ideas From the Frontier of Health Care,"
communicates a strategy for delivering innovative, affordable benefit
plans to businesses. Further brand building efforts reflecting this theme
were introduced during 2005 both nationally and in target markets.
While the Company continues to reduce its focus on its HMO products in
most markets, Great-West Healthcare Consumer Advantage, a consumer-driven
tiered benefits product, has continued its success. This first-to-market
consumer-driven preferred provider organization product provides
employers with a more affordable option than a traditional plan design
and engages employees in healthcare decisions.
The Company also offers health reimbursement accounts ("HRA") and health
savings accounts ("HSA"). With an HRA, employers contribute a specified
annual amount for each employee to spend on healthcare expenses. Funds
remaining in an account at the end of the year can be rolled over for
future use. An HSA offering combines a high-deductible health plan
administered by the Company with a health savings account administered by
an outside third party.
Medical management programs are offered to complement each health plan
the Company offers. The Company's disease management program services
enroll members with asthma, diabetes, emphysema, heart disease, cancer,
premature birth, end stage renal disease, and chronic pain. A new
wellness program provides employers with an opportunity to lower
healthcare costs and increase employee productivity. Great-West
Healthcare contracts with CorSolutions, Inc., the nations leading
provider of health intelligence solutions for many of these programs.
CorSolutions assists with data analysis, risk assessment and predictive
modeling for client groups and provides an interactive health and
wellness web site for its members. In addition, the Company provides a
nurse hotline and online educational and comparison tools to help members
manage their healthcare and make medically and financially sound
treatment choices.
Sales of group life insurance consist principally of renewable term
coverage, the amounts of which are usually linked to individual employee
wage levels. The following table shows group life insurance in-force
prior to reinsurance ceded at December 31 for each of the years
indicated:
December 31,
---------------------------------------------------------------------------
(In millions) 2005 2004 (1) 2003 (2) 2002 (3) 2001
---------------------- ------------ ----------- ----------- ----------- ------------
Life insurance
in-force $ 43,537 $ 49,244 $ 102,721 $ 58,572 $ 66,539
(1) The insurance in-force at December 31, 2004 reflects the
recapture by CLAC during 2004 of certain group life business
it ceded to the Company in 2003.
(2) The insurance in-force at December 31, 2003 reflects the
ceding to the Company by CLAC of certain life business.
(3) The insurance in-force at December 31, 2002 was influenced by
a related decline in healthcare membership.
2. Method of Distribution
The Company distributes its products and services through field sales
staff. As of December 31, 2005, a sales staff of 368, inclusive of
management, was located in 31 sales offices throughout the United States.
Each sales office works with insurance brokers, agents, and consultants
in its local market. Additionally, the Company is expanding its
distribution channels to include third party administrators through its
specialty-risk group.
3. Competition
The employee benefits industry is highly competitive. The marketplace
creates pricing pressures that encourage employers to seek competitive
bids each year. Although most employers are looking for affordably priced
employee benefits products, they also want to offer product choices
because employee needs differ. In many cases, it is more cost-effective
and efficient for an employer to contract with a carrier such as the
Company that offers multiple product lines and centralized
administration.
In addition to price considerations, there are a number of other factors
that influence employer decision-making. These factors include: quality
of services; size, cost-effectiveness and the quality of provider
networks; product responsiveness to customer needs; cost-containment
services and the effectiveness of marketing and sales.
4. Reserves
For group whole life and term insurance products, policy reserve
liabilities are equal to the present value of future benefits and
expenses less the present value of future net premiums using best
estimate assumptions for interest, mortality and expenses (including
margins for adverse deviation). For waiver of premium on account of
disability and paid up group whole life contracts, the policy reserves
equal the present value of future benefits and expenses using best
estimate assumptions for interest, mortality, morbidity and expenses
(including margins for adverse deviation). For group universal life, the
policy reserves equal the accumulated fund balance (that reflects
cumulative deposits plus credited interest less charges thereon).
Reserves for long-term disability products are established for lives
currently in payment status, or that are approved for payment but are in
a waiting period, using industry and Company morbidity factors and
interest rates based on Company experience. In addition, reserves are
held for claims that have been incurred but not reported and for
long-term disability claims that have been reported but not yet
adjudicated.
For fully insured medical and dental insurance products, reserves reflect
the ultimate cost of claims including, on an estimated basis, (i) claims
that have been reported but not settled, and (ii) claims that have been
incurred but not reported. Claim reserves are based upon factors derived
from past experience. Reserves also reflect a retrospective experience
rating that is done on certain types of business.
Assumptions used for mortality and morbidity experience are periodically
reviewed against published industry data and the Company's experience.
The above-mentioned reserves are computed amounts that, with additions
from premiums and deposits to be received and with interest on such
reserves, are expected to be sufficient to meet the Company's policy
obligations of paying expected death benefits and to generate profits.
5. Reinsurance
The Company enters into reinsurance transactions as both a provider and a
purchaser of reinsurance. When purchasing reinsurance, the Company seeks
to limit its exposure on any single insured and to recover a portion of
benefits paid by ceding risks to other insurance enterprises under excess
coverage and coinsurance contracts. Under the terms of these contracts,
the reinsurer agrees to reimburse the Company for the ceded amount in the
event a claim is paid. However, the Company remains liable to its
policyholders with respect to the ceded insurance if a reinsurer fails to
meet the obligations it has assumed. Accordingly, the Company only cedes
insurance to highly rated, well-capitalized companies. The maximum amount
of group life insurance retained on any one life or for accidental death
coverage is $1,500,000. The maximum amount of group disability income
benefit at risk on any one life is $6,000 per month.
The Company entered into a reinsurance agreement during the third quarter
of 2003 with Allianz Risk Transfer (Bermuda) Limited ("Allianz") to cede
40% in 2005, 75% in 2004 and 90% in 2003 of direct written group health
stop-loss and excess-loss business. The Allianz agreement was retroactive
to January 1, 2003 and was terminated on December 31, 2005.
On February 29, 2004, CLAC recaptured the group life and health business
from the Company associated with the original Indemnity Reinsurance
Agreement dated August 31, 2003. The Company recorded an income statement
impact of $256 million of negative premium income and change in reserves
associated with these policies. The Company also recorded, at fair value,
the following at February 29, 2004 as a result of this transaction:
Assets (In thousands) Liabilities and Stockholder's Equity
-------------------------------------------------------------- -------------------------------------------------
Cash $ (126,105) Policy reserves $ (286,149)
Reinsurance receivable (152,077) Policy and contract claims (32,755)
Deferred ceding commission (29,831) Policyholders' funds (3,982)
Premiums in course of collection (14,873)
--------------- ---------------
$ (322,886) $ (322,886)
=============== ===============
1.4 GREAT-WEST FINANCIAL SERVICES
1. Principal Products
The Financial Services business segment of the Company develops and
administers products under two general categories: Great-West Retirement
ServicesSM and Individual Markets. These areas distribute retirement and
life insurance products and services for public, private and non-profit
employers, corporations and individuals.
Great-West Retirement Services
Under the Great-West Retirement Services brand, the Company provides
enrollment services, communication materials, various investment options
and education services to employer-sponsored defined contribution and
voluntary 403(b) plans, as well as comprehensive administrative and
record-keeping services for financial institutions and employers. Defined
contribution plans provide for benefits based upon the value of
contributions to, and investment returns on, an individual's account.
This has been the fastest growing portion of the pension marketplace in
recent years.
The marketing focus is directed towards providing services and investment
products under Internal Revenue Code Sections 401(a), 401(k), 403(b),
408, and 457 to state and local governments, hospitals, non-profit
organizations, public school districts, corporations and individuals.
Record-keeping and administrative services for defined contribution plans
may also be provided to this target market. Through a subsidiary,
FASCore, LLC, the Company is focused on partnering with other large
institutions to provide third-party record keeping and administration
services.
The Company offers both guaranteed interest rate investment options for
various lengths of time and variable annuity products designed to meet
the specific needs of the customer. In addition, the Company offers both
customized annuity and non-annuity products.
For the guaranteed interest rate option, the Company earns investment
margins on the difference between the income earned on investments in its
general account and the interest credited to the participant's account
balance. The Company's general account assets support the guaranteed
investment product. The Company also manages separate account fixed
interest rate options where it is paid a management fee.
The Company's variable investment options provide the opportunity for
participants to assume the risks of, and receive the benefits from, the
investment of retirement assets. The variable product assets are
invested, as designated by the participant, in separate accounts that in
turn invest in shares of underlying funds managed by the Company or by
selected external fund managers.
The Company is compensated by separate account fees for mortality and
expense risks pertaining to the variable annuity contract and/or for
providing administrative services. The Company is reimbursed by external
mutual funds for marketing, sales and service costs under various revenue
sharing agreements.
The Company also receives fees for providing third-party administrative
and record-keeping services to financial institutions and
employer-sponsored retirement plans.
Customer retention is a key factor for the profitability of group annuity
products. To encourage customer retention, annuity contracts may impose a
surrender charge on policyholder balances withdrawn for a period of time
after the contract's inception. The period of time and level of the
charge vary by product as well as other factors such as size of the
prospective group, projected annual contributions for all participants in
the group, frequency of projected withdrawals, type and frequency of
administrative and sales services provided, level of other charges, type
and level of communication services provided, and number and type of
plans. Existing federal tax penalties on distributions prior to age 59
1/2 provide an additional disincentive to premature surrenders of
balances held under the group annuity contract, but do not impede
transfers of those balances to products of competitors.
Individual Markets
In the Individual Markets area, the Company distributes life insurance
and individual annuity products to both individuals and businesses
through various distribution channels. Life insurance products in-force
include participating and non-participating term life, whole life,
universal life and variable universal life. Participating policyholders
share in the financial results of the participating business in the form
of dividends. The Company no longer actively markets participating
products. The provision for participating policyholder earnings is
reflected in liabilities in undistributed earnings on participating
business in the Company's consolidated balance sheets. Participating
policyholder earnings are not included in the Company's consolidated net
income.
Term life provides coverage for a stated period and pays a death benefit
only if the insured dies within the period. Whole life provides
guaranteed death benefits and level premium payments for the life of the
insured. Universal life products include a cash value component that is
credited with interest at regular intervals. The Company's universal life
earnings result from the difference between the investment income and
interest credited on customer cash values and from differences between
charges for mortality and actual death claims. Universal life cash values
are charged for the cost of insurance coverage and for administrative
expenses.
Sales of life insurance products typically have initial marketing
expenses, which are deferred. These expenses are shown as deferred policy
acquisition costs in the Company's consolidated balance sheets.
Therefore, retention is an important factor in profitability and is
encouraged through product features. For example, the Company's universal
and whole life insurance contracts typically impose a surrender charge on
policyholder balances withdrawn within the first ten years of the
contract's inception. The period of time and level of the charge vary by
product. In addition, more favorable credited rates may be offered after
policies have been in-force for a period of time.
During 2005, the Company continued its efforts to partner with large
financial institutions to provide individual term and whole life
insurance to the general population. Some of the institutional partners
include Citibank, US Bank, Regions Bank, AmSouth Bank, and Huntington
National Bank.
At December 31, 2005 and 2004, the Company had $4.3 billion and $4.1
billion, respectively, of policy reserves on individual insurance
products sold to corporations to provide coverage on the lives of certain
employees, also known as Corporate-Owned Life Insurance ("COLI"). Due to
legislation enacted in 1996 that phased out the interest deductions on
COLI policy loans, leveraged COLI product sales have ceased.
The Company has shifted its emphasis from COLI to the Business-Owned Life
Insurance ("BOLI") market. BOLI was not affected by the aforementioned
1996 legislation. These products are interest-sensitive whole life,
universal life and variable universal life policies that indirectly fund
post-retirement benefits for employees and non-qualified executive
benefit plans. At December 31, 2005, the Company had $1.7 billion of
fixed and $1.7 billion of separate account BOLI policy reserves, compared
to $1.6 billion of fixed and $1.6 billion of separate account reserves at
December 31, 2004.
The Company also has a marketing agreement with Charles Schwab & Co.,
Inc. ("Schwab") to sell individual fixed and variable qualified and
non-qualified deferred annuities. The fixed product is a Guarantee Period
Fund that was established as a non-unitized separate account in which the
owner does not participate in the performance of the assets. The assets
accrue solely to the benefit of the Company and any gain or loss in the
Guarantee Period Fund is borne entirely by the Company. The Company is
currently offering guarantee period durations of three to ten years.
Distributions from the amounts allocated to a Guarantee Period Fund more
than six months prior to the maturity date result in a market value
adjustment ("MVA"). The MVA reflects the relationship as of the time of
its calculation between the current U.S. Treasury Strip ask side yield
and the U.S. Treasury Strip ask side yield at the inception of the
contract.
On a very limited basis, the Company also offers single premium annuities
and guaranteed certificates that provide guarantees of principal and
interest with a fixed maturity date.
Certain of the Company's life insurance and group annuity products allow
policy owners to borrow against their policies. At December 31, 2005,
approximately 10% (also 10% in both 2004 and 2003) of outstanding policy
loans were on individual life policies that had fixed interest rates
ranging from 5% to 8%. The remaining 90% of outstanding policy loans had
variable interest rates averaging 5.64% at December 31, 2005. Investment
income from policy loans was $202.9 million, $203.1 million and $195.6
million for the years ended December 31, 2005, 2004 and 2003,
respectively.
2. Method of Distribution
The Great-West Retirement Services area distributes pension products
through its subsidiary, GWFS Equities, Inc., as well as over 270 pension
consultants, representatives and service personnel. Record-keeping and
administrative services are also distributed through institutional
partners.
The Individual Markets area distributes individual life insurance through
marketing agreements with various retail financial institutions. BOLI is
primarily distributed through Clark Consulting and SunTrust Bank.
Individual life insurance and annuity products are also offered through
Schwab.
3. Competition
The life insurance, savings and investments marketplace is highly
competitive. The Company's competitors include mutual fund companies,
insurance companies, banks, investment advisers and certain service and
professional organizations. No one competitor or small number of
competitors is dominant. Competition focuses on service, technology,
cost, variety of investment options, investment performance, product
features, price and financial strength as indicated by ratings issued by
nationally recognized agencies. For more information on the Company's
ratings strength, see Item 1.7, Ratings.
4. Reserves
Reserves for investment-type policies (deferred annuities and 401(k)) are
established at the contract holder's account value, which is equal to
cumulative deposits, less withdrawals and mortality and expense and/or
administrative service charges, plus credited interest.
Reserves for all fixed individual life insurance contracts are computed
on the basis of assumed investment yield, mortality, morbidity and
expenses (including a margin for adverse deviation). These reserves are
calculated as the present value of future benefits (including dividends)
and expenses less the present value of future net premiums. The
assumptions used in calculating the reserves generally vary by plan, year
of issue and policy duration.
For all life insurance contracts, reserves are established for claims
that have been incurred but not reported based on factors derived from
past experience.
Reserves for limited payment contracts (immediate annuities) are computed
on the basis of assumed investment yield, mortality (where payouts are
contingent on survivorship) and expenses. These assumptions generally
vary by plan, year of issue and policy duration. Reserves for immediate
annuities without life contingent payouts are computed on the basis of
assumed investment yield and expenses.
The mentioned reserves are computed amounts that, with additions from
premiums and deposits to be received, and with interest on such reserves,
are expected to be sufficient to meet the Company's policy obligations
(such as paying expected death or retirement benefits or surrender
requests) and to generate profits.
5. Reinsurance
The Company enters into reinsurance transactions as both a provider and a
purchaser of reinsurance. When purchasing reinsurance, the Company seeks
to limit its exposure to loss on any single insured and to recover a
portion of benefits paid by ceding risks to other insurance enterprises
under excess coverage and coinsurance contracts. Under the terms of these
contracts, the reinsurer agrees to reimburse the Company for the ceded
amount in the event a claim is paid. However, the Company remains liable
to its policyholders with respect to the ceded insurance if a reinsurer
fails to meet the obligations it assumed. Accordingly, the Company only
cedes insurance to highly rated, well-capitalized companies. The Company
retains a maximum of $3.5 million of coverage per individual life.
The Company originally recorded a reinsurance receivable in connection
with the indemnity reinsurance agreement dated August 31, 2003, which
relates to the amount due to it for reserves assumed by coinsurance with
funds withheld. The Company's return on this reinsurance receivable is
the interest and other investment returns earned, as defined by the
agreement, on a segregated pool of investments of CLAC's United States
branch. Pursuant to an interpretation of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133"), as amended, the Company has
identified an embedded derivative for its exposure to interest rate risk
and to credit risk on the segregated pool of investments. As this
embedded derivative does not qualify for hedge accounting, the Company
recognized associated losses and its net income decreased by $8.5 million
and $5.3 million during the years ended December 31, 2005 and 2004,
respectively.
In the third quarter of 2004, the deferred ceding commission asset and
certain policy reserve liabilities acquired as part of this reinsurance
transaction were both decreased by $157 million based on the Company's
final analysis of the policy reserves acquired. CLAC's United States
branch had not previously computed policy liabilities under accounting
principles generally accepted in the United States of America ("GAAP")
which required the Company to estimate the amount of liabilities assumed,
which was approximately $3.0 billion at September 1, 2003. These
adjustments had no material effect on the Company's consolidated
financial position or results of operations at December 31, 2004 or for
the year then ended.
Effective April 1, 2005, the Company and CLAC amended the indemnity
reinsurance agreement to allow for periodic transfers of funds withheld
assets. Under the amended agreement, the remaining funds withheld assets
will be transferred to the Company prior to December 31, 2007. During
2005, CLAC transferred $538 million of assets to the Company as follows:
T
Assets (In thousands) Liabilities and Stockholder's Equity
---------------------------------------------------------------- -------------------------------------------------
Bonds $ 414,623 $ -
Mortgages 49,218
Investment income due and accrued 4,282
Cash 70,000
Reinsurance receivable (538,123)
------------------ ----------------
$ - $ -
================== ================
As a result of this transaction, the reinsured 80% of the life, health,
and annuity business is currently 59% coinsurance and 21% coinsurance with
funds withheld.
On December 31, 2005, GWSC, a wholly-owned subsidiary of the Company and
CLAC, entered into a reinsurance agreement on a coinsurance with funds
withheld basis pursuant to which the Company assumed a certain specific
in-force block of term life insurance policies of CLAC. The Company
recorded $167 million in both premium income and increase in reserves
associated with these policies.
The Company recorded, at fair value, the following at December 31, 2005 as
a result of this transaction:
Assets (In thousands) Liabilities and Stockholder's Equity
---------------------------------------------------------------- -------------------------------------------------
Reinsurance receivable $ 166,688 Policy reserves $ 166,688
------------------ ----------------
$ 166,688 $ 166,688
================== ================
1.5 INVESTMENT OPERATIONS
The Company's investment division manages and administers its general and
separate accounts in support of the cash and liquidity requirements of the
Company's insurance and investment products. The Company's principal
investments are in fixed maturities and mortgage loans on real estate, all
of which are exposed to three primary sources of investment risk: credit,
interest rate, and market valuation. Total investments at December 31,
2005, were $35.0 billion, comprised of general account assets of $20.5
billion and separate account assets of $14.5 billion. Total investments at
December 31, 2004, were $33.8 billion, comprised of general account assets
in the amount of $19.6 billion and separate account assets in the amount
of $14.2 billion.
The Company's general account investments are in a broad range of asset
classes, primarily domestic fixed maturities. Fixed maturity investments
include public and privately placed corporate bonds, government bonds and
mortgage-backed and asset-backed securities.
The Company manages the characteristics of its investment assets, such as
liquidity, currency, yield, and duration, to reflect the underlying
characteristics of related insurance and policyholder liabilities that
vary among its principal product lines. The Company observes strict asset
and liability matching guidelines designed to ensure that the investment
portfolio will appropriately meet the cash flow and income requirements of
its liabilities. In connection with its investment strategy, the Company
makes limited use of derivative instruments in hedging transactions to
manage certain portfolio related risks such as variability in cash flows
or changes in the fair value of an asset or a liability. Derivative
instruments are not used for speculative purposes. For more information on
derivatives see Notes 1 and 4 to the Company's consolidated financial
statements that are included in Item 8, Financial Statements and
Supplementary Data.
The Company routinely monitors and evaluates the status of its investments
in light of current economic conditions, trends in capital markets, and
other factors. These other factors include investment size, quality,
concentration by issuer and industry, and other diversification
considerations relevant to the Company's fixed maturity investments.
The Company's fixed maturity investments comprised 67% of its general
account investment assets as of December 31, 2005. The Company reduces
credit risk for the portfolio as a whole by investing primarily in
investment grade fixed maturities. As of both December 31, 2005 and 2004,
97% of the fixed maturity portfolio carried an investment grade rating.
The Company's equity investments remained relatively constant at December
31, 2005 when compared to December 31, 2004. At both December 31, 2005 and
2004, they comprised 3% of total investment assets. The Company maintained
an investment in an exchange-traded fund investing in debt securities.
This investment represents approximately 25% and 31% of the equity
investments at December 31, 2005 and December 31, 2004, respectively. This
investment provides both liquidity and diversification at relatively low
risk levels. The fund has an investment grade debt rating.
The Company's mortgage loans on its real estate portfolio constituted 7%
and 8% of investment assets as of December 31, 2005 and 2004,
respectively.
At December 31, 2005, 18% of investment assets were invested in policy
loans and 5% were invested in short-term investments compared to 18% and
4%, respectively, at December 31, 2004.
The following table sets forth the distribution of invested assets, cash
and accrued investment income for the Company's general account as of the
end of the years indicated:
(In millions) December 31,
----------- ---------------------------------------------------------------------------
Carrying Value 2005 2004 2003 2002 2001
-------------- ----------- ------------ ----------- -------------- -----------
Debt Securities:
U.S. government direct
obligations and
U.S. agencies $ 3,368 $ 3,154 $ 3,199 $ 2,710 $ 3,075
Bonds 10,378 10,055 9,880 7,618 7,013
Foreign governments 21 16 58 43 28
----------- ------------ ----------- -------------- -----------
Total debt securities 13,767 13,225 13,137 10,371 10,116
Other Investments:
Equity investments 524 637 428 90 73
Mortgage loans 1,461 1,544 1,894 421 625
Policy loans 3,716 3,548 3,389 2,964 3,001
Short-term investments 1,070 709 852 710 425
Other 5 - - - -
----------- ------------ ----------- -------------- -----------
Total investments $ 20,543 $ 19,663 $ 19,700 $ 14,556 $ 14,240
=========== ============ =========== ============== ===========
Cash $ 58 $ 110 $ 151 $ 155 $ 214
Accrued investment
income 151 159 165 133 131
The following table summarizes the Company's general account investment
results:
(In millions) Earned Net
-----------
Year Ended December 31, Net Investment Income Investment Income Rate
---------------------------------------- ------------------------------- ---------------------------------
2005 $ 1,073 5.82 %
2004 1,033 5.37 %
2003 988 6.23 %
2002 919 6.79 %
2001 935 7.10 %
1.6 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.
As part of their regulatory oversight process, state insurance departments
conduct periodic detailed examinations of the operations and accounts of
the insurers domiciled in their states. For the three-year period ended
December 31, 2005, these examinations produced no significant adverse
findings regarding the operations and accounts of the Company and its
insurance subsidiaries.
The National Association of Insurance Commissioners (the "NAIC") has
prescribed risk-based capital ("RBC") rules and other financial ratios for
life insurance companies. The calculations set forth in these rules, which
are used by regulators to assess the sufficiency of an insurer's capital,
measure the risk characteristics of an insurer's assets, liabilities, and
certain off-balance sheet items. RBC is calculated by applying factors to
various asset, premium, and liability items. The application of the RBC
levels contained within the rules is a regulatory tool, which may indicate
the need for possible corrective action with respect to an insurer, and is
not intended as a means to rank insurers generally.
Based on their December 31, 2005, statutory financial reports, the Company
and its insurance subsidiaries have risk-based capital well in excess of
that required by their regulators.
The NAIC has also adopted the Codification of Statutory Accounting
Principles (the "Codification"). Codification was intended to standardize
accounting and reporting to state insurance departments. However,
statutory accounting principles will continue to be established by
individual state laws and permitted practices. The Colorado Division of
Insurance (the "CDOI") requires, with certain modifications, statutory
financial statements to be prepared under the provisions of the
Codification.
2. Insurance Holding Company Regulations
The Company and certain of its subsidiaries are subject to, and comply
with, insurance holding company regulations in applicable states. These
regulations contain certain restrictions and reporting requirements for
transactions between affiliates, including the payment 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 (the "SEC") and the National
Association of Securities Dealers, Inc. The SEC regulates the Company's
investment adviser subsidiaries and its transfer agent subsidiary. Certain
of the Company's separate accounts supporting its variable insurance and
annuity products, as well its mutual fund subsidiaries, are registered
under the Investment Company Act of 1940 while the securities they issue
are registered under 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 in the amount of $1.1 million as of December 31,
2005 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 in the
amounts of $1.2 million and $1.6 million at December 31, 2005 and 2004,
respectively.
5. Potential Legislation
United States federal and state legislative and regulatory developments
could significantly and adversely affect the Company's health and
retirement services business. Congress continues to consider changes to
various aspects of retirement plans and healthcare coverage.
It is impossible 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.
1.7 RATINGS
The Company is rated by a number of nationally recognized rating agencies.
The ratings represent the opinion of the rating agencies regarding the
financial strength of the Company and its ability to meet ongoing
obligations to policyholders. The Company's financial strength ratings as
of the date of this filing are as follows:
Rating Agency Measurement Current Rating
------------------------------------ ---------------------------------- ----------------------------------
A.M. Best Company, Inc. Financial strength, operating A+ (1)
performance and
business profile
Fitch Ratings Financial strength AA+ (2)
Moody's Investors Service Financial strength Aa3 (3)
Standard & Poor's Ratings Financial strength AA (4)
Services
(1) Superior (highest category out of ten categories).
(2) Very Strong (second highest category out of eight categories).
(3) Excellent (second highest category out of nine categories).
(4) Very Strong(second highest category out of nine categories).
1.8 MISCELLANEOUS
No customer accounted for 10% or more of the Company's consolidated
revenues in 2005, 2004 or 2003. In addition, no segment of the Company's
business is dependent upon a single customer or a few customers, the loss
of which would have a significant effect on it or either of its business
segment's operations. The loss of business from any one, or a few,
independent brokers or agents would not have a material adverse effect on
the Company or either of its business segments.
The Company had approximately 6,600 employees at December 31, 2005.
ITEM 1A. RISK FACTORS
In the normal course of its business, the Company is exposed to certain
operational, regulatory, and financial risks. The most significant risks
include:
1. Competition
The industry in which the Company operates is highly competitive. The
Company's competitors include life, accident and health insurance
companies, HMOs, mutual fund companies, banks, investment advisers and
certain service and professional organizations. Although there has been
consolidation in some sectors, no one competitor is dominant. Customer
retention is a key factor for continued profitability. Management cannot
assure that the Company will be able to maintain its current competitive
position in the markets in which it operates, or that it will be able to
expand its operations into new markets. If the Company fails to do so, its
business could be materially and adversely affected. See Items 1.3 and 1.4
for a further discussion of competition.
2. Regulation
Federal and state regulatory reform that increases the compliance
requirements imposed on the Company or that change the way that the
Company is able to do business may significantly harm its business or
adversely impact the results of operations in the future. It is not
possible to predict whether future legislation or regulation adversely
affecting the Company's business will be enacted and, if enacted, the
extent to which such legislation will have an effect on the Company or its
competitors. Furthermore, there can be no assurance as to which of the
Company's specific products would be impacted by any such legislative or
regulatory reform.
The Company's operations and accounts are subject to examination by the
CDOI and other regulators at specified intervals. The NAIC has also
prescribed RBC rules and other financial ratios for life insurance
companies. The calculations set forth in these rules, which are used by
regulators to assess the sufficiency of an insurer's capital, measure the
risk characteristics of an insurer's assets, liabilities, and certain
off-balance sheet items. RBC is calculated by applying factors to various
asset, premium, and liability items. Although the Company has risk-based
capital levels well in excess of those required by its regulators, there
can be no assurances made that it will continue to maintain these levels.
See Item 1.6 for a further discussion of regulation.
3. Ratings
The Company is rated by a number of nationally recognized rating agencies.
The ratings represent the opinion of the rating agencies regarding the
Company's financial strength and its ability to meet ongoing obligations
to policyholders. Claims paying ability and financial strength ratings are
factors in establishing the competitive position of insurers. A rating
downgrade, or the potential for such a downgrade, of the Company or any of
its rated insurance subsidiaries could, among other things, materially
increase the number of policy surrenders and withdrawals by policyholders
of cash values from their policies, adversely affecting relationships with
broker-dealers, banks, agents, wholesalers, and other distributors of its
products and services. This may result in cash payments requiring the
Company to sell invested assets, including illiquid assets such as
privately placed fixed maturities and mortgage loans on real estate, at a
price that may result in realized investment losses. These cash payments
to policyholders result in a decrease in total invested assets and a
decrease in net income. Among other things, early withdrawals may also
cause the Company to accelerate amortization of policy acquisition costs,
reducing net income. In addition, a downgrade may negatively impact new
sales and adversely affect the company's ability to compete and thereby
have a material affect on its business, results of operations, and
financial condition. Negative changes in credit ratings may also increase
the Company's cost of funding.
See Item 1.7 for the Company's current ratings.
4. Reinsurance
The Company purchases reinsurance by transferring, or ceding, part of the
risk it assumes to a reinsurance company in exchange for part of the
premium it receives in connection with the risk. The part of the risk the
Company retains for its own account is known as the retention. Through
reinsurance, the Company has the contractual right to collect the amount
above its retention from its reinsurers. Although reinsurance makes the
reinsurer liable to the Company to the extent the risk is transferred or
ceded to the reinsurer, it does not relieve it of its full liability to
its policyholders. Accordingly, the Company bears credit risk with respect
to its reinsurers. Management cannot make assurances that the Company's
reinsurers will pay all of its reinsurance claims, or that they will pay
claims on a timely basis. If the Company becomes liable for risks it has
ceded to reinsurers or if its reinsurers cease to meet their obligations
to the Company, whether because they are in a weakened position as a
result in incurred losses or otherwise, the Company's financial position,
results of operations and cash flows could be materially adversely
affected.
The Company's reinsurance facilities are generally subject to annual
renewal. However, no assurances can be made that the Company can maintain
its current reinsurance facilities or that it can obtain other reinsurance
facilities in adequate amounts and at favorable rates. If the Company is
unable to renew its expiring facilities or to obtain new reinsurance
facilities, either its net exposures would increase or, if it is unwilling
to bear an increase in net exposures, it would have to reduce the level of
its underwriting commitments. Either of these potential developments could
have a material adverse effect on the Company's business.
See Items 1.3 and 1.4 for a further discussion of reinsurance.
5. Reserves
The Company maintains policy and contract reserves to cover its estimated
liability for unpaid losses and loss adjustment expenses for both reported
and unreported claims incurred. Reserves do not represent an exact
calculation of liability. Rather, reserves represent an estimate of what
management expects the ultimate settlement and administration of claims
will cost. These estimates, which generally involve actuarial projections,
are based upon management's assessment of facts and circumstances then
known, as well as estimates of future trends in claims severity,
frequency, judicial theories of liability and other factors. These
variables are affected by both internal and external events, such as
changes in claims handling procedures, catastrophic events, inflation,
judicial trends and legislative changes. Many of these items are not
directly quantifiable in advance. Our life insurance products are exposed
to the risk of catastrophic events, such as a pandemic, terrorism, or
other such events that cause a large number of deaths. The Company's group
insurance products are exposed to the risk of significant mortality or
morbidity losses caused by a local event effecting one or more of our
group insurance policyholders. Additionally, there may be a significant
reporting delay between the occurrence of an insured event and the time it
is reported. The inherent uncertainties of estimating reserves are greater
for certain types of liabilities, particularly those in which the various
considerations affecting the type of claim are subject to change and in
which long periods of time may elapse before a definitive determination of
liability is made. Reserve estimates are continually refined in a regular
and ongoing process as experience develops and further claims are reported
and settled. Adjustments to reserves are reflected in the Company's
consolidated statement of income in the period in which adjustments are
determined. Because setting reserves is inherently uncertain, there can be
no assurance that current reserves will prove to be adequate in light of
subsequent events.
See Items 1.3 and 1.4 for a further discussion of reserves.
6. Interest rates
In periods of rapidly increasing interest rates, policy loans, surrenders
and withdrawals may increase. Premiums in flexible premium policies may
decrease as policyholders seek investments with higher perceived returns.
This activity may result in the Company making cash payments requiring
that it sell invested assets at a time when the prices of those assets are
adversely affected by the increase in market interest rates. Among other
things, early withdrawals may also cause the Company to accelerate the
amortization of deferred policy acquisition costs, reducing net income.
During periods of sustained low interest rates, life insurance and annuity
products may be affected by increased premium payments on products with
flexible premium features and a higher percentage of insurance policies
remaining in-force from year to year. During such a period, investment
earnings may be lower because the interest earnings on new fixed income
investments will likely have declined with the market interest rates.
Although the Company invests in a broad range of asset classes, it is
primarily invested in domestic fixed income securities. Accordingly,
during periods of sustained low interest rates, net income may decline as
a result of a decrease in the spread between either the interest rates
credited to policyholders or the rates assumed in reserve calculations.
Although the Company engages in hedging activities including investing in
interest rate derivatives, there can be no assurance that it would be
fully insulated from realizing any losses on sales of securities. In
addition, regardless of whether the Company realized an investment loss,
potential withdrawals would produce a decrease in invested assets, with an
adverse effect on future earnings.
7. Market risk
The Company manages or administers its general and separate accounts in
support of cash and liquidity requirements of its insurance and investment
products. The Company's general account investment portfolio is
diversified over a broad range of asset classes, primarily domestic fixed
income securities. The fair value of these and other general account
invested assets fluctuates depending upon, among other factors, general
economic and market conditions. In general, the market value of the
Company's general account fixed maturity securities portfolio increases or
decreases in inverse relationship with fluctuations in interest rates.
Additionally, the Company may, from time to time, for business,
regulatory, or other reasons, elect or be required to sell certain of its
general account invested assets at a time when their fair values are less
than their original cost, resulting in realized capital losses, which
would reduce net income.
The risk of fluctuations in market value of substantially all of the
separate account assets is borne by the policyholders. The Company's fee
income for administering separate account assets, however, is generally
set as a percentage of those assets. Accordingly, fluctuations in the
market value of separate account assets may result in fluctuations in
revenue from policy charges.
See Item 7A for a further discussion of market risk.
8. Litigation
In recent years, life, accident and health insurance and financial service
companies have been named as defendants in lawsuits, including class
actions. A number of these lawsuits have resulted in substantial jury
awards and settlements. There can be no assurance that any future
litigation relating to matters such as the provision of health coverage or
pricing and sales practices will not have a material adverse affect on the
Company's financial position or the results of its operations.
ITEM 2. PROPERTIES
The Company's corporate office facility consists of a 752,000 square foot
complex located in Greenwood Village, Colorado. The Company owns its
corporate office facilities. The Company leases sales and claims
processing offices throughout the United States.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is a party or of which any of their property is
the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 2005.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
5.1 EQUITY SECURITY HOLDERS AND MARKET INFORMATION
There is no established public trading market for the Company's common
equity. GWL&A Financial is the sole shareholder of the Company's common
equity securities.
5.2 DIVIDENDS
In the two most recent fiscal years, the Company has paid dividends on its
common shares. Dividends paid on the Company's common stock were $221.4
million and $163.2 million during the years ended December 31, 2005 and
2004, respectively.
Under Colorado law, the Company cannot, without the approval of the
Colorado Commissioner of Insurance, pay a dividend if as a result of such
payment, the total of all dividends paid in the preceding twelve months,
would exceed the greater of (i) 10% of the Company's statutory surplus as
regards policyholders as of the preceding year ended December 31; or (ii)
the Company's statutory net gain, not including realized capital gains,
for the twelve-month period ending the next preceding December 31 not
including pro rata distributions of the Company's own securities.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of certain consolidated financial information
for the Company. This summary has been derived in part from, and should be
read in conjunction with, the Company's audited consolidated financial
statements for the years indicated and Item 1, regarding the acquisition
of CLICA and CLINY and the reinsurance agreements with CLAC. Note 1 to the
consolidated financial statements discusses the significant accounting
policies of the Company. Significant estimates are required to account for
policy reserves, allowances for credit losses on mortgage loans, deferred
policy acquisition costs, derivative instruments, valuation of privately
placed fixed maturities, employee benefit plans, and taxes on income.
Actual results could differ from those estimates.
Year Ended December 31,
---------------------------------------------------------------------------------
(In millions) 2005 2004 2003 2002 2001
----------- ------------- ------------- ------------- ------------- -------------
Income Statement Data
---------------------------------
Premium income $ 1,225 $ 671 $ 2,253 $ 1,120 $ 1,203
Fee income 965 916 840 884 947
Net investment income 1,072 1,033 988 919 935
Net realized gains on
investments 39 58 40 42 47
------------- ------------- ------------- ------------- -------------
Total revenue 3,301 2,678 4,121 2,965 3,132
------------- ------------- ------------- ------------- -------------
Policyholder benefits 1,792 1,234 2,684 1,593 1,696
Operating expenses 976 968 965 958 1,021
------------- ------------- ------------- ------------- -------------
Total benefits and
expenses excluding
special charges 2,768 2,202 3,649 2,551 2,717
------------- ------------- ------------- ------------- -------------
Income from operations
excluding special
charges 533 476 472 414 415
Income tax expense 161 150 154 130 141
------------- ------------- ------------- ------------- -------------
Net income before
special charges 372 326 318 284 274
Special charges, net - - - - 81
------------- ------------- ------------- ------------- -------------
Net income $ 372 $ 326 $ 318 $ 284 $ 193
============= ============= ============= ============= =============
Dividends declared $ 221 $ 163 $ 76 $ 171 $ 188
============= ============= ============= ============= =============
Year Ended December 31,
--------------------------------------------------------------------------------
(In millions) 2005 2004 2003 2002 2001
----------- ------------ ------------- ------------ ------------ -------------
Deposits for investment-
type contracts $ 1,159 $ 711 $ 676 $ 691 $ 627
Deposits to separate
accounts 2,125 1,979 2,217 2,461 3,240
Self-funded premium
equivalents 4,612 4,706 4,674 5,228 5,721
(In millions) December 31,
----------- --------------------------------------------------------------------------------
Balance Sheet Data 2005 2004 2003 2002 2001
--------------------------------- ------------ ------------- ----------- ------------ -------------
Investment assets $ 20,543 $ 19,663 $ 19,700 $ 14,556 $ 14,240
Separate account assets 14,456 14,155 13,175 11,338 12,585
Total assets 37,779 37,093 36,610 27,656 28,818
Total policy benefit
liabilities 19,235 18,942 19,703 13,007 12,931
Due to parent and affiliates 241 221 207 205 257
Total shareholder's
equity 2,062 2,044 1,887 1,664 1,470
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K 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 its
products, investment spreads or yields, or the earnings or profitability
of the Company's activities. Forward-looking statements are necessarily
based upon estimates and assumptions that are inherently subject to
significant business, economic and competitive uncertainties and
contingencies, many of which are beyond the Company's control and many of
which, with respect to future business decisions, are subject to change.
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 its investment portfolio and other factors. Readers
should also consider other matters, including any risks and
uncertainties, discussed in documents filed by the Company and certain of
its subsidiaries with the Securities and Exchange Commission. This
discussion should be read in conjunction with the Company's consolidated
financial statements included in Item 8.
Management's discussion and analysis of financial condition and results
of operations of the Company for the three years ended December 31, 2005
follows. This management discussion and analysis should be read in
conjunction with the financial data contained in Item 6, Selected
Financial Data, and in Item 8, Financial Statements and Supplementary
Data.
7.1 EXECUTIVE SUMMARY
The Company and its subsidiaries are providers of insurance and other
financial service products to a large spectrum of individual, corporate,
institutional and governmental customers. The Company offers life
insurance and annuities to individuals, while corporations and other
institutions are offered group life and health insurance, retirement and
savings products and services.
The Company is organized into two business segments: Great-West
Healthcare and Financial Services. There is no legal separation of the
two segments. To separately assess and reflect the financial performance
of the two segments, the Company has allocated all of its assets,
liabilities and earnings between them. The segments are accounted for and
analyzed as if they were separate entities. For this purpose, corporate
and other overhead expenses are allocated between the two segments.
In assessing the performance of the Great-West Healthcare segment,
management considers its profitability and the level of membership (the
number of individuals covered under health contracts with employer
customers) to be its primary points of focus. Increased membership is
expected to improve the Company's ability to obtain healthcare provider
network discounts, which will enable it to enhance pricing
competitiveness and earnings.
In the highly competitive healthcare marketplace, employers often
regularly seek competitive bids to obtain better pricing as well as
varied product choices to meet their employees' differing needs. In many
cases, it is more cost effective and efficient for an employer to
contract with a carrier that offers multiple product lines and
centralized administration. The Great-West Healthcare segment continues
to focus on its consumer driven product portfolio in addition to
improving programs that benefit members and deliver cost savings to
employers.
During 2005, the Company made significant progress in advancing
Great-West Healthcare's position as a leader in consumer-driven
healthcare. In the Company's first full year of offering an integrated
suite of consumer-driven healthcare products, it introduced Great-West
Healthcare Consumer AdvantageSM, a healthcare savings account plan and a
healthcare reimbursement account. In addition, during 2005, Great-West
Healthcare introduced a new magazine, Trailblazer, devoted to
consumer-driven healthcare. Trailblazer has proven exceptionally useful
to employee benefits managers, brokers, consultants and others who make
healthcare related decisions.
During 2005, Great-West Healthcare expanded its specialty risk market
segment. The specialty risk market segment provides services to
third-party administrators and other specialized distribution channels.
During September 2005, the Company completed the acquisition of
Mediversal, Inc., a healthcare services company that administers claims
for employers with self-funded group health and worker's compensation
plans.
In assessing the performance of the Financial Services segment,
management considers the ability to continue to expand its presence in
the United States defined contribution and institutional insurance
markets to be its primary point of focus. The life insurance, savings and
investments marketplace is also highly competitive. Competitors include
mutual fund companies, insurance companies, banks, investment advisors
and certain service and professional organizations.
The Financial Services segment continued to grow during 2005. The
Financial Services segment experienced a significant increase in the
number of plans and participants served by its Retirement Services unit
and a slight decrease in the individual markets area due primarily to the
run off of CLAC, CLINY and CLICA policies. During 2005, Individual
Markets continued to focus on core strengths, increasing the number of
placed policies, improving retention and increasing the partnership base.
In late 2005, Advised Assets Group, LLC, ("AAG"), the Company's
registered investment advisory subsidiary, rolled out Reality Investing,
a program that expands AAG's participant level advice services including
professional account management at the participant level.
The Financial Services segment is committed to providing exceptional
service and high value to life and annuity policyholders. It has a
dedicated service unit to work in collaboration with its brokers and
agents to ensure that policyholders continue to receive the information
and service they need to make sound financial decisions with respect to
their policies.
On December 31, 2005, William T. McCallum retired as president and chief
executive officer of the Company. Mr. McCallum was appointed
vice-chairman of the Board of Directors of the Company effective January
1, 2006 and will continue as a director of the Company and as a director
of Lifeco. Raymond L. McFeetors was appointed president and chief
executive officer of the Company effective January 1, 2006. Mr. McFeetors
will continue to serve as president and chief executive officer of the
Company's affiliates, Great-West Life, London Life Insurance Company,
CLAC, and Lifeco.
7.2 CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
the Company's management to make a significant variety of estimates and
assumptions. These estimates and assumptions affect, among other things,
the reported amounts of assets and liabilities, the disclosure of
contingent liabilities and the reported amounts of revenues and expenses.
Actual results can differ from the amounts previously estimated, which
were based on information available at the time the estimates were made.
The critical accounting policies described below are those that the
Company believes are important to the portrayal of its financial
condition and results and which require management to make difficult,
subjective and/or complex judgments. Critical accounting policies cover
accounting matters that are inherently uncertain because the future
resolution of such matters is unknown. The Company believes that critical
accounting policies determine the reported amounts of policy reserves,
allowances for credit losses on mortgage loans, deferred policy
acquisition costs, derivative instruments, valuation of privately placed
fixed maturities, employee benefit plans, and taxes on income.
1. Policy Reserves
Life Insurance and Annuity Reserves - The Company's liability for
contract and policy benefits is the largest liability included in its
consolidated balance sheets representing 53.9% and 54.0% of total
liabilities at December 31, 2005 and 2004, respectively. Life insurance
and annuity policy reserves with life contingencies are computed on the
basis of estimated mortality, investment yield, withdrawals, future
maintenance and settlement expenses and retrospective experience rating
premium refunds. If actual experience is different than estimated,
adjustments to such reserves may be required. Annuity contract reserves
without life contingencies are established at the contractholder's
account value.
Reinsurance - The Company enters into reinsurance transactions as both a
provider and a purchaser of reinsurance. Policy reserves ceded to other
insurance companies are carried as reinsurance receivables in the
Company's consolidated balance sheets. 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. Ceded reinsurance contracts do not
relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations under these contracts 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 defaults. 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 $3.5 million of coverage per individual life.
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 the Company's prior experience.
See Notes 1 and 7 to the accompanying consolidated financial statements
for a further discussion of policy reserves and reinsurance transactions.
2. Allowance For Credit Losses on Mortgage Loans
The Company maintains an allowance for credit losses on mortgage loans at
a level that, in management's opinion, is sufficient to absorb credit
losses on its impaired mortgage loans. Management's judgment is based on
past loss experience and current and projected economic conditions and,
as relates to mortgages, extensive situational analysis of each
individual loan. The measurement of impaired loans is based on the fair
value of the collateral. Individual mortgage and related collateral
characteristics have a more pronounced impact on the ultimate adequacy of
the allowance for mortgage loans.
See Note 4 to the accompanying consolidated financial statements for a
further discussion of the Company's allowance for credit losses.
3. Deferred Policy Acquisition Costs
Policy acquisition costs, which primarily consist of sales commissions,
cost of policy issuance and underwriting and costs associated with the
Company's sales representatives related to the production of new
business, have been deferred to the extent recoverable. The
recoverability of such costs is dependent upon the future profitability
of the related business. The amount of future profit is primarily
dependent on investment returns, mortality, morbidity, persistency,
interest crediting rates and the expenses incurred to administer the
business. Deferred costs associated with 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, which can be affected by such factors as investment yield,
realized investment gains and losses and policyholder retention. 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 and adjustments to deferred policy
acquisition costs are reflected in earnings through an adjustment to
operating expenses.
4. Derivative Instruments
Derivatives are financial instruments whose values are derived from
interest rates, foreign exchange rates, financial indices or the values
of securities or commodities. The Company uses certain derivative
instruments, such as futures, options and swaps, for purposes of hedging
its risk exposure to changes in interest rates, market exchanges and
foreign currency exchanges. The Company designates its derivative
financial instruments as (i) fair value hedges, (ii) cash flow hedges,
(iii) foreign currency hedges and (iv) derivatives not qualifying for
hedge accounting.
o Fair value hedges. Changes in the fair value of a derivative
instrument that is designated as a fair value hedge are recorded
in the current period earnings.
o Cash flow hedges. Changes in the fair value of a derivative
instrument that is designated as a cash flow hedge are recorded
in accumulated other comprehensive income on the consolidated
balance sheet and reclassified to earnings when the cash flow of
the hedged item impacts earnings.
o Foreign currency hedges. Changes in the fair value of a
derivative instrument that is designated as a foreign currency
hedge are recorded in either current earnings or in accumulated
other comprehensive income depending on whether the hedged
transaction is either a fair value hedge or a cash flow hedge,
respectively.
o Derivatives not qualifying for hedge accounting. Changes in the
fair value of a derivative instrument that does not qualify
for hedge accounting treatment are recorded in current period
earnings.
The Company generally enters into derivative transactions only with high
quality institutions, as such, no losses associated with non-performance
have occurred or are expected to occur. Derivative instruments are not
used for speculative purposes.
See Notes 1 and 4 to the accompanying consolidated financial statements
for a further discussion of the Company's derivative instruments.
5. Valuation Of Privately Placed Fixed Maturities
A large portion of the Company's invested assets is stated at fair value
in the consolidated balance sheets based on quoted market prices.
However, when such information is not available, fair value is estimated.
The estimated fair values of financial instruments have been determined
using available information and established valuation methodologies.
However, considerable judgment 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 fair value of approximately 40% and 39% of the
Company's fixed maturity investments at December 31, 2005 and 2004,
respectively, are valued using these types of estimates.
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.
See Note 5 to the accompanying consolidated financial statements for a
further discussion of the valuation of privately placed fixed maturities.
6. Employee Benefit Plans
The Company sponsors pension and other retirement plans in various forms
covering employees who meet specific eligibility requirements. Expenses
and liabilities reported in connection with these plans require an
extensive use of estimates and assumptions. The estimates and assumptions
include the expected interest rate used to determine the expected return
on plan assets, the rate of future employee compensation increases and
compensation levels and general trends in healthcare costs. Management
determines these estimates and assumptions based upon currently available
market data, historical performance of the plan assets and consultation
with an independent actuarial consulting firm.
The estimates and assumptions utilized by the Company may differ
materially from actual results obtained due to changes in market and
economic conditions, higher or lower withdrawal rates or longer or
shorter life spans of the various plan's participants.
See Note 12 to the accompanying consolidated financial statements for a
further discussion of the Company's employee benefit plans.
7. Taxes on Income
The Company's effective tax rate is based upon expected income and
statutory income tax rates and available tax planning opportunities. In
the Company's determination of its effective income tax rate, management
considers judgments regarding its business plans, planning opportunities
and expectations about their future outcomes. Certain changes or future
events, such as changes in tax legislation and the commencement or
completion of tax audits, could have an impact on management's estimates
and the Company's effective tax rate.
Accounting and tax regulations require that items be included in income
tax returns at different times from when they are reflected in financial
statements. These timing differences give rise to deferred tax assets and
liabilities. A deferred tax liability is recognized for temporary
differences that will result in taxable amounts or nondeductible expenses
in future years. A deferred tax asset is recognized for temporary
differences that will result in tax deductible amounts or nontaxable
income in future years, including carryforwards.
The application of GAAP requires management to evaluate the
recoverability of its deferred tax assets. Although realization is not
assured, management believes that it is more likely than not that the
deferred tax assets will be realized.
The amount of income taxes paid by the Company is subject to ongoing
audits in the various jurisdictions in which it carries on business. The
Internal Revenue Service (the "I.R.S.") has completed audits of the
Company's income tax returns through 1993. I.R.S. audits of the Company's
income tax returns for the years 1994 through 2005 are in various stages
of completion. Although the results of these audits are not final, based
upon available information, management believes provisions for potential
audit assessments are adequate.
See Note 13 to the accompanying consolidated financial statements for a
further discussion of taxes on income.
7.3 COMPANY RESULTS OF OPERATIONS
Year ended December 31, 2005 compared with the year ended December 31,
2004
Consolidated Results
Net Income
The Company's consolidated net income increased by $46 million, or 14.1%,
to $372 million for the year ended December 31, 2005 from $326 million in
2004. The net income increase reflects a $24 million increase from the
Great-West Healthcare segment and a $22 million increase from the
Financial Services segment. The Great-West Healthcare segment increase
was primarily due to improved morbidity and mortality gains combined with
higher pharmacy benefit management revenue and investment income. The
Financial Services segment increase reflected higher fee income during
2005 as a result of new sales in the administrative record keeping area
and improved mortality rates in the Individual Markets line of business.
Revenues
In the year ended December 31, 2005, total revenues increased by $623
million, or 23.3%, to $3.3 billion when compared to the year ended
December 31, 2004. The increase in revenues during 2005 was in part due
to the February 2004 CLAC recapture of certain group life and health
business from the Company associated with the original indemnity
reinsurance agreement, as discussed in Note 3 to the accompanying
consolidated financial statements. Under the terms of this reinsurance
agreement, the Great-West Healthcare segment recorded an income statement
impact in the amount of $256 million of negative premium income and an
offsetting change in reserves associated with these recaptured policies.
Also in the Great-West Healthcare segment, premiums ceded to Allianz
decreased by $141 million during 2005 when compared to 2004 as a result
of the lower contractual cession percentages on the contract. The
Financial Services segment also entered into a reinsurance agreement with
CLAC on December 31, 2005, pursuant to which it assumed a certain
specific in-force block of term life insurance. Under the terms of this
reinsurance agreement, the Company recorded premiums of $167 million.
Fee income in 2005 increased by $49 million when compared to year ended
December 31, 2004. The increase resulted from $34 million from the
Financial Services segment attributed to higher fees for providing
administrative services to institutional clients and $15 million from the
Great-West Healthcare segment attributed to increased pharmacy benefits
management contract revenue and from improved renewal pricing.
Net investment income increased by $39 million, or 3.8%, to $1.072
billion during the year ended December 31, 2005 when compared to 2004.
The increase was primarily the result of higher interest earned rates due
to less amortization of premiums on fixed maturity investments in 2005
and more invested assets, which more than offset the impact of the change
in the embedded derivative on CLFC funds withheld that decreased
investment income by $24.3 million during the year ended December 31,
2005 when compared to 2004.
The net realized gains on investments of $39 million in 2005 was
primarily due to a large gain on the sale of equity investments. The net
realized gains on investments of $58 million in 2004 was primarily from
the sale of fixed maturities resulting in gains due to declining interest
rates.
Benefits
Benefit expenses include amounts paid or credited to policyholders,
changes in policy liabilities, claims, surrenders and annuity and
maturity payments. Total benefits increased by $558 million, or 45.3%,
during the year ended December 31, 2005 when compared to 2004. The
increase was primarily due to the aforementioned CLAC reinsurance
recapture resulting in $256 million of negative change in reserves in
February 2004. In addition, benefits ceded to Allianz decreased by $141
million during the year ended December 31, 2005 when compared to 2004 as
a result of the lower contractual cession percentages under the
reinsurance contract. The remaining increase was the result of the
aforementioned December 31, 2005 CLAC reinsurance resulting in $167
million of increase in reserves.
Expenses
Operating expenses include general and administrative expenses,
commissions and premium taxes. Total operating expenses increased by $8
million, or 1.0%, to $976 million during the year ended December 31, 2005
when compared to 2004.
Income tax expense increased by $11 million, or 7.5%, during the year
ended December 31, 2005 when compared to 2004. This increase was
primarily due to the 12% increase in the Company's pretax income, offset
by a decrease in its 2005 effective tax rate, from 31.5% to 30.3% during
the years ended December 31, 2004 and 2005, respectively.
Deposits for Investment-Type Contracts, Deposits to Separate Accounts and
Self-Funded Equivalents
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 and deposits to the separate
accounts increased by $594 million, or 22.0%, during the year ended
December 31, 2005 when compared to 2004. The increase was due to an
increase in transfers by participants from unaffiliated retail investment
options to the company's investment options for which it provides plan
and participant record keeping services.
Self-funded premium equivalents decreased by $94 million, or 2.0%, during
the year ended December 31, 2005 when compared to 2004. This decrease was
primarily due to decreased membership in the Healthcare segment.
Other
The Company's Great-West Healthcare segment entered into a reinsurance
agreement during 2003 with Allianz to cede 40% in 2005, 75% in 2004 and
90% in 2003 of direct written group health stop-loss and excess-loss
business. The Allianz reinsurance agreement was retroactive to January 1,
2003 and was terminated on December 31, 2005.
Year ended December 31, 2004 compared with the year ended December 31,
2003
Consolidated Results
Net Income
The Company's consolidated net income increased by $8 million, or 2.5%,
to $326 million for the year ended December 31, 2004 from $318 million in
2003. The net income increase reflects a $32 million increase from the
Financial Services segment, partially offset by a decrease in the amount
of $24 million from the Great-West Healthcare segment. The Great-West
Healthcare segment experienced a combination of weaker morbidity results
primarily from lower customer deficit recoveries and a decrease in
premium income, partially offset by an increase in fee income. The
Financial Services segment increase reflected higher fee income and
improved margins on invested assets. In addition, the Financial Services
segment included the results of CLFC businesses for twelve months in the
year ended December 31, 2004, compared with less than six months in 2003.
Revenues
During the year ended December 31, 2004, total revenues decreased by $1.5
billion, or 37.4%, to $2.6 billion when compared to the year ended
December 31, 2003. The decrease in revenues during 2004 was primarily the
result of the effect of the one-time increase of $1.427 billion to
premium revenue in 2003 related to the CLAC Indemnity Reinsurance
Agreement. In addition, the group life and health portion of this
reinsurance agreement was recaptured by CLAC on February 29, 2004, as
previously discussed. The Company recorded an income statement impact in
the amount of $256 million of negative premium income and an offsetting
change in reserves associated with these policies.
Fee income during 2004 was comprised of Great-West Healthcare fee income
and Financial Services fee income in the amounts of $649 million and $267
million, increases of 6.9% and 14.5%, respectively, when compared to
2003. Administrative fees also include the impact of increased pharmacy
benefit management revenue due to higher utilization combined with
favorable contract amendments.
Net investment income increased by $45 million, or 4.5%, to $1.033
billion during the year ended December 31, 2004 when compared to 2003.
The increase was primarily the result of the inclusion of CLFC's business
for twelve months for the year ended December 31, 2004 compared with less
than six months in 2003. This increase was partially offset by generally
lower interest rates and the impact of the change in the embedded
derivative on CLFC funds withheld which decreased investment income by
$27.4 million in 2004 compared to 2003.
The net realized gains on investments of $58 million and $40 million in
2004 and 2003, respectively, was primarily from the sale of fixed
maturities resulting in gains due to declining interest rates.
Benefits
Total benefits decreased by $1.5 billion, or 57.7%, in the year ended
December 31, 2004 when compared to 2003. The decrease was primarily
attributed to the one-time adjustment increasing benefit reserves in 2003
associated with the CLAC Indemnity Reinsurance Agreement, and its
subsequent group life and health recapture on February 29, 2004, as
mentioned above.
Expenses
Total operating expenses increased by $3.0 million to $968 million during
the year ended December 31, 2004 when compared to 2003.
Income tax expense decreased by $4 million, or 2.6%, during the year
ended December 31, 2004 when compared to 2003. This decrease was
primarily due to the decrease in the Company's 2004 effective tax rate,
from 32.6% to 31.5% during the years ended December 31, 2003 and 2004,
respectively, which resulted primarily from tax credits realized from
investments in low income housing assets.
Deposits for Investment-Type Contracts, Deposits to Separate Accounts and
Self-Funded Equivalents
Deposits for investment-type contracts increased by $35 million, or 5.2%,
during the year ended December 31, 2004 when compared to 2003. The
increase was primarily attributable to a net increase in participant
accounts in the retirement products area in 2004.
Deposits to separate accounts decreased by $238 million, or 10.7%, during
the year ended December 31, 2004 when compared to 2003. This decrease was
primarily due to a combination of decreased sales of institutional
annuity and insurance products partially offset by significant increases
in the sales of the BOLI product line.
Self-funded premium equivalents increased by $32 million, or 0.7%, during
the year ended December 31, 2004 when compared to 2003. This increase was
primarily due to an overall increase in membership during 2004.
Other
The Company's Great-West Healthcare segment entered into a reinsurance
agreement during the third quarter of 2003 with Allianz to cede 75% in
2004 and 90% in 2003 of direct written group health stop-loss and
excess-loss business. This Allianz agreement was retroactive to January
1, 2003 and was terminated on December 31, 2005.
7.4 GREAT-WEST HEALTHCARE RESULTS OF OPERATIONS
Year ended December 31, 2005 compared with the year ended December 31,
2004
The following is a summary of certain financial data of the Great-West
Healthcare segment:
T
(In millions) Year Ended December 31,
----------- -------------------------------------------
Income Statement Data 2005 2004 Percent Change
--------------------------------------------- -------------------- -------------------- --------------------
Premium income $ 678 $ 262 158.8%
Fee income 664 649 2.3%
Net investment income 67 47 42.6%
Net realized investment gains 18 15 20.0%
-------------------- -------------------- --------------------
Total revenue 1,427 973 46.7%
-------------------- -------------------- --------------------
Policyholder benefits 495 68 627.9%
Operating expenses 674 681 (1.0%)
-------------------- -------------------- --------------------
Total benefits and expenses 1,169 749 56.1%
-------------------- -------------------- --------------------
Income from operations 258 224 15.2%
Income tax expense 85 75 13.3%
-------------------- -------------------- --------------------
Net income $ 173 $ 149 16.1%
==================== ==================== ====================
Self-funded premium equivalents $ 4,612 $ 4,706 (2.0%)
The following is a summary of the Great-West Healthcare segment membership at December 31, 2005 and 2004:
(In millions) December 31,
----------- -------------------------------------------
Membership 2005 2004 Percent Change
------------------------------------------------ ------------------- -------------------- ---------------------
Select and Mid Market Groups 1.292 1.367 (5.5%)
National and Specialty Risk Groups 0.733 0.654 12.1%
------------------- -------------------- ---------------------
Total 2.025 2.021 0.2%
=================== ==================== =====================
The Great-West Healthcare segment net income increased by $24 million, or
16.1%, to $173 million during the year ended December 31, 2005 from $149
million during 2004. The increase was primarily due to improved morbidity
and mortality gains combined with higher pharmacy benefit management
revenue and investment income.
Premium and fee income increased by $431 million, or 47.3% to $1.342
billion during the year ended December 31, 2005 when compared to 2004.
The increase was attributable to the inclusion of negative premium in the
amount of $207 million in 2004 as a result of the February 2004 recapture
discussed previously, comprised of $256 million of negative premiums
offset by $49 million of normal CLAC reinsurance activity recorded before
the recapture. In addition, premiums ceded to Allianz decreased by $141
million during 2005 when compared to 2004 as a result of lower
contractual cession percentages on the contract. The remaining increase
was the result of higher renewal pricing partially offset by the decline
in full service membership. These results also include higher pharmacy
benefit management fee revenue due to greater utilization combined with
favorable contract amendments resulting from the conversion of the
Company's pharmacy business to Express Scripts, Inc.
The Great-West Healthcare segment net investment income increased by $20
million, or 42.6%, to $67 million during the year ended December 31, 2005
when compared to 2004. The increase was the result of higher interest
earned rates primarily due to less amortization of premiums on fixed
maturity investments in 2005 and increased investment income on surplus
assets.
Self-funded premium equivalents decreased slightly by $94 million, or
2.0%, to $4.612 billion during the year ended December 31, 2005 when
compared to 2004 as a result of decreased full service membership.
Total benefits and expenses increased by $420 million, or 56.1%, to
$1.169 billion during the year ended December 31, 2005 when compared to
2004. The increase was attributable to the inclusion of negative benefits
in the amount of $250 million in 2004 as a result of the February 2004
recapture discussed previously, comprised of $256 million of negative
change in reserves offset by $6 million of normal CLAC reinsurance
activity recorded before the recapture. In addition, benefits ceded to
Allianz decreased by $141 million during 2005 when compared to 2004 as a
result of lower contractual cession percentages on the contract. This
contract was terminated on December 31, 2005. The remaining increase was
the result of higher specific stop loss claims experience partially
offset by improved aggregate stop loss claims and life claims experience.
Commission expense reflected a slight decline as the result of a
reduction in per capita payments on lower membership.
Excluding customers associated with Canada Life, group healthcare
customers (employer groups) in the Great-West Healthcare segment
experienced a slight decline during the year ended December 31, 2005.
Total membership remained relatively constant from 2.021 million members
at December 31, 2004 to 2.025 million members at December 31, 2005. Point
of service ("POS"), including open access membership and HMO members
increased by 4.4% from approximately 228,000 at December 31, 2004 to
approximately 238,000 at December 31, 2005.
Higher membership in the specialty risk segment has offset decreases in
all other markets as a result of lower sales combined with higher
terminations. This membership includes 54,000 medical members related to
the Company's September 2005 acquisition of Mediversal, Inc., a third
party administrator that administers health and worker's compensation
claims for employers with self-funded plans.
Year ended December 31, 2004 compared with the year ended December 31,
2003
The following is a summary of certain financial data of the Great-West
Healthcare segment:
(In millions) Year Ended December 31,
-----------
-------------------------------------------
Income Statement Data 2004 2003 Percent Change
--------------------------------------------- -------------------- -------------------- --------------------
Premium income $ 262 $ 838 (68.7)%
Fee income 649 607 6.9%
Net investment income 47 72 (34.7)%
Net realized investment gains 15 11 36.4%
-------------------- -------------------- --------------------
Total revenue 973 1,528 (36.3)%
-------------------- -------------------- --------------------
Policyholder benefits 68 568 (88.0)%
Operating expenses 681 699 (2.6)%
-------------------- -------------------- --------------------
Total benefits and expenses 749 1,267 (40.9)%
-------------------- -------------------- --------------------
Income from operations 224 261 (14.2)%
Income tax expense 75 88 (14.8)%
-------------------- -------------------- --------------------
Net income $ 149 $ 173 (13.9)%
==================== ==================== ====================
Self-funded premium equivalents $ 4,706 $ 4,674 0.7%
The following is a summary of the Great-West Healthcare segment membership at December 31, 2004 and 2003:
(In millions) December 31,
----------- --------------------------------------------
Membership 2004 2003 Percent Change
----------------------------------------------- -------------------- -------------------- --------------------
Select and Mid Market Groups 1.367 1.278 7.0%
National and Specialty Risk Groups 0.654 0.578 13.1%
-------------------- -------------------- --------------------
Total 2.021 1.856 8.9%
==================== ==================== ====================
The Great-West Healthcare segment net income decreased by $24 million, or
13.9%, to $149 million during the year ended December 31, 2004 from $173
million in 2003. The decrease was primarily due to lower premium income
and weaker morbidity results in the select and mid-market market
segments.
Excluding premium and fee income associated with the CLAC reinsurance and
the Allianz reinsurance, premium and fee income decreased by $5.4
million, or 0.4%, during 2004 when compared to 2003. The decrease was
primarily due to lower membership levels during the first few months of
2004. The decreases in early 2004 were offset by increased sales and
membership later in the year. Additionally, this decrease was partially
offset by increased revenues associated with the pharmacy benefit
management contract, which resulted from greater utilization and certain
favorable contract amendments during 2004.
The Great-West Healthcare segment net investment income decreased by $25
million, or 34.7%, to $47 million during the year ended December 31, 2004
when compared to 2003. The decrease was attributed to a reduction in the
net earned rate on investments from 6.23% in 2003 to 5.37% in 2004 and
the reduction in investment assets associated with the recapture of the
CLAC group life and health business.
Self-funded premium equivalents increased by $32 million, or 0.7%, to
$4.706 billion in 2004 when compared to 2003 as a result of increased
membership.
Excluding benefits and expenses associated with the CLAC reinsurance and
the Allianz reinsurance, total benefits and expenses increased by $15.7
million or 1.2% to $1,305 million during 2004 when compared to 2003.
Increased utilization, higher medical costs, accelerated claims payments
and lower customer deficit recoveries have contributed to higher health
claims. In addition, there were higher commissions on increased sales and
program amendments.
Excluding customers associated with Canada Life, the Great-West
Healthcare segment experienced a net increase of 3.8% or 186 group
healthcare customers (employer groups) during 2004. There was an 8.9%
increase in total healthcare membership from 1.856 million at the end of
2003 to 2.021 million at year-end 2004. Point of service ("POS") and HMO
members decreased 6.5% from approximately 244,000 at December 31, 2003 to
approximately 228,000 at December 31, 2004.
The overall increase in membership was primarily the result of improved
persistency, increased sales productivity and an enhanced product
portfolio. The persistency increase from 74.1% at December 31, 2003 to
82.2% at December 31, 2004 was the result of more competitive pricing of
renewals and increased service efforts.
Outlook
The Company continues to focus on programs that benefit members and
deliver savings to employers. By expanding the Company's second-tier
network program, whereby members were offered discounts on services from
thousands of additional providers outside the Company's proprietary
network. Network expansion contributes to the Company's competitive
positioning as it continues to provide claims savings to employers as
well as more provider options for the employees of multi-state employers.
During 2005, the Company introduced a health savings account ("HSA") for
employer-sponsored health plans. The HSA has strengthened the Company's
product portfolio. This new offering combines a high-deductible health
plan administered by Great-West Healthcare with an HSA administered by an
outside third party. Given the high level of interest in HSA's by
employers, it is a popular product in the expanding market for
consumer-driven health plans.
Efforts surrounding provider re-contracting and more disease management
programs will continue to enhance the Company's medical cost and market
positions. These efforts are a key element in controlling healthcare
costs for clients and members.
In 2005, the specialty risk market segment, which focuses on third-party
administrators and other specialized distribution channels, was expanded.
The acquisition of Mediversal, Inc., a healthcare services company that
administers claims for employers with self-funded group health and
workers' compensation plans, was completed in September 2005. The
continued expansion of additional TPA relationships is a focus for 2006
as well as the implementation of new product offerings such as pharmacy
benefit management through our TPA channels.
Continued evaluation of the Company's core administrative systems will be
a focus in 2006 as efforts have begun to implement a new system
initiative that would result in the consolidation of many existing core
administrative systems.
Efforts to enhance brand awareness continue as the theme of the Company's
targeted advertising campaign, "New Ideas From the Frontier of Health
Care", communicates the strategy for delivering innovative, affordable
benefits plans to businesses. The Company will continue to build on its
strengths in self-funding, creative solutions, and medical management
expertise.
7.5 FINANCIAL SERVICES RESULTS OF OPERATIONS
Year ended December 31, 2005 compared with the year ended December 31,
2004
The following is a summary of certain financial data of the Financial
Services segment:
T
(In millions) Year Ended December 31,
----------- --------------------------------------------
Income Statement Data 2005 2004 Percent Change
--------------------------------------------- -------------------- --------------------- --------------------
Premium income $ 547 $ 409 33.7%
Fee income 300 266 12.8%
Net investment income 1,006 987 1.9%
Net realized investment gains 21 43 (51.2%)
-------------------- --------------------- --------------------
Total revenue 1,874 1,705 9.9%
-------------------- --------------------- --------------------
Policyholder benefits 1,297 1,165 11.3%
Operating expenses 302 287 5.2%
-------------------- --------------------- --------------------
Total benefits and expenses 1,599 1,452 10.1%
-------------------- --------------------- --------------------
Income from operations 275 253 8.7%
Income tax expense 76 76 0.0%
-------------------- --------------------- --------------------
Net income $ 199 $ 177 12.4%
==================== ===================== ====================
Deposits for investment-type contracts $ 1,159 $ 711 63.0%
Deposits to separate accounts 2,125 1,979 7.4%
The following is a summary of the Financial Services segment participant accounts at December 31, 2005 and 2004:
(In millions) December 31,
----------- ---------------------------------------------
Participant Accounts 2005 2004 Percent Change
----------------------------------------------- --------------------- -------------------- -------------------
Individual Markets Line 0.454 0.452 0.4%
Retirement Services Line 2.767 2.520 9.8%
--------------------- -------------------- -------------------
Total 3.221 2.972 8.4%
===================== ==================== ===================
The Financial Services segment net income increased by $22 million, or
12.4%, to $199 million during the year ended December 31, 2005 from $177
million during 2004. The increase in the Financial Services segment's net
income was primarily attributed to higher fee income during 2005 as the
result of new sales in the administrative record-keeping area and
improved mortality in the Individual Markets line of business.
Total premiums, including deposits to investment-type contracts and
deposits to separate accounts, increased by $732 million, or 23.6% to
$3.831 billion during the year ended December 31, 2005 when compared to
2004. The increase is primarily within the Retirement Services business
area. Premium income was favorably impacted by transfers by participants
from investing options for which the Company provides administrative and
record-keeping services to the Company's investment options, which are
offered in connection with its general and separate accounts. The
Company's separate accounts offer mutual funds or other investment
options that, beginning in 2005, purchased guaranteed interest annuity
contracts issued by the Company in the amount of $363 million, which is
included in deposits for investment-type contracts. On December 31, 2005,
GWSC, a wholly-owned subsidiary of the Company and CLAC, entered into a
reinsurance agreement on a coinsurance with funds withheld basis pursuant
to which the Company assumed a certain specific in-force block of term
life insurance of CLAC. The Company recorded $167 million in both premium
income and increase in reserves associated with these policies.
Fee income increased by $34 million, or 12.8% to $300 million during the
year ended December 31, 2005 from $266 million during 2004. Variable fee
income fluctuates with changes in the equities markets as these fees are
typically assessed on participant account balances. Variable fee income
is also affected by fluctuations in the participant account balances
associated with cash flows to and from the separate accounts,
participation in the variety of plan offerings and also with the types of
services offered and with price renegotiations. Fixed fees, expense
recoveries on annuities and insurance products also fluctuate with
changes in the participant or policyholder account balances due to cash
flows, participation and services. Fees from third-party administration
and record keeping services fluctuate with the number of participants and
with services provided. The fee income increase during 2005 is primarily
associated with increased income from providing administrative services
to institutional clients for the retirement plans they administer.
Retirement participant accounts, including third-party administration and
institutional accounts, increased by 9.8% during 2005 from 2.520 million
at December 31, 2004 to 2.767 million at December 31, 2005.
Net investment income increased by $19 million, or 1.9%, to $1.006
billion during the year ended December 31, 2005 from $987 million in
2004. This increase is primarily due to an increase in the average earned
rate on investments from 5.37% in 2004 to 5.82% in 2005 primarily due to
less amortization of premiums on fixed maturity investments in 2005 and
more invested assets. This increase was partially offset by a $17 million
reduction resulting from the marking to market of the embedded derivative
on the funds withheld reinsurance agreement.
Earnings are generated on fixed products or general account products from
the difference between the net investment income earned on investments
and the amount credited to policyholders' or participants' accounts. This
difference is referred to as the "interest margins" or "margins" on fixed
assets.
The amount of fixed annuity products in-force is measured by policy
reserves. The following table shows group and individual annuity policy
reserves for the years indicated as well as the annuity balances in the
separate accounts:
(In millions)
----------- General Account Retirement Services Individual Markets
Year ended December 31, Annuity Reserves Separate Accounts Separate Accounts
----------------------------------- ---------------------- ------------------------ ----------------------
2001 $ 4,687 $ 10,277 $ 945
2002 4,612 8,859 808
2003 8,410 10,289 1,244
2004 7,965 11,152 1,237
2005 7,913 11,272 1,237
Total policyholder benefits increased by $132 million, or 11.3% to $1.297
billion during the year ended December 31, 2005 when compared to 2004.
This was primarily due to an increase in reserves of $167 million
resulting from the aforementioned December 31, 2005 reinsurance agreement
with CLAC. Total policyholder benefits represent benefits on insurance
and annuity products, interest paid or credited to policyholder and
participant accounts, dividends paid, and change in actuarial reserves.
At December 31, 2005 and 2004, the Company had $9.9 billion and $9.5
billion, respectively, of policy reserves on individual insurance on the
consolidated balance sheets. The following table summarizes individual
life insurance in-force prior to reinsurance ceded for the years
indicated:
December 31,
---------------------------------------------------------------------------------
(In millions) 2005 2004 2003 2002 2001
----------- ------------- ------------- ----------- ------------- -------------
Life insurance in-force $ 67,000 $ 65,027 $ 67,645 $ 50,605 $ 50,769
Year ended December 31, 2004 compared with the year ended December 31,
2003
The following is a summary of certain financial data of the Financial
Services segment:
(In millions) Year Ended December 31,
----------- --------------------------------------------
Income Statement Data 2004 2003 Percent Change
--------------------------------------------- -------------------- --------------------- --------------------
Premium income $ 409 $ 1,415 (71.1)%
Fee income 266 233 14.6%
Net investment income 987 916 7.8%
Net realized investment gains 43 29 48.3%
-------------------- --------------------- --------------------
Total revenue 1,705 2,593 (38.0)%
-------------------- --------------------- --------------------
Policyholder benefits 1,165 2,116 (44.9)%
Operating expenses 287 267 7.9%
-------------------- --------------------- --------------------
Total benefits and expenses 1,452 2,383 (43.1)%
-------------------- --------------------- --------------------
Income from operations 253 210 20.5%
Income tax expense 76 65 16.9%
-------------------- --------------------- --------------------
Net income $ 177 $ 145 22.1%
==================== ===================== ====================
Deposits for investment-type contracts $ 711 $ 676 5.2%
Deposits to separate accounts 1,979 2,217 (10.7)%
The following is a summary of the Financial Services segment participant
accounts at December 2004 and 2003:
(In millions) December 31,
----------- --------------------------------------------
Participant Accounts 2004 2003 Percent Change
------------------------------------------------ -------------------- -------------------- -------------------
Individual Markets Line 0.452 0.465 (2.8)%
Retirement Services Live 2.520 2.297 9.7%
-------------------- -------------------- -------------------
Total 2.972 2.762 7.6%
==================== ==================== ===================
Effective July 10, 2003, the Company acquired CLICA and CLINY. The
results of operations for the life insurance and annuity business of
these subsidiaries have been included in the results of the Financial
Services segment during the year ended December 31, 2004 and the period
from July 10 through December 31, 2003. In addition, under the terms of
the Indemnity Reinsurance Agreement, as previously discussed, the results
of operations of certain life insurance and annuity business of the
United States branch of CLAC were included in the results of the
Financial Services segment for twelve months and four months during the
years ended December 31, 2004 and 2003, respectively. Under the terms of
this reinsurance agreement, on August 31, 2003, the Financial Services
segment recorded an initial increase in premiums and reserves in the
amount of $1.174 billion.
The Financial Services segment net income increased by $32 million, or
22.1%, to $177 million during the year ended December 31, 2004 from $145
million in 2003. The increase in this segment's earnings was the result
of a combination of the inclusion of Canada Life in the Individual
Markets line of business for the full twelve months of 2004 and higher
fee income and improved investment margins on invested assets transferred
from variable rate to fixed rate products within Great-West Retirement
Services.
Total premiums, including deposits to investment-type contracts and
deposits to separate accounts, but excluding the one-time CLAC adjustment
in the amount of $1.174 billion, mentioned above, decreased by $35
million, or 1.1%, during 2004. Premiums and deposits decreased by $38
million in the Individual Markets area. The remaining difference was due
to lower cash flows during 2004 on the variable annuity products driven
by lower single premium deposits or rollovers in the Great-West
Retirement Services area from new plans.
Fee income during 2004 increased by $33 million, or 14.6% due to the U.S.
market recovery, the acquisition of Emjay Corporation and growth in fees
from existing institutional partners.
Great-West Retirement Services participant accounts, including
third-party administration and institutional accounts, increased by 9.7%
during 2004 from 2.297 million at December 31, 2003 to 2.520 million at
December 31, 2004.
During 2004, net investment income increased by $70 million, or 7.7%,
from 2003. This increase was due to the inclusion of Canada Life activity
for twelve months during 2004 compared to less than six months during
2003, partially offset by a drop in the net interest earned rate on
investments from 6.23% in 2003 to 5.37% during 2004. Offsetting this
decrease's impact on net income was a corresponding decrease in the
interest rate credited on policyholder general account products.
On fixed products or general account products, earnings are generated
from the difference between the net investment income earned on
investments and the amount credited to policyholders' or participants'
accounts. This difference is referred to as the "interest margins" or
"margins" on fixed assets.
The amount of fixed annuity products in-force is measured by policy
reserves. The following table shows group and individual annuity policy
reserves for the years indicated as well as the annuity balances in the
separate accounts:
(In millions)
----------- General Account Retirement Services Individual Markets
Year ended December 31, Annuity Reserves Separate Accounts Separate Accounts
----------------------------------- ---------------------- ------------------------ ----------------------
2000 $ 4,738 $ 10,753 $ 950
2001 4,687 10,277 945
2002 4,612 8,859 808
2003 7,124 10,289 1,244
2004 7,099 11,152 1,237
Total policyholder benefits increased by $125 million, or 13.3%, during
the year ended December 31, 2004 excluding the one-time CLAC adjustment
in the amount of $1.174 billion, mentioned above. The increase was
primarily due to the inclusion of Canada Life activity for twelve months
during 2004 compared to less than six months during 2003. Total
policyholder benefits represent benefits on insurance and annuity
products, interest paid or credited to policyholder and participant
accounts, dividends paid, and change in actuarial reserves.
Total policyholder benefits fluctuate with the amount of interest
credited to policyholder or participant account balances from differences
between charges for mortality and actual death claims and from
fluctuations in premiums and cash flows to and from general account
products.
At December 31, 2004 and 2003, the Company had $9.5 billion and $8.9
billion, respectively, of policy reserves on individual insurance on the
consolidated balance sheets. The following table summarizes individual
life insurance in-force prior to reinsurance ceded for the years
indicated:
December 31,
---------------------------------------------------------------------------------
(In millions) 2004 2003 2002 2001 2000
----------- ------------- ------------- ----------- ------------- -------------
Life insurance in-force $ 65,027 $ 67,645 $ 50,605 $ 50,769 $ 46,631
Outlook
The Retirement Services business line continues to improve upon the
enhanced field service model introduced in 2004. This strategy offers a
proactive, measurable approach to increasing participation among existing
clients, providing education, encouraging appropriate asset allocation
and meeting the information needs of participants. This initiative should
position the Company to continue its penetration of the existing client
base in 2006 while continuing to seek out new opportunities in this
highly competitive market place.
In 2005, Retirement Services completed its integration of the operations
of EMJAY Retirement Plan Services, Inc. and will create additional
infrastructure to support the growth experienced in the Retirement
Services business line. Several key partnerships were established in 2005
with two major financial institutions. These key partnerships should
continue to increase the Company's fees received from the institutional
services segment.
In late 2005, AAG, the Company's registered investment advisory
subsidiary, rolled out Reality Investing, a program that expands AAG's
participant level advice tool into a suite of investment advisory
services. Reality Investing provides access to a range of advice services
including professional account management at the participant level. AAG
partnered with Ibbotson Associates, an industry leader in asset
allocation and investment analytics to develop the new advice and managed
account services. The Company will continue to roll out these advisory
services to existing 401(k) plans and other segments within its
Retirement Services group in 2006, and anticipates increased
participation, resulting in increased fees.
In 2005, Individual Markets continued to focus on core strengths,
increasing the number of placed policies, improving retention and
increasing the partnership base. Plans are also underway to launch new
market-driven products and value added service enhancements to existing
partners.
In the Financial Institutions Market there was continued growth in 2005,
however, the growth pace slowed while changes were made to the products
and processes to enhance the financial performance of this business line.
New products were successfully introduced in 2005 to both improve
business margins as well as to expand into the wealth transfer market.
In 2006, the Company plans to market a single premium whole life policy
through new and existing partners. The Company is also realigning its
marketing and sales resources to more directly support our partners'
sales needs through wholesaling activities. The renewed product line-up
and focus on field sales will enable further profitable growth of this
market.
The Company continues to utilize and expand upon its partnership with
Clark Consulting to distribute BOLI. The focus is to provide innovative
and flexible solutions to meet client needs for financing non-qualified
executive retirement plans through the use of life insurance. The area
continues to enhance its relationships with key consultants and develop
new marketing materials to communicate the Company's proprietary
strengths and expertise. The Company continues to explore opportunities
in the small corporate market to cross-sell executive benefits marketing
and product solutions to the existing corporate retirement market
customers. The Company introduced a new product design in 2004, which
resulted in increased sales opportunities in 2005 and is expected to have
a positive impact on premium growth in 2006.
7.6 INVESTMENT OPERATIONS
The Company's primary investment objective is to acquire assets with
duration and cash flow characteristics reflective of its liabilities,
while meeting industry, size, issuer, and geographic diversification
standards. Formal liquidity and credit quality parameters have also been
established.
The Company follows rigorous procedures to control interest rate risk and
observes strict asset and liability matching guidelines. These guidelines
ensure that even under changing market conditions, the Company's assets
should meet the cash flow and income requirements of its liabilities.
Using dynamic modeling to analyze the effects of a range of possible
market changes upon investments and policyholder benefits, the Company
works to ensure that its investment portfolio is appropriately structured
to fulfill financial obligations to its policyholders.
A summary of the Company's general account invested assets follows:
December 31,
--------------------------------------------
(In millions) 2005 2004
----------------------------------------------------------------- -------------------- ---------------------
Fixed maturities, available-for-sale, at fair value $ 13,767 $ 13,225
Equity investments, at fair value 524 637
Mortgage loans on real estate 1,461 1,544
Short-term investments, available-for-sale 1,070 709
Policy loans 3,716 3,548
Other 5 -
-------------------- ---------------------
Total invested assets $ 20,543 $ 19,663
==================== =====================
S
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 investments with low prepayment risk 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 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.
The distribution of the fixed maturity portfolio by credit rating is
summarized as follows:
December 31,
---------------------------------------------
Credit Rating 2005 2004
------------------------------------------------------------------- --------------------- --------------------
AAA 58.9% 56.9%
AA 8.0 8.2
A 14.9 15.6
BBB 15.6 16.7
BB and below (non-investment grade) 2.6 2.6
--------------------- --------------------
Total 100.0% 100.0%
===================== ====================
At December 31, 2005, the Company had 26 bonds in default with a carrying
value in the amount of $27.2 million (0.2% of the total fixed maturity
investment portfolio), compared to 29 bonds representing $33.4 million
(0.3% of the total fixed maturity investment portfolio) at December 31,
2004.
The following tables summarize the fair values and gross unrealized
losses on fixed maturities, where the estimated fair value has declined
and remained below amortized cost by 20% or more at December 31, 2005 and
2004:
(Dollars in thousands)
-------------------- Number of Estimated
December 31, 2005 Securities Fair Value Unrealized Loss
----------------------------------- ---------------------- ------------------------ ----------------------
Six months or less 7 $ 31,690 $ 10,071
Six to twelve months 5 990 360
More than twelve months 4 9,705 4,637
---------------------- ------------------------ ----------------------
Total 16 $ 42,385 $ 15,068
====================== ======================== ======================
(Dollars in thousands)
-------------------- Number of Estimated
December 31, 2004 Securities Fair Value Unrealized Loss
----------------------------------- ---------------------- ------------------------ ----------------------
Six months or less 6 $ 4,392 $ 1,484
Six to twelve months 5 7,519 4,065
More than twelve months 9 11,265 5,525
---------------------- ------------------------ ----------------------
Total 20 $ 23,176 $ 11,074
====================== ======================== ======================
For the year ended December 31, 2005, the unrealized losses are generally
related to the automobile and technology industries. For the year ended
December 31, 2004, the unrealized losses are generally related to the
airline and technology industries. The Company considers these
investments to be only temporarily impaired.
During the years ended December 31, 2005 and 2004, the Company recorded
other-than-temporary impairments in the fair value of its fixed maturity
investments in the amounts of $12.9 million and $13.2 million,
respectively. The write-downs during the year ended December 31, 2005
generally related to asset-backed securities with manufactured housing
collateral and corporate debt securities in the automobile industry. The
write-downs during the year ended December 31, 2004 generally related to
corporate debt securities in the airline industry. At December 31, 2005,
the fair value of all fixed maturities in the airline and automobile
industries was 1.3% of total fixed maturities.
See Note 4 to the accompanying consolidated financial statements for a
further discussion of impaired fixed maturity investments.
2. Mortgage Loans
During 2005, the mortgage loan portfolio decreased by 5.4% to $1,461
million, net of allowances for credit losses.
The Company follows a comprehensive approach with 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 $14.0 million during
the year ended December 31, 2005 compared to $25.0 million during the
year ended December 31, 2004. In 2005 there was one property acquired
through foreclosure with a carrying value in the amount of $4.3 million.
There were no properties acquired through foreclosure in 2004. The low
levels of problematic mortgage loans relative to the Company's overall
financial position are due to its active loan management program.
Occasionally, the Company elects to restructure certain mortgage loans if
the economic benefits to it are believed to be more advantageous than
those achieved by acquiring the collateral through foreclosure. At
December 31, 2005 and 2004, the Company's mortgage loan portfolio
included $18.2 million and $18.9 million, respectively, of non-impaired
restructured loans. The Company anticipates limited participation in the
real estate market during the year ended December 31, 2006.
See Note 4 to the accompanying consolidated financial statements for a
further discussion of impaired mortgage loans.
3. Other Investments
Other investments consist primarily of policy loans, equity investments,
and short-term investments. The Company anticipates limited participation
in the equity markets during the year ended December 31, 2006.
See Note 4 to the accompanying consolidated financial statements for a
further discussion of impaired equity investments.
4. Derivatives
The Company uses certain derivatives, such as futures, options and swaps,
for purposes of hedging interest rate, market and foreign currency
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 of
Directors authorized derivative transactions are executed. Notes 1 and 4
to the consolidated financial statements contain a discussion of the
Company's derivative position.
5. Outlook
The Company's investment portfolio is well positioned for the current
interest rate environment. The portfolio is diversified and comprised of
high quality, relatively stable assets. It is the Company's philosophy
and intent to maintain its proactive portfolio management policies in an
ongoing effort to maintain the quality and performance of its
investments.
7.7 LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to a company's ability to generate sufficient cash flows
to meet the needs of its operations. The Company manages its operations
to create stable, reliable and cost-effective sources of cash flows to
meet all of its obligations.
The principal sources of the Company's liquidity are premium, fee, and
investment income and investment maturities and sales. The principal uses
of the Company's liquidity relate to benefit payments, payments to policy
and contract holders in connection with surrenders and withdrawals,
purchase of investments, commissions and general and administrative
expenses.
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
cash flows from operations. Liquidity for the Company has remained
strong, as evidenced by significant amounts of short-term investments and
cash that totaled $1.128 billion and $819.3 million as of December 31,
2005 and 2004, respectively. In addition, as of both December 31, 2005
and 2004, 97% 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. In addition, a demand for funds may arise as a
result of the Company taking advantage of current investment
opportunities. The sources of the funds that may be required in such
situations include the issuance of commercial paper and equity
securities. Management believes that the liquidity profile of its assets
is sufficient to satisfy the liquidity requirements of reasonably
foreseeable scenarios.
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 $95.1 million and $95.4 million of commercial
paper outstanding at December 31, 2005 and 2004, respectively. The
commercial paper has been given a rating of A-1+ by Standard & Poor's
Ratings Services and a rating of P-1 by Moody's Investors Service, each
being the highest rating available.
The Company also has available a corporate credit facility agreement in
the amount of $50 million for general corporate purposes. The Company had
no borrowings under the credit facility at either December 31, 2005 or
2004.
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.
7.8 CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The following table summarizes the Company's major contractual
obligations at December 31, 2005:
Payment due by period
---------------------------------------------------------------------------------------
Less Than One to Three to More Than
(In millions) Total One Year Three Years Five Years Five Years
----------- ------------ -------------- ---------------- -------------- ---------------
Policyholder obligations
with known contractual
maturities (1) $ 2,394 $ 586 $ 666 $ 430 $ 712
Related party long-term
debt - principal 220 25 - 195
Related party long-term
debt- interest 380 14 26 26 314
Commercial paper 95 95 - - -
Operating leases 94 24 41 27 2
------------ -------------- ---------------- -------------- ---------------
Total $ 3,183 $ 744 $ 733 $ 483 $ 1,223
============ ============== ================ ============== ===============
(1) Policyholder obligations with known contractual maturities include
contractually certain individual and group annuity payments, such as
guaranteed investment contracts and term certain annuity payouts.
The table above does not include obligations under the Company's life or
health insurance contracts, as the timing of cash requirements is largely
dependent on the occurrence and timing of future events. As discussed
previously, the Company follows strict asset/liability management
practices designed to provide funds for the payment of its insurance
obligations.
From time to time, the Company enters into agreements or contracts,
including capital leases, to purchase goods or services in the normal
course of its business. However, these agreements and contracts are not
material to the Company's results of operations or financial position.
7.9 APPLICATION OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123R "Share-Based Payment" ("SFAS No. 123R"). SFAS 123R
replaces Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS No. 123") and
supersedes Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB No.25"). SFAS No. 123R requires a
company to use the fair value method to account for its stock-based
employee compensation and to provide certain other additional
disclosures. Previously, the Company elected to only disclose the
proforma impact of recording the fair value of stock options under the
provisions of SFAS No. 123 in the notes to its consolidated financial
statements. The Company adopted the provisions of SFAS No. 123R on
January 1, 2006. Upon adoption, the Company recorded an increase
to additional paid-in capital and a deferred tax asset in the amount of
$21,305 and it does not expect the adoption of SFAS No. 123R to have a
material effect on results of operations.
In November 2005, the FASB issued Staff Position No. FAS 115-1 and FAS
124-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" ("FSP 115-1 and 124-1"). FSP 115-1
and 124-1 supersedes Emerging Issues Task Force Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" and amends Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities,"
Statement of Financial Accounting Standards No. 124 "Accounting for
Certain Investments Held by Not-for-Profit Organizations" and Accounting
Principles Board Opinion No. 18 "The Equity Method of Accounting for
Investments in Common Stock." FSP 115-1 and 124-1 addresses the
determination as to when an investment is considered impaired, whether
that impairment is other-than-temporary and the measurement of an
impairment loss. FSP 115-1 and 124-1 also includes provisions for
accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. FSP 115-1 and 124-1 is effective for reporting periods
beginning after December 15, 2005 with earlier adoption permitted. The
Company adopted FSP 115-1 and 124-1 during its fiscal quarter ended
December 31, 2005. The adoption of FSP 115-1 and 124-1 did not have a
material effect on the Company's consolidated financial position or
results of its operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's assets are purchased to fund future benefit payments to its
policyholders and contract holders. The primary risk of these assets is
exposure to rising interest rates. However, when the asset and liability
payments are considered together, the primary risk is to exposure to
falling interest rates due to minimum credited rate guarantees in the
liabilities. The Company's exposure to foreign currency exchange rate
fluctuations is minimal as only nominal foreign investments are held.
To manage interest rate risk, the Company invests in assets that are
suited to the products that it sells. For products with fixed and highly
predictable benefit payments such as certificate annuities and payout
annuities, the Company invests in fixed income assets with cash flows
that closely match the liability product cash flows. The Company is then
protected against interest rate changes, as any change in the fair value
of the assets will be offset by a similar change in the fair value of the
liabilities. For products with uncertain timing of benefit payments such
as portfolio annuities and life insurance, the Company invests in fixed
income assets with expected cash flows that are earlier than the expected
timing of the benefit payments. The Company can then react to changing
interest rates sooner as these assets mature for reinvestment.
To manage foreign currency exchange risk, the Company uses currency swaps
to convert foreign currency back to United States dollars. These swaps
are purchased each time a foreign currency denominated asset is
purchased.
The Company has estimated the possible effects of interest rate changes
at December 31, 2005. If interest rates increased by 100 basis points
(1.00%), the fair value of the fixed income assets would decrease by
approximately $686 million. This calculation uses projected asset cash
flows, discounted back to December 31, 2005. 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
are expected to be received. These spot rates in the benchmark
calculation range from 4.74% to 5.86%.
Projected Cash Flows by Calendar Year
(In millions)
There- Undiscounted Fair
2006 2007 2008 2009 2010 after Total Value
------ ------- ------- ------- ------- -------- ------------- ---------
Benchmark $ 2,726 $ 2,569 $ 2,172 $ 1,814 $ 1,847 8,733 $ 19,862 $ 15,009
Interest rates
increase one
percent 2,495 2,494 2,116 1,772 1,837 9,579 20,294 14,323
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 $10.8 million per year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Great-West Life & Annuity Insurance Company
Greenwood Village, Colorado
We have audited the accompanying consolidated balance sheets of
Great-West Life & Annuity Insurance Company and subsidiaries as of
December 31, 2005 and 2004, 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, 2005. Our audits also included the
financial statement schedule listed in the Index at Item 8. These
financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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, 2005 and
2004, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2005, in conformity
with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 27, 2006
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
(In Thousands, Except Share Amounts)
December 31,
--------------------------------------------------
2005 2004
----------------------- -----------------------
ASSETS
INVESTMENTS:
Fixed maturities, available-for-sale, at fair value
(amortized cost $13,736,055 and $12,911,071) $ 13,767,417 $ 13,224,505
Equity investments, at fair value (cost $518,614
and $591,474) 524,212 637,434
Mortgage loans on real estate (net of
allowances of $15,661 and $30,339) 1,460,559 1,543,507
Policy loans 3,715,888 3,548,225
Short-term investments, available-for-sale (cost
approximates fair value) 1,070,049 708,801
Other investments 4,659 -
----------------------- -----------------------
Total Investments 20,542,784 19,662,472
----------------------- -----------------------
OTHER ASSETS:
Cash 57,903 110,518
Reinsurance receivable:
Related party 654,965 1,072,940
Other 256,156 260,409
Deferred policy acquisition costs 335,406 301,603
Deferred ceding commission 81,408 82,648
Investment income due and accrued 150,876 159,398
Receivables related to uninsured accident
and health plan claims (net of allowances of
$18,404 and $22,938) 145,203 144,312
Premiums in course of collection (net of
allowances of $5,227 and $7,751) 106,518 95,627
Deferred income taxes 190,044 138,845
Collateral for securities lending program 145,193 349,913
Due from parent and affiliates 26,646 66,966
Other assets 630,588 492,299
SEPARATE ACCOUNT ASSETS 14,455,710 14,155,397
----------------------- -----------------------
TOTAL ASSETS $ 37,779,400 $ 37,093,347
======================= =======================
(Continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
(In Thousands, Except Share Amounts)
December 31,
--------------------------------------
2005 2004
---------------- -----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves:
Related party $ 4,835,896 $ 5,170,447
Other 13,387,868 12,771,872
Policy and contract claims 371,670 360,862
Policyholders' funds 348,937 327,409
Provision for policyholders' dividends 111,626 118,096
Undistributed earnings on participating business 178,907 192,878
GENERAL LIABILITIES:
Due to parent and affiliates 240,929 220,823
Repurchase agreements 755,905 563,247
Commercial paper 95,064 95,044
Payable under securities lending agreements 145,193 349,913
Other liabilities 789,984 722,998
SEPARATE ACCOUNT LIABILITIES 14,455,710 14,155,397
---------------- -----------------
Total Liabilities 35,717,689 35,048,986
---------------- -----------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDER'S EQUITY:
Preferred stock, $1 par value, 50,000,000 shares
authorized, none issued and outstanding - -
Common stock, $1 par value; 50,000,000 shares
authorized; 7,032,000 shares issued and outstanding 7,032 7,032
Additional paid-in capital 728,701 725,935
Accumulated other comprehensive income (loss) (16,818) 118,795
Retained earnings 1,342,796 1,192,599
---------------- -----------------
Total Stockholder's Equity 2,061,711 2,044,361
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 37,779,400 $ 37,093,347
================ =================
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(In Thousands)
Year Ended December 31,
---------------------------------------------------------
2005 2004 2003
----------------- ---------------- ----------------
REVENUES:
Premium income:
Related party (net of premiums ceded totaling
$5,185, $260,445 and $815) $ 329,175 $ (22,880) $ 1,595,357
Other (net of premiums ceded totaling
$279,007, $428,010 and $460,277) 895,961 693,948 657,540
Fee income 964,699 915,644 840,072
Net investment income 1,072,528 1,033,307 988,400
Net realized gains on investments 38,977 57,947 39,560
----------------- ---------------- ----------------
Total revenues 3,301,340 2,677,966 4,120,929
----------------- ---------------- ----------------
BENEFITS AND EXPENSES:
Life and other policy benefits (net of
reinsurance recoveries totaling $263,043,
$396,886 and $410,430) 1,042,085 853,676 573,976
Increase (decrease) in reserves:
Related party 147,466 (186,972) 1,450,185
Other 26,678 (69,901) 51,320
Interest paid or credited to contract holders 478,659 517,807 514,846
Provision for policyholders' share of earnings
(loss) on participating business (3,039) 10,181 1,159
Dividends to policyholders 100,613 108,822 92,118
----------------- ---------------- ----------------
Total benefits 1,792,462 1,233,613 2,683,604
Commissions 187,115 193,943 180,673
Operating expenses 755,293 740,740 753,336
Premium taxes 33,470 33,030 31,675
----------------- ---------------- ----------------
Total benefits and expenses 2,768,340 2,201,326 3,649,288
----------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES 533,000 476,640 471,641
PROVISION FOR INCOME TAXES:
Current 141,337 152,028 173,181
Deferred 20,108 (1,808) (19,561)
----------------- ---------------- ----------------
Total income taxes 161,445 150,220 153,620
----------------- ---------------- ----------------
NET INCOME $ 371,555 $ 326,420 $ 318,021
================= ================ ================
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(In Thousands)
Accumulated
Other Comprehensive
Income (Loss)
--------------------------
Unrealized Minimum
Additional Gains Pension
Preferred Common Paid-in (Losses) on Liability Retained
Stock Stock Capital Securities Adjustment Earnings Total
---------- --------- ----------- ------------- ------------- ----------- ---------
Balances, January 1, 2003 $ - $ 7,032 $ 719,709 $ 163,500 $ (12,884) $ 787,099 $ 1,664,456
Net income 318,021 318,021
Other comprehensive income (loss) (26,369) 3,573 (22,796)
----------
Total comprehensive income 295,225
Dividends (75,711) (75,711)
Income tax benefit on stock compensation 2,656 2,656
---------- --------- ----------- ------------- ------------- ----------- ----------
Balances, December 31, 2003 - 7,032 722,365 137,131 (9,311) 1,029,409 1,886,626
Net income 326,420 326,420
Other comprehensive loss (3,585) (5,440) (9,025)
----------
Total comprehensive income 317,395
Dividends (163,230) (163,230)
Income tax benefit on stock compensation 3,570 3,570
---------- --------- ----------- ------------- ------------- ----------- ----------
Balances, December 31, 2004 - 7,032 725,935 133,546 (14,751) 1,192,599 2,044,361
Net income 371,555 371,555
Other comprehensive loss (125,280) (10,333) (135,613)
----------
Total comprehensive income 235,942
Dividends (221,358) (221,358)
Income tax benefit on stock compensation 2,766 2,766
---------- --------- ----------- ------------- ------------- ----------- ----------
Balances, December 31, 2005 $ - $ 7,032 $ 728,701 $ 8,266 $ (25,084) $ 1,342,796 $ 2,061,711
========== ========= =========== ============= ============= =========== ==========
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(In Thousands)
Year Ended December 31,
-------------------------------------------------------
2005 2004 2003
---------------- ------------------ ----------------
OPERATING ACTIVITIES:
Net income $ 371,555 $ 326,420 $ 318,021
Adjustments to reconcile net income to net
cash provided by operating activities:
Earnings allocated to participating policyholders
(3,039) 10,181 1,159
Amortization of premiums and discounts on
investments (52,712) 28,367 (64,126)
Net realized gains on investments (38,977) (57,947) (39,560)
Depreciation and amortization 81,847 93,580 95,542
Deferral of acquisition costs (50,437) (52,693) (49,245)
Deferred income taxes 20,108 (1,808) (19,561)
Changes in assets and liabilities, net of
effects from acquisitions:
Policy benefit liabilities 86,845 (106,912) 478,066
Reinsurance receivable 120,793 21,352 (71,123)
Receivables 1,022 (34,056) (33,621)
Other, net (186,760) 74,488 55,531
---------------- ------------------ ----------------
Net cash provided by operating activities 350,245 300,972 671,083
---------------- ------------------ ----------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities and
redemptions of investments:
Fixed maturities available-for-sale 14,741,780 13,615,290 13,886,015
Mortgage loans on real estate 250,112 368,734 191,353
Equity investments 240,886 148,685 86,908
Purchases of investments:
Fixed maturities available-for-sale (15,105,051) (13,715,370) (14,128,309)
Mortgage loans on real estate (122,078) (50,577) (11,690)
Equity investments (121,881) (323,551) (369,650)
Net change in short-term investments (361,248) 143,397 (136,798)
Acquisitions, net of cash acquired - - (128,636)
Other, net 64,504 (124,944) 96,155
---------------- ------------------ ----------------
Net cash (used in) provided by investing activities (412,976) 61,664 (514,652)
---------------- ------------------ ----------------
(Continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(In Thousands)
Year Ended December 31,
--------------------------------------------------------
2005 2004 2003
----------------- ----------------- ----------------
FINANCING ACTIVITIES:
Contract deposits $ 1,166,502 $ 668,381 $ 479,257
Contract withdrawals (1,195,166) (964,759) (659,603)
Change in due to parent and affiliates 60,426 (52,784) (2,066)
Change in bank overdrafts 7,034 (63,148) 32,068
Dividends paid (221,358) (163,230) (75,711)
Net commercial paper borrowings (repayments) 20 (1,388) (213)
Net repurchase agreements borrowings 192,658 173,532 66,515
----------------- ----------------- ----------------
Net cash provided by (used in) financing activities 10,116 (403,396) (159,753)
----------------- ----------------- ----------------
Net decrease in cash (52,615) (40,760) (3,322)
Cash, beginning of year 110,518 151,278 154,600
----------------- ----------------- ----------------
Cash, end of year $ 57,903 $ 110,518 $ 151,278
================= ================= ================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ 93,608 $ 147,287 $ 144,273
Interest 17,553 15,220 16,155
Non-cash investing and financing transactions during the year:
Assets acquired from acquisitions, net of cash $ - $ - $ 3,658,111
Assets transferred from The Canada Life Assurance Company
(See Note 3) 634,811 - 3,037,684
Recapture of reinsurance assets by The Canada Life Assurance
Company (See note 3) - (196,781) -
Fair value of asset acquired in settlement of fixed
maturity investment 4,659 - -
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Great-West Life & Annuity Insurance Company and its
subsidiaries (collectively, the "Company") is a direct wholly-owned
subsidiary of GWL&A Financial Inc. ("GWL&A Financial"), a holding company
formed in 1998. GWL&A Financial is an indirect wholly-owned subsidiary of
Great-West Lifeco Inc. ("Lifeco"). 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.
Basis of presentation - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America ("GAAP") 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 on mortgage
loans, deferred policy acquisition costs, derivative instruments,
valuation of privately placed fixed maturities, employee benefits plans
and taxes on income. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. The Company employs the equity method of accounting
for investments in which it has more than a minor equity interest or more
than minor influence over the entity's operations, but does not have a
controlling interest. The Company employs the cost method of accounting
for investments in which it has a minor equity interest and virtually no
influence over the entity's operations. All material intercompany
transactions and balances have been eliminated in consolidation.
Certain reclassifications have been made to the 2004 and 2003
consolidated financial statements and related notes to conform to the
2005 presentation. These changes in classification had no effect on
previously reported stockholder's equity or net income.
Investments - Investments are reported as follows:
1. The Company has classified its fixed maturity investments 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 the stockholder's
equity section of its consolidated balance sheets. Net unrealized
gains and losses related to participating contract policies are
recorded as undistributed earnings on participating business.
Premiums and discounts are recognized as a component of net
investment income using the scientific interest method. Realized
gains and losses and declines in value determined to be
other-than-temporary are included in net realized gains on
investments.
2. Mortgage loans on real estate are carried at their unpaid balances
adjusted for any unamortized premiums or discounts and any
uncollectible accounts. Interest income is accrued on the unpaid
principal balance. Discounts and premiums are amortized to net
investment income using the scientific 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 judgment is based upon
past loss experience, current and projected economic conditions
and extensive situational analysis of each individual loan. The
measurement of impaired loans is based upon the fair value of the
collateral.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
3. Equity investments are carried at fair value with net unrealized
gains and losses, net of deferred taxes, reported as accumulated
other comprehensive income (loss) in the stockholder's equity
section of the Company's consolidated balance sheets. The
Company classifies its equity investments not accounted for
under the equity method of accounting as available-for-sale.
The Company uses the equity method of accounting for
investments in which it has more than a minority interest and has
influence in the entity's operating and financial policies, but
does not have a controlling interest. Realized gains and losses
and declines in value, determined to be other-than-temporary,
are included in net realized gains on investments.
4. Policy loans are carried at their unpaid balances.
5. 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.
6. Gains and losses realized on disposal of investments are
determined on a specific identification basis.
7. From time to time, the Company may employ a trading
strategy that involves the sale of securities with a
simultaneous agreement to repurchase similar securities at a
future date at an agreed-upon price. Proceeds of the sale are
reinvested in other securities and may enhance the current
yield and total return. The difference between the sales price
and the future repurchase price is recorded as an adjustment to
interest income. During the period between the sale and
repurchase, the Company will not be entitled to receive
interest and principal payments on the securities sold. Losses
may arise from changes in the value of the securities or if the
counterparty files for bankruptcy or becomes insolvent. In such
cases, the Company's right to repurchase the security may be
restricted. Amounts owed to brokers under these arrangements are
included in repurchase agreements in the accompanying
consolidated balance sheets. The liability is collateralized
by securities with approximately the same value.
8. 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.
Derivative financial instruments - All derivatives, whether designated in
hedging relationships or not, are recorded on the consolidated balance
sheets at fair value. Accounting for the ongoing changes in the fair
value of a derivative depends upon the intended use of the derivative and
its designation as determined when the derivative contract is entered
into. If the derivative is designated as a fair value hedge, the changes
in its fair value 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 on
the Company's consolidated balance sheets and are recognized in the
consolidated income statements when the hedged item affects earnings.
Changes in the fair value of derivatives not qualifying for hedge
accounting and the ineffective portion of cash flow hedges are recognized
in net investment income in the period of the change.
Cash - Cash includes only amounts in demand deposit accounts.
Bank overdrafts - The Company's cash management system provides for the
reimbursement of all major bank disbursement accounts on a daily basis.
Checks issued but not yet presented to banks for payment frequently
result in overdraft balances for accounting purposes and are included in
other liabilities in the accompanying consolidated balance sheets. At
December 31, 2005 and 2004, this liability was $142,325 and $135,291,
respectively.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
Internal use software - Capitalized internal use software development
costs, net of accumulated depreciation, in the amounts of $86,766 and
$74,021 are included in other assets at December 31, 2005 and 2004,
respectively. The Company capitalized $26,873, $21,484 and $27,882 of
internal use software development costs during the years ended December
31, 2005, 2004 and 2003, respectively.
Deferred policy acquisition costs - Policy acquisition costs, which
primarily consist of sales commissions and costs associated with the
Company's sales representatives related to the production of new
business, have been deferred to the extent recoverable. The
recoverability of such costs is dependent upon the future profitability
of the related business. 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, which is reflected in operating
expenses, was $47,496, $40,536 and $36,283 during the years ended
December 31, 2005, 2004 and 2003, respectively.
Separate accounts - Separate account assets and related liabilities are
carried at fair value in the accompanying consolidated balance sheets.
The Company's separate accounts invest in shares of Maxim Series Fund,
Inc., an open-end management investment company, which is an affiliate of
the Company, and 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 contract
holders and, therefore, are not included in the Company's consolidated
statements of income. Revenues to the Company from the separate accounts
consist of contract maintenance fees, administrative fees and mortality
and expense risk charges. The Company's separate accounts include mutual
funds or other investment options that, beginning in 2005, purchase
guaranteed interest annuity contracts issued by the Company. During the
year ended December 31, 2005, these purchases totaled $363,440. As the
general account investment contracts are also included in the separate
account balances in the accompanying consolidated balance sheets, the
Company has reduced the separate account assets and liabilities by
$318,907 at December 31, 2005 to avoid the overstatement of assets and
liabilities in its consolidated balance sheet at that date.
Life insurance and annuity reserves - Life insurance and annuity policy
reserves with life contingencies in the amounts of $12,421,030 and
$12,115,519 at December 31, 2005 and 2004, 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 in
the amounts of $5,727,506 and $4,831,428 at December 31, 2005 and 2004,
respectively, are established at the contract holder's account value.
Reinsurance - Policy reserves and policy and contract claims ceded to
other insurance companies are carried as a reinsurance receivable in the
accompanying consolidated balance sheets. The cost of reinsurance related
to long duration contracts is accounted for over the life of the
underlying reinsured policies using assumptions consistent with those
used to account for the underlying policies.
Policy and contract claims - Policy and contract claims include
provisions for claims incurred but not reported and claims in the process
of settlement. The provision for claims incurred but not reported is
valued based primarily on the Company's prior experience. The claims in
the process of settlement are valued in accordance with the terms of the
related policies and contracts.
Participating fund account - The Company sells participating policies in
which the policyholder shares in the Company's participating earnings
through policyholder dividends that reflect the difference between the
premium charged and the actual experience. The amount of dividends to be
paid from undistributed earnings on participating business is determined
annually by the Board of Directors.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
Participating life and annuity policy reserves are $6,607,453 and
$6,290,994 at December 31, 2005 and 2004, respectively. Participating
business approximates 30.5%, 29.2% and 34.3% of the Company's individual
life insurance in-force and 42.0%, 74.3% and 66.4% of individual life
insurance premium income at December 31, 2005, 2004 and 2003,
respectively.
The Company has established a Participating Policyholder Experience
Account ("PPEA") for the benefit of all participating policyholders,
which is included in the accompanying consolidated balance sheets.
Earnings associated with the operation of the PPEA are credited to the
benefit of all participating policyholders. In the event that the assets
of the PPEA are insufficient to provide contractually guaranteed
benefits, the Company must provide such benefits from its general account
assets.
The Company has also established a Participation Fund Account ("PFA") for
the benefit of the participating policyholders previously transferred to
it from The Great-West Life Assurance Company ("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.
Recognition of premium and fee income and benefits and expenses - Life
insurance premiums are recognized when due. Annuity contract premiums
with life contingencies are recognized as received. Accident and health
insurance 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 and 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 health
insurance 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 policy
reserves. The average crediting rate on annuity products was
approximately 4.0%, 4.3%, and 5.2%, during the years ended December 31,
2005, 2004 and 2003, respectively.
Income taxes - Income taxes are recorded using the asset and liability
method of recognition in which the recognition of deferred tax assets and
liabilities for expected future tax consequences of events 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 - Lifeco maintains the Great-West Lifeco Inc. Stock Option
Plan (the "Plan") that provides for the granting of options on its common
shares to certain of its officers and employees and those of its
subsidiaries, including the Company. The Company accounts for stock
options granted under the plan in accordance with the recognition and
measurement principles of Accounting Principles Board Opinion 25
"Accounting for Stock Issued to Employees," ("APB No. 25") and related
interpretations. No stock-based employee compensation cost is reflected
in net income in the accompanying consolidated financial statements, as
all options granted under the plan had an exercise price equal to the
market value of the underlying common stock on the date of grant.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
The following table illustrates the effect on consolidated net income
during the years ended December 31, 2005, 2004 and 2003 if the Company
had applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), as revised by Statement of Financial
Accounting Standards No. 123R "Share-Based Payment" ("SFAS No. 123R"), to
stock-based employee compensation. See "Application of recent accounting
pronouncements" below regarding changes to the accounting for stock
options that the Company implemented on January 1, 2006.
Year Ended December 31,
------------------------------------------------------
2005 2004 2003
--------------- --------------- ---------------
Net income, as reported $ 371,555 $ 326,420 $ 318,021
Less, compensation expense for the fair value
of stock options, net of related tax effects (3,061) (3,352) (3,105)
--------------- --------------- ---------------
Proforma net income $ 368,494 $ 323,068 $ 314,916
=============== =============== ===============
Regulatory requirements - In accordance with the requirements of the
Colorado Division of Insurance, the Company must demonstrate that it
maintains adequate capital. At December 31, 2005 and 2004, the Company
was in compliance with the requirement (See Note 9).
In accordance with the requirements of the regulatory authorities in the
states in which the Company conducts its business, it is required to
maintain deposits with those authorities for the purpose of security to
policy and contract holders. The Company generally fulfills this
requirement with the deposit of United States government obligations.
Application of recent accounting pronouncements - In December 2004, the
FASB issued Statement of Financial Accounting Standards No. 123R
"Share-Based Payment" ("SFAS No. 123R"). SFAS 123R replaces Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS No. 123") and supersedes Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB No.25").
SFAS No. 123R requires a company to use the fair value method to account
for its stock-based employee compensation and to provide certain other
additional disclosures. Previously, the Company elected to only disclose
the proforma impact of recording the fair value of stock options under
the provisions of SFAS No. 123 in the notes to its consolidated financial
statements. The Company adopted the provisions of SFAS No. 123R on
January 1, 2006. Upon adoption, the Company recorded an increase to
additional paid-in capital and a deferred tax asset in the amount of
$21,305 and it does not expect the adoption of SFAS No. 123R to have a
material effect on results of operations.
In November 2005, the FASB issued Staff Position No. FAS 115-1 and FAS
124-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" ("FSP 115-1 and 124-1"). FSP 115-1
and 124-1 supersedes Emerging Issues Task Force Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" and amends Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities,"
Statement of Financial Accounting Standards No. 124 "Accounting for
Certain Investments Held by Not-for-Profit Organizations" and Accounting
Principles Board Opinion No. 18 "The Equity Method of Accounting for
Investments in Common Stock." FSP 115-1 and 124-1 addresses the
determination as to when an investment is considered impaired, whether
that impairment is other-than-temporary and the measurement of an
impairment loss. FSP 115-1 and 124-1 also includes provisions for
accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. FSP 115-1 and 124-1 is effective for reporting periods
beginning after December 15, 2005 with earlier adoption permitted. The
Company adopted FSP 115-1 and 124-1 during its fiscal quarter ended
December 31, 2005. The adoption of FSP 115-1 and 124-1 did not have a
material effect on the Company's consolidated financial position or
results of its operations.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
2. ACQUISITIONS
On July 10, 2003, Lifeco completed its acquisition of Canada Life
Financial Corporation ("Canada Life"). Canada Life is a Canadian based
holding company that is the owner of insurance companies with businesses
principally in Canada, the United Kingdom, the United States and Ireland.
On December 31, 2003 Canada Life sold two direct wholly-owned
subsidiaries, Canada Life Insurance Company of New York ("CLINY") and
Canada Life Insurance Company of America ("CLICA") to the Company for
cash in the amount of $235,000. These acquisitions have been accounted
for as a "reorganization of businesses under common control" and,
accordingly, the assets and liabilities of CLICA and CLINY were recorded
at Lifeco's cost basis, and the results of operations of CLICA and CLINY
subsequent to July 10, 2003 are included in the Company's consolidated
statements of income. CLINY and CLICA sell individual and group insurance
and annuity products in the United States. Since the time of its
acquisition by Lifeco, the marketing and sale of Canada Life's insurance
and annuity businesses in the United States, including that of the
Company, have ceased.
The Company's statements of income include the following related to CLICA
and CLINY for the period from July 10 to December 31, 2003:
Period July 10, 2003
to December 31, 2003
--------------------------
Total revenues $ 105,868
--------------------------
Benefits 92,193
Operating expenses 9,385
--------------------------
Total benefits and expenses 101,578
--------------------------
Income from operations 4,290
Income taxes 1,501
--------------------------
Net income $ 2,789
==========================
On December 31, 2005, CLINY was merged with First Great-West Life &
Annuity Insurance Company, another wholly-owned subsidiary of the
Company. Upon completion of the merger, CLINY's name was changed to First
Great-West Life & Annuity Insurance Company.
3. RELATED-PARTY TRANSACTIONS
The Company performs administrative services for the United States
operations of The Great-West Life Assurance Company ("GWL"), a
wholly-owned subsidiary of Lifeco and investment services for London
Reinsurance Group, an indirect subsidiary of GWL. Beginning in 2003, the
Company began providing administrative and operational services for the
United States operations of Canada Life. The following table presents
revenue and expense reimbursement from related parties for services
provided pursuant to these service agreements. These amounts, in
accordance with the terms of the various contracts, are based upon
estimated costs incurred (including a profit charge) and resources
expended based upon the number of policies, certificates in-force and/or
administered assets.
Year Ended December 31,
-----------------------------------------------------
2005 2004 2003
--------------- -------------- ---------------
Investment management revenue included
in net investment income $ 7,377 $ 6,304 $ 3,355
Administrative and underwriting expense
reimbursement included in operating expenses 1,367 1,820 1,859
--------------- -------------- ---------------
Total $ 8,744 $ 8,124 $ 5,214
=============== ============== ===============
At December 31, 2005 and 2004, due from parent and affiliates includes
$13,625 and $55,915, respectively, due on demand from GWLA Financial and
$13,021 and $11,051, respectively, due on demand from Canada Life
Assurance Company.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
At December 31, 2005 and 2004, due to parent and affiliates includes a
note payable and accrued interest to GWL&A Financial in the amount of
$195,873 and $195,843 respectively, a note payable and accrued interest
to GWL in the amount of $25,338 at each date, and amounts due on demand
to GWL of $19,718 and $0, respectively.
The note payable to GWL&A Financial was issued as a surplus note on
November 15, 2004, with a face amount of $195,000 and carrying amounts of
$194,174 and $194,164 at December 31, 2005 and 2004, respectively. The
surplus note bears interest at the rate of 6.675% per annum, payable in
arrears on each May 14 and November 14. The surplus note matures on
November 14, 2034. On December 16, 2004, the Company used the proceeds
from the issuance of the surplus note to redeem its $175,000 subordinated
note payable to GWL&A Financial and for general corporate purposes.
Payments of principal and interest under the surplus note shall be made
only out of surplus funds of the Company and only with prior written
approval of the Commissioner of Insurance of the State of Colorado when
the Commissioner of Insurance is satisfied that the financial condition
of the Company warrants such action pursuant to applicable Colorado law.
Payments of principal and interest on the surplus note are payable only
if at the time of such payment and after giving effect to the making
thereof, the Company's surplus would not fall below two and one half
times the authorized control level as required by the most recent
risk-based capital calculations.
The note payable to GWL matures on October 1, 2006 and bears interest at
the rate of 5.4% per annum. The holder may not demand payment before the
maturity date.
Interest expense attributable to these related party obligations was
$14,396, $15,189 and $14,345 for the years ended December 31, 2005, 2004
and 2003, respectively.
On August 31, 2003, the Company and The Canada Life Assurance Company
("CLAC"), a wholly owned subsidiary of Canada Life, entered into an
indemnity reinsurance agreement pursuant to which the Company assumed 80%
(45% coinsurance and 35% coinsurance with funds withheld) of certain
United States life, health and annuity business of CLAC. As a result of
the transaction, the Company recorded $1,426,362 in both premium income
and increase in reserves.
On February 29, 2004, CLAC recaptured the group life and health business
from the Company associated with the original indemnity reinsurance
agreement dated August 31, 2003. As a result of this transaction, the
Company recorded an income statement impact in the amount of $256,318 of
negative premium income and change in reserves. The Company recorded, at
fair value, the following at February 29, 2004 as a result of this
transaction:
Assets Liabilities and Stockholder's Equity
----------------------------------------------------------- ------------------------------------------------------
Cash $ (126,105) Policy reserves $ (286,149)
Reinsurance receivable (152,077) Policy and contract claims (32,755)
Deferred ceding commission (29,831) Policyholders' funds (3,982)
Premiums in course of
collection (14,873)
---------------------- -----------------------
$ (322,886) $ (322,886)
====================== =======================
During the third quarter of 2004, the deferred ceding commission asset
and certain policy reserve liabilities acquired as part of this
reinsurance transaction were both decreased by $157,000 based on the
Company's final analysis of the policy reserves it acquired. CLAC had not
previously computed policy liabilities under GAAP, which required the
Company to estimate the amount of liabilities assumed, which was
$3,037,684 at September 1, 2003. These adjustments did not have a
material effect on the Company's consolidated financial position or the
results of its operations.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
The reinsurance receivable relates to the amount due to the Company for
reserves ceded by coinsurance with funds withheld. The Company's return
on this reinsurance receivable is the interest and other investment
returns earned, as defined by the agreement, on a segregated pool of
investments of CLAC's United States branch. Pursuant to an interpretation
of Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), as
amended, the Company has identified an embedded derivative for its
exposure to interest rate and credit risk on the segregated pool of
investments. As this embedded derivative does not qualify for hedge
accounting, it was marked to market resulting in the Company's net income
decreasing by $8,454 and $5,282, net of policyholder related amounts and
deferred taxes, during the years ended December 31, 2005 and 2004,
respectively.
Effective April 1, 2005, the Company and CLAC amended the indemnity
reinsurance agreement to allow for periodic transfers of funds withheld
assets. Under the amended agreement, the remaining funds withheld assets
will be transferred to the Company prior to December 31, 2007. During
2005, CLAC transferred $538,123 of assets to the Company as follows:
Assets (In thousands) Liabilities and Stockholder's Equity
---------------------------------------------------------------- -------------------------------------------------
Fixed maturities $ 414,623 $ -
Mortgages 49,218
Investment income due and accrued 4,282
Cash 70,000
Reinsurance receivable (538,123)
------------------ ----------------
$ - $ -
================== ================
As a result of these transfers, the reinsured 80% of the life, health and
annuity business is currently 59% coinsurance and 21% coinsurance with
funds withheld.
On December 31, 2005, a wholly-owned subsidiary of the Company and CLAC
entered into a reinsurance agreement on a coinsurance with funds withheld
basis pursuant to which the Company assumed a certain specific in-force
block of term life insurance of CLAC. The Company recorded $166,688 in
both premium income and increase in reserves associated with these
policies.
The Company recorded, at fair value, the following at December 31, 2005
as a result of this transaction:
Assets Liabilities and Stockholder's Equity
---------------------------------------------------------------- -------------------------------------------------
Reinsurance receivable $ 166,688 Policy reserves $ 166,688
------------------ ----------------
$ 166,688 $ 166,688
================== ================
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
4. SUMMARY OF INVESTMENTS
The following table summarizes fixed maturities and equity securities
available-for-sale at December 31, 2005:
December 31, 2005
----------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Fixed Maturities: Cost Gains Losses Value Value
---------------------------- -------------- -------------- --------------- ------------- --------------
U.S. government direct
obligations and U.S.
agencies $ 3,366,237 $ 30,488 $ 28,638 $ 3,368,087 $ 3,368,087
Obligations of U.S.
states and their
subdivisions 1,279,318 35,117 12,202 1,302,233 1,302,233
Foreign government 21,402 193 21,349 21,349
140
Corporate debt securities 5,461,994 114,375 87,027 5,489,342 5,489,342
Mortgage-backed and
asset-backed securities 3,607,104 32,626 53,324 3,586,406 3,586,406
-------------- -------------- --------------- ------------- --------------
Total fixed maturities $ 13,736,055 $ 212,746 $ 181,384 $ 13,767,417 $ 13,767,417
============== ============== =============== ============= ==============
Total equity investments $ 518,614 $ 10,208 $ 4,610 $ 524,212 $ 524,212
============== ============== =============== ============= ==============
The following table summarizes fixed maturities and equity securities available-for-sale at December 31, 2004:
December 31, 2004
----------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Fixed Maturities: Cost Gains Losses Value Value
----------------------------- -------------- ------------- --------------- ------------- --------------
U.S. Government direct
obligations and U.S.
agencies $ 3,107,235 $ 55,242 $ 8,687 $ 3,153,790 $ 3,153,790
Obligations of U.S.
states and their
subdivisions 1,197,912 61,951 4,930 1,254,933 1,254,933
Foreign government 15,759 276 218 15,817 15,817
Corporate debt securities 5,257,308 203,603 38,163 5,422,748 5,422,748
Mortgage-backed and
asset-backed securities 3,332,857 65,994 21,634 3,377,217 3,377,217
-------------- ------------- --------------- ------------- --------------
Total fixed maturities $ 12,911,071 $ 387,066 $ 73,632 $ 13,224,505 $ 13,224,505
============== ============= =============== ============= ==============
Total equity investments $ 591,474 $ 47,015 $ 1,055 $ 637,434 $ 637,434
============== ============= =============== ============= ==============
See Note 5 for additional information on policies regarding estimated fair value of fixed maturities.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
The amortized cost and estimated fair value of fixed maturity investments
at December 31, 2005, are shown in the table below. Actual maturities
will likely differ from these projections because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
December 31, 2005
-------------------------------------------------
Amortized Estimated
Cost Fair Value
----------------------- ----------------------
Due in one year or less $ 932,118 $ 943,663
Due after one year through five years 3,131,675 3,134,823
Due after five years through ten years 1,679,671 1,701,358
Due after ten years 1,761,878 1,782,991
Mortgage-backed and asset-backed securities 6,230,713 6,204,582
----------------------- ----------------------
$ 13,736,055 $ 13,767,417
======================= ======================
Mortgage-backed and asset-backed securities include collateralized
mortgage obligations that 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 are adjusted by such prepayments.
The following table summarizes information regarding the sales of fixed
maturities for the years ended December 31, 2005, 2004 and 2003:
Year Ended December 31,
--------------------------------------------------------
2005 2004 2003
---------------- -------------- ---------------
Proceeds from sales 12,977,396 $ 6,150,160 $ 7,852,152
Gross realized gains from sales 33,629 103,892 72,815
Gross realized losses from sales (40,800) (59,930) (43,214)
Derivative financial instruments - The Company makes limited use of
derivative financial instruments to manage interest rate, market credit
and foreign exchange risk associated with its invested assets.
Derivatives are not used for speculative purposes.
The Company controls the credit risk of its derivative contracts through
credit approvals, limits and monitoring procedures. Risk of loss is
generally limited to the fair value of derivative instruments and not to
the notional or contractual amounts of the derivatives. As the Company
generally enters into derivative transactions only with high quality
institutions, no losses associated with non-performance of derivative
financial instruments have occurred or are expected to occur.
Fair value hedges - Written call options are used in conjunction with
interest rate swap agreements to effectively convert fixed rate bonds to
variable rate bonds as part of the Company's overall asset/liability
matching program.
The Company's use of derivatives treated as fair value hedges has been
nominal during the last three years. The ineffective portions of hedges
had no material impact on net income during the years ended December 31,
2005, 2004 and 2003.
Cash flow hedges - 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. Interest rate 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 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. 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 maturity investments as well as to adjust the duration of the
overall investment portfolio.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
Hedge ineffectiveness in the amount of $567 was recorded as an increase
to net investment income during the year ended December 31, 2005 and
$3,534 and $125 were recorded as decreases to net investment income
during the years ended December 31, 2004 and 2003, respectively.
Unrealized derivative gains and losses included in accumulated other
comprehensive income are reclassified into earnings at the time interest
income is recognized. Derivative gains in the amounts of $1,311, $975 and
$1,024 were reclassified to net investment income during the years ended
December 31, 2005, 2004 and 2003, respectively. As of December 31, 2005,
the Company estimates that $1,031 of net derivative gains included in
other comprehensive income will be reclassified into net investment
income within the next twelve months.
Derivatives not designated as hedging instruments - The Company attempts
to match the timing of when interest rates are committed on insurance
products with other new investments. However, timing differences may
occur and can expose the Company to fluctuating interest rates. To offset
this risk, the Company uses U.S. Treasury futures contracts. The Company
also utilizes U.S. Treasury futures as a method of adjusting the duration
of the overall portfolio.
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, are a combination of a derivative and a cash security to
synthetically create a third replicated security. As of December 31,
2004, the Company had one such security that has been created through the
combination of a credit default swap and a U.S. Government Agency
security. This security was sold prior to December 31, 2005.
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 and carried at its fair value.
Although the above-mentioned derivatives are effective hedges from an
economic standpoint, they do not meet the requirements for hedge
accounting treatment under Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"), as amended. As such, periodic changes in the market
value of these instruments are recorded in net investment income. During
the year ended December 31, 2005, a decrease in the amount of $793 was
recognized in net investment income from market value changes of
derivatives not receiving hedge accounting treatment, while increases to
net investment income in the amounts of $4,043 and $1,007 were recognized
during the years ended December 31, 2004 and 2003, respectively. These
amounts exclude the impact of the embedded derivative discussed in Note
3.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
The following tables summarize derivative financial instruments at
December 31, 2005 and 2004:
December 31, 2005
-------------------------------------------------------------------------------
Notional
Amount Strike / Swap Rate Maturity
--------------- --------------------------------- -----------------------
January 2006 -
Interest rate swaps $ 360,013 2.72% - 6.54% February 2045
July 2006 -
Credit default swaps 102,952 N/A November 2007
Foreign currency July 2006 -
exchange contracts 19,000 N/A November 2006
Options:
Calls 22,000 Various February 2006
Futures:
Ten year U.S. Treasury:
Long position 2,100 N/A March 2006
Five year U.S. Treasury:
Long position 23,500 N/A March 2006
Short position 16,000 N/A March 2006
Total return swap:
Receivable for coinsurance
with funds withheld 510,295 Variable Indeterminable
December 31, 2004
-------------------------------------------------------------------------------
Notional
Amount Strike / Swap Rate Maturity
-------------- -------------------------------- -----------------------
Interest rate caps $ 300,000 11.65% January 2005
February 2006 -
Interest rate swaps 221,264 2.40% - 5.20% March 2031
October 2005 -
Credit default swaps 145,085 N/A November 2007
Foreign currency June 2005 -
exchange contracts 27,585 N/A November 2006
Options:
Calls 22,000 Various February 2006
Futures:
Thirty year U.S. Treasury:
Long position 33,300 N/A March 2005
Short position 15,000 N/A March 2005
Ten year U.S. Treasury:
Long position 18,600 N/A March 2005
Short position 36,400 N/A March 2005
Five year U.S. Treasury:
Long position 113,000 N/A March 2005
Short position 3,000 N/A March 2005
Total return swap:
Receivable for coinsurance
with funds withheld 1,087,416 Variable Indeterminable
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
Mortgage loans - The following table summarizes information with respect to impaired
mortgage loans at December 31, 2005 and 2004:
December 31,
------------------------------------
2005 2004
--------------- ----------------
Loans, net of related allowance for credit losses of
$6,213 and $13,000 $ 4,906 $ 8,700
Loans with no related allowance for credit losses - 5,560
Average balance of impaired loans during the year 14,096 25,049
Interest income recognized while impaired 750 890
Interest income received and recorded while impaired
using the cash basis method of recognition 702 1,029
As part of its 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 $18,283 and $18,881 at December 31, 2005 and 2004,
respectively.
The following table summarizes activity in the allowance for mortgage
loan credit losses for the years 2005, 2004 and 2003:
Year Ended December 31,
-------------------------------------------------------
2005 2004 2003
---------------- --------------- ---------------
Balance, January 1 $ 30,339 $ 31,889 $ 55,654
Release of provision (8,000) (3,192) (9,817)
Amounts written off, net of recoveries (6,678) (304) (15,766)
Recoveries - 1,946 1,818
---------------- --------------- ---------------
Balance, December 31 $ 15,661 $ 30,339 $ 31,889
================ =============== ===============
The changes to the allowance for mortgage loan credit losses are recorded
in net realized gains on investments.
Equity investments -The carrying value of the Company's equity
investments was $524,212 and $637,434 at December 31, 2005 and 2004,
respectively. At December 31, 2005 and 2004, the Company had investments
in the amounts of $132,233 and $199,162, respectively, in an
exchange-traded fund, which invests in corporate debt securities. Upon
redemption of the fund, the Company has the option of receiving the
underlying debt securities or the redemption value of the investment.
At December 31, 2005 and 2004, the Company had $374,295 and $360,377,
respectively, invested in limited partnerships and limited liability
corporations. The Company makes commitments to fund partnership interests
in the normal course of its business. The amounts of unfunded commitments
at December 31, 2005 and 2004 were $33,648 and $85,867, respectively.
Securities pledged, restricted assets and special deposits - The Company
pledges investment securities it owns to unaffiliated parties through
certain transactions, including securities sold under agreements to
repurchase, futures contracts and state regulatory deposits.
The Company had securities on deposit with governmental authorities as
required by certain insurance laws with carrying values in the amounts of
$63,688 and $60,353 at December 31, 2005 and 2004, respectively.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
The Company participates in a securities lending program whereby
securities, which are included in invested assets in the accompanying
consolidated balance sheets, are loaned to third parties. The Company
requires a minimum of 102% of the fair value of the loaned securities to
be separately maintained as collateral for the loans. Securities with a
cost or amortized cost in the amounts of $138,530 and $336,949 and
estimated fair values in the amounts of $139,146 and $340,755 were on
loan under the program at December 31, 2005 and 2004, respectively. The
Company was liable for collateral under its control in the amounts of
$145,193 and $349,913 at December 31, 2005 and 2004, respectively.
Additionally, the fair value of margin deposits related to futures
contracts was approximately $2,313 and $4,310 at December 31, 2005 and
2004, respectively.
Impairment of fixed maturities and equity investments - The Company
classifies all of its fixed maturities and equity investments as
available-for-sale and marks them to market with the related net gain or
loss, net of policyholder related amounts and deferred taxes, being
recorded in other comprehensive income in the stockholder's equity
section in the accompanying consolidated balance sheets. All securities
with gross unrealized losses at the consolidated balance sheet date are
subjected to the Company's process for identifying other-than-temporary
impairments.
The Company writes securities down to their fair values when it deems a
security to be other-than-temporarily impaired. A realized loss is
recorded in the period the securities are deemed to be so impaired, and
adjusts the cost basis of the securities accordingly. The Company does
not adjust the revised cost basis for subsequent recoveries in value.
The assessment of whether an other-than-temporary impairment has occurred
is based upon management's case-by-case evaluation of the underlying
reasons for the decline in fair value. Management considers a wide range
of factors, as described below, regarding the security issuer and uses
its best judgment in evaluating the cause of the decline in its estimated
fair value and in assessing the prospects for near-term recovery.
Inherent in management's evaluation of the security are assumptions and
estimates about the operations and future earnings potential of the
issuer.
Considerations used by the Company in the impairment evaluation process
include, but are not limited to, the following:
o Fair value is significantly below cost.
o The decline in fair value is attributable to specific adverse
conditions affecting a particular instrument, its issuer, an
industry or geographic area.
o The decline in fair value has existed for an extended period of
time.
o A debt security has been downgraded by a rating agency.
o The financial condition of the issuer has deteriorated.
o Dividends have been reduced/eliminated or scheduled interest
payments have not been made.
While all available information is taken into account, it is difficult to
predict the ultimate recoverable amount from a distressed or impaired
security.
The Company's portfolio of fixed maturities fluctuates in value based
upon interest rates in financial markets and other economic factors.
These fluctuations, caused by market interest rate changes, have little
bearing on whether or not the investment will be ultimately recoverable.
Therefore, the Company considers these declines in value as temporary,
even for periods exceeding one year.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
The following tables summarize unrealized investment losses by class of
investment at December 31, 2005 and 2004. The Company considers these
investments to be only temporarily impaired.
December 31, 2005
---------------------------------------------------------------------------------------------------
Less than twelve months Twelve months or longer Total
-------------------------------- ------------------------------- ----------------------------
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fixed Maturities: Fair value Loss Fair value Loss Fair value Loss
-------------------------- ------------- ------------- -------------- ------------- ------------ ------------
U.S. Government
direct obligations
and U.S. agencies $ 1,332,248 $ 20,663 $ 327,392 $ 7,975 $ 1,659,640 $ 28,638
Obligations of U.S.
states and their
subdivisions 355,708 4,876 190,828 7,326 546,536 12,202
Foreign governments 10,997 56 2,863 137 13,860 193
Corporate debt
securities 1,899,246 45,172 903,183 41,855 2,802,429 87,027
Mortgage-backed
and asset-backed
securities 1,590,209 26,855 714,946 26,469 2,305,155 53,324
------------- ------------- -------------- ------------- ------------ ------------
Total fixed maturities 5,188,408 $ 97,622 $ 2,139,212 $ 83,762 $ 7,327,620 $ 181,384
============= ============= ============== ============= ============ ============
Total equity
investments $ 129,081 $ 4,449 $ 3,414 $ 161 $ 132,495 $ 4,610
============ ============ ============= ============= ============= =============
December 31, 2004
--------------------------------------------------------------------------------------------------
Less than twelve months Twelve months or longer Total
------------------------------ ------------------------------ ------------------------------
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fixed Maturities: Fair value Loss Fair value Loss Fair value Loss
-------------------------- ------------ ------------- -------------- ------------- ------------- -------------
U.S. Government
direct obligations
and U.S. agencies $ 850,994 $ 4,000 $ 220,214 4,687 $ 1,071,208 $ 8,687
Obligations of U.S.
states and their
subdivisions 160,000 2,256 107,556 2,674 267,556 4,930
Foreign governments 59,208 193 8,525 25 67,733 218
Corporate debt
securities 648,979 11,298 600,119 26,865 1,249,098 38,163
Mortgage-backed
and asset-backed
securities 555,898 7,605 283,131 14,029 839,029 21,634
------------ ------------- -------------- ------------- ------------- -------------
Total fixed maturities $ 2,275,079 $ 25,352 $ 1,219,545 48,280 $ 3,494,624 $ 73,632
============ ============= ============== ============= ============= =============
Total equity
investments $ 109,411 $ 652 $ 867 403 $ 110,278 $ 1,055
============= ============ =============== ============= ============= =============
Fixed maturities - At December 31, 2005 and 2004, there were 1,134 and
480 securities, respectively, that had been in a loss position for less
than twelve months with carrying values in the amounts of $5,188,408 and
$2,275,079, respectively, and unrealized losses in the amounts of $97,622
and $25,352, respectively. At December 31, 2005 and 2004, less than 2% of
these securities were rated non-investment grade. The losses on these
securities are primarily attributable to changes in market interest rates
and changes in credit spreads since the securities were acquired.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
At December 31, 2005 and 2004, there were 641 and 410 securities,
respectively, that had been in a continuous loss position for twelve
months or longer with carrying values in the amounts of $2,139,212 and
$1,219,545, respectively, and unrealized losses in the amounts of $83,762
and $48,280, respectively.
For the years ended December 31, 2005 and 2004, the Company recorded
other-than-temporary impairments in the fair value of its
available-for-sale investments in the amounts of $12,958 and $13,167,
respectively.
The Company has fixed maturity securities with fair values in the amounts
of $13,312 and $19,518 that have been non-income producing for the twelve
months preceding December 31, 2005 and 2004, respectively.
U.S. Government direct obligations and U.S. agencies, obligations of U.S.
states and their subdivisions and foreign governments - The unrealized
losses on the Company's investments in U.S. Government direct obligations
and U.S. agencies, obligations of U.S. States and their subdivisions, and
foreign governments as of December 31, 2005 and 2004 were caused by
market interest rate increases since the securities were acquired. The
contractual terms of these investments do not permit the issuer to settle
the securities at a price less than the amortized cost of the
investments. All of these investments are rated A and above. Because the
Company has the ability and intent to hold these investments until a
recovery of fair value, which may be maturity, the Company does not
consider these investments to be other-than-temporarily impaired at
December 31, 2005.
Mortgage-backed and asset-backed securities - Six issues have been in a
continuous loss position for twelve months or longer with a fair value of
$40,129 and a loss of $2,948 due to decrease in credit quality. Five of
these six issues have manufactured housing collateral. The Company
recognized other-than-temporary impairment of $4,001 on three of these
securities during the year ended December 31, 2005. While the Company is
in an unrealized loss position on these securities, payments continue to
be made under their original terms and the Company believes the
collateral is sufficient to repay remaining outstanding principal. All
remaining losses in both categories are related to market interest rate
increases since the purchase of the securities. Because the Company has
the ability and intent to hold these investments until a recovery of fair
value, which may be maturity, the Company does not consider these
investments to be other-than-temporarily impaired at December 31, 2005.
Corporate debt securities - In the automobile related industry, 12
securities have been in a loss position for less than twelve months with
losses of $10,847. One security has been in a loss position for twelve
months or longer with a loss of $1,946. There were 2 automobile industry
securities upon which $7,992 of impairment write-downs were recognized
during the year ended December 31, 2005. Based on the Company's analysis
of the liquidity of the issuers of these investments, the Company
considers the remaining principal to be fully recoverable under the
contractual terms of the investments.
In the airline industry, there were no securities in a loss position for
less than twelve months. Twenty issues were in a loss position for twelve
months or longer with losses of $1,829. There were 8 airline industry
securities upon which $363 of impairment write-downs were recognized
during the year ended December 31, 2005. Based on current and anticipated
debt restructure agreements on these investments, the Company considers
the remaining principal to be fully recoverable.
The telephone and telecommunications industry has 25 securities with
unrealized losses of $3,384 for less than twelve months and $3,798 for
twelve months or longer. In the electric/utilities industry, there were
38 securities in a loss position for less than twelve months with an
unrealized loss of $8,911. There were 40 securities in a loss position
for twelve months or longer with an unrealized loss of $5,427. Less than
$750 of the unrealized losses in these industries were related to a
decrease in credit quality. The Company does not consider these
investments to be other-than-temporarily impaired at December 31, 2005.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
The remaining unrealized losses on the Company's investments in corporate
debt securities in both categories are not concentrated in any one
industry. Because the Company has the ability and intent to hold these
investments until a recovery of fair value, which may be maturity, the
Company does not consider these investments to be other-than-temporarily
impaired at December 31, 2005.
Equity investments - At December 31, 2005 and 2004, the Company had
unrealized losses on equity investments in the amounts of $4,610 and
$1,055, respectively. The increase in unrealized loss is primarily a
result of the decline in market value of an exchange-traded bond fund
whose value fluctuates with interest rates. Of the total unrealized loss
of $4,610, $4,449 has been in a loss position for less than twelve
months. At December 31, 2005, the Company has no information indicating
that any of these investments are other-than-temporarily impaired.
5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying amount and estimated fair
value of the Company's financial instruments at December 31, 2005 and
2004:
December 31, December 31,
----------------------------------- ----------------------------------
2005 2004
----------------------------------- ----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- --------------- --------------- ---------------
ASSETS:
Fixed maturities and
short-term investments $ 14,837,466 $ 14,837,466 $ 13,933,306 $ 13,933,306
Equity investments 524,212 524,212 637,434 637,434
Mortgage loans on
real estate 1,460,559 1,471,642 1,543,507 1,511,437
Policy loans 3,715,888 3,715,888 3,548,225 3,548,225
Derivatives 4,695 4,695 4,100 4,100
Reinsurance receivable 911,121 911,121 1,333,349 1,333,349
LIABILITIES:
Annuity contract reserves
without life contingencies 5,727,506 5,725,027 4,831,428 4,833,755
Policyholders' funds 348,937 348,937 327,409 327,409
Due to parent and affiliates 240,929 241,064 220,823 221,674
Commercial paper 95,064 95,064 95,044 95,044
Derivatives 12,789 12,789 13,563 13,563
Repurchase agreements 755,905 755,905 563,247 563,247
The estimated fair values of financial instruments have been determined
using available information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data to
develop estimates of fair value. Accordingly, the estimates presented are
not necessarily indicative of the amounts that 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 of the Company's financial instruments.
The estimated fair value of fixed maturities and equity investments that
are publicly traded are obtained from an independent pricing service. To
determine fair value of fixed maturity and equity investments that are
not actively traded, the Company utilizes discounted cash flows
calculated at current market rates on investments of similar quality and
term. The fair value of a cost method investment is not estimated if
there are no identified events or changes in circumstances that may have
a significant adverse effect.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
Mortgage loan fair value estimates are generally 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 its portfolio.
Policy loans accrue interest at variable rates with no fixed maturity
dates; therefore, estimated fair value approximates carrying value.
The estimated fair value and carrying amount of reinsurance receivables
at December 31, 2005 and 2004 includes $(34,063) and $13,372,
respectively, representing the estimated fair value of the embedded
derivative associated with the Company's reinsurance receivable under its
coinsurance with funds withheld agreement with the United States branch
of CLAC (See Note 3). Valuation of the derivative is based upon the
estimated fair value of the segregated pool of assets from which the
Company derives its return on the reinsurance receivable.
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 interest crediting rates for similar
products.
The estimated fair value of policyholders' funds is the same as the
carrying amount since the Company can change the interest crediting rates
with 30 days notice.
The estimated fair value of the notes payable to GWL&A Financial and GWL
is based upon discounted cash flows at current market rates on high
quality investments.
The carrying value of repurchase agreements and commercial paper is a
reasonable estimate of fair value due to the short-term nature of these
liabilities.
Included in other assets at December 31, 2005 and 2004, are derivative
financial instruments in the amounts of $4,695 and $4,100 respectively.
Included in other liabilities at December 31, 2005 and 2004, are
derivative financial instruments in the amounts of $12,789 and $13,563,
respectively. The estimated fair value of over-the-counter 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.
6. ALLOWANCES ON POLICYHOLDER RECEIVABLES
Amounts receivable for uninsured accident and health insurance plan
claims paid on behalf of customers and premiums in the course of
collection are generally uncollateralized. Such receivables are from a
large number of 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 amounts
receivable related to uninsured accident and health insurance plan claims
and premiums in course of collection. Management's judgment is based upon
past loss experience and current and projected economic conditions.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
Activity in the allowances for amounts receivable related to uninsured
accident and health insurance plan claims paid on behalf of customers is
as follows:
2005 2004 2003
---------------- -------------- ---------------
Balance, January 1 $ 22,938 $ 32,329 $ 42,144
Amounts acquired by reinsurance (394) (1,859) -
Provisions charged (reversed) to operations (507) (517) 1,460
Amounts written off, net of recoveries (3,633) (7,015) (11,275)
---------------- -------------- ---------------
Balance, December 31 $ 18,404 $ 22,938 $ 32,329
================ ============== ===============
Activity in the allowances for premiums in course of collection is as follows:
2005 2004 2003
---------------- -------------- ---------------
Balance, January 1 $ 7,751 $ 9,768 $ 12,011
Amounts acquired by reinsurance (97) (300) -
Provisions charged (reversed) to operations (1,559) 17 1,889
Amounts written off, net of recoveries (868) (1,734) (4,132)
---------------- -------------- ---------------
Balance, December 31 $ 5,227 $ 7,751 $ 9,768
================ ============== ===============
7. REINSURANCE
The Company enters into reinsurance transactions as both a provider and
purchaser of 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 coinsurance contracts. The Company retains a
maximum liability of $3,500 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, 2005 and 2004, the
reinsurance receivables had carrying values in the amounts of $911,121
and $1,333,349, respectively. Included in these amounts are $654,965 and
$1,072,940 at December 31, 2005 and 2004, respectively, associated with
reinsurance agreements with related parties. There were no allowances for
potential uncollectible reinsurance receivables at either December 31,
2005 or 2004.
In addition to the indemnity reinsurance agreement entered into with CLAC
(See Note 3), the Great-West Healthcare division of the Company entered
into a reinsurance agreement, effective January 1, 2003, with Allianz
Risk Transfer (Bermuda) Limited ("Allianz") to cede 90% in 2003, 75% in
2004 and 40% in 2005 of direct written group health stop-loss and excess
loss activity. This agreement was terminated on December 31, 2005.
The following table summarizes life insurance in-force and total premium
income at, and for the year ended, December 31, 2005:
Percentage
of Amount
Written Reinsurance Reinsurance Assumed
Direct Ceded Assumed Net to Net
---------------- ---------------- --------------- ---------------- --------------
Life insurance in-force:
Individual $ 50,652,853 $ (12,886,784) $ 16,347,463 $ 54,113,532 30.2%
Group 43,537,222 (211) - 43,537,011 0.0%
---------------- ---------------- --------------- ----------------
Total $ 94,190,075 $ (12,886,995) $ 16,347,463 $ 97,650,543
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
Percentage
of Amount
Written Reinsurance Reinsurance Assumed
Direct Ceded Assumed Net to Net
---------------- ---------------- --------------- ---------------- --------------
Premium income:
Life insurance $ 392,489 $ (51,946) $ 357,134 $ 697,677 51.2%
Accident/health 555,506 (231,489) 197,113 521,130 37.8%
Annuities 4,677 (757) 2,409 6,329 38.1%
---------------- ---------------- --------------- ----------------
Total $ 952,672 $ (284,192) $ 556,656 $ 1,225,136
================ ================ =============== ================
The following table summarizes life insurance in-force and life and accident/health premiums at, and for
the year ended, December 31, 2004:
Percentage
of Amount
Written Reinsurance Reinsurance Assumed
Direct Ceded Assumed Net to Net
---------------- ---------------- ---------------- ---------------- --------------
Life insurance in-force
Individual $ 50,946,388 $ (12,925,504) $ 14,080,477 $ 52,101,361 27.0%
Group 48,101,396 (501,200) 1,142,649 48,742,845 2.3%
---------------- ---------------- ---------------- ----------------
Total $ 99,047,784 $ (13,426,704) $ 15,223,126 $ 100,844,206
================ ================ ================ ================
Premium income:
Life insurance $ 416,157 $ (54,610) $ 157,351 $ 518,898 30.3%
Accident/health 628,257 (377,632) (103,721) 146,904 (70.6)%
Annuities 745 (953) 5,474 5,266 103.9%
---------------- ---------------- ---------------- ----------------
Total $ 1,045,159 $ (433,195) $ 59,104 $ 671,068
================ ================ ================ ================
The following table summarizes life insurance in-force and life and accident/health premiums at, and for
the year ended, December 31, 2003:
Percentage
of Amount
Written Reinsurance Reinsurance Assumed
Direct Ceded Assumed Net to Net
---------------- ---------------- --------------- ---------------- --------------
Life insurance in-force:
Individual $ 49,590,015 $ (16,483,477) $ 18,054,587 $ 51,161,125 35.3%
Group 49,150,866 (18,941) 53,570,393 102,702,318 52.2%
---------------- ---------------- --------------- ----------------
Total $ 98,740,881 $ (16,502,418) $ 71,624,980 $ 153,863,443
================ ================ =============== ================
Premium income:
Life insurance $ 355,791 $ (44,118) $ 1,301,560 $ 1,613,233 80.7%
Accident/health 678,516 (423,592) 321,996 576,920 55.8%
Annuities 4,800 (500) 58,444 62,744 93.1%
---------------- ---------------- --------------- ----------------
Total $ 1,039,107 $ (468,210) $ 1,682,000 $ 2,252,897
================ ================ =============== ================
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
8. COMMERCIAL PAPER
The Company has a commercial paper program that is partially supported by
a $50,000 corporate credit facility. (See Note 17).
The following table provides information regarding the Company's
commercial paper program at December 31, 2005 and 2004:
December 31,
------------------------------------------------------
2005 2004
-------------------------- --------------------------
Commercial paper outstanding $ 95,064 $ 95,044
Maturity range (days) 10 - 86 10 - 66
Interest rate range 3.99% - 4.48% 2.18% - 2.50%
9. STOCKHOLDER'S EQUITY, DIVIDEND RESTRICTIONS AND OTHER MATTERS
At December 31, 2005 and 2004, the Company had 50,000,000 shares of $1
par value preferred stock authorized, none of which were issued or
outstanding at either date. In addition, the Company has 50,000,000
shares of $1 par value common stock authorized, 7,032,000 of which were
issued and outstanding at both December 31, 2005 and 2004.
The Company's net income (loss) and capital and surplus, as determined in
accordance with statutory accounting principles and practices, for the
years ended December 31, 2005, 2004 and 2003 are as follows:
Year Ended December 31,
---------------------------------------------------------
2005 2004 2003
---------------- ---------------- ----------------
(Unaudited)
Net income (loss) $ 391,631 $ 402,341 $ (75,626)
Capital and surplus 1,514,203 1,477,464 1,281,191
Dividends are paid as determined by the Board of Directors, subject to
restrictions as discussed below. Dividends in the amounts of $221,358,
$163,230 and $75,711, were paid on the Company's common stock during the
years ended December 31, 2005, 2004 and 2003, respectively.
The maximum amount of dividends that can be paid to stockholders by
insurance companies domiciled in the State of Colorado, without prior
approval of the Insurance Commissioner, is subject to restrictions
relating to statutory capital and surplus and statutory net gain from
operations. Unaudited statutory capital and surplus and net gain from
operations at December 31, 2005 were $1,514,203 and $411,925,
respectively. The Company should be able to pay up to $411,925
(unaudited) of dividends in 2006.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
10. OTHER COMPREHENSIVE INCOME
The following table presents the composition of other comprehensive
income for the year ended December 31, 2005:
Year Ended December 31, 2005
----------------------------------------------------------
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 $ 5,753 $ (2,014) $ 3,739
Unrealized holding gains (losses) arising
during the period (256,982) 89,142 (167,840)
Less: reclassification adjustment for (gains)
losses realized in net income (3,474) 1,216 (2,258)
---------------- ------------------ ---------------
Net unrealized gains (losses) (254,703) 88,344 (166,359)
Reserve and deferred policy acquisition
costs adjustment 63,393 (22,314) 41,079
---------------- ------------------ ---------------
Net unrealized gains (losses) (191,310) 66,030 (125,280)
Minimum pension liability adjustment (15,897) 5,564 (10,333)
---------------- ------------------ ---------------
Other comprehensive income (loss) $ (207,207) $ 71,594 $ (135,613)
================ ================== ===============
The following table presents the composition of other comprehensive
income for the year ended December 31, 2004:
Year Ended December 31, 2004
----------------------------------------------------------
Before Tax Tax (Expense) Net of Tax
Amount Benefit Amount
--------------- ----------------- ----------------
Unrealized gains on available-for-sale securities:
Net changes during the year related to cash
flow hedges $ 7,326 $ (2,564) $ 4,762
Unrealized holding gains (losses) arising
during the period (12,706) 4,448 (8,258)
Less: reclassification adjustment for (gains)
losses realized in net income (35,908) 12,567 (23,341)
--------------- ----------------- ----------------
Net unrealized gains (losses) (41,288) 14,451 (26,837)
Reserve and deferred policy acquisition
costs adjustment 35,773 (12,521) 23,252
--------------- ----------------- ----------------
Net unrealized gains (losses) (5,515) 1,930 (3,585)
Minimum pension liability adjustment (8,370) 2,930 (5,440)
--------------- ----------------- ----------------
Other comprehensive income (loss) $ (13,885) $ 4,860 $ (9,025)
=============== ================= ================
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
The following table presents the composition of other comprehensive
income for the year ended December 31, 2003:
Year Ended December 31, 2003
---------------------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
---------------- ----------------- -----------------
Unrealized gains on available-for-sale securities:
Net changes during the year related to
cash flow hedges $ (18,159) $ 6,356 $ (11,803)
Unrealized holding gains (losses) arising
during the period 12,967 (4,538) 8,429
Less: reclassification adjustment for (gains)
losses realized in net income (22,824) 7,989 (14,835)
---------------- ----------------- -----------------
Net unrealized gains (losses) (28,016) 9,807 (18,209)
Reserve and deferred policy
acquisition costs adjustment (12,553) 4,393 (8,160)
---------------- ----------------- -----------------
Net unrealized gains (losses) (40,569) 14,200 (26,369)
Minimum pension liability adjustment 5,498 (1,925) 3,573
---------------- ----------------- -----------------
Other comprehensive income (loss) $ (35,071) $ 12,275 $ (22,796)
================ ================= =================
11. NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS
The following table summarizes net investment income for the years ended December 31, 2005, 2004 and 2003:
Year Ended December 31,
--------------------------------------------------------
2005 2004 2003
--------------- ----------------- ---------------
Investment income:
Fixed maturities and short-term investments $ 762,683 $ 688,096 $ 666,849
Equity investments 18,899 10,749 4,703
Mortgage loans on real estate 93,230 104,902 85,966
Policy loans 202,946 203,127 195,633
Other, including interest income from related
parties of $32,723, $60,922 and $47,584 22,377 64,149 67,614
--------------- ----------------- ---------------
1,100,135 1,071,023 1,020,765
Investment expenses, including interest on
amounts charged by related parties
of $14,396, $15,189 and $14,345 27,607 37,716 32,365
--------------- ----------------- ---------------
Net investment income $ 1,072,528 $ 1,033,307 $ 988,400
=============== ================= ===============
The following table summarizes net realized gains on investments for the
years ended December 31, 2005, 2004 and 2003:
Year Ended December 31,
--------------------------------------------------------
2005 2004 2003
--------------- ----------------- ---------------
Net realized gains (losses):
Fixed maturities and short-term investments $ (20,129) $ 34,960 $ 26,621
Equity investments 43,884 8,040 1,013
Mortgage loans on real estate 625 5,318 2,911
Other (81) (13) -
Provisions for mortgage impairments 14,678 9,642 9,015
--------------- ----------------- ---------------
Net realized gains on investments $ 38,977 $ 57,947 $ 39,560
=============== ================= ===============
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
Included in net investment income and net realized gains on investments
are amounts allocable to the participating fund account. This allocation
is based on the activity in a specific block of invested assets that are
segmented for the benefit of the participating fund account. The amount
of net investment income allocated to the participating fund account was
$351,149, $367,558, and $343,504 for the years ended December 31, 2005,
2004 and 2003, respectively. The amount of net realized gains (losses)
allocated to the participating fund account was $(3,300), $8,504, and
$8,236 for the years ended December 31, 2005, 2004 and 2003,
respectively.
12. EMPLOYEE BENEFIT PLANS
Defined benefit pension and post-retirement medical plans - The Company
has a noncontributory defined benefit pension plan covering substantially
all of its employees that were hired before January 1, 1999. Pension
benefits are based principally on an employee's years of service and
compensation levels near retirement. The Company's policy for funding the
defined benefit pension plans is to make annual contributions, which
equal or exceed regulatory requirements.
The Company sponsors an unfunded post-retirement medical plan (the
"medical plan") that provides health benefits to retired employees who
are not Medicare eligible. The medical plan is contributory and contains
other cost sharing features, which may be adjusted annually for the
expected general inflation rate. The Company's policy is to fund the cost
of the medical plan benefits in amounts determined at the discretion of
management. The following table summarizes changes in the benefit
obligations and plan assets for the Company's defined benefit pension
plan and its unfunded post-retirement medical plan for the years ended
December 31, 2005, 2004 and 2003:
Defined Benefit Pension Plan Post-Retirement Medical Plan
------------------------------------------ ----------------------------------------
Year Ended December 31, Year Ended December 31,
------------------------------------------ ----------------------------------------
2005 2004 2003 2005 2004 2003
----------- ------------ ------------ ------------ ---------- -----------
Change in projected
benefit obligation:
Benefit obligation,
January 1 $ 238,024 212,963 $ 186,047 $ 50,074 44,105 $ 31,242
Service cost 8,498 8,576 8,269 2,385 2,891 2,046
Interest cost 14,537 13,317 12,275 2,421 2,735 2,269
Actuarial (gain) loss 21,658 9,781 12,746 (2,813) 1,482 9,614
Benefits paid (7,071) (6,613) (6,374) (1,089) (1,139) (1,066)
Plan change - - - (34,965) - -
Canada Life plan merger - - - 7,910 - -
----------- ------------ ------------ ------------ ---------- -----------
Benefit obligation,
December 31 $ 275,646 238,024 $ 212,963 $ 23,923 50,074 $ 44,105
=========== ============ ============ ============ ========== ===========
Defined Benefit Pension Plan Post-Retirement Medical Plan
------------------------------------------ ----------------------------------------
Year Ended December 31, Year Ended December 31,
----------- ------------ ------------ ------------ ---------- -----------
2005 2004 2003 2005 2004 2003
----------- ------------ ------------ ------------ ---------- -----------
Change in plan assets:
Fair value of plan
assets, January 1 $ 198,964 189,319 $ 163,316 $ - - $ -
Actual return on plan
assets 16,860 13,058 32,377 - - -
Employer contributions - 3,200 - 1,089 1,139 1,066
Benefits paid (7,071) (6,613) (6,374) (1,089) (1,139) (1,066)
----------- ------------ ------------ ------------ ---------- -----------
Fair value of plan
assets, December 31 $ 208,753 198,964 $ 189,319 $ - - $ -
=========== ============ ============ ============ ========== ===========
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
Defined Benefit Pension Plan Post-Retirement Medical Plan
Year Ended December 31, Year Ended December 31,
------------------------------------------- ----------------------------------------
2005 2004 2003 2005 2004 2003
----------- ------------ ------------- ----------- ----------- ------------
Funded (unfunded)
status $ (66,893) $ (39,060) $ (23,643) $ (23,923) $ (50,074) $ (44,105)
Unrecognized net
actuarial loss 67,055 50,682 41,777 11,879 14,532 13,715
Unrecognized prior
service cost 832 1,464 2,095 (41,063) (7,965) (8,679)
Contributions after
measurement date and
before fiscal year end
4,700 - - - - -
Unrecognized net
obligation or (asset)
at transition (9,085) (10,599) (12,113) - - -
----------- ------------ ------------- ----------- ----------- ------------
Net amount recognized (3,391) 2,487 8,116 (53,107) (43,507) (39,069)
Additional minimum
liability (39,148) (24,158) (16,419) - - -
----------- ------------ ------------- ----------- ----------- ------------
Prepaid benefit cost
(accrued benefit
liability) (42,539) (21,671) (8,303) (53,107) (43,507) (39,069)
Intangible asset 832 1,464 2,095 - - -
Accumulated other
comprehensive
income adjustments 38,316 22,694 14,324 - - -
----------- ------------ ------------- ----------- ----------- ------------
Net amount recognized $ (3,391) $ 2,487 $ 8,116 $ (53,107) $ (43,507) $ (39,069)
=========== ============ ============= =========== =========== ============
Increase (decrease) in
minimum liability
included in other
comprehensive income $ 10,155 $ 5,440 $ (3,573)
=========== ============ =============
Expected Benefit Payments Year Ended December 31,
--------------------------------------------------------------------------------------
2011
Through
2006 2007 2008 2009 2010 2015
----------- ------------ -------------- ----------- ----------- ------------
Defined benefit
pension plan $ 8,013 $ 8,544 $ 9,255 $ 9,938 $ 10,532 $ 68,571
Post-retirement
medical plan 832 975 1,151 1,299 1,488 10,723
During December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. Under the Act,
which takes effect on January 1, 2006, employers who sponsor
postretirement plans that provide for a prescription drug benefit under
Medicare Part D may be entitled to a subsidy payment. In conjunction with
the effect of this legislation, the Company amended its post-retirement
medical plan, whereby it eliminated the provision of medical benefits for
retired employees past the age of 65. This amendment resulted in a
reduction of the Company's estimated post-retirement medical plan benefit
obligation in the amount of $34,965. On January 1, 2005, the United States
employees of CLAC became participants in the Company's post-retirement
medical benefit plan.
The accumulated benefit obligation for all defined benefit pension plans
was $255,992 and $220,635 at December 31, 2005 and 2004, respectively.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
The following table presents the components of net periodic benefit cost
for the years ended December 31, 2005, 2004 and 2003:
Defined Benefit Pension Plan Post-Retirement Medical Plan
Years Ended December 31, Years Ended December 31,
--------------------------------------------- -------------------------------------
2005 2004 2003 2005 2004 2003
------------- ------------ ------------- ----------- ---------- ----------
Components of net
periodic benefit cost:
Service cost $ 8,498 $ 8,576 $ 8,269 $ 2,385 $ 2,891 $ 2,046
Interest cost 14,537 13,317 12,275 2,421 2,735 2,269
Expected return on
plan assets (15,610) (14,933) (12,954) - - -
Amortization of
transition obligation (1,514) (1,514) (1,514) - - -
Amortization of
unrecognized prior
service costs 632 632 632 (1,868) (713) (713)
Amortization of loss
from earlier periods 4,035 2,751 3,489 532 664 261
------------- ------------ ------------- ----------- ---------- ----------
Net periodic benefit
cost $ 10,578 $ 8,829 $ 10,197 $ 3,470 $ 5,577 $ 3,863
============= ============ ============= =========== ========== ==========
The following table presents the assumptions used in determining benefit
obligations for the years ended December 31, 2005, 2004 and 2003:
Defined Benefit Pension Plan Post-Retirement Medical Plan
--------------------------------------------- -------------------------------------
Year Ended December 31, Year Ended December 31,
--------------------------------------------- -------------------------------------
2005 2004 2003 2005 2004 2003
------------- ------------ ------------- ----------- ---------- ----------
Discount rate 5.750% 6.00% 6.25% 5.750% 6.00% 6.25%
Expected return on
plan asset 8.00% 8.00% 8.00% - - -
Rate of compensation
increase 3.19% 3.19% 3.44% - - -
The discount rate has been set based on the rates of return on
high-quality fixed-income investments currently available and expected to
be available during the period the benefits will be paid. In particular,
the yields on bonds rated AA or better on the measurement date have been
used to set the discount rate.
Assumed healthcare 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 healthcare
benefits was assumed and that the rate would gradually decrease to a
level of 5.25% by 2014.
The following table presents what a one-percentage-point change would
have on assumed healthcare cost trend rates:
One Percentage One Percentage
Point Increase Point Decrease
---------------------- ---------------------
Increase (decrease) on total of service and interest cost
on components $ 400 $ (338)
Increase (decrease) on post-retirement benefit obligation 2,882 (2,484)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
The following table presents how the Company's pension plan assets are
invested at December 31, 2005 and 2004:
December 31,
----------------------------------------------
Asset Category: 2005 2004
---------------------- --------------------
Equity securities 68% 64%
Debt securities 27% 29%
Real estate 4% -
Other 1% 7%
---------------------- --------------------
Total 100% 100%
====================== ====================
The following table presents the Company's target allocation for invested plan assets at December 31, 2006:
Asset Category: December 31, 2006
-----------------------
Equity securities 60%
Debt securities 30%
Other 10%
-----------------------
Total 100%
=======================
The Company does not expect to make contributions to its pension plan
during the year ended December 31, 2006.
The investment objective of the defined benefit pension plan is to
provide an attractive risk-adjusted return that will ensure the payment
of benefits while protecting against the risk of substantial investment
losses. Correlations among the asset classes are used to identify an
asset mix that the Company believes will provide the most attractive
returns. Long-term return forecasts for each asset class using historical
data and other qualitative considerations to adjust for projected
economic forecasts are used to set the expected rate of return for the
entire portfolio.
Supplemental executive retirement plan - The Company also provides
supplemental executive retirement plans 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 Company's expense for this plan was
$3,732, $3,183 and $3,290 for the years ended December 31, 2005, 2004 and
2003, respectively. The liability associated with this plan was $35,348
and $29,378 at December 31, 2005 and 2004, respectively, and is included
in other liabilities in the accompanying consolidated balance sheets.
The following table summarizes changes in the benefit obligations and plan
assets for the Company's supplemental executive retirement plans for the
years ended December 31, 2005, 2004 and 2003:
Supplemental Executive Retirement Plans
-------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------
2005 2004 2003
--------------- --------------- ---------------
Change in projected benefit obligation:
Benefit obligation, January 1 $ 36,299 $ 30,441 $ 29,873
Service cost 818 767 611
Interest cost 2,147 1,871 2,022
Plan amendments 4,261 318 -
Actuarial (gain) loss 3,186 3,617 (2,078)
Special termination benefits - 225 954
Benefits paid (940) (940) (941)
--------------- --------------- ---------------
Benefit obligation, December 31 $ 45,771 $ 36,299 $ 30,441
=============== =============== ===============
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
Supplemental Executive Retirement Plans
-------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------
2005 2004 2003
--------------- --------------- ---------------
Change in plan assets:
Fair value of plan assets, January 1 $ - $ - $ -
Employer contributions 940 940 941
Benefits paid (940) (940) (941)
--------------- --------------- ---------------
Fair value of plan assets, December 31 $ - $ - $ -
=============== =============== ===============
Supplemental Executive Retirement Plans
-------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------
2005 2004 2003
--------------- --------------- ---------------
Unfunded status $ (45,771) $ (36,299) $ (30,441)
Unrecognized net actuarial gain 8,327 5,310 1,718
Unrecognized prior service cost 9,096 5,433 5,660
--------------- --------------- ---------------
Net amount recognized $ (28,348) $ (25,556) $ (23,063)
=============== =============== ===============
Accrued benefit cost (35,348) (29,378) (24,942)
Intangible asset 6,726 3,578 1,687
Accumulated other comprehensive income 274 244 192
--------------- --------------- ---------------
Net amount recognized (28,348) (25,556) (23,063)
=============== =============== ===============
Increase in minimum liability included
in other comprehensive income $ 178 $ - $ -
=============== =============== ===============
Expected Benefit Payments Year Ended December 31,
--------------------------------------------------------------------------------------------
2011
Through
2006 2007 2008 2009 2010 2015
----------- ----------- ----------- ----------- ------------ --------------
Supplemental
Executive
Retirement Plan $ 2,167 $ 2,379 $ 2,196 $ 2,511 $ 2,698 $ 15,796
The following table presents the components of net periodic benefit cost
for the years ended December 31, 2005, 2004 and 2003:
Supplemental Executive Retirement Plans
-------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------
2005 2004 2003
--------------- --------------- ---------------
Components of net periodic benefit cost:
Service cost $ 818 $ 767 $ 611
Interest cost 2,147 1,871 2,022
Amortization of unrecognized prior service costs 598 545 545
Amortization of loss from prior periods 169 - 112
--------------- --------------- ---------------
Net periodic benefit cost $ 3,732 $ 3,183 $ 3,290
=============== =============== ===============
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
The following table presents the assumptions used in determining benefit
obligations for the years ended December 31, 2005, 2004 and 2003:
Supplemental Executive Retirement Plans
-------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------
2005 2004 2003
--------------- --------------- ---------------
Discount rate 5.75% 6.00% 6.25%
Rate of compensation increase 6.00% 6.00% 6.00%
Other employee benefit plans - The Company sponsors a defined
contribution 401(k) retirement plan, which provides eligible participants
with the opportunity to defer up to 50% of base compensation. The Company
matches 50% of the first 5% of participant pre-tax contributions for
employees hired before January 1, 1999. For all other employees, the
Company matches 50% of the first 8% of participant pre-tax contributions.
Company contributions for the years ended December 31, 2005, 2004 and
2003 were $8,153, $7,522 and $6,646, respectively.
The Company has an executive 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 the amounts deferred. The
program is not qualified under Section 401 of the Internal Revenue Code.
Participant balances, which are reflected in other liabilities in the
accompanying consolidated balance sheets, are $17,837 and $16,810 at
December 31, 2005 and 2004, respectively. The participant deferrals
earned interest at the average rate of 6.08% and 6.56% during the years
ended December 31, 2005 and 2004, respectively. The interest rate is
based on the Moody's Average Annual Corporate Bond Index rate plus 0.45%
for actively employed participants and fixed rates ranging from 6.70% to
8.30% for retired participants. Interest expense related to this plan was
$1,199, $1,184 and $1,087 for the years ended December 31, 2005, 2004 and
2003, respectively.
The Company has a deferred compensation plan for select sales personnel
with the opportunity to participate in an unfunded deferred compensation
program. Under this program, participants may defer compensation and earn
interest on the amounts deferred. The program is not qualified under
Section 401 of the Internal Revenue Code.
Effective January 1, 2005, this program no longer accepted participant
deferrals. Participant balances, which are included in other liabilities
in the accompanying consolidated balance sheets, are $6,055 and $6,339 at
December 31, 2005 and 2004, respectively. The participant deferrals
earned interest at the average rate of 4.50% during both years ended
December 31, 2005 and 2004. The interest rate is based on an annual rate
determined by the Company. The interest expense related to this plan was
$282, $291 and $362 for the years ended December 31, 2005, 2004 and 2003,
respectively.
The Company offers an unfunded, non-qualified deferred compensation plan
to a select group of management and highly compensated individuals.
Participants defer a portion of their compensation and realize potential
market gains or losses on the invested contributions. The program is not
qualified under Section 401 of the Internal Revenue Code.
Participant balances, which are included in other liabilities in the
accompanying consolidated balance sheets, are $10,633 and $9,246 at
December 31, 2005 and 2004, respectively. Unrealized gains(losses) on
invested participant deferrals were $542 and $963 for the years ended
December 31, 2005 and 2004, respectively.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
13. FEDERAL INCOME TAXES
The following table presents a reconciliation between the statutory
federal income tax rate and the Company's effective federal income tax
rate for the years ended December 31, 2005, 2004 and 2003:
Year Ended December 31,
----------------------------------------------------------
2005 2004 2003
-------------- ------------- ----------------
Statutory federal income tax rate 35.0 % 35.0 % 35.0 %
Income tax effect of:
Reduction in tax contingency (0.2) (0.3) (2.1)
Investment income not subject to federal tax (1.0) (1.3) (2.1)
Tax credits (3.8) (2.4) -
State income taxes, net of federal benefit 0.7 0.2 0.6
Other, net (0.4) 0.3 1.2
-------------- ------------- ----------------
Effective federal income tax rate 30.3 % 31.5 % 32.6 %
============== ============= ================
The Company has reduced its liability for tax contingencies in each of
the last three years due to the completion of Internal Revenue Service
examinations.
Deferred income taxes represent the tax effect of the differences between
the book and tax bases of assets and liabilities. The tax effect of
temporary differences, which give rise to the deferred tax assets and
liabilities as of December 31, 2005 and 2004, are as follows:
December 31,
----------------------------------------------------------------------
2005 2004
-------------------------------- --------------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
--------------- -------------- -------------- -------------
Policyholder reserves $ 427,604 $ - $ 334,357 $ -
Deferred policy acquisition costs - 150,079 - 127,563
Deferred acquisition cost proxy tax 235,243 - 137,867 -
Investment assets - 106,973 - 242,297
NOL carryforward 100,044 - - -
Other - 315,794 36,481 -
--------------- -------------- -------------- -------------
Total deferred taxes $ 762,891 $ 572,846 $ 508,705 $ 369,860
=============== ============== ============== =============
Amounts presented for investment assets above include $2,539 and $75,726
related to the unrealized gains on the Company's fixed maturities, which
are classified as available-for-sale at December 31, 2005 and 2004,
respectively.
Under pre-1984 life insurance company income tax laws, a portion of a
life insurance company's 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 at December 31, 2005 and 2004 was $0 and
$7,742, respectively.
The Company, together with certain of its subsidiaries, and GWL&A
Financial have entered into an income tax allocation agreement whereby
GWL&A Financial files a consolidated federal income tax return. Under the
agreement, these companies are responsible for and will receive the
benefits of any income tax liability or benefit computed on a separate
tax return basis. Certain other subsidiaries file their federal income
tax returns separately.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
Included in due from parent and affiliates at December 31, 2005 and 2004
is $13,661 and $38,789, respectively, of income taxes receivable from
GWLA Financial related to the consolidated income tax return filed by the
Company and certain subsidiaries. Included in the consolidated balance
sheet at December 31, 2005 is $5,128 of income taxes receivable related
to the separate federal income tax returns filed by certain subsidiaries
and other state income tax receivables. Included in the consolidated
balance sheet at December 31, 2004 is $33,337 of income tax liabilities
related to the separate federal income tax returns filed by certain
subsidiaries and other state income tax liabilities.
14. SEGMENT INFORMATION
The Company has two reportable business segments: Great-West Healthcare
and Financial Services. The Great-West Healthcare segment markets and
administers group life and health insurance to small and mid-sized
corporate employers. The Financial Services segment markets and
administers savings products to individuals, public and not-for-profit
employers and corporations, 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 its own unique distribution
channels.
The accounting policies of each of the segments are the same as those
described in Note 1. The Company evaluates performance of its reportable
segments based on their profitability from operations after income taxes.
The Company's operations are not materially dependent on one or a few
customers, brokers or agents.
The following tables summarize segment financial information for the year
ended and as of December 31, 2005:
Year Ended December 31, 2005
-------------------------------------------------------------
Great-West Financial
Operations: Healthcare Services Total
----------- ------------------ ------------------- -----------------
Revenue:
Premium income $ 678,333 $ 546,803 $ 1,225,136
Fee income 663,932 300,767 964,699
Net investment income 66,687 1,005,841 1,072,528
Net realized gains on investments 18,098 20,879 38,977
------------------ ------------------- ----------------
Total revenue 1,427,050 1,874,290 3,301,340
------------------ ------------------- ----------------
Benefits and expenses:
Benefits 495,181 1,297,281 1,792,462
Operating expenses 673,568 302,310 975,878
------------------ ------------------- ----------------
Total benefits and expenses 1,168,749 1,599,591 2,768,340
------------------ ------------------- ----------------
Net operating income before income taxes 258,301 274,699 533,000
Income taxes 85,641 75,804 161,445
------------------ ------------------- ----------------
Net income $ 172,660 $ 198,895 $ 371,555
================== =================== ================
December 31, 2005
-------------------------------------------------------------
Great-West Financial
Assets: Healthcare Services Total
------- ------------------ ------------------- ----------------
Investments $ 2,033,463 $ 18,509,321 $ 20,542,784
Other assets 277,996 2,502,910 2,780,906
Separate account assets - 14,455,710 14,455,710
------------------ ------------------- ----------------
Total assets $ 2,311,459 $ 35,467,941 $ 37,779,400
================== =================== ================
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
The following tables summarize segment financial information for the year
ended and as of December 31, 2004:
Year Ended December 31, 2004
-------------------------------------------------------------
Great-West Financial
Operations: Healthcare Services Total
----------- ------------------ ------------------- ----------------
Revenue:
Premium income $ 261,957 $ 409,111 $ 671,068
Fee income 649,113 266,531 915,644
Net investment income 46,253 987,054 1,033,307
Net realized gains on investments 15,248 42,699 57,947
------------------ ------------------- ----------------
Total revenue 972,571 1,705,395 2,677,966
------------------ ------------------- ----------------
Benefits and expenses:
Benefits 68,306 1,165,307 1,233,613
Operating expenses 680,563 287,150 967,713
------------------ ------------------- ----------------
Total benefits and expenses 748,869 1,452,457 2,201,326
------------------ ------------------- ----------------
Net operating income before income taxes 223,702 252,938 476,640
Income taxes 74,541 75,679 150,220
------------------ ------------------- ----------------
Net income $ 149,161 $ 177,259 $ 326,420
================== =================== ================
December 31, 2004
-------------------------------------------------------------
Great-West Financial
Assets: Healthcare Services Total
------- ------------------ ------------------- ----------------
Investments $ 1,564,147 $ 18,098,325 $ 19,662,472
Other assets 276,778 2,998,700 3,275,478
Separate account assets - 14,155,397 14,155,397
------------------ ------------------- ----------------
Total assets $ 1,840,925 $ 35,252,422 $ 37,093,347
================== =================== ================
The following tables summarize segment financial information for the year
ended and as of December 31, 2003:
Year Ended December 31, 2003
-------------------------------------------------------------
Great-West Financial
Operations: Healthcare Services Total
----------- ------------------ ------------------- ----------------
Revenue:
Premium income $ 838,194 $ 1,414,703 $ 2,252,897
Fee income 607,369 232,703 840,072
Net investment income 72,191 916,209 988,400
Net realized gains on investments 10,340 29,220 39,560
------------------ ------------------- ----------------
Total revenue 1,528,094 2,592,835 4,120,929
------------------ ------------------- ----------------
Benefits and expenses:
Benefits 567,603 2,116,001 2,683,604
Operating expenses 699,146 266,538 965,684
------------------ ------------------- ----------------
Total benefits and expenses 1,266,749 2,382,539 3,649,288
------------------ ------------------- ----------------
Net operating income before income taxes 261,345 210,296 471,641
Income taxes 88,104 65,516 153,620
------------------ ------------------- ----------------
Net income $ 173,241 $ 144,780 $ 318,021
================== =================== ================
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
The following table, which summarizes premium and fee income by segment,
presents supplemental information for the years ended December 31, 2005,
2004 and 2003:
Year Ended December 31,
-------------------------------------------------------------
2005 2004 2003
------------------ ------------------- ----------------
Premium Income:
Great-West Healthcare:
Group Life & Health $ 678,333 $ 261,957 $ 838,194
------------------ ------------------- ----------------
Total Great-West Healthcare 678,333 261,957 838,194
------------------ ------------------- ----------------
Financial Services:
Retirement Services 6,277 1,640 824
Individual Markets 540,526 407,471 1,413,879
------------------- ---------------- ----------------
Total Financial Services 546,803 409,111 1,414,703
------------------ ------------------- ----------------
Total premium income $ 1,225,136 $ 671,068 $ 2,252,897
================== =================== ================
Year Ended December 31,
-------------------------------------------------------------
2005 2004 2003
----------------- ------------------ ----------------
Fee Income:
Great-West Healthcare:
Group Life & Health (uninsured plans) $ 663,932 $ 649,113 $ 607,369
----------------- ------------------ ----------------
Total Great-West Healthcare 663,932 649,113 607,369
----------------- ------------------ ----------------
Financial Services:
Retirement Services 258,064 226,958 199,374
Individual Markets 42,703 39,573 33,329
----------------- ------------------ ----------------
Total Financial Services 300,767 266,531 232,703
----------------- ------------------ ----------------
Total fee income $ 964,699 $ 915,644 $ 840,072
================= ================== ================
15. STOCK OPTIONS
Lifeco has a stock option plan (the "Lifeco plan") that provides for the
granting of options on its common shares to certain officers and
employees of its subsidiaries, including the Company. Options may be
granted with exercise prices not less than the market price of the shares
on the date of the grant. Termination of employment prior to the vesting
of the options results in the forfeiture of the unvested options. The
common stock of Lifeco split on a two-for-one basis on October 4, 2004.
The 2003 amounts have been restated to reflect the two-for-one stock
split. As of December 31, 2005 stock available for award to Company
employees under the Lifeco plan was 2,743,588 shares.
The Lifeco plan provides for the granting of options with varying terms
and vesting requirements. The majority of basic options under the Lifeco
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 vested and became 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. 200,000 variable
options granted in 2003 became exercisable at December 31, 2005, and
accordingly, the Company disclosed compensation expense in accordance
with APB No. 25. For these options that became exercisable, the exercise
period expires ten years from the date of grant.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
The following table summarizes the status of, and changes in, the Lifeco
plan options granted to Company employees which are outstanding and the
weighted-average exercise price (the "WAEP") for 2005, 2004 and 2003. As
the options granted relate to stock traded on the Toronto Stock Exchange,
the values, which are presented in U.S. dollars, will fluctuate as a
result of exchange rate fluctuations:
2005 2004 2003
------------------------- -------------------------- --------------------------
Options WAEP Options WAEP Options WAEP
-------------- --------- ------------- --------- ------------- --------
Outstanding, January 1 6,274,204 $ 11.87 7,754,314 $ 10.29 8,894,290 $ 6.83
Granted 742,000 24.34 242,000 18.96 1,706,000 13.41
Exercised 800,083 8.85 1,248,834 6.65 972,352 5.43
Expired or canceled 175,400 16.09 473,276 14.36 1,873,624 6.98
-------------- --------- ------------- --------- ------------- --------
Outstanding, December 31 6,040,721 14.04 6,274,204 $ 11.87 7,754,314 $ 10.29
============== ========= ============= ========= ============= ========
Options exercisable,
December 31 4,213,821 $ 11.45 4,195,804 $ 9.98 4,554,584 $ 8.09
============== ========= ============= ========= ============= ========
Year Ended December 31,
---------------------------------------------------------------------------------------
2005 2004 2003
------------------------- ---------------------------- ---------------------------
Options WAEP Options WAEP Options WAEP
------------- -------- ------------- --------- ------------- ---------
Weighted average
fair value of options
granted during year 742,000 $ 5.10 242,000 $ 4.80 1,706,000 $ 3.49
============= ======== ============= ========= ============= =========
The following table summarizes the range of exercise prices for
outstanding Lifeco common stock options granted to Company employees at
December 31, 2005:
December 31, 2005
----------------------------------------------------------------------------------------
Outstanding Exercisable
-------------------------------------------------- ---------------------------------
Average Average Average
Exercise Options Life Exercise Options Exercise
Price Range Outstanding Remaining Price Outstanding Price
--------------------- ---------------- ------------- ------------- ---------------- -------------
$3.62 - $6.94 434,700 1.15 $ 5.74 434,700 $ 5.74
$7.16 - $11.51 2,121,704 4.07 9.48 2,121,704 9.48
$14.65 - $17.80 2,570,317 6.44 15.52 1,623,017 15.34
$20.66 - $25.50 914,000 9.61 24.43 34,400 21.21
Of the exercisable Lifeco options, 3,690,421 relate to fixed option
grants and 523,400 relate to variable option grants.
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:
Granted During the Year Ended December 31,
---------------------------------------------------------
2005 2004 2003
----------------- ---------------- -----------------
Dividend yield 2.97% 2.58% 2.81%
Expected volatility 21.13% 24.64% 26.21%
Risk free interest rate 4.01% 4.33% 4.48%
Expected duration 7.0 years 6.7 years 7.0 years
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollars In Thousands, Except Share Amounts)
16. OBLIGATIONS RELATING TO DEBT AND LEASES
The Company enters into operating leases primarily for office space. The
following table shows, as of December 31, 2005, scheduled related party
debt repayments and minimum annual rental commitments for operating
leases having initial or remaining non-cancelable lease terms in excess
of one year during the years ended December 31, 2006 through 2010 and
thereafter.
Year Ended December 31,
----------------------------------------------------------------------------------------
2006 2007 2008 2009 2010 Thereafter
---------- ---------- ----------- ---------- ----------- --------------
Related party notes $ 25,000 $ - $ - $ - $ - $ 195,000
Operating leases 24,490 20,820 20,089 18,407 8,144 1,934
---------- ---------- ----------- ---------- ----------- --------------
Total contractual
obligations $ 49,490 $ 20,820 $ 20,089 $ 18,407 $ 8,144 $ 196,934
========== ========== =========== ========== =========== ==============
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 the Company's financial position or the
results of its operations.
During 2002, the Company entered into a corporate credit facility
agreement in the amount of $50,000 for general corporate purposes. The
agreement was extended by an amended agreement on May 26, 2005. The credit
facility matures on May 26, 2010. Interest accrues at a rate dependent on
various conditions and terms of borrowings. The agreement requires the
Company to maintain a minimum adjusted net worth of $900,000 plus 50% of
its net income, if positive (both compiled by the unconsolidated statutory
accounting basis prescribed by the National Association of Insurance
Commissioners), for each quarter ending after March 31, 2005. The Company
had no borrowings under the credit facility at either December 31, 2005 or
2004.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
SCHEDULE III
SUPPLEMENTAL INSURANCE INFORMATION
(In Thousands)
Financial
Healthcare Services
As of and for the year ended December 31, 2005 Segment Segment Total
- ---------------------------------------------- ----------------- ---------------- ----------------
Deferred policy acquisition costs $ - $ 335,406 $ 335,406
Future policy benefits, losses, claims, expenses 302,718 17,871,131 18,173,849
Unearned premiums 49,435 480 49,915
Other policy claims and benefits payable 588,091 423,049 1,011,140
Premium income 678,333 546,803 1,225,136
Net investment income 66,687 1,005,841 1,072,528
Benefits, claims, losses and settlement expenses 495,181 1,297,281 1,792,462
Amortization of deferred policy acquisition costs - 47,496 47,496
Other operating expenses 673,568 302,310 975,878
Financial
Healthcare Services
As of and for the year ended December 31, 2004 Segment Segment Total
- ---------------------------------------------- ----------------- ---------------- ----------------
Deferred policy acquisition costs $ - $ 301,603 $ 301,603
Future policy benefits, losses, claims, expenses 317,532 17,580,118 17,897,650
Unearned premiums 44,237 432 44,669
Other policy claims and benefits payable 564,623 434,622 999,245
Premium income 261,957 409,111 671,068
Net investment income 46,253 987,054 1,033,307
Benefits, claims, losses and settlement expenses 68,306 1,165,307 1,233,613
Amortization of deferred policy acquisition costs - 40,536 40,536
Other operating expenses 680,563 287,150 967,713
Financial
Healthcare Services
For the year ended December 31, 2003 Segment Segment Total
- ------------------------------------ ----------------- ---------------- ----------------
Premium income $ 838,194 $ 1,414,703 $ 2,252,897
Net investment income 72,191 916,209 988,400
Benefits, claims, losses and settlement expenses 567,603 2,116,001 2,683,604
Amortization of deferred policy acquisition costs - 36,283 36,283
Other operating expenses 699,146 266,538 965,684
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change in the Company's independent accountants or
disagreements on accounting and financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
Based on their evaluation as of December 31, 2005, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are effective at the reasonable
assurance level in ensuring that information relating to the Company
which is required to be disclosed in reports filed under the Securities
Exchange Act of 1934 is (i) recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commission's rules and forms; and is (ii) accumulated and communicated to
the Company's senior management, including the President and Chief
Executive Officer and the Executive Vice President and Chief Financial
Officer, as appropriate so that timely decisions may be made regarding
disclosure.
The Chief Executive Officer and Chief Financial Officer hereby confirm
that there were no changes in the Company's internal control over
financial reporting during the fourth quarter of 2005 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
10.1 IDENTIFICATION OF DIRECTORS
Served as
Director Principal Occupation(s)
Director Age from for last Five Years
------------------------------ ------- ------------- -----------------------------------------------------
James Balog 77 1993 Corporate Director
(1)(2)(4)
James W. Burns, O.C. 76 1991 Director Emeritus, Power Corporation and Power
(1)(2)(5) Financial Corporation
Orest T. Dackow 69 1991 Corporate Director since April 2000; previously
(1)(2)(5) President and Chief Executive Officer, Lifeco
Andre Desmarais, O.C. 49 1997 President and Co-Chief Executive Officer,
(1)(2)(4)(5)(6) Power Corporation; Deputy Chairman,
Power Financial Corporation
Paul Desmarais, Jr., 51 1991 Chairman and Co-Chief Executive Officer,
O.C. Power Corporation; Chairman, Power
(1)(2)(4)(5)(6) Financial Corporation
Robert Gratton 62 1991 Chairman of the Board of the Company;
(1)(2)(4)(5) Chairman of the Board of Power
Financial Corporation; Chairman of the Boards
of Lifeco, Great-West Life, Canada Life and
London Life Insurance Company
Kevin P. Kavanagh, C.M. 73 1986 Corporate Director; Chancellor Emeritus,
(1)(3)(5) Brandon University
William Mackness 67 1991 Corporate Director
(1)(2)
William T. McCallum 63 1990 Vice Chairman of the Company since January
(1)(2)(5) 2006; previously President and Chief Executive
Officer of the Company
Raymond L. McFeetors 61 2006 President and Chief Executive Officer of the
(1)(2)(5) Company since January 1, 2006; President and Chief
Executive Officer Great-West Life,
London Life Assurance Company, CLAC and Lifeco
R. Jeffrey Orr 47 2005 President and Chief Executive Officer and Director,
(1)(2)(4)(5) Power Financial Corporation
and IGM Financial Inc.; Director of Power
Corporation, Great-West Life, CLAC and Lifeco.
Jerry E.A. Nickerson 69 1994 Chairman of the Board, H.B. Nickerson & Sons
(3)(5) Limited (a management and holding company)
David A. Nield 67 2003 Corporate Director; previously Chairman and Chief
(1)(2)(5) Executive Officer, Canada Life
Michel Plessis-Belair, 63 1991 Vice Chairman and Chief Financial Officer,
F.C.A.(1)(2)(3)(5) Power Corporation; Executive Vice President
and Chief Financial Officer, Power Financial
Corporation
Brian E. Walsh 52 1995 Managing Partner, QVan Capital, LLC
(1)(2)(3)(4) (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) Member of the Compensation Committee.
(5) Also a director of Great-West Life.
(6) 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.
P. Desmarais, Jr. SUEZ
TOTAL S.A.
Rhodia
W.T. McCallum Maxim Series Fund, Inc.
10.2 IDENTIFICATION OF EXECUTIVE OFFICERS
Served as
Executive
Officer Principal Occupation(s)
Executive Officer Age from for last Five Years
------------------------------- ------ ------------- --------------------------------------------------
Raymond L. McFeetors 61 2006 President and Chief Executive Officer of the
President and Chief Company since January 1, 2006;
Executive Officer President and Chief Executive Officer of
Great-West Life, London Life Insurance Company,
CLAC and Lifeco
Mitchell T.G. Graye 50 1997 Executive Vice President and Chief
Executive Vice Financial Officer of the Company
President and Chief
Financial Officer
Richard F. Rivers 52 2002 Executive Vice-President, Healthcare of the
Executive Vice Company since August 2002; previously
President, Healthcare Senior Vice President, PacifiCare Health
System from August 2002; previously Chief
Operating Officer, BlueCross/BlueShield
Georgia
Douglas L. Wooden 49 1991 Executive Vice President, Financial
Executive Vice President, Services of the Company
Financial Services
S. Mark Corbett 46 2001 Senior Vice President, Investments of the
Senior Vice President, Company
Investments
Glen R. Derback 54 2003 Senior Vice President and Controller of the
Senior Vice President Company
and Controller
Terry L. Fouts 62 2003 Senior Vice President and Chief Medical
Senior Vice President Officer of the Company since May 2002;
and Chief Medical previously National Medical Director for
Officer Clinical Cost Management, Aetna U.S.
Healthcare from May 2001; previously
Global Medical Director for Cigna
International
John R. Gabbert 51 2000 Senior Vice President and Chief Information
Senior Vice President Officer, Healthcare of the Company
and Chief Information
Officer, Healthcare
Donna A. Goldin 58 1996 Senior Vice President, Healthcare
Senior Vice President, Operations of the Company
Healthcare Operations
Wayne T. Hoffmann 50 2001 Senior Vice President, Investments of the
Senior Vice President, Company
Investments
Christopher M. Knackstedt 37 2005 Senior Vice President, Healthcare
Senior Vice President, Management of the Company since June 2005;
Healthcare Management previously Vice President, Healthcare Management
of the Company; previously Chief Financial
Officer, St. Anthony Hospitals
D. Craig Lennox 58 1984 Senior Vice President, General Counsel
Senior Vice President, and Secretary of the Company
General Counsel and
Secretary
James L. McCallen 55 2003 Senior Vice President and Actuary of the
Senior Vice President Company
and Actuary
Graham R. McDonald 59 2003 Senior Vice President, Corporate
Senior Vice President, Administration of the Company
Corporate Administration
Charles P. Nelson 45 1998 Senior Vice President, Retirement Services
Senior Vice President, of the Company
Retirement Services
Martin Rosenbaum 53 1997 Senior Vice President, Healthcare
Senior Vice President, Finance of the Company
Healthcare Finance
Gregory E. Seller 52 1999 Senior Vice President, Government
Senior Vice President, Markets of the Company
Government Markets
Robert K. Shaw 50 1998 Senior Vice President, Individual Markets of
Senior Vice President, the Company
Individual Markets
Douglas J. Stefanson 50 2003 Senior Vice President, Healthcare
Senior Vice President, Underwriting of the Company
Healthcare Underwriting
George D. Webb 62 1999 Senior Vice President, P/NP
Senior Vice President, Operations of the Company
P/NP Operations
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.
10.3 CODE OF ETHICS
The Company has adopted a Code of Business Conduct (the "Code") that is
applicable to its senior financial officers, as well as to other
officers and employees. All of the items identified as elements of a
"code of ethics" as defined in Securities and Exchange Commission
regulations adopted pursuant to the Sarbanes-Oxley Act of 2002 are
substantively covered by the Code. A copy of the Code is available
without charge upon written request to David C. Aspinwall, Chief
Compliance Officer, 8515 East Orchard Road, Greenwood Village, Colorado
80111.
10.4 AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has reviewed the qualifications and backgrounds
of the members of the Audit Committee and determined that, although no
one member of the Audit Committee is an "audit committee financial
expert" within the meaning of the Rules under the Securities Exchange
Act of 1934, the combined qualifications and experience of the members
of the Audit Committee give the Committee collectively the financial
expertise necessary to discharge its responsibilities.
ITEM 11. EXECUTIVE COMPENSATION
11.1 SUMMARY COMPENSATION TABLE
The following table sets out all compensation paid by the Company to
the individuals who were, at December 31, 2005, 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.
Name and Year Annual Compensation Long-term Awards
Principal Position Options
(Number)(1)(2)
-------------------------------- ---------- ---------------------------------------- ------------------------
Salary (Dollars) Bonus (Dollars)
-------------------------------- ---------- -------------------- ------------------- ------------------------
W.T. McCallum 2005 1,057,633 1,000,000 -
President and Chief 2004 972,596 1,000,000 -
Executive Officer 2003 903,333 915,000 -
400,000(3)
-------------------------------- ---------- -------------------- ------------------- ------------------------
D.L. Wooden 2005 605,500 455,233 280,000(1)
Executive Vice 450,000(6)
President, Financial 2004 587,750 444,000 -
Services 2003 568,750 200,000(3) 100,000(4)
-------------------------------- ---------- -------------------- ------------------- ------------------------
R.F. Rivers 2005 592,500 445,483 -
Executive Vice President, 2004 562,700 427,500 -
Healthcare 2003 530,600 515,000 -
-------------------------------- ---------- -------------------- ------------------- ------------------------
M.T.G. Graye 2005 521,625 395,447 280,000(1)
Executive Vice President 450,000(6)
and Chief Financial 2004 506,250 382,500 -
Officer 2003 490,000 371,250 100,000(4)
200,000(3)
-------------------------------- ---------- -------------------- ------------------- ------------------------
C.P. Nelson 2005 425,360 240,750 -
Senior Vice President, 2004 412,000 247,200 -
Retirement Services 2003 359,120 118,000 -
75,000(5)
-------------------------------- ---------- -------------------- ------------------- ------------------------
(1) The options set out are options for common shares of Lifeco that
are granted by Lifeco pursuant to the Lifeco Stock Option Plan (the
"Lifeco Options"). Lifeco Options become exercisable on specified
dates and expire ten years after the date of the grant.
(2) After giving effect to the October 6, 2004 two-for-one subdivision
of Lifeco common shares.
(3) Special bonus paid in respect of the acquisition of Canada Life.
(4) These Lifeco Options are contingent upon the attainment of certain
financial targets.
(5) Special bonus paid in respect of business acquisitions.
(6) Special bonus paid in respect of the integration of Canada Life's
operations from July 10, 2003 to December 31, 2005.
11.2 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 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 1/1.17.
OPTION GRANTS IN LAST FISCAL YEAR
-------------------------------------------------------------------------------------- -----------------------------
Individual Grants Potential realized value at
assumed annual rates of
stock price appreciation
for option term
-------------------- ----------- -------------------- ------------ ------------------- -------------- --------------
Name Options Percentage of Exercise Expiration date 5% ($) 10% ($)
Granted total options or base
(#) granted to price
employees in ($/share)
fiscal year
-------------------- ----------- -------------------- ------------ ------------------- -------------- --------------
M.T.G. Graye 280,000 9.1 25.50 December 13, 2015 4,491,200 11,379,200
-------------------- ----------- -------------------- ------------ ------------------- -------------- --------------
D.L. Wooden 280,000 9.1 25.50 December 13, 2015 4,491,200 11,379,200
-------------------- ----------- -------------------- ------------ ------------------- -------------- --------------
The Great-West Lifeco Stock Option Plan was created effective April 24,
1996. The following table describes all Lifeco options exercised in
2005, and all unexercised Lifeco options held as of December 31, 2005,
by the Named Executive Officers. Lifeco options are issued with an
exercise price in Canadian dollars. Year-end Canadian dollar amounts
have been translated to U.S. dollars at a rate of 1/1.17.
AGGREGATED LIFECO OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Name Shares Value
acquired
on Value of unexercised in-the-
exercise Realized Unexercised options at money options at fiscal
(Number) (Dollars) fiscal year-end (Number) year-end (Dollars)
--------------------- ------------ -------------- --------------------------------- ---------------------------------
Exercisable Unexercisable Exercisable Unexercisable
--------------------- ------------ -------------- -------------- ------------------ -------------- ------------------
W.T. McCallum 200,000 2,891,868 900,000 - 15,055,709 -
--------------------- ------------ -------------- -------------- ------------------ -------------- ------------------
D.L. Wooden - - 672,902 380,000 11,967,833 1,170,813
--------------------- ------------ -------------- -------------- ------------------ -------------- ------------------
R.F. Rivers - - 144,000 96,000 1,661,711 1,107,807
--------------------- ------------ -------------- -------------- ------------------ -------------- ------------------
M.T.G. Graye - - 350,002 396,000 5,533,956 1,350,890
--------------------- ------------ -------------- -------------- ------------------ -------------- ------------------
C.P. Nelson - - 48,000 72,000 556,287 834,430
--------------------- ------------ -------------- -------------- ------------------ -------------- ------------------
11.3 PENSION PLAN TABLE
The following table sets out the pension benefits payable to the Named
Executive Officers.
--------------------- -------------------------------------------------------------------------------------
Remuneration Years of Service
(Dollars)
--------------------- -------------------------------------------------------------------------------------
15 years 20 years 25 years 30 years 35 years
--------------------- ---------------- ---------------- ----------------- ---------------- ----------------
400,000 120,000 160,000 200,000 240,000 240,000
--------------------- ---------------- ---------------- ----------------- ---------------- ----------------
600,000 180,000 240,000 300,000 360,000 360,000
--------------------- ---------------- ---------------- ----------------- ---------------- ----------------
800,000 240,000 320,000 400,000 480,000 480,000
--------------------- ---------------- ---------------- ----------------- ---------------- ----------------
1,000,000 300,000 400,000 500,000 600,000 600,000
--------------------- ---------------- ---------------- ----------------- ---------------- ----------------
1,200,000 360,000 480,000 600,000 720,000 720,000
--------------------- ---------------- ---------------- ----------------- ---------------- ----------------
1,400,000 420,000 560,000 700,000 840,000 840,000
--------------------- ---------------- ---------------- ----------------- ---------------- ----------------
1,600,000 480,000 640,000 800,000 960,000 960,000
--------------------- ---------------- ---------------- ----------------- ---------------- ----------------
1,800,000 540,000 720,000 900,000 1,080,000 1,080,000
--------------------- ---------------- ---------------- ----------------- ---------------- ----------------
2,000,000 600,000 800,000 1,000,000 1,200,000 1,200,000
--------------------- ---------------- ---------------- ----------------- ---------------- ----------------
2,200,000 660,000 880,000 1,100,000 1,320,000 1,320,000
--------------------- ---------------- ---------------- ----------------- ---------------- ----------------
2,400,000 720,000 960,000 1,200,000 1,440,000 1,440,000
--------------------- ---------------- ---------------- ----------------- ---------------- ----------------
The Named Executive Officers have the following years of service, as of
December 31, 2005.
------------------------------------------------------ ----------------------------------------------------
Name Years of Service
------------------------------------------------------ ----------------------------------------------------
W.T. McCallum 40
------------------------------------------------------ ----------------------------------------------------
D.L. Wooden 15
------------------------------------------------------ ----------------------------------------------------
R.F. Rivers 3
------------------------------------------------------ ----------------------------------------------------
M.T.G. Graye 12
------------------------------------------------------ ----------------------------------------------------
C.P. Nelson 22
------------------------------------------------------ ----------------------------------------------------
W.T. McCallum is entitled 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, R.F. Rivers, M.T.G. Graye and C.P. Nelson, 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.
11.4 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 in the amount of
$75,000 ($45,000 of which is paid in deferred share units under The
Great-West Life Assurance Company Deferred Share Unit Plan) and for
such directors serving on the Audit Committee an additional fee in the
amount of $3,000. The Company pays all directors a meeting fee in the
amount of $2,000 for each meeting of the Board of Directors or a
committee thereof attended. The Chairperson of the Investment Committee
receives an annual fee in the amount of $20,000 and the Chairperson of
the Executive Committee receives an annual fee in the amount of
$25,000. At their option, in lieu of cash payments, directors may
receive additional deferred share units. 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.
11.5 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Executive compensation is determined by the Company's Compensation
Committee. Messrs. Gratton, Balog, A. Desmarais,
P. Desmarais, Jr., Orr and Walsh serve on the Committee. None of
these individuals are either current or former officers or employees
of the Company or any of its subsidiaries.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
12.1 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below is certain information, as of March 1, 2006, 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 900, 1959
Upper Water Street, Halifax, Nova Scotia, Canada B3J 3N2.
(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) 70.6% 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) 66.4% 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, directly and 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.
12.2 SECURITY OWNERSHIP OF MANAGEMENT
The following tables set 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 March 1, 2006, 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.
------------------------ -------------------------------- ------------------------ ------------------------
Directors Great-West Lifeco Inc. (1) Power Financial Power Corporation
Corporation (2) of Canada (3)
------------------------ -------------------------------- ------------------------ ------------------------
J. Balog --- --- ---
------------------------ -------------------------------- ------------------------ ------------------------
J.W. Burns 307,318 16,000 1,051,280
------------------------ -------------------------------- ------------------------ ------------------------
O.T. Dackow 163,284 --- ---
------------------------ -------------------------------- ------------------------ ------------------------
A. Desmarais 103,318 43,200 811,768
3,240,000 options
------------------------ -------------------------------- ------------------------ ------------------------
P. Desmarais, Jr. 87,318 --- 41,768
2,980,000 options
------------------------ -------------------------------- ------------------------ ------------------------
R. Gratton 664,992 11,180,000 37,911
4,000,000 options
------------------------ -------------------------------- ------------------------ ------------------------
K.P. Kavanagh 20,104 --- ---
4,000 Preferred (Series D)
------------------------ -------------------------------- ------------------------ ------------------------
W. Mackness 9,000 --- ---
------------------------ -------------------------------- ------------------------ ------------------------
W.T. McCallum 163,936 --- ---
900,000 options
------------------------ -------------------------------- ------------------------ ------------------------
R.L. McFeetors 764,547 170,500 ---
2,856,000 options
------------------------ -------------------------------- ------------------------ ------------------------
J.E.A. Nickerson 5,000 14,761 17,396
------------------------ -------------------------------- ------------------------ ------------------------
D.A. Nield 62,000 --- ---
2,777 Preferred (Series E)
38,553 Preferred (Series F)
------------------------ -------------------------------- ------------------------ ------------------------
R.J. Orr 20,000 200,200 20,000
------------------------ -------------------------------- ------------------------ ------------------------
M. Plessis-Belair 40,000 6,000 157,409
270,000 options
------------------------ -------------------------------- ------------------------ ------------------------
B.E. Walsh 15,567 --- ---
------------------------ -------------------------------- ------------------------ ------------------------
-------------------------- ------------------------------- ----------------------- ------------------------
Named Executive Great-West Lifeco Inc. (1) Power Financial Power Corporation
Officers Corporation (2) of Canada (3)
-------------------------- ------------------------------- ----------------------- ------------------------
W.T. McCallum 163,936 --- ---
900,000 options
-------------------------- ------------------------------- ----------------------- ------------------------
D.L. Wooden --- 226,000 ---
672,902 options
-------------------------- ------------------------------- ----------------------- ------------------------
R.F. Rivers --- --- ---
144,000 options
-------------------------- ------------------------------- ----------------------- ------------------------
M.T.G. Graye 4,237 75,000 ---
350,002 options
-------------------------- ------------------------------- ----------------------- ------------------------
C.P. Nelson 17,816 --- ---
48,000 options
-------------------------- ------------------------------- ----------------------- ------------------------
-------------------------- ------------------------------- ----------------------- ------------------------
Directors and Great-West Lifeco Inc. (1) Power Financial Power Corporation
Executive Officers Corporation (2) of Canada (3)
as a Group
-------------------------- ------------------------------- ----------------------- ------------------------
2,448,437 11,931,661 2,137,532
4,970,904 options 4,000,000 options 6,490,000 options
4,000 Preferred (Series D)
2,777 Preferred (Series E)
38,553 Preferred (Series F)
-------------------------- ------------------------------- ----------------------- ------------------------
(1) All holdings are common shares, or where indicated, preferred
shares or 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 Robert Gratton represents 2.1%
of the total number of common shares and exercisable options for common
shares of Power Financial Corporation outstanding. The number of common
shares and exercisable options for common shares of Power Financial
Corporation held by the directors and executive officers as a group
represents 2.2% 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 Andre
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 1.9% 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
14.1 PRINCIPAL ACCOUNTING FEES
For the years ended December 31, 2005 and 2004, professional services
were performed by Deloitte & Touche LLP ("D&T"). The total fees for
these services were $4,239,605 and $3,915,950 for the years ended
December 31, 2005 and 2004, respectively, and were composed of the
following:
Audit Fees
The aggregate fees billed for the audit of the Company's and its
subsidiaries' annual financial statements for the fiscal years ended
December 31, 2005 and 2004, and for the review of the financial
statements included in the Company's quarterly reports on Form 10-Q,
were $3,527,000 and $3,254,300, respectively.
Audit Related Fees
The aggregate fees billed for audit related services for the fiscal
years ended December 31, 2005 and 2004 were $374,200 and $415,850,
respectively. These services included "SAS 70" internal control reports
and audits of the Company's employee benefit plans.
Tax Fees
The aggregate fees billed for tax services for the fiscal years ended
December 31, 2005 and 2004 were $217,815 and $196,950, respectively.
These services included tax compliance services for the Company's
affiliated mutual funds, Maxim Series Fund, Inc. and Orchard Series
Fund, as well as tax planning and compliance services for the Company
and its subsidiaries.
All Other Fees
The aggregate fees for services not included above were $120,590 and
$48,850, respectively, for the years ended December 31, 2005 and 2004,
respectively. The fees for 2004 relate to an analysis of potential
service providers for the potential expansion of the Financial Services
division's record keeping services.
14.2 PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee pre-approves all services, including both audit and
non-audit services, provided by D&T. Each year, the Committee receives
a schedule of the audit, audit-related and tax services that it is
asked to approve for the year before D&T may be engaged.
None of the services described in this Item 14 were approved by the
Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation
S-X, the de minimis safe harbor exemption from pre-approval
requirements. The amount of hours expended on D&T's audit of the
Company's financial statements for 2005 attributable to work performed
by persons other than D&T's full-time, permanent employees was less
than 50%.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The documents identified below are filed as a part of this report:
15.1 INDEX TO FINANCIAL STATEMENTS
Page
---------------
Independent Auditors' Report on Consolidated Financial Statements
for the Years Ended December 31, 2005, 2004 and 2003 42
Consolidated Balance Sheets as of December 31, 2005 and 2004 43
Consolidated Statements of Income for the Years Ended
December 31, 2005, 2004 and 2003 45
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 2005, 2004, and 2003 46
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005, 2004 and 2003 47
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2005, 2004 and 2003 49
Schedule III - Supplemental Insurance Information 84
All other schedules and separate financial statements of the Registrant
are omitted because they are not applicable, or not required, or
because the required information is included in the financial
statements or notes thereto.
15.2 INDEX TO EXHIBITS
Exhibit Number Title Page
------------------------ ----------------------------------------------------- --------------------
3(i) Articles of Redomestication of Great-West Life
& Annuity Insurance Company
Filed as Exhibit 3(i) to Registrant's Form
10-K for the year ended December 31, 1996
and incorporated herein by reference.
3(ii) Bylaws of Great-West Life & Annuity
Insurance Company Filed as Exhibit 3(ii)
to Registrant's Form 10-K for the year
ended December 31, 1997 and incorporated
herein by reference.
10 Material Contracts
10.1 Description of Executive Officer Annual
Incentive Bonus Program
Filed as Exhibit 10.1 to Registrant's Form
10-K for the year ended December 31, 1997
and incorporated herein by reference.
10.2 Great-West Lifeco Inc. Stock Option Plan
Filed as Exhibit 10.2 to Registrant's Form
10-K for the year ended December 31, 1997
and incorporated herein by reference.
Description of amendment to the Great-West
Lifeco Inc. Stock Option Plan
Filed as Exhibit 10.2 to Registrant's Form
10-K for the year ended December 31, 2001
and incorporated herein by reference.
10.3 Supplemental Executive Retirement Plan
Filed as Exhibit 10.3 to Registrant's Form 10-K
for the year ended December 31, 1997 and
incorporated herein by reference.
Amendment No. 3 to Supplemental Executive
Retirement Plan. Filed as Exhibit 10.3 to
Registrant's Form 10-K for the year ended
December 31, 2000 and incorporated herein
by reference.
10.4 Executive Deferred Compensation Plan
Filed as Exhibit 10.4 to Registrant's Form 10-K
for the year ended December 31, 1997 and
incorporated herein by reference.
10.5 Deferred Share Unit Plan.
Filed as Exhibit 10.5 to Registrant's Form
10-K for the year ended December 31, 2001
and incorporated herein by reference.
10.6 Executive Long Term Disability Plan.
Filed as Exhibit 10.6 to Registrant's Form 10-K for
the year ended December 31, 2002 and incorporated
herein by reference.
10.7 Nonqualified Deferred Compensation Plan.
Filed as Exhibit 10.7 to Registrant's Form 10-K for
the year ended December 31, 2002 and incorporated
herein by reference.
21 Subsidiaries of Great-West Life & Annuity
Insurance Company filed herewith.
24 Directors' Powers of Attorney Directors'
Powers of Attorney filed as Exhibit 24 to
Registrant's Form 10-K for the year ended
December 31, 1996, Exhibit 24 to
Registrant's Form 10-K for the year ended
December 31, 1997, Exhibit 24 to
Registrant's Form 10-K for the year ended
December 31, 2003, and Exhibit 24 to
Registrant's Form 10-K for the year ended
December 31, 2005 and incorporated herein
by reference.
31.1 Section 302 Certification of the Chief Executive
Officer filed herewith.
31.2 Section 302 Certification of the Chief Financial
Officer filed herewith.
32 Section 906 Certification of the Chief Executive
Officer and Chief Financial Officer filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
By: /s/ Raymond L. McFeetors
-------------------------------------------------------------
Raymond L. McFeetors, President and Chief Executive Officer
Date: March 30, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature and Title Date
------------------------------------------------------------------------ ----------------------
/s/ Raymond L. McFeetors March 30, 2006
------------------------------------------------------------------------
Raymond L. McFeetors
President and Chief Executive Officer and a Director
/s/ Mitchell T.G. Graye March 30, 2006
------------------------------------------------------------------------
Mitchell T.G. Graye
Executive Vice President and Chief Financial Officer
/s/ Glen R. Derback March 30, 2006
------------------------------------------------------------------------
Glen R. Derback
Senior Vice President and Controller
/s/ James Balog* March 30, 2006
------------------------------------------------------------------------
James Balog, Director
/s/ James W. Burns* March 30, 2006
------------------------------------------------------------------------
James W. Burns, Director
/s/ Orest T. Dackow* March 30, 2006
------------------------------------------------------------------------
Orest T. Dackow, Director
/s/ Andre Desmarais* March 30, 2006
------------------------------------------------------------------------
Andre Desmarais, Director
/s/ Paul Desmarais, Jr.* March 30, 2006
------------------------------------------------------------------------
Paul Desmarais, Jr., Director
/s/ Robert Gratton* March 30, 2006
------------------------------------------------------------------------
Robert Gratton, Chairman of the Board
/s/ Kevin P. Kavanagh* March 30, 2006
------------------------------------------------------------------------
Kevin P. Kavanagh, Director
/s/ William Mackness* March 30, 2006
------------------------------------------------------------------------
William Mackness, Director
/s/ William T. McCallum* March 30, 2006
------------------------------------------------------------------------
William T. McCallum, Director
/s/ Jerry E.A. Nickerson* March 30, 2006
------------------------------------------------------------------------
Jerry E.A. Nickerson, Director
/s/ David A. Nield* March 30, 2006
------------------------------------------------------------------------
David A. Nield, Director
/s/ R. Jeffrey. Orr* March 30, 2006
------------------------------------------------------------------------
R. Jeffrey. Orr, Director
/s/ Michel Plessis-Belair* March 30, 2006
------------------------------------------------------------------------
Michel Plessis-Belair, Director
/s/ Brian E.Walsh* March 30, 2006
------------------------------------------------------------------------
Brian E. Walsh, Director
*By:/s/ Glen R. Derback March 30, 2006
------------------------------------------------------------------------
Glen R. Derback
Attorney-in-fact pursuant to filed Power of Attorney