Schwab Select Annuity(TM)
A flexible premium deferred fixed and variable annuity
Distributed by
Charles Schwab & Co., Inc.
---------------------------------------------
Issued by
Great-West Life & Annuity Insurance Company
Prospectus Supplement dated May 1, 1999
to the Prospectus dated May 1, 1999
This Prospectus supplement describes eight (8) Sub-Accounts that will be closed
to Contributions and Transfers effective June 1, 1999 (the "Deleted
Sub-Accounts").
Any Contract owner attempting to make Contributions or effect Transfers
(including those utilizing an Automatic Contribution Plan or one of the custom
transfer features: Dollar Cost Averaging or Rebalancer Option, involving the
Deleted Portfolios should contact the Schwab Insurance & Annuity Service Center
at 1-800-838-0650 or P.O. Box 7666, San Francisco, California 94120-7666
immediately to make alternate arrangements. If you fail to make alternate
arrangements, Schwab will try to contact you immediately to request alternative
allocation instructions. If Schwab is unable to contact you immediately,
Contributions allocated to the Deleted Sub-Accounts will be returned to you with
a request that you provide alternate allocation instructions and Transfer
Requests, including those utilizing a customer transfer feature, will not be
processed.
Great-West Life & Annuity Insurance Company ("Great-West") is seeking an order
from the Securities and Exchange Commission ("SEC") to permit a substitution of
the shares of the Portfolios held in the Deleted Sub-Accounts. If the
substitution transactions are approved, your Annuity Account Value, if any, held
in the Deleted Sub-Accounts will be transferred to the following Sub-Accounts
(the "Substituted Sub-Accounts") on the date designated by Great-West upon
receipt of the SEC order:
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Deleted Sub-Accounts Substituted Sub-Accounts
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Van Eck Hard Assets Janus Worldwide Growth
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Lexington Emerging Markets Janus International Growth
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Stein Roe Special Venture SAFECO RST Growth
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INVESCO VIF Total Return INVESCO VIF Equity Income
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Janus Aggressive Growth, Alger American
Small Capitalization, Strong Discovery II Alger American Growth
and American Century VP Capital Appreciation
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At any time prior to the proposed substitution, you may transfer your account
balance from the Deleted Sub-Accounts to any of the remaining Sub-Accounts
available under your Contract without incurring any charges and such transfer
will not be counted as one of the twelve free transfers permitted in a calendar
year. If the substitution is approved by the SEC, Contract owners affected by
the substitution will be permitted to make one transfer of all amounts in the
Substituted Sub-Accounts without incurring any charges and, so long as the
transfer is made within 30 days of the effective date of the substitution, it
will not be counted as one of the twelve free transfers permitted in a calendar
year.
Following is a description of each of the Portfolios which correspond to the
Deleted Sub-Accounts:
Alger American Small Capitalization Portfolio
Seeks long-term capital appreciation. It focuses on small, fast-growing
companies that offer innovative products, services or technologies to a rapidly
expanding marketplace. Under normal circumstances, the Portfolio invests
primarily in the equity securities of small capitalization companies. A small
capitalization company is one that has a market capitalization within the range
of companies included in the Russell 2000 Growth Index ("Russell Index") or the
S&P SmallCap 600 Index ("S&P Index"), updated quarterly.
American Century VP Capital Appreciation Portfolio
Seeks capital growth by investing in common stocks (including securities
convertible into common stocks and other equity equivalents) and other
securities that meet certain fundamental and technical standards of selection
and have, in the opinion of the investment manager, better-than-average
potential for appreciation.
INVESCO VIF - Total Return Fund
Seeks a high total return on investment through capital appreciation and current
income by investing in a combination of equity securities (consisting of common
stocks and, to a lesser degree, securities convertible into common stock) and
fixed income securities.
Janus Aspen Series Aggressive Growth Portfolio
Seeks long-term growth of capital by investing in common stocks selected for
their growth potential, and normally invests at least 50% of its equity assets
in securities issued by medium-sized companies.
Lexington Emerging Markets Fund
Seeks long-term growth of capital primarily through investment in equity
securities of companies domiciled in, or doing business in emerging countries
and emerging markets.
SteinRoe Special Venture Fund Variable Series
Seeks capital growth by investing primarily in common stocks, convertible
securities, and other securities selected for prospective capital growth.
The Strong Discovery Fund II, Inc.
Seeks long-term growth by normally investing at least 65% of its assets in
common stocks of companies with small market capitalizations.
Van Eck Worldwide Insurance Trust: Van Eck Worldwide Hard Assets Fund Seeks
long-term capital appreciation by investing in hard asset securities, such as
commodities or securities of firms involved to a significant extent (directly or
indirectly) primarily in the following areas: precious metals, ferrous and
non-ferrous metals, energy, forest products, real estate, and other
non-agricultural commodities.
For more information about the Schwab Select Annuity, please see the Prospectus
and Statement of Additional Information.
Portfolio Annual Expenses1
(as a percentage of Portfolio net assets)
Portfolio Management Other 12b-1 Total Total Total
fees expenses fees Portfolio Fee Portfolio
expenses Waivers++ expenses
before after
fee fee
waivers waivers
Alger American Small Capitalization 0.85% 0.04% 0.00% 0.89% 0.00% 0.89%
American Century VP Capital 1.00% 0.00% 0.00% 1.00% 0.00% 1.00%
Appreciation
INVESCO VIF-Total Return 0.75% 0.49% 0.00% 1.24% 0.07% 1.17%
Janus Aspen Series Aggressive Growth 0.72% 0.03% 0.00% 0.75% 0.00% 0.75%
Lexington Emerging Markets 0.85% 1.23% 0.00% 2.08% 0.00% 2.08%
Lexington Emerging Markets
Stein Roe Special Venture 0.65% 0.10% 0.00% 0.75% 0.00% 0.75%
Strong Discovery Fund II 1.00% 0.23% 0.00% 1.23% 0.00% 1.23%
Strong Discovery Fund II
Van Eck Worldwide Hard Assets 1.00% 0.20% 0.00% 1.20% 0.04% 1.16%
++ For the INVESCO VIF-Total Return Fund, certain expenses are being voluntarily
absorbed by INVESCO. For the Van Eck Worldwide Hard Assets Fund, `Other
Expenses' are reduced to 1.16% pursuant to the directed brokerage and custodian
fee arrangement the Fund has in place.
Examples1
If you retain, annuitize or surrender the Contract at the end of the applicable
time period, you would pay the following fees and expenses on a $1,000
investment, assuming a 5% return on assets. These examples assume that no
Premium Taxes have been assessed.
Portfolio 1 year2 3 years 5 years 10 years
Alger American Small Capitalization $ 9 $30 $56 $139
American Century VP Capital $11 $34 $62 $155
Appreciation
INVESCO-VIF Total Return $12 $40 $73 $180
Janus Aspen Series Aggressive Growth $ 8 $26 $47 $118
Lexington Emerging Markets $22 $70 $126 $306
SteinRoe Special Venture $ 8 $26 $47 $118
Strong Discovery Fund II $13 $42 $76 $189
Van Eck Worldwide Hard Assets $12 $40 $72 $167
These examples, including the assumed rate of return, should not be considered
representations of future performance or past or future expenses. Actual
expenses paid or performance achieved may be greater or less than that shown,
subject to the guarantees in the Contract.
Performance Data
From time to time, we may advertise average annual total returns for the
Sub-Accounts. These figures will be based on historical information and are not
intended to indicate future performance.
The table on the following page reflects standardized and non-standardized
average annual total return for one-, three-, five- and ten-year periods (or
since inception, if less than ten years) ended December 31, 1998 for the Deleted
Portfolios. Average annual total return quotations represent the average annual
compounded rate of return that would equate an initial investment of $1,000 to
the redemption value of that investment (excluding Premium Taxes, if any) as of
the last day of each of the periods for which total return quotations are
provided.
Both the standardized and non-standardized data reflect the deduction of all
fees and charges under the Contract. The standardized data is calculated from
the inception date of the Sub-Account and the non-standardized data is
calculated for periods preceding the inception date of the Sub-Account. For
additional information regarding yields and total returns calculated using the
standard methodologies briefly described herein, please refer to the Statement
of Additional Information.
Performance information and calculations for any Sub-Account are based only on
the performance of a hypothetical Contract under which the Annuity Account Value
is allocated to an Sub-Account during a particular time period. Performance
information should be considered in light of the investment objectives and
policies and characteristics of the Portfolios in which the Sub-Account invests
and the market conditions during the given time period. It should not be
considered as a representation of what may be achieved in the future.
Reports and promotional literature may also contain other information including:
o the ranking of any Sub-Account derived from rankings of variable annuity
separate accounts or their investment products tracked by Lipper Analytical
Services, Inc., VARDS, Morningstar, Value Line, IBC/Donoghue's Money Fund
Report, Financial Planning Magazine, Money Magazine, Bank Rate Monitor, Standard
& Poor's Indices, Dow Jones Industrial Average, and other rating services,
companies, publications or other people who rank separate accounts or other
investment products on overall performance or other criteria, and
o the effect of tax-deferred compounding on investment returns, or returns in
general, which may be illustrated by graphs, charts, or otherwise, and which may
include a comparison, at various points in time, of the return from an
investment in a Contract (or returns in general) on a tax-deferred basis
(assuming one or more tax rates) with the return on a currently taxable basis.
Other ranking services and indices may be used.
We may from time to time also disclose cumulative (non-annualized) total
returns, yield and standard total returns for the Sub-Accounts.
We may also advertise performance figures for the Sub-Accounts based on the
performance of a Portfolio prior to the time the Series Account commenced
operations.
For additional information regarding the calculation of other performance data,
please refer to the Statement of Additional Information.
Sub-Account 1 year 3 years 5 years 10 years Since Inception Since Inception
Inception of Date of Inception of Date of
Sub-Account Sub-Account Portfolio Portfolio
(if less than
10 years)
Alger American Small Capitalization 14.55% 9.32% 12.13% 11.91% 11/1/96 9/21/88
American Century VP Capital
Appreciation -2.99% -4.08% 2.39% -5.05% 11/1/96 11/20/87
INVESCO VIF-Total Return 8.67% 13.78% N/A N/A 15.26% 11/1/96 13.84% 6/2/94
Janus Aspen Aggressive Growth 33.12% 16.76% 18.34% N/A 19.47% 11/1/96 20.89% 9/13/93
Lexington Emerging Markets -28.82% -12.72% N/A N/A -18.62% 11/1/96 -8.87% 3/30/94
SteinRoe Special Venture -18.01% 3.32% 4.16% -4.74% 11/1/96 1/3/89
Strong Discovery Fund II 6.35% 5.49% 8.11% N/A 9.86% 11/1/96 10.44% 5/8/92
Van Eck Worldwide Hard Assets -31.49% -7.90% -4.08% N/A -15.88% 11/1/96 1.38% 9/1/89
Schwab Select Annuity(TM)
A flexible premium deferred variable and fixed annuity
Distributed by
Charles Schwab & Co., Inc.
Issued by
Great-West Life & Annuity Insurance Company
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Overview
This Prospectus describes the Schwab Select Annuity--a flexible premium deferred
annuity contract which allows you to accumulate assets on a tax-deferred basis
for retirement or other long-term purposes. This Contract is issued either on a
group basis or as individual contracts by Great-West Life & Annuity Insurance
Company (we, us, Great-West or GWL&A). Both will be referred to as the
"Contract" throughout this prospectus.
How to Invest
The minimum initial investment (a "Contribution") is:
o $5,000
o $2,000 if an IRA
o $1,000 if subsequent Contributions are made via Automatic Contribution Plan
The minimum subsequent Contribution is:
o $500 per Contribution
o $100 per Contribution if made via Automatic Contribution Plan
Allocating Your Money
When you contribute money to the Schwab Select Annuity, you can allocate it
among the Sub-Accounts of the Variable Annuity-1 Series Account which invest in
the following Portfolios: o Alger American Growth Portfolio o American Century
VP International Portfolio o BT Funds Trust EAFE Equity Index Portfolio o BT
Funds Trust Small Cap Index Portfolio o Baron Capital Asset Fund o Berger
IPT-Small Company Growth Fund o Dreyfus Variable Investment Fund Capital
Appreciation Portfolio o Dreyfus Variable Investment Fund Growth and Income
Portfolio o Federated American Leaders Fund II o Federated Fund for U.S.
Government Securities II o Federated Utility Fund II o INVESCO VIF-High Yield
Fund o INVESCO VIF-Equity Income Fund o Janus Aspen Series Growth Portfolio o
Janus Aspen Series Worldwide Growth Portfolio o Janus Aspen Flexible Income
Portfolio o Janus Aspen International Growth Portfolio o Montgomery Variable
Series Growth Fund o Prudential Series Fund Equity Portfolio o SAFECO Resource
Series Trust Equity Portfolio o SAFECO Resource Series Trust Growth Portfolio o
Schwab MarketTrack Growth Portfolio II o Schwab Money Market Portfolio o Schwab
S&P 500 Portfolio o Scudder Variable Life Investment Fund:
Capital Growth Portfolio
o Scudder Variable Life Investment Fund:
Growth & Income Portfolio
o The Strong Schafer Value Fund II
o Van Kampen Life Investment Trust-Morgan Stanley
Real Estate Securities Portfolio
You can also allocate some or all of the money you contribute to the Guarantee
Period Fund. The Guarantee Period Fund allows you to select one or more
Guarantee Periods that offer specific interest rates for a specific period.
Please note that the Guarantee Period Fund may not be available in all states.
Sales and Surrender Charges
There are no sales, redemption, surrender or withdrawal charges under the Schwab
Select Annuity.
Free Look Period
After you receive your Contract, you can look it over free of obligation for at
least 10 days or longer if required by your state law (up to 35 days for
replacement policies), during which you may cancel your Contract.
Payout Options
The Schwab Select Annuity offers a variety of annuity payout and periodic
withdrawal options. Depending on the option you select, income can be guaranteed
for your lifetime, your spouse's and/or beneficiaries' lifetime or for a
specified period of time.
The Contracts are not deposits of, or guaranteed or endorsed by any bank, nor
are the Contracts federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency. The
Contracts involve certain investment risks, including possible loss of
principal.
For account information, please contact:
Schwab Insurance & Annuity Service Center
P.O. Box 7666
San Francisco, California 94120-7666
800-838-0650
This prospectus presents important information you should review before
purchasing the Schwab Select Annuity. Please read it carefully and keep it for
future reference. You can find more detailed information pertaining to the
Contract in the Statement of Additional Information dated May 1, 1999 (as may be
amended from time to time), and filed with the Securities and Exchange
Commission. The Statement of Additional Information is incorporated by reference
into this prospectus and is legally a part of this prospectus. The table of
contents for the Statement of Additional Information may be found on page - of
this Prospectus. You may obtain a copy without charge by contacting the Schwab
Insurance & Annuity Service Center at the above address or phone number. Or, you
can obtain it by visiting the Securities and Exchange Commission's web site at
www.sec.gov. This web site also contains other information about us that has
been filed electronically.
This Prospectus does not constitute an offering in any jurisdiction in which
such offering may not lawfully be made. No dealer, salesperson or other person
is authorized to give any information or make any representations in connection
with this offering other than those contained in this Prospectus, and, if given
or made, such other information or representations must not be relied on.
The contract is not available in all states.
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Table of Contents
Definitions....................................4
Summary........................................6
How to contact Schwab........................6
Variable Annuity Fee Table.....................7
Portfolio Annual Expenses......................8
Fee Examples...................................9
Condensed Financial Information...............10
Great-West Life & Annuity Insurance
Company.......................................10
The Series Account............................10
The Portfolios................................10
Meeting Investment Objectives...............12
Where to Find More Information About the Portfolios 12
Addition, Deletion or Substitution..........12
The Guarantee Period Fund.....................12
Investments of the Guarantee Period Fund....13
Subsequent Guarantee Periods................13
Breaking a Guarantee Period.................14
Interest Rates..............................14
Market Value Adjustment.....................14
Application and Initial Contributions.........14
Free Look Period..............................15
Subsequent Contributions......................15
Annuity Account Value.........................15
Transfers.....................................16
Possible Restrictions.......................16
Automatic Custom Transfers..................16
Cash Withdrawals..............................18
Withdrawals to Pay Investment Manager or
Financial Advisor Fees......................18
Tax Consequences of Withdrawals.............18
Telephone Transactions........................18
Death Benefit.................................19
Beneficiary.................................19
Distribution of Death Benefit...............19
Charges and Deductions........................20
Mortality and Expense Risk Charge...........21
Contract Maintenance Charge.................21
Transfer Fees...............................21
Expenses of the Portfolios..................21
Premium Tax.................................21
Other Taxes..................................22
Payout Options................................22
Periodic Withdrawals........................22
Annuity Payouts.............................23
Seek Tax Advice...............................24
Federal Tax Matters...........................24
Taxation of Annuities.......................25
Individual Retirement Annuities.............26
Assignments or Pledges........................27
Performance Data..............................27
Money Market Yield..........................27
Average Annual Total Return.................27
Distribution of the Contracts.................29
Selected Financial Data.......................29
Management's Discussion and Analysis of
Financial Condition and Results of Operations 31
Voting Rights..................................44
Rights Reserved by Great-West.................44
Legal Proceedings.............................44
Legal Matters.................................44
Experts.......................................44
Available Information.........................45
Appendix A--Condensed Financial
Information...................................46
Appendix B--Market Value Adjustments...........48
Appendix C--Net Investment Factor..............50
Consolidated Financial Statements and
Independent Auditors' Report 51
Definitions
1035 Exchange--A provision of the Internal Revenue Code that allows for the
tax-free exchange of assets among certain types of insurance contracts.
Accumulation Period--The time period between the Effective Date and the Annuity
Commencement Date. During this period, you're contributing to the annuity.
Annuitant--The person named in the application upon whose life the payout of an
annuity is based and who will receive annuity payouts. If a Contingent Annuitant
is named, the Annuitant will be considered the Primary Annuitant. Annuity
Account--An account established by us in your name that reflects all account
activity under your Contract. Annuity Account Value--The sum of all the
investment options credited to your Annuity Account--less partial withdrawals,
amounts applied to an annuity payout option, periodic withdrawals, charges
deducted under the Contract, and Premium Tax, if any.
Annuity Commencement Date--The date annuity payouts begin.
Annuity Individual Retirement Account (or Annuity IRA)--An annuity contract used
in a retirement savings program that is intended to satisfy the requirements of
Section 408 of the Internal Revenue Code of 1986, as amended.
Annuity Payout Period--The period beginning on the Annuity Commencement Date and
continuing until all annuity payouts have been made under the Contract. During
this period, the Annuitant receives payouts from the annuity.
Annuity Unit--An accounting measure we use to determine the amount of any
variable annuity payout after the first annuity payout is made.
Automatic Contribution Plan--A feature which allows you to make automatic
periodic Contributions. Contributions will be withdrawn from an account you
specify and automatically credited to your Annuity Account.
Beneficiary--The person(s) designated to receive any Death Benefit under the
terms of the Contract.
Contingent Annuitant--The person you may name in the application who becomes the
Annuitant when the Primary Annuitant dies. The Contingent Annuitant must be
designated before the death of the Primary Annuitant.
Contributions--The amount of money you invest or deposit into your annuity.
Death Benefit--The amount payable to the Beneficiary when the Owner or the
Annuitant dies.
Distribution Period--The period starting with your Payout Commencement Date.
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Schwab Select Annuity Structure
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Your total Annuity Account can be made up of a variable and a fixed account.
[object omitted]
Effective Date--The date on which the first Contribution is credited to your
Annuity Account.
Fixed Account Value--The value of the fixed investment option credited to you
under the Annuity Account.
Guarantee Period--The number of years available in the Guarantee Period Fund
during which Great-West will credit a stated rate of interest. Great-West may
discontinue offering a period at any time for new Contributions. Amounts
allocated to one or more guaranteed periods may be subject to a Market Value
Adjustment.
Guarantee Period Fund--A fixed investment option which pays a stated rate of
interest for a specified time period.
Guarantee Period Maturity Date--The last day of any Guarantee Period.
Guaranteed Interest Rate--The minimum annual interest rate in effect that
applies to each Guarantee Period at the time the Contribution is made.
Market Value Adjustment (or MVA)--An amount added to or subtracted from certain
transactions involving the Guarantee Period Fund to reflect the impact of
changing interest rates.
Non-Qualified Annuity Contract--An annuity contract funded with money outside a
tax qualified retirement plan.
Owner (Joint Owner) or You--The person(s) named in the application who is
entitled to exercise all rights and privileges under the Contract, while the
Annuitant is living. Joint Owners must be husband and wife as of the date the
Contract is issued. The Annuitant will be the Owner unless otherwise indicated
in the application. If a Contract is purchased in an IRA, the Owner and the
Annuitant must be the same individual and a Joint Owner is not allowed.
Payout Commencement Date--The date on which annuity payouts or periodic
withdrawals begin under a payout option. The Payout Commencement Date must be at
least one year after the Effective Date of the Contract. If you do not indicate
a Payout Commencement Date on your application, annuity payouts will begin on
the first day of the month of the Annuitant's 91st birthday.
Portfolio--A registered management investment company, or portfolio, in which
the assets of the Annuity Account may be invested.
Premium Tax--A tax charged by a state or other governmental authority. Varying
by state, the current range of Premium Taxes is 0% to 3.5% and may be assessed
at the time you make a Contribution or when annuity payments begin.
Request--Any written, telephoned, or computerized instruction in a form
satisfactory to Great-West and Schwab received at the Schwab Insurance & Annuity
Service Center (or other annuity service center subsequently named) from you,
your designee (as specified in a form acceptable to Great-West and Schwab) or
the Beneficiary (as applicable) as required by any provision of the Contract.
Series Account--The segregated account established by Great-West under Colorado
law and registered as a unit investment trust under the Investment Company Act
of 1940, as amended.
Sub-Account--A division of the Series Account containing the shares of a
Portfolio. There is a Sub-Account for each Portfolio.
Surrender Value--The value of your annuity account with any applicable Market
Value Adjustment on the Effective Date of the surrender, less Premium Tax, if
any.
Transaction Date--The date on which any Contribution or Request from you will be
processed. Contributions and Requests received after 4:00 p.m. EST/EDT will be
deemed to have been received on the next business day. Requests will be
processed and the variable account value will be determined on each day that the
New York Stock Exchange is open for trading.
Transfer--Moving money from and among the Sub-Account(s) and the Guaranteed
Period Fund.
Variable Account Value--The value of the Sub-Accounts credited to you under the
Annuity Account.
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Summary
The Schwab Select Annuity allows you to accumulate assets on a tax-deferred
basis by investing in a variety of variable investment options (the
Sub-Accounts) and a fixed investment option (the Guarantee Period Fund). The
performance of your Annuity Account Value will vary with the investment
performance of the Portfolios corresponding to the Sub-Accounts you select. You
bear the entire investment risk for all amounts invested in them. Depending on
the performance of the Sub-Accounts you select, your Annuity Account Value could
be less than the total amount of your Contributions.
The Schwab Select Annuity can be purchased on a non-qualified basis or purchased
and used in connection with an IRA. You can also purchase it through a 1035
Exchange from another insurance contract.
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How to contact Schwab:
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Schwab Insurance & Annuity Service Center
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P.O. Box 7666
San Francisco, CA 94120-7666
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800-838-0650
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Your initial Contribution must be at least $5,000; $2,000 if an IRA; $1,000 if
you are setting up an Automatic Contribution Plan. Subsequent Contributions must
be either $500; or $100 if made through an Automatic Contribution Plan.
The money you contribute to the annuity will be invested at your direction,
except that during your "free look period" which, depending on your state law,
is generally 10 days after you receive your Contract. During this period your
payment will be allocated to the Schwab Money Market Sub-Account.
Prior to the Payout Commencement Date, you can withdraw all or a part of your
Annuity Account Value. There are no surrender or withdrawal charges. Certain
withdrawals may be subject to federal income tax as well as a federal penalty
tax.
When you're ready to start taking money out of your annuity, you can select from
a variety of payout options, including variable and fixed annuity payouts as
well as periodic payouts.
If the Annuitant dies before the Annuity Commencement Date, we will pay the
Death Benefit to the Beneficiary you select. If the Owner dies before the entire
value of the Contract is distributed, the remaining value will be distributed
according to the rules outlined in the "Death Benefit" section on page 19.
For accounts under $50,000, we deduct a $25 annual Contract Maintenance Charge
from the Annuity Account Value on each Contract anniversary date. There is no
annual Contract Maintenance Charge for accounts of more than $50,000. We also
deduct a Mortality and Expense Risk Charge from your Sub-Accounts at the end of
each daily valuation period equal to an effective annual rate of 0.85% of the
value of the net assets in your Sub-Accounts. Each Portfolio assesses a charge
for management fees and other expenses. These fees and expenses are detailed in
this prospectus.
You may cancel your Contract during the free look period by sending it to the
Schwab Insurance & Annuity Service Center. If you are replacing an existing
insurance contract with the Contract, the free look period may be extended based
on your state of residence. We will refund the greater of: o Contributions
received, less surrenders, withdrawals and
distributions, or
o The Annuity Account Value
This summary highlights some of the more significant aspects of the Schwab
Select Annuity. You'll find more detailed information about these topics
throughout the prospectus and in your Contract. Please keep them both for future
reference.
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Variable Annuity Fee Table
The purpose of the tables and the examples that follow is to help you understand
the various costs and expenses that you will bear directly or indirectly when
investing in the annuity. The tables and examples reflect expenses related to
the Sub-Accounts as well as of the Portfolios. In addition to the expenses
listed below, Premium Tax may be applicable.
Contract Owner transaction expenses1
Sales load None
Surrender fee None
Transfer fee (first 12 per year)2 None
Annual Contract Maintenance Charge3 $25.00
Annual expenses1
(as a percentage of average Variable Account assets) Mortality and expense risk
charge 0.85% Administrative expense charge 0.00% Other fees and expenses of the
variable account 0.00% Total annual expenses 0.85%
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1The Contract Owner Transaction Expenses apply to each Contract, regardless of
how the Annuity Account Value is allocated. The Sub-Account Annual Expenses do
not apply to the Guarantee Period Fund. 2There is a $10 fee for each Transfer in
excess of twelve in any calendar year. 3The Contract Maintenance Charge is
currently waived for Contracts with an Annuity Account Value of at least
$50,000. If your Annuity Account Value falls below $50,000 due to a withdrawal,
the Contract Maintenance Charge will be reinstated until such time as your
Annuity Account Value is equal to or greater than $50,000.
Portfolio Annual Expenses
Portfolio Annual Expenses
(as a percentage of Portfolio net assets, before and after fee waivers and expense reimbursements)
Portfolio Management Other 12b-1 Total Total Total
fees expenses fees Portfolio Fee Portfolio
Expenses Waivers1 expenses
before after
fee fee
waivers waivers
Portfolio Management Other 12b-1 Total Portfolio
fees expenses fee expenses
expensess
Alger American Growth 0.75% 0.04% 0.00% 0.79% 0.00% 0.79%
Portfolio
American Century VP International 1.47% 0.00% 0.00% 1.47% 0.00% 1.47%
BT Funds Insurance Trust
EAFE Equity Index 0.45% 1.21% 0.00% 1.66% 1.01% 0.65%
BT Funds Insurance Trust
Small Cap Index 0.35% 1.23% 0.00% 1.58% 1.13% 0.45%
Baron Capital Asset 1.00% 0.25% 0.25% 1.50% 0.00% 1.50%
Berger IPT-Small Company Growth 0.90% 1.29% 0.00% 2.19% 1.04% 1.15%
Dreyfus Variable Investment Fund 0.75% 0.06% 0.00% 0.81% 0.00% 0.81%
Capital Appreciation
Dreyfus Variable Investment Fund 0.75% 0.03% 0.00% 0.78% 0.00% 0.78%
Growth & Income
Federated American Leaders II 0.75% 0.14% 0.00% 0.89% 0.01% 0.88%
Federated U.S. Government 0.60% 0.33% 0.00% 0.93% 0.08% 0.85%
Securities II
Federated Utility II 0.75% 0.25% 0.00% 1.00% 0.07% 0.93%
INVESCO VIF-High Yield 0.60% 0.47% 0.00% 1.07% 0.00% 1.07%
INVESCO VIF-Equity Income 0.75% 0.42% 0.00% 1.17% 0.24% 0.93%
Janus Aspen Growth 0.72% 0.03% 0.00% 0.75% 0.07% 0.68%
Janus Aspen Worldwide Growth 0.67% 0.07% 0.00% 0.74% 0.02% 0.72%
Janus Aspen Flexible Income 0.65% 0.08% 0.00% 0.73% 0.00% 0.73%
Janus Aspen International Growth 0.75% 0.20% 0.00% 0.95% 0.09% 0.86%
Montgomery Variable Series: Growth 1.00% 0.40% 0.00% 1.40% 0.15% 1.25%
Prudential Series Fund Equity 0.45% 0.16% 0.25% 0.86% 0.00% 0.86%
SAFECO RST Equity 0.74% 0.04% 0.00% 0.78% 0.00% 0.78%
SAFECO RST Growth 0.74% 0.06% 0.00% 0.80% 0.00% 0.80%
Schwab MarketTrack Growth II 0.54% 0.55% 0.00% 1.09% 0.49% 0.60%
Schwab Money Market 0.38% 0.15% 0.00% 0.53% 0.03% 0.50%
Schwab S&P 500 0.20% 0.19% 0.00% 0.39% 0.11% 0.28%
Scudder Variable Life Investment 0.47% 0.04% 0.00% 0.51% 0.00% 0.51%
Fund: Capital Growth
Scudder Variable Life Investment 0.47% 0.09% 0.00% 0.56% 0.00% 0.56%
Fund: Growth & Income
Strong Schafer Value II 1.00% 0.39% 0.00% 1.39% 0.00% 1.39%
Van Kampen Life Investment Trust -
Morgan Stanley Real Estate 1.00% 0.08% 0.00% 1.08% 0.00% 1.08%
Securities
1 For the BT Insurance Funds Trust EAFE Equity Index and Small Cap Index , the
Advisor has voluntarily undertaken to waive its fee and reimburse each Fund for
certain expenses so that the EAFE Equity Index Fund's total operating expense
will not exceed 0.65% and the Small Cap Index Fund's total operating expense
will not exceed 0.45%. For the Berger IPT-Small Company Growth Portfolio, under
a written contract, the Portfolio's investment advisor waives its fees and
reimburses the Portfolio to the extent that, at any time during the life of the
Portfolio, the Portfolio's annual operating expenses will not exceed 1.15%. The
contract may not be terminated or amended except by a vote of the Portfolio's
Board of Trustees. For the Federated American Leaders II, Federated U.S.
Government Securities II and Federated Utility Funds, the management fee has
been reduced to reflect the voluntary waiver of a portion of the fee. The
adviser can terminate this voluntary waiver at any time at its sole discretion.
For the INVESCO VIF-Equity Income Fund, certain expenses are being voluntarily
absorbed by INVESCO. For the Janus Aspen Growth, Janus Aspen International
Growth and Janus Aspen Worldwide Growth Portfolios, the investment adviser has
agreed, until at least the next annual renewal of the advisory agreement, to
reduce the management fee to the level of the corresponding Janus retail fund.
For the Montgomery Variable Series: Growth Fund, the Advisor has voluntarily
undertaken to waive its fee and reimburse the Fund for certain expenses so that
the Fund's total operating expense will not exceed 1.25%.For the Prudential
Series Fund Equity Portfolio, "Other Expenses" are estimated for 1999. For the
Schwab MarketTrack Growth, Money Market and S&P 500 Portfolios, the total
Portfolio expenses after fee waivers are guaranteed by Schwab and the investment
adviser through April 30, 2000.
- ---------------------------------------------------------------------------
Fee Examples4
If you retain, annuitize or surrender the Contract at the end of the applicable
time period, you would pay the following fees and expenses on a $1,000
investment, assuming a 5% annual return on assets. These examples assume that no
Premium Taxes have been assessed.
PORTFOLIO 1 year5 3 years 5 years 10 years
Alger American Growth $8 $27 $49 $124
Portfolio
American Century VP International $15 $50 $90 $223
BT Insurance Funds Trust EAFE Equity Index $7 $22 $41 $102
BT Insurance Funds Trust Small Cap Index $5 $16 $28 $72
Baron Capital Asset $16 $51 $92 $227
Berger IPT-Small Company Growth $12 $39 $71 $177
Dreyfus Variable Investment Fund Capital $9 $28 $51 $127
Appreciation
Dreyfus Variable Investment Fund
Growth & Income $8 $27 $49 $122
Federated American Leaders II $9 $30 $55 $137
Federated U.S. Government Securities II $9 $29 $53 $133
Federated Utility II $10 $32 $58 $145
INVESCO VIF-High Yield $11 $37 $66 $165
INVESCO VIF-Equity Income $10 $32 $58 $145
Janus Aspen Growth $7 $23 $43 $107
Janus Aspen Worldwide Growth $8 $25 $45 $113
Janus Aspen Flexible Income $7 $22 $41 $102
Janus Aspen International Growth $9 $29 $54 $134
Montgomery Variable Series: Growth $13 $43 $77 $191
Fund
Prudential Series Fund Equity $9 $29 $54 $134
SAFECO RST Equity $8 $27 $49 $122
SAFECO RST Growth $8 $27 $50 $$125
Schwab MarketTrack Growth II $6 $21 $38 $95
Schwab Money Market $5 $17 $32 $79
Schwab S&P 500 $3 $10 $18 $45
Scudder Variable Life Investment Fund: Capital $5 $18 $32 $81
Growth
Scudder Variable Life Investment Fund: Growth $6 $19 $35 $89
and Income
Strong Schafer Value II $15 $47 $86 $212
Van Kampen $11 $37 $67 $167
American Life Investment Trust-Morgan Stanley
Real Estate Securities Portfolio
These examples, including the assumed rate of return, should not be considered
representations of future performance or past or future expenses. Actual
expenses paid or performance achieved may be greater or less than those shown,
subject to the guarantees in the Contract.
4 The Portfolio Annual Expenses and these examples are based on data provided by
the Portfolios. Great-West has no reason to doubt the accuracy or completeness
of that data, but Great-West has not verified the Portfolios' figures. In
preparing the Portfolio Expense table and the Examples above, Great-West has
relied on the figures provided by the Portfolios. 5 These examples are based on
total Portfolio expenses after taking fee waivers and reimbursements into
account.
- ------------------------------------------------
Condensed Financial Information
Attached as Appendix A is a table showing selected information concerning
accumulation units for each Sub-Account for 1996, 1997 and 1998. An accumulation
unit is the unit of measure that we use to calculate the value of your interest
in a Sub-Account. The accumulation unit values do not reflect the deduction of
certain charges that are subtracted from your Annuity Account Value, such as the
Contract Maintenance Charge. The information in the table is included in the
Series Account's financial statements, which have been audited by Deloitte &
Touche LLP, independent auditors. To obtain a more complete picture of each
Sub-Account's finances and performance, you should also review the Series
Account's financial statements, which are in the Series Account's Annual Report
dated December 31,1998 and contained in the Statement of Additional Information.
- ------------------------------------------------
Great-West Life & Annuity Insurance Company
Great-West is a stock life insurance company that was originally organized under
the laws of the state of Kansas as the National Interment Association. Our name
was changed to Ranger National Life Insurance Company in 1963 and to
Insuramerica Corporation prior to changing to our current name in 1982. In
September of 1990, we re-domesticated under the laws of the state of Colorado.
We are authorized to do business in 49 states, the District of Columbia, Puerto
Rico, U.S.Virgin Islands and Guam.
- ------------------------------------------------
The Series Account
We established the Variable Annuity-1 Series Account in accordance with Colorado
laws on July 24, 1995.
The Series Account is registered with the Securities and Exchange Commission
(the "SEC") under the Investment Company Act of 1940 (the "1940 Act"), as a unit
investment trust. Registration under the 1940 Act does not involve supervision
by the SEC of the management or investment practices or policies of the Series
Account.
We own the assets of the Series Account. The income, gains or losses, realized
or unrealized, from assets allocated to the Series Account are credited to or
charged against the Series Account without regard to our other income gains or
losses.
We will at all times maintain assets in the Series Account with a total market
value at least equal to the reserves and other liabilities relating to the
variable benefits under all Contracts participating in the Series Account. Those
assets may not be charged with our liabilities from our other business. Our
obligations under those Contracts are, however, our general corporate
obligations.
The Series Account is divided into 28 Sub-Accounts. Each Sub-Account invests
exclusively in shares of a corresponding investment Portfolio of a registered
investment company (commonly known as a mutual fund). We may in the future add
new or delete existing Sub-Accounts. The income, gains or losses, realized or
unrealized, from assets allocated to each Sub-Account are credited to or charged
against that Sub-Account without regard to the other income, gains or losses of
the other Sub-Accounts. All amounts allocated to a Sub-Account will at all times
be fully invested in Portfolio shares.
We hold the assets of the Series Account. We keep those assets physically
segregated and held separate and apart from our general account assets. We
maintain records of all purchases and redemptions of shares of the Portfolios.
- ------------------------------------------------
The Portfolios
The Contract offers a number of Portfolios, corresponding to the Sub-Accounts.
Each Sub-Account invests in a single Portfolio. Each Portfolio is a separate
mutual fund registered under the 1940 Act. More comprehensive information,
including a discussion of potential risks, is found in the current prospectuses
for the Portfolios (the "Portfolio Prospectuses"). The Portfolio Prospectuses
should be read in connection with this Prospectus. You may obtain a copy of the
Portfolio Prospectuses without charge by request.
Each Portfolio:
o holds its assets separate from the assets of the other Portfolios,
o has its own distinct investment objective and policy, and
o operates as a separate investment fund
The income, gains and losses of one Portfolio generally have no effect on the
investment performance of any other Portfolio.
The Portfolios are not available to the general public directly. The Portfolios
are only available as investment options in variable annuity contracts or
variable life insurance policies issued by life insurance companies or, in some
cases, through participation in certain qualified pension or retirement plans.
Some of the Portfolios have been established by investment advisers which manage
publicly traded mutual funds having similar names and investment objectives.
While some of the Portfolios may be similar to, and may in fact be modeled after
publicly traded mutual funds, you should understand that the Portfolios are not
otherwise directly related to any publicly traded mutual fund. Consequently, the
investment performance of publicly traded mutual funds and any corresponding
Portfolios may differ substantially.
The investment objectives of the Portfolios are briefly described below:
The Alger American Fund--advised by Fred Alger
Management, Inc. of New York, New York.
Alger American Growth Portfolio seeks long-term capital appreciation. It focuses
on growing companies that generally have broad product lines, markets, financial
resources and depth of management. Under normal circumstances, the Portfolio
invests primarily in the equity securities of large companies. The Portfolio
considers a large company to have a market capitalization of $1 billion or
greater.
American Century Variable Portfolios,
Inc.--advised by American Century Investment
Management, Inc. of Kansas City, Missouri,
advisers to the American Century family of
mutual funds.
American Century VP International seeks capital growth by investing primarily in
equity securities of foreign companies. The Fund invests primarily in securities
of issuers in developed countries.
The BT Insurance Funds Trust--advised by Bankers Trust Company of New York, New
York.
BT Insurance Funds Trust Small Cap Index Fund seeks to match, as closely as
possible, before expenses, the performance of the Russell 2000 Small Stock
Index. The Russell 2000 Index emphasizes stocks of small U.S. companies and is a
widely accepted benchmark of small-company stock performance.
BT Insurance Funds Trust EAFE Equity Index Fund seeks to match, as closely as
possible, before expenses, the performance of the Morgan Stanley Capital
International EAFE(R) Index. The EAFE Index emphasizes stocks of companies in
major markets in Europe, Australia, and the Far East and is a widely accepted
benchmark of international stock performance.
Baron Capital Asset Fund--advised by BAMCO, Inc.
of New York, New York.
Baron Capital Asset Fund seeks capital appreciation through investments in small
and medium sized companies with undervalued assets or favorable growth
prospects. The Fund invests primarily in small sized companies with market
capitalizations of approximately $100 million to $1.5 billion and medium sized
companies with market values of $1.5 billion to $5 billion.
Berger Institutional Products Trust--advised by
Berger Associates of Denver, Colorado.
Berger IPT-Small Company Growth Fund seeks capital appreciation by investing
primarily in equity securities (including common and preferred stocks,
convertible debt securities and other securities having equity features) of
small growth companies whose market capitalization, at the time of initial
purchase, is less than the 12-month average of the maximum market capitalization
for companies included in the Russell 2000 Index. This average is updated
monthly.
Dreyfus Variable Investment Fund--advised by The
Dreyfus Corporation of New York, New York.
Dreyfus Variable Investment Fund Capital Appreciation Portfolio seeks long-term
capital growth consistent with the preservation of capital. Its secondary goal
is current income. The Fund generally invests at least 80% of net assets in the
common stock of U.S. and foreign companies. The Fund focuses on "blue-chip"
companies with total market values of more than $5 billion.
Dreyfus Variable Investment Fund Growth & Income Portfolio seeks long-term
capital growth, current income and growth of income consistent with reasonable
investment risk. To pursue these goals, it invests in stocks, bonds and money
market instruments of domestic and foreign issuers.
Federated Insurance Series--advised by Federated
Advisers of Pittsburgh, Pennsylvania.
Federated American Leaders Fund II seeks to achieve long-term growth of capital
as a primary objective and seeks to provide income as a secondary objective
through investment of at least 65 % of its total assets (under normal
circumstances) in common stocks of "blue chip" companies.
Federated Fund for U.S. Government Securities II seeks to provide current income
through investment of at least 65% of its total assets in securities which are
primary or direct obligations of the U.S. government or its agencies or
instrumentalities or which are guaranteed as to principal and interest by the
U.S. government, its agencies, or instrumentalities and in certain
collateralized mortgage obligations, and repurchase agreements.
Federated Utility Fund II seeks to provide high current income and moderate
capital appreciation by investing in a professionally-managed, diversified
portfolio of utility company equity and debt securities.
INVESCO Variable Investment Funds, Inc.--advised by INVESCO Funds Group, Denver,
Colorado. INVESCO Trust Company is the sub-adviser for the INVESCO VIF-Equity
Income Portfolio.
INVESCO VIF-Equity Income Fund is a diversified fund that seeks the highest
possible current income, with the added potential for capital appreciation. The
Fund normally invests at least 65% of its total assets in dividend paying common
stocks. The Fund's equity investments are limited to stocks that can be easily
traded in the U.S.; it may, however, invest in foreign securities in the form of
American Depository Receipts. The rest of the Fund's assets are invested in debt
securities, generally corporate bonds that are rated investment grade or better.
The Fund may also invest up to 15% of its assets in lower-grade debt securities
commonly known as "junk bonds," which generally offer higher interest rates, but
are riskier investments than investment grade securities.
INVESCO VIF-High Yield Fund seeks a high level of current income. It invests
substantially all of its assets in lower-rated debt securities, commonly called
"junk bonds," and preferred stock, including securities issued by foreign
companies. Although these securities carry with them higher risks, they
generally provide higher yields - and therefore higher income than higher-rated
debt securities.
Janus Aspen Series--advised by Janus Capital
Corporation of Denver, Colorado.
Janus Aspen Growth Portfolio seeks long-term growth of capital in a manner
consistent with the preservation of capital. The Portfolio invests primarily in
common stocks selected for their growth potential.
Janus Aspen Worldwide Growth Portfolio seeks long-term growth of capital in a
manner consistent with the preservation of capital. The Portfolio invests
primarily in common stocks of any size throughout the world. The Portfolio
normally invests in issuers from at least five different countries, including
the U.S.
Janus Aspen International Growth Portfolio seeks long-term growth of capital.
The Portfolio normally invests at least 65% of its total assets in securities of
issuers from at least five different countries, excluding the U.S.
Janus Aspen Flexible Income Portfolio seeks to obtain maximum total return,
consistent with preservation of capital. The Portfolio invests in a wide variety
of income-producing securities such as corporate bonds and notes, government
securities and preferred stock. The Portfolio will invest at least 80% of its
assets in income-producing securities and may own an unlimited amount of
high-yield/high-risk fixed income securities and these securities may be a big
part of the Portfolio.
Montgomery Variable Series--advised by
Montgomery Asset Management, LLC of San
Francisco, California
Montgomery Growth Fund seeks long-term capital appreciation by investing in
growth-oriented U.S. companies. The Fund may invest in U.S. companies of any
size, but invests at least 65% of its total assets in those companies whose
shares have a total stock market value (market capitalization) of at least $1
billion. The Fund's strategy is to identify well-managed U.S. companies whose
share prices appear to be undervalued relative to the firm's growth potential.
Prudential Series Fund--advised by the
Prudential Insurance Company of America of
Newark, New Jersey
Prudential Series Fund Equity Portfolio seeks capital appreciation through
investment primarily in common stocks of companies, including major established
corporations as well as smaller capitalization companies, that appear to offer
attractive prospects of price appreciation that is superior to broadly-based
stock indexes. Current income, if any , is incidental.
SAFECO Resource Series Trust--advised by SAFECO Asset Management Company of
Seattle, Washington.
SAFECO RST Equity Portfolio seeks growth of capital and the increased income
that ordinarily follows from such growth. The Portfolio invests primarily in
common stocks selected for appreciation potential.
SAFECO RST Growth Portfolio seeks growth of capital and the increased income
that ordinarily follows from such growth. The Portfolio invests primarily in
common stocks selected for appreciation potential.
Schwab Insurance & Annuity Portfolios--advised
by Charles Schwab Investment Management, Inc.
of San Francisco, California.
Schwab Money Market Portfolio seeks maximum current income consistent with
liquidity and stability of capital. This Portfolio is neither insured nor
guaranteed by the United States Government and there can be no assurance that it
will be able to maintain a stable net asset value of $1.00 per share.
Schwab MarketTrack Growth Portfolio II seeks to provide high capital growth with
less volatility than an all stock portfolio by investing in a mix of stocks,
bonds, and cash equivalents either directly or through investment in other
mutual funds. Schwab S&P 500 Portfolio seeks to track the price and dividend
performance (total return) of common stocks of U.S. companies, as represented in
the Standard & Poor's Composite Index of 500 stocks.
Scudder Variable Life Investment Trust--advised
by Scudder Kemper Investments, Inc. of Boston,
Massachusetts
Scudder Variable Life Investment Fund: Capital Growth Portfolio seeks to
maximize long-term capital growth through a broad and flexible investment
program. The Portfolio invests principally in common stocks and preferred stocks
in all sectors of the market, including companies that generate or apply new
technologies, companies that own or develop natural resources, companies that
may benefit from changing consumer demands and lifestyles and foreign companies.
Scudder Variable Life Investment Fund: Growth and Income Portfolio seeks
long-term growth of capital, current income and growth of income. The Portfolio
pursues its goal by investing primarily in common stocks, preferred stocks and
securities convertible into common stocks of companies which offer the prospect
for growth of earnings while paying higher than average current dividends. The
Portfolio may also purchase such securities which do not pay current dividends
but which offer prospects for growth of capital and future income.
The Strong Schafer Value Fund II --advised by
Strong Schafer Capital Management, L.L.C.
(SSCM) of Princeton, New Jersey
The Strong Schafer Value Fund II seeks long-term capital growth. Current income
is a secondary objective. The Fund invests primarily in common stocks of
medium-and
large-size companies.
Van Kampen Life Investment Trust--advised by Van
Kampen Asset Management Inc. of Oakbrook
Terrace, Illinois.
Van Kampen LIT-Morgan Stanley Real Estate Securities Portfolio seeks as a
primary objective, long-term growth of capital by investing in securities of
companies operating in the real estate industry, primarily equity securities of
real estate investment trusts. Current income is a secondary investment
objective.
Meeting Investment Objectives Meeting investment objectives depends on various
factors, including, but not limited to, how well the Portfolio managers
anticipate changing economic and market conditions. There is no guarantee that
any of these Portfolios will achieve their stated objectives.
Where to Find More Information About the Portfolios Additional information about
the investment objectives and policies of all the Portfolios and the investment
advisory and administrative services and charges can be found in the current
Portfolio Prospectuses, which can be obtained from the Schwab Insurance &
Annuity Service Center.
The Portfolios' Prospectuses should be read carefully before any decision is
made concerning the allocation of Contributions to, or Transfers among, the
Sub-Accounts.
Addition, Deletion or Substitution Great-West does not control the Portfolios
and cannot guarantee that any of the Portfolios will always be available for
allocation of Contributions or Transfers. We retain the right to make changes in
the Series Account and in its investments. Currently, Schwab must approve
certain changes.
Great-West and Schwab reserve the right to discontinue the offering of any
Portfolio. If a Portfolio is discontinued, we may substitute shares of another
Portfolio or shares of another investment company for the discontinued
Portfolio's shares. Any share substitution will comply with the requirements of
the 1940 Act.
If you are contributing to a Sub-Account corresponding to a Portfolio that is
being discontinued, you will be given notice prior to the Portfolio's
elimination.
Based on marketing, tax, investment and other conditions, we may establish new
Sub-Accounts and make them available to Owners at our discretion. Each
additional Sub-Account will purchase shares in a Portfolio or in another mutual
fund or investment vehicle.
If, in our sole discretion, marketing, tax, investment or other conditions
warrant, we may also eliminate one or more Sub-Accounts. If a Sub-Account is
eliminated, we will notify you and request that you to re-allocate the amounts
invested in the eliminated Sub-Account.
- ------------------------------------------------
The Guarantee Period Fund
The Guaranteed Period Fund is not part of the Series
Account. Amounts allocated to the Guarantee Period Fund will be deposited to,
and accounted for, in a non-unitized market value separate account. As a result,
you do not participate in the performance of the assets through unit values.
Because your Contributions do not receive a unit ownership of assets accounted
for in the separate account, the assets accrue solely to the benefit of
Great-West and any gain or loss in the separate account is borne entirely by
Great-West. You will receive the Contract guarantees made by Great-West for
amounts you contribute to the Guarantee Period Fund.
When you contribute or Transfer amounts to the Guarantee Period Fund, you select
a new Guarantee Period from those available. All Guarantee Periods will have a
term of at least one year. Contributions allocated to the Guarantee Period Fund
will be credited on the Transaction Date we receive them.
Each Guarantee Period will have its own stated rate of interest and maturity
date determined by the date the Guarantee Period is established and the term you
choose.
Currently, Guarantee Periods with annual terms of 1 to 10 years are offered only
in those states where the Guarantee Period Fund is available. The Guarantee
Periods may change in the future, but this will not have an impact on any
Guarantee Period already in effect.
The value of amounts in each Guarantee Period equals Contributions plus interest
earned, less any Premium Tax, amounts distributed, withdrawn (in whole or in
part), amounts Transferred or applied to an annuity option, periodic withdrawals
and charges deducted under the Contract. If a Guarantee Period is broken, a
Market Value Adjustment may be assessed (please see "Breaking a Guarantee
Period" on page 14). Any amount withdrawn or Transferred prior to the Guarantee
Period Maturity Date will be paid in accordance with the Market Value Adjustment
formula. You can read more about Market Value Adjustments on page 14.
Investments of the Guarantee Period Fund
We use various techniques to invest in assets that have similar characteristics
to our general account assets--especially cash flow patterns. We will primarily
invest in investment-grade fixed income securities including: o Securities
issued by the U.S. Government or its agencies or instrumentalities, which
may or may not be guaranteed by the U.S. Government.
o Debt securities which have an investment grade, at the time of purchase,
within the four highest grades assigned by Moody's Investment Services, Inc.
(Aaa, Aa, A or Baa), Standard & Poor's Corporation (AAA, AA, A or BBB) or
any other nationally recognized rating service.
o Other debt instruments, including, but not limited to, issues of banks or
bank holding companies and of corporations, which obligations--although not
rated by Moody's, Standard & Poor's, or other nationally recognized rating
firms--are deemed by us to have an investment quality comparable to
securities which may be purchased as stated above.
o Commercial paper, cash or cash equivalents and other short-term investments
having a maturity of less than one year which are considered by us to have
investment quality comparable to securities which may be purchased as stated
above.
In addition, we may invest in futures and options solely for non-speculative
hedging purposes. We may sell a futures contract or purchase a put option on
futures or securities to protect the value of securities held in or to be sold
for the general account or the non-unitized separate account if the securities
prices are anticipated to decline. Similarly, if securities prices are expected
to rise, we may purchase a futures contract or a call option against anticipated
positive cash flow or may purchase options on securities.
The above information generally describes the investment strategy for the
Guarantee Period Fund. However, we are not obligated to invest the assets in the
Guarantee Period Fund according to any particular strategy, except as may be
required by Colorado and other state insurance laws. And, the stated rate of
interest that we establish will not necessarily relate to the performance of the
non-unitized market value separate account.
Subsequent Guarantee Periods
Before annuity payouts begin, you may reinvest the value of amounts in a
maturing Guarantee Period in a new Guarantee Period of any length we offer at
that time. On the quarterly statement you receive prior to the end of any
Guarantee Period, we will notify you of the upcoming maturity of a Guarantee
Period. The Guarantee Period available for new Contributions may be changed at
any time, including between the date we notify you of a maturing Guarantee
Period and the date a new Guarantee Period begins.
If you do not tell us where you would like the amounts in a maturing Guarantee
Period allocated by the maturity date, we will automatically allocate the amount
to a Guarantee Period of the same length as the maturing period. If the term
previously chosen is no longer available, the amount will be allocated to the
next shortest available Guarantee Period term. If none of the above are
available, the value of matured Guarantee Periods will be allocated to the
Schwab Money Market Sub-Account.
No Guarantee Period may mature later than six months after your Payout
Commencement Date. For example, if a 3-year Guarantee Period matures and the
Payout Commencement Date begins 1 3/4 years from the Guarantee Period maturity
date, the matured value will be transferred to a 2-year Guarantee Period.
Breaking a Guarantee Period
If you begin annuity payouts, Transfer or withdraw prior to the Guarantee Period
maturity date, you are breaking a Guarantee Period. When we receive a request to
break a Guarantee Period and you have another Guarantee Period that is closer to
its maturity date, we will break that Guarantee Period first.
If you break a Guarantee Period, you may be assessed an interest rate adjustment
called a Market Value Adjustment.
Interest Rates
The declared annual rates of interest are guaranteed throughout the Guarantee
Period. For Guarantee Periods not yet in effect, Great-West may declare interest
rates different than those currently in effect. When a subsequent Guarantee
Period begins, the rate applied will be equal to or more than the rate currently
in effect for new Contracts with the same Guarantee Period.
The stated rate of interest must be at least equal to the Guaranteed Interest
Rate, but Great-West may declare higher rates. The Guaranteed Interest Rate is
based on the applicable state standard non-forfeiture law. The standard
non-forfeiture rate in all states is 3%, except in Florida, Mississippi and
Oklahoma, it's 0%.
The determination of the stated interest rate is influenced by, but does not
necessarily correspond to, interest rates available on fixed income investments
which Great-West may acquire using funds deposited into the Guarantee Period
Fund. In addition, Great-West considers regulatory and tax requirements, sales
and administrative expenses, general economic trends and competitive factors in
determining the stated interest rate.
Market Value Adjustment
Amounts you allocate to the Guarantee Period Fund may be subject to an interest
rate adjustment called a Market Value Adjustment if, six months or more before
the fund's maturity date, you: o surrender your investment in the fund, o
transfer money from the fund, o partially withdraw money from the fund, o apply
amounts from the fund to purchase an annuity to receive payouts from your
account, or
o take a distribution from the fund upon the death of the Owner or the
Annuitant.
The Market Value Adjustment will not apply to any Guarantee Period having fewer
than six months prior to the Guarantee Period maturity date in each of the
following situations: o Transfer to a Sub-Account offered under
this Contract
o Surrenders, partial withdrawals, annuitization or periodic withdrawals o A
single sum payout upon death of the Owner or Annuitant
A Market Value Adjustment may increase or decrease the amount payable on the
above-described distributions. The formula for calculating Market Value
Adjustments is detailed in Appendix B. Appendix B also includes examples of how
Market Value Adjustments work.
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Application and Initial Contributions
The first step to purchasing the Schwab Select Annuity is to complete your
Contract application and submit it with your initial minimum Contribution of
$5,000; $2,000 if an IRA; or $1,000 if you are setting up an Automatic
Contribution Plan. Initial Contributions can be made by check (payable to GWL&A)
or transferred from a Schwab brokerage account.
If your application is complete, your Contract will be issued and your
Contribution will be credited within two business days after receipt at the
Schwab Insurance & Annuity Service Center. Acceptance is subject to sufficient
information in a form acceptable to us. We reserve the right to reject any
application or Contribution.
If your application is incomplete, the Schwab Insurance & Annuity Service Center
will complete the application from information Schwab has on file or contact you
by telephone to obtain the required information. If the information necessary to
complete your application is not received within five business days, we will
return to you both your check and the application. If you provide consent we
will retain the initial Contribution and credit it as soon as we have completed
your application.
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Free Look Period
During the ten-day free look period (or longer where required by law), you may
cancel your Contract. During the free look period, all Contributions will be
processed as follows: o Amounts you specify to be allocated to one or more of
the available Guarantee Periods
will be allocated as directed, effective upon the Transaction Date.
o Amounts you specify to be allocated to one or more of the Sub-Accounts will
first be allocated to the Schwab Money Market Sub-Account until the end of
the free look period. After the free look period is over, the Variable
Account Value held in the Schwab Money Market Sub-Account will be allocated
to the Sub-Accounts you selected on the application.
During the free look period, you may change the Sub-Accounts in which you'd like
to invest as well as your allocation percentages. Any changes you make during
the free look period will take effect after the free look period has expired.
Any returned Contracts will be void from the date we issued the Contract and the
greater of the following will be refunded: o Contributions less withdrawals and
distributions, or o The Annuity Account Value.
If you exercise the free look privilege, you must return the Contract to
Great-West or to the Schwab Insurance & Annuity Service Center.
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Subsequent Contributions
Once your application is complete and we have received your initial
Contribution, you can make subsequent Contributions at any time prior to the
Payout Commencement Date, as long as the Annuitant is living. Additional
Contributions must be at least $500; or $100 if made via an Automatic
Contribution Plan. Total Contributions may exceed $1,000,000 with our prior
approval.
Subsequent Contributions can be made by check or via an Automatic Contribution
plan directly from your bank or savings account. You can designate the date
you'd like your subsequent Contributions deducted from your account each month.
If you make subsequent Contributions by check, your check should be payable to
GWL&A.
You'll receive a confirmation of each Contribution you make upon its acceptance.
Great-West reserves the right to modify the limitations set forth in this
section.
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Annuity Account Value
Before the date annuity payouts begin, your Annuity Account Value is the sum of
your Variable and Fixed Accounts established under your Contract.
Before your Annuity Commencement Date, the Variable Account Value is the total
dollar amount of all accumulation units credited to you for each Sub-Account.
Initially, the value of each accumulation unit was set at $10.00. Each
Sub-Account's value prior to the Payout Commencement Date is equal to:
o net Contributions allocated to the corresponding Sub-Account, o plus or minus
any increase or decrease in the value of the assets of the
Sub-Account due to investment results,
o minus the daily mortality and expense risk charge,
o minus reductions for the Contract Maintenance Charge deducted on the contract
anniversary
o minus any applicable Transfer fees and o minus any withdrawals or Transfers
from the Sub-Account.
The value of a Sub-Account's assets is determined at the end of each day that
the New York Stock Exchange is open for regular business (a valuation date). A
valuation period is the period between successive valuation dates. It begins at
the close of the New York Stock Exchange (generally 4:00 p.m. Eastern time) on
each valuation date and ends at the close of the New York Stock Exchange on the
next succeeding valuation date.
The Variable Account Value is expected to change from valuation period to
valuation period, reflecting the investment experience of the selected
Sub-Account(s), as well as the deductions for applicable charges.
Upon allocating Variable Account Values to a Sub-Account you will be credited
with variable accumulation units in that Sub-Account. The number of accumulation
units you will be credited is determined by dividing the portion of each
Contribution allocated to the Sub-Account by the value of an accumulation unit.
The value of the accumulation unit is determined and credited at the end of the
valuation period during which the Contribution was received.
Each Sub-Account's accumulation unit value is established at the end of each
valuation period. It is calculated by multiplying the value of that unit at the
end of the prior valuation period by the Sub-Account's Net Investment Factor for
the valuation period. The formula used to calculate the Net Investment Factor is
discussed in Appendix C.
Unlike a brokerage account, amounts held under a Contract are not covered by the
Securities Investor Protection Corporation ("SIPC").
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Transfers
Prior to the Annuity Commencement Date you may Transfer all or part of your
Annuity Account Value among and between the Sub-Accounts and the available
Guarantee Periods by telephone, by sending a Request to the Schwab Insurance &
Annuity Service Center or by calling our touch-tone account and trading service.
Your Request must specify:
o the amounts being Transferred,
o the Sub-Account(s) and/or Guarantee Period(s) from which the Transfer is to
be made, and
o the Sub-Account(s) and/or Guarantee Period(s) that will receive the
Transfer.
Currently, there is no limit on the number of Transfers you can make among the
Sub-Accounts and the Guarantee Period Fund during any calendar year. However, we
reserve the right to limit the number of Transfers you make.
There is no charge for the first twelve Transfers each calendar year, but there
will be a charge of $10 for each additional Transfer made. The charge will be
deducted from the amount Transferred. All Transfers made on a single Transaction
Date will count as only one Transfer toward the twelve free Transfers. However,
if a one-time rebalancing Transfer also occurs on the Transaction Date, it will
be counted as a separate and additional Transfer.
A Transfer generally will be effective on the date the Request for Transfer is
received by the Schwab Insurance & Annuity Service Center if received before
4:00 p.m. Eastern time. Under current tax law, there will not be any tax
liability to you if you make a Transfer.
Transfers involving the Sub-Accounts will result in the purchase and/or
cancellation of accumulation units having a total value equal to the dollar
amount being Transferred. The purchase and/or cancellation of such units is made
using the Variable Account Value as of the end of the valuation date on which
the Transfer is effective.
When you make a Transfer from amounts in a Guarantee Period before the Guarantee
Period maturity date, the amount Transferred may be subject to a Market Value
Adjustment as discussed on page 14. If you request in advance to Transfer
amounts from a maturing Guarantee Period upon maturity, your Transfer will not
count toward the 12 free Transfers and no Transfer fees will be charged.
Possible Restrictions
We reserve the right without prior notice to modify, restrict, suspend or
eliminate the Transfer privileges (including telephone Transfers) at any time.
For example, Transfer restrictions may be necessary to protect you from the
negative effect large and/or numerous Transfers can have on portfolio
management. Moving significant amounts from one Sub-Account to another may
prevent the underlying Portfolio from taking advantage of long-term investment
opportunities because the Portfolio must maintain enough cash to cover the
cancellation of accumulation units that results from a Transfer out of a
Sub-Account. Moving large amounts of money may also cause a substantial increase
in Portfolio transaction costs which must be indirectly borne by you.
As a result, we reserve the right to require that all Transfer requests be made
by you and not by your designee and to require that each Transfer request be
made by a separate communication to us. We also reserve the right to require
that each Transfer request be submitted in writing and be signed by you.
Transfers among the Sub-Accounts may also be subject to such terms and
conditions as may be imposed by the Portfolios.
Automatic Custom Transfers
Dollar Cost Averaging
Dollar cost averaging allows you to make systematic Transfers from one
Sub-Account to any other of the Sub-Accounts. Dollar cost averaging allows you
to buy more units when the price is low and fewer units when the price is high.
Over time, your average cost per unit may be more or less than if you invested
all your money at one time. However, dollar cost averaging does not assure a
greater profit, or any profit, and will not prevent or necessarily alleviate
losses in a declining market.
You can set up automatic dollar cost averaging on a monthly, quarterly,
semi-annual or annual basis. Your Transfer will be initiated on the Transaction
Date one frequency period following the date of the request. For example, if you
request quarterly Transfers on January 9, your first Transfer will be made on
April 9 and every three months on the 9th thereafter. Transfers will continue on
that same day each interval unless terminated by you or for other reasons as set
forth in the Contract.
If there are insufficient funds in the applicable Sub-Account on the date your
Transfer is scheduled, your Transfer will not be made. However, your dollar cost
averaging Transfers will resume once there are sufficient funds in the
applicable Sub-Account. Dollar cost averaging will terminate automatically when
you start taking payouts from the annuity. Dollar cost averaging Transfers are
not included in the twelve free Transfers allowed in a calendar year.
Dollar cost averaging Transfers must meet the following conditions:
o The minimum amount that can be Transferred out of the selected
Sub-Account is $100.
o You must: (1) specify the dollar amount to be Transferred, (2)
designate the Sub-Account(s) to which the Transfer will be made, and
(3) designate the percent of the dollar amount to be allocated to
each Sub-Account into which you are Transferring money. The
accumulation unit values will be determined on the Transfer date.
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Here's how dollar cost averaging works:
-------- --------- -------- --------
Month Contribution Units Price
Purchased per
unit
-------- --------- -------- --------
-------- --------- -------- --------
Jan. $250 10 $25.00
-------- --------- -------- --------
-------- --------- -------- --------
Feb. 250 12 20.83
-------- --------- -------- --------
-------- --------- -------- --------
Mar. 250 20 12.50
-------- --------- -------- --------
-------- --------- -------- --------
Apr. 250 20 12.50
-------- --------- -------- --------
-------- --------- -------- --------
May 250 15 16.67
-------- --------- -------- --------
-------- --------- -------- --------
June 250 12 20.83
-------- --------- -------- --------
Average market value per unit $18.06
Investor's average cost per unit $16.85
In the chart above, if all units had been purchased at one time at the highest
unit value of $25.00, only 60 units could have been purchased with $1500. By
contributing smaller amounts over time, dollar cost averaging allowed 89 units
to be purchased with $1500 at an average unit price of $16.85. This investor
purchased 29 more units at $1.21 less per unit than the average market value per
unit of $18.06.
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You may not participate in dollar cost averaging and rebalancer at the same
time.
Great-West reserves the right to modify, suspend or terminate dollar cost
averaging at any time.
Rebalancer
Over time, variations in each Sub-Account's investment results will change your
asset allocation plan percentages. Rebalancer allows you to automatically
reallocate your Variable Account Value to maintain your desired asset
allocation. Participation in Rebalancer does not assure a greater profit, or any
profit, nor will it prevent or necessarily alleviate losses in a declining
market.
You can set up rebalancer as a one-time Transfer or on a quarterly, semi-annual
or annual basis. If you select to rebalance only once, the Transfer will take
place on the Transaction Date of the request. One-time rebalancer Transfers
count toward the twelve free Transfers allowed in a calendar year.
If you select to rebalance on a quarterly, semi-annual or annual basis, the
first Transfer will be initiated on the Transaction Date one frequency period
following the date of the request. For example, if you request quarterly
Transfers on January 9, your first Transfer will be made on April 9 and every
three months on the 9th thereafter. Transfers will continue on that same day
each interval unless terminated by you or for other reasons as set forth in the
Contract. Quarterly, semi-annual and annual Transfers will not count toward the
12 free Transfers.
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Here's how rebalancer works:
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Suppose you purchased your annuity and you decided to allocate 60% of your
initial contribution to stocks; 30% to bonds and 10% to cash equivalents as in
this pie chart:
[object omitted]
Now assume that stock portfolios outperform bond portfolios and cash equivalents
over a certain period of time. Over this period, the unequal performance may
alter the asset allocation of the above hypothetical plan to look like this:
[object omitted]
Rebalancer automatically reallocates your Variable Account Value to maintain
your desired asset allocation. In this example, the portfolio would be
re-allocated back to 60% in stocks; 30% in bonds; 10% in cash equivalents.
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On the Transaction Date for the specified request, assets will be automatically
reallocated to the Sub-Accounts you selected. The rebalancer option will
terminate automatically when you start taking payouts from the annuity.
Rebalancer Transfers must meet the following conditions:
o Your entire Variable Account Value must be included.
o You must specify the percentage of your Variable Account Value you'd like
allocated to each Sub-Account and the frequency of rebalancing. You may
modify the allocations or stop the rebalancer option at any time.
o You may not participate in dollar cost averaging and rebalancer at the same
time.
Great-West reserves the right to modify, suspend, or terminate the rebalancer
option at any time.
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Cash Withdrawals
You may withdraw all or part of your Annuity Account Value at any time during
the life of the Annuitant and prior to the date annuity payouts begin by
submitting a written withdrawal request to the Schwab Insurance & Annuity
Service Center. Withdrawals are subject to the rules below and federal or state
laws, rules or regulations may also apply. The amount payable to you if you
surrender your Contract is your Annuity Account Value, with any applicable
Market Value Adjustment on the Effective Date of the surrender, less any
applicable Premium Tax. No withdrawals may be made after the date annuity
payouts begin.
If you request a partial withdrawal, your Annuity Account Value will be reduced
by the dollar amount withdrawn. A Market Value Adjustment may apply. Market
Value Adjustments are discussed on page 14.
Partial withdrawals are unlimited. However, you must specify the Sub-Account(s)
or Guarantee Period(s) from which the withdrawal is to be made. After any
partial withdrawal, if your remaining Annuity Account Value is less than $2,000,
then a full surrender may be required. The minimum partial withdrawal (before
application of the MVA) is $500.
The following terms apply to withdrawals:
o Partial withdrawals or surrenders are not permitted after the date annuity
payouts begin.
o A partial withdrawal or a surrender will be effective upon the Transaction
Date.
o A partial withdrawal or a surrender from amounts in a Guarantee Period may
be subject to the Market Value Adjustment provisions, and the Guarantee
Period Fund provisions of the Contract.
Withdrawal requests must be in writing with your original signature. If your
instructions are not clear, your request will be denied and no withdrawal or
partial withdrawal will be processed.
After a withdrawal of all of your Annuity Account Value, or at any time that
your Annuity Account Value is zero, all your rights under the Contract will
terminate.
Withdrawals to Pay Investment Manager or Financial Advisor Fees You may request
partial withdrawals from your Annuity Account Value and direct us to remit the
amount withdrawn directly to your designated Investment Manager or Financial
Advisor (collectively "Consultant"). A withdrawal request for this purpose must
meet the $500 minimum withdrawal requirements and comply with all terms and
conditions applicable to partial withdrawals, as described above. Tax
consequences of withdrawals are detailed below, but you should consult a
competent tax advisor prior to authorizing a withdrawal from your Annuity
Account to pay Consultant fees.
Tax Consequences of Withdrawals
Withdrawals made for any purpose may be taxable--including payments made by us
directly to your Consultant.
In addition, the Internal Revenue Code may require us to withhold federal income
taxes from withdrawals and report such withdrawals to the IRS. If you request
partial withdrawals to pay Consultant fees, your Annuity Account Value will be
reduced by the sum of the fees paid to the Consultant and the related
withholding.
You may elect, in writing, to have us not withhold federal income tax from
withdrawals, unless withholding is mandatory for your Contract. If you are
younger than 59 1/2, the taxable portion of any withdrawal is generally
considered to be an early withdrawal and is subject to an additional federal
penalty tax of 10%.
Withholding applies only if the taxable amount of the withdrawal is at least
$200. Some states also require withholding for state income taxes. For details
about withholding, please see "Federal Tax Matters" on page 24.
If you are interested in this Contract as an IRA, please refer to Section 408 of
the Internal Revenue Code of 1986, as amended, for limitations and restrictions
on cash withdrawals.
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Telephone Transactions
You may make Transfer requests by telephone. Telephone Transfer requests
received before 4:00 p.m. Eastern time will be made on that day at that day's
unit value. Calls completed after 4:00 p.m. Eastern time will be made on the
next business day we and the NYSE are open for business, at that day's unit
value.
We will use reasonable procedures to confirm that instructions communicated by
telephone are genuine, such as: o requiring some form of personal identification
prior to acting on instructions, o providing written confirmation of the
transaction and/or o tape recording the instructions given by telephone.
If we follow such procedures we will not be liable for any losses due to
unauthorized or fraudulent instructions.
We reserve the right to suspend telephone transaction privileges at any time,
for some or all Contracts, and for any reason. Withdrawals are not permitted by
telephone.
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Death Benefit
Before the date when annuity payouts begin, the Death Benefit, if any, will be
equal to the greater of:
o the Annuity Account Value with an MVA, if applicable, as of the date the
request for payout is received, less any Premium Tax, or
o the sum of Contributions, less partial withdrawals and/or periodic
withdrawals, less any Premium Tax.
The Death Benefit will become payable following our receipt of the Beneficiary's
claim in good order. When an Owner or the Annuitant dies before the Annuity
Commencement Date and a Death Benefit is payable to a Beneficiary, the Death
Benefit proceeds will remain invested according to the allocation instructions
given by the Owner(s) until new allocation instructions are requested by the
Beneficiary or until the Death Benefit is actually paid to the Beneficiary.
The amount of the Death Benefit will be determined as of the date payouts begin.
However, on the date a payout option is processed, the Variable Account Value
will be Transferred to the Schwab Money Market Sub-Account unless the
Beneficiary elects otherwise.
Subject to the distribution rules below, payout of the Death Benefit may be made
as follows:
Variable Account Value
o payout in a single sum, or
o payout under any of the variable annuity options provided under this Contract.
Fixed Account Value
o payout in a single sum that may be subject to a Market Value Adjustment, or o
payout under any of the annuity options provided under this Contract that may be
subject to a Market Value Adjustment
Any payment within 6 months of the Guarantee Period Maturity Date will not be
subject to a Market Value Adjustment.
In any event, no payout of benefits provided under the Contract will be allowed
that does not satisfy the requirements of the Internal Revenue Code and any
other applicable federal or state laws, rules or regulations.
Beneficiary
You may select one or more Beneficiaries. If more than one Beneficiary is
selected, they will share equally in any Death Benefit payable unless you
indicate otherwise. You may change the Beneficiary any time before the
Annuitant's death.
A change of Beneficiary will take effect as of the date the request is processed
by the Schwab Insurance & Annuity Service Center, unless a certain date is
specified by the Owner. If the Owner dies before the request is processed, the
change will take effect as of the date the request was made, unless we have
already made a payout or otherwise taken action on a designation or change
before receipt or processing of such request. A Beneficiary designated
irrevocably may not be changed without the written consent of that Beneficiary,
except as allowed by law.
The interest of any Beneficiary who dies before the Owner or the Annuitant will
terminate at the death of the Beneficiary. The interest of any Beneficiary who
dies at the time of, or within 30 days after the death of an Owner or the
Annuitant will also terminate if no benefits have been paid to such Beneficiary,
unless the Owner otherwise indicates by request. The benefits will then be paid
as though the Beneficiary had died before the deceased Owner or Annuitant. If no
Beneficiary survives the Owner or Annuitant, as applicable, we will pay the
Death Benefit proceeds to the Owner's estate.
If the Beneficiary is not the Owner's surviving spouse, she/he may elect, not
later than one year after the Owner's date of death, to receive the Death
Benefit in either a single sum or payout under any of the variable or fixed
annuity options available under the Contract, provided that:
o such annuity is distributed in substantially equal installments over the life
or life expectancy of the Beneficiary or over a period not extending beyond the
life expectancy of the Beneficiary and
o such distributions begin not later than one year after the Owner's date of
death. If an election is not received by Great-West from a non-spouse
Beneficiary and substantially equal installments begin no later than one year
after the Owner's date of death, then the entire amount must be distributed
within five years of the Owner's date of death. The Death Benefit will be
determined as of the date the payouts begin.
If a corporation or other non-individual entity is entitled to receive benefits
upon the Owner's death, the Death Benefit must be completely distributed within
five years of the Owner's date of death.
Distribution of Death Benefit
Death of Annuitant
Upon the death of the Annuitant while the Owner is living, and before the
Annuity Commencement Date, we will pay the Death Benefit to the Beneficiary
unless there is a Contingent Annuitant.
If a Contingent Annuitant was named by the Owner(s) prior to the Annuitant's
death, and the Annuitant dies before the Annuity Commencement Date while the
Owner and Contingent Annuitant are living, no Death Benefit will be payable and
the Contingent Annuitant will become the Annuitant.
If the Annuitant dies after the date annuity payouts begin and before the entire
interest has been distributed, any benefit payable must be distributed to the
Beneficiary according to and as rapidly as under the payout option which was in
effect on the Annuitant's date of death.
If the deceased Annuitant is an Owner, or if a corporation or other
non-individual is an Owner, the death of the Annuitant will be treated as the
death of an Owner and the Contract will be subject to the "Death of Owner"
provisions described below.
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Contingent Annuitant
While the Annuitant is living, you may, by Request designate or change a
Contingent Annuitant from time to time. A change of Contingent Annuitant will
take effect as of the date the request is processed at the Schwab Insurance &
Annuity Service Center, unless a certain date is specified by the Owner(s).
Please note, you are not required to designate a Contingent Annuitant.
---------------------------------
Death of Owner Who Is Not the Annuitant
If there is a Joint Owner who is the surviving spouse and the Beneficiary of
the deceased Owner, the Joint Owner becomes the Owner and Beneficiary and the
Death Benefit will be paid to the Joint Owner or the Joint Owner may elect to
take the Death Benefit or to continue the Contract in force.
If the Owner dies after annuity payouts commence and before the entire interest
has been distributed while the Annuitant is living, any benefit payable will
continue to be distributed to the Annuitant as rapidly as under the payout
option applicable on the Owner's date of death. All rights granted the Owner
under the Contract will pass to any surviving Joint Owner and, if none, to the
Annuitant.
In all other cases, we will pay the Death Benefit to the Beneficiary even if a
Joint Owner (who was not the Owner's spouse on the date of the Owner's death),
the Annuitant and/or the Contingent Annuitant are alive at the time of the
Owner's death, unless the sole Beneficiary is the deceased Owner's surviving
spouse who may elect to become the Owner and Annuitant and to continue the
Contract in force.
Death of Owner Who Is the Annuitant
If there is a Joint Owner who is the surviving spouse of the deceased Owner and
a Contingent Annuitant, the Joint Owner becomes the Owner and the Beneficiary,
the Contingent Annuitant will become the Annuitant, and the Contract will
continue in force.
If there is a Joint Owner who is the surviving spouse and the Beneficiary of the
deceased Owner but no Contingent Annuitant, the Joint Owner will become the
Owner, Annuitant and Beneficiary and may elect to take the Death Benefit or
continue the Contract in force.
In all other cases, we will pay the Death Benefit to the Beneficiary, even if a
Joint Owner (who was not the Owner's spouse on the date of the Owner's death),
Annuitant and/or Contingent Annuitant are alive at the time of the Owner's
death, unless the sole Beneficiary is the deceased Owner's surviving spouse who
may elect to become the Owner and Annuitant and to continue the Contract in
force.
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Charges and Deductions
No amounts will be deducted from your Contributions except for any applicable
Premium Tax. As a result, the full amount of your Contributions (less any
applicable Premium Tax) are invested in the Contract.
As more fully described below, charges under the Contract are assessed only as
deductions for:
o Premium Tax, if applicable,
o Certain Transfers,
o a Contract Maintenance Charge, and
o charges against your Variable Account Value for our assumption of
mortality and expense risks.
Mortality and Expense Risk Charge
We deduct a Mortality and Expense Risk Charge from your Variable Account Value
at the end of each valuation period to compensate us for bearing certain
mortality and expense risks under the Contract. This is a daily charge equal to
an effective annual rate of 0.85%. The approximate portion of this charge
attributable to mortality risks is 0.68%. The approximate portion of this charge
estimated to be attributable to expense risk is 0.17%. We guarantee that this
charge will never increase beyond 0.85%.
The Mortality and Expense Risk Charge is reflected in the unit values of each of
the Sub-Accounts you have selected. Thus, this charge will continue to be
applicable should you choose a variable annuity payout option or the periodic
withdrawal option.
Annuity Account Values and annuity payouts are not affected by changes in actual
mortality experience incurred by us. The mortality risks assumed by us arise
from our contractual obligations to make annuity payouts determined in
accordance with the annuity tables and other provisions contained in the
Contract. This means that you can be sure that neither the Annuitant's longevity
nor an unanticipated improvement in general life expectancy will adversely
affect the annuity payouts under the Contract.
We bear substantial risk in connection with the Death Benefit before the Annuity
Commencement Date.
The expense risk assumed is the risk that our actual expenses in administering
the Contracts and the Series Account will be greater than we anticipated.
If the Mortality and Expense Risk Charge is insufficient to cover actual costs
and risks assumed, the loss will fall on us. If this charge is more than
sufficient, any excess will be profit to us. Currently, we expect a profit from
this charge. Our expenses for distributing the Contracts will be borne by our
general assets, including any profits from this charge.
Contract Maintenance Charge
We currently deduct a $25 annual Contract Maintenance Charge from the Annuity
Account Value on each Contract anniversary date for accounts under $50,000. This
charge partially covers our costs for administering the Contracts and the Series
Account. Once you have started receiving payouts from the annuity, this charge
will stop unless you choose the periodic withdrawal option.
The Contract Maintenance Charge is deducted from the portion of your Annuity
Account Value allocated to the Schwab Money Market Sub-Account. If the portion
of your Annuity Account Value in this Sub-Account is not sufficient to cover the
Contract Maintenance Charge, then the charge or any portion of it will be
deducted on a pro rata basis from all your Sub-Accounts with current value. If
the entire Annuity Account is held in the Guarantee Period Fund or there are not
enough funds in any Sub-Account to pay the entire charge, then the Contract
Maintenance Charge will be deducted on a pro rata basis from amounts held in all
Guarantee Periods. There is no MVA on amounts deducted from a Guarantee Period
for the Contract Maintenance Charge.
The Contract Maintenance Charge is currently waived for Contracts with an
Annuity Account Value of at least $50,000. If your Annuity Account Value falls
below $50,000, the Contract Maintenance Charge will be reinstated until such
time as your Annuity Account Value is equal to or greater than $50,000. We do
not expect a profit from amounts received from the Contract Maintenance Charge.
Transfer Fees
There will be a $10 charge for each Transfer in excess of 12 Transfers in any
calendar year. We do not expect a profit from the Transfer fees.
Expenses of the Portfolios
The value of the assets in the Sub-Accounts reflect the value of Portfolio
shares and therefore the fees and expenses paid by each Portfolio. A complete
description of the fees, expenses, and deductions from the Portfolios is
included in this Prospectus under the Variable Annuity Fee Table and Portfolio
Annual Expenses on pages 7 and 8.
Premium Tax
We may be required to pay state Premium Taxes or retaliatory taxes currently
ranging from 0% to 3.5% in connection with Contributions or values under the
Contracts. Depending upon applicable state law, we will deduct charges for the
Premium Taxes we incur with respect to your Contributions, from amounts
withdrawn, or from amounts applied on the Payout Commencement Date. In some
states, charges for both direct Premium Taxes and retaliatory Premium Taxes may
be imposed at the same or different times with respect to the same Contribution,
depending on applicable state law.
Other Taxes
Under present laws, we will incur state or local taxes (in addition to the
Premium Tax described above) in several states. No charges are currently made
for taxes other than Premium Tax. However, we reserve the right to deduct
charges in the future for federal, state, and local taxes or the economic burden
resulting from the application of any tax laws that we determine to be
attributable to the Contract.
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Payout Options
During the Distribution Period, you can choose to receive payouts in four
ways--through periodic withdrawals, variable annuity payouts, fixed annuity
payouts or in a single, lump-sum payment.
You may change the Payout Commencement Date within 60 days prior to commencement
of payouts or your Beneficiary may change it upon the death of the Owner.
If this is an IRA, payouts which satisfy the minimum distribution requirements
of the Internal Revenue Code must begin no later than when you become age 70
1/2.
Periodic Withdrawals
You may request that all or part of the Annuity Account Value be applied to a
periodic withdrawal option. The amount applied to a periodic withdrawal is the
Annuity Account Value with any applicable MVA, less Premium Tax, if any.
In requesting periodic withdrawals, you must elect:
o The withdrawal frequency of either 1-, 3-, 6- or 12-month intervals o A
minimum withdrawal amount of at least $100 o The calendar day of the month on
which withdrawals will be made o One of the periodic withdrawal payout options
discussed below-- you may change the withdrawal option and/or the frequency once
each calendar year
Your withdrawals may be prorated across the Guarantee Period Fund (if
applicable) and the Sub-Accounts in proportion to their assets. Or, they can be
made specifically from the Guarantee Period Fund and specific Sub-Account(s)
until they are depleted. Then, we will automatically prorate the remaining
withdrawals against any remaining Guarantee Period Fund and Sub-Account assets
unless you request otherwise.
While periodic withdrawals are being received:
o You may continue to exercise all contractual rights, except that no
Contributions may be made.
o A Market Value Adjustment, if applicable, will be assessed for periodic
withdrawals from Guarantee Periods six or more months prior to its
Guarantee Period maturity date.
o You may keep the same Sub-Accounts as you had selected before periodic
withdrawals began.
o Charges and fees under the Contract continue to apply.
o Maturing Guarantee Periods renew into the shortest Guarantee Period
then available.
Periodic withdrawals will cease on the earlier of the date:
o The amount elected to be paid under the option selected has been reduced
to zero.
o The Annuity Account Value is zero.
o You request that withdrawals stop.
o The Owner or the Annuitant dies.
If periodic withdrawals stop, you may resume making Contributions. However, we
may limit the number of times you may restart a periodic withdrawal program.
Periodic withdrawals made for any purpose may be taxable, subject to withholding
and to the 10% federal penalty tax if you are younger than age 59 1/2. IRAs are
subject to complex rules with respect to restrictions on and taxation of
distributions, including penalty taxes.
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If you choose to receive payouts from your annuity through periodic withdrawals,
you may select from
the following payout options: Income for a specified period (at least 36
months)--You elect the length of time over which withdrawals will be made. The
amount paid will vary based on the duration you choose.
Income of a specified amount (at least 36 months)--You elect the dollar amount
of the withdrawals. Based on the amount elected, the duration may vary. Interest
only--Your withdrawals will be based on the amount of interest credited to the
Guarantee Period Fund between withdrawals. Available only if 100% of your
Account Value is invested in the Guarantee Period Fund. Minimum distribution--If
you are using this Contract as an IRA, you may request minimum distributions as
specified under Internal Revenue Code Section 401(a)(9). Any other form of
periodic withdrawal acceptable to Great-West which is for a period of at least
36 months.
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In accordance with the provisions outlined in this section, you may request a
periodic withdrawal to remit fees paid to your Investment Manager or Financial
Advisor. There may be income tax consequences to any periodic withdrawal made
for this purpose. Please see "Cash Withdrawals" on page 18.
Annuity Payouts
You can choose the date you'd like annuity payouts to start either when you
purchase the Contract or at a later date. The date you choose must be at least
one year after your initial Contribution. If you do not select a payout start
date, payouts will begin on the first day of the month of the Annuitant's 91st
birthday. You can change your selection at any time up to 30 days before the
annuity date you selected.
If you have not elected a payout option within 30 days of the Annuity
Commencement Date, the portion of your Annuity Account Value held in your Fixed
Account will be paid out as a fixed life annuity with a guarantee period of 20
years. The Annuity Account Value held in the Sub-Account(s) will be paid out as
a variable life annuity with a guarantee period of 20 years.
The amount to be paid out is the Annuity Account Value on the Annuity
Commencement Date. The minimum amount that may be withdrawn from the Annuity
Account Value to purchase an annuity payout option is $2,000 with a Market Value
Adjustment, if applicable. If after the Market Value Adjustment, your Annuity
Account Value is less than $2,000, we may pay the amount in a single sum subject
to the Contract provisions applicable to a partial withdrawal.
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If you choose to receive variable annuity payouts from your annuity, you may
select from the following payout options: Variable life annuity with guaranteed
period--This option provides for monthly payouts during a guaranteed period or
for the lifetime of the Annuitant, whichever is longer. The guaranteed period
may be 5, 10, 15 or 20 years. Variable life annuity--This option provides for
monthly payouts during the lifetime of the Annuitant. The annuity terminates
with the last payout due prior to the death of the Annuitant. Since no minimum
number of payouts is guaranteed, this option may offer the maximum level of
monthly payouts. It is possible that only one payout may be made if the
Annuitant died before the date on which the second payout is due.
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Under an annuity payout option, you can receive payouts monthly, quarterly,
semi-annually or annually in payments which must be at least $50. We reserve the
right to make payouts using the most frequent payout interval which produces a
payout of at least $50.
If you elect to receive a single sum payment, the amount paid is the Surrender
Value.
Amount of First Variable Payout The first payout under a variable annuity payout
option will be based on the value of the amounts held in each Sub-Account you
have selected on the 5th valuation date preceding the Annuity Commencement Date.
It will be determined by applying the appropriate rate to the amount applied
under the payout option.
For annuity options involving life income, the actual age and/or gender of the
Annuitant will affect the amount of each payout. We reserve the right to ask for
satisfactory proof of the Annuitant's age. We may delay annuity payouts until
satisfactory proof is received. Since payouts to older Annuitants are expected
to be fewer in number, the amount of each annuity payout under a selected
annuity form will be greater for older Annuitants than for younger Annuitants.
If the age of the Annuitant has been misstated, the payouts established will be
made on the basis of the correct age. If payouts were too large because of
misstatement, the difference with interest may be deducted by us from the next
payout or payouts. If payouts were too small, the difference with interest may
be added by us to the next payout. This interest is at an annual effective rate
which will not be less than the Guaranteed Interest Rate.
Variable Annuity Units
The number of Annuity Units paid for each Sub-Account is determined by dividing
the amount of the first monthly payout by its Annuity Unit value on the 5th
valuation date preceding the date the first payout is due. The number of Annuity
Units used to calculate each payout for a Sub-Account remains fixed during the
Annuity Payout Period.
Amount of Variable Payouts After the First Payout Payouts after the first will
vary depending upon the investment performance of the Sub-Accounts. The
subsequent amount paid from each Sub-Account is determined by multiplying (a) by
(b) where (a) is the number of Sub-Account Annuity Units to be paid and (b) is
the Sub-Account Annuity Unit value on the 5th valuation date preceding the date
the annuity payout is due. The total amount of each variable annuity payout will
be the sum of the variable annuity payouts for each Sub-Account you have
selected. We guarantee that the dollar amount of each payout after the first
will not be affected by variations in expenses or mortality experience.
Transfers After the Variable Annuity Commencement Date Once annuity payouts have
begun, no Transfers may be made from a fixed annuity payout option to a variable
annuity payout option, or vice versa. However, for variable annuity payout
options, Transfers may be made within the variable annuity payout option among
the available Sub-Accounts. Transfers after the Annuity Commencement Date will
be made by converting the number of Annuity Units being Transferred to the
number of Annuity Units of the Sub-Account to which the Transfer is made. The
result will be that the next annuity payout, if it were made at that time, would
be the same amount that it would have been without the Transfer. Thereafter,
annuity payouts will reflect changes in the value of the new Annuity Units.
Other restrictions
Once payouts start under the annuity payout option you select:
o no changes can be made in the payout option,
o no additional Contributions will be accepted under the Contract and
o no further withdrawals, other than withdrawals made to provide annuity
benefits, will be allowed.
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If you choose to receive fixed annuity payouts from your annuity, you may select
from the following payout options: Income of specified amount--The amount
applied under this option may be paid in equal annual, semi-annual, quarterly or
monthly installments in the dollar amount elected for not more than 240 months.
Income for a specified period--Payouts are paid annually, semi-annually,
quarterly or monthly, as elected, for a selected number of years not to exceed
240 months. Fixed life annuity with guaranteed period--This option provides
monthly payouts during a guaranteed period or for the lifetime of the Annuitant,
whichever is longer. The guaranteed period may be 5, 10, 15 or 20 years. Fixed
life annuity--This option provides for monthly payouts during the lifetime of
the Annuitant. The annuity ends with the last payout due prior to the death of
the Annuitant. Since no minimum number of payouts is guaranteed, this option may
offer the maximum level of monthly payouts. It is possible that only one payout
may be made if the Annuitant died before the date on which the second payout is
due. Any other form of a fixed annuity acceptable to us.
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A portion or the entire amount of the annuity payouts may be taxable as ordinary
income. If, at the time the annuity payouts begin, we have not received a proper
written election not to have federal income taxes withheld, we must by law
withhold such taxes from the taxable portion of such annuity payouts and remit
that amount to the federal government (an election not to have taxes withheld is
not permitted for certain Qualified Contracts). State income tax withholding may
also apply. Please see "Federal Tax Matters" below for details.
Annuity IRAs
The annuity date and options available for IRAs may be controlled by
endorsements, the plan documents, or applicable law.
Under the Internal Revenue Code, a Contract purchased and used in connection
with an Individual Retirement Account or with certain other plans qualifying for
special federal income tax treatment is subject to complex "minimum
distribution" requirements. Under a minimum distribution plan, distributions
must begin by a specific date and the entire interest of the plan participant
must be distributed within a certain specified period of time. The application
of the minimum distribution requirements vary according to your age and other
circumstances.
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Seek Tax Advice
The following discussion of the federal income tax consequences is only a brief
summary and is not intended as tax advice. The federal income tax consequences
discussed here reflect our understanding of current law and the law may change.
Federal estate tax consequences and state and local estate, inheritance, and
other tax consequences of ownership or receipt of distributions under a Contract
depend on your individual circumstances or the circumstances of the person who
receives the distribution. A tax adviser should be consulted for further
information.
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Federal Tax Matters
The following discussion is a general description of federal income tax
considerations relating to the Contracts and is not intended as tax advice. This
discussion assumes that the Contract qualifies as an annuity contract for
federal income tax purposes. This discussion is not intended to address the tax
consequences resulting from all situations. If you are concerned about these tax
implications relating to the ownership or use of the Contract, you should
consult a competent tax adviser before initiating any transaction.
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This discussion is based upon our understanding of the present federal income
tax laws as they are currently interpreted by the Internal Revenue Service. No
representation is made as to the likelihood of the continuation of the present
federal income tax laws or of the current interpretation by the Internal Revenue
Service. Moreover, no attempt has been made to consider any applicable state or
other tax laws.
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The Contract may be purchased on a non-tax qualified basis ("Non-Qualified
Contract") or purchased and used in connection with IRAs. The ultimate effect of
federal income taxes on the amounts held under a Contract, on annuity payouts,
and on the economic benefit to you, the Annuitant, or the Beneficiary may depend
on the type of Contract, and on the tax status of the individual concerned.
Certain requirements must be satisfied in purchasing an Annuity IRA and
receiving distributions from an Annuity IRA in order to continue receiving
favorable tax treatment. As a result, purchasers of Annuity IRAs should
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Because tax laws, rules and regulations are constantly
changing, we do not make any guarantees about the
Contract's tax status.
- -------------------------------------------------------
seek competent legal and tax advice regarding the suitability of the Contract
for their situation, the applicable requirements and the tax treatment of the
rights and benefits of the Contract. The following discussion assumes that an
Annuity IRA is purchased with proceeds and/or Contributions that qualify for the
intended special federal income tax treatment.
Taxation of Annuities
Section 72 of the Internal Revenue Code governs taxation of annuities. You, as a
"natural person" will not generally be taxed on increases, if any, in the value
of your Annuity Account Value until a distribution occurs by withdrawing all or
part of the Annuity Account Value (for example, withdrawals or annuity payouts
under the annuity payout option elected). However, under certain circumstances,
you currently may be subject to taxation. In addition, an assignment, pledge, or
agreement to assign or pledge any portion of the Annuity Account Value generally
will be treated as a distribution. The taxable portion of a distribution (in the
form of a single sum payout or an annuity) is taxable as ordinary income. An IRA
Contract may not be assigned as collateral.
If the Contract is not owned by a natural person (for example, a corporation or
certain trusts), you generally must include in income any increase in the excess
of the Annuity Account Value over the "investment in the Contract" (discussed
below) during each taxable year. The rule does not apply where the non-natural
person is the stated Owner of a Contract and the beneficial Owner is a natural
person.
The rule also does not apply where:
o The annuity Contract is acquired by the estate of a decedent.
o The Contract is held under an IRA.
o The Contract is a qualified funding asset for a structured settlement.
o The Contract is purchased on behalf of an employee upon termination of a
qualified plan.
The following discussion generally applies to a Contract owned by a natural
person.
Withdrawals
In the case of a withdrawal under an IRA, including withdrawals under the
periodic withdrawal option, a portion of the amount received may be non-taxable.
The amount of the non-taxable portion is generally determined by the ratio of
the "investment in the Contract" to the individual's total accrued benefit under
the plan. The "investment in the Contract" generally equals the amount of any
nondeductible Contributions paid by or on behalf of any individual. Special tax
rules may be available for certain distributions from an IRA.
With respect to Non-Qualified Contracts, partial withdrawals, including periodic
withdrawals, are generally treated as taxable income to the extent that the
Annuity Account Value immediately before the withdrawal exceeds the "investment
in the Contract" at that time. If a partial withdrawal is made from a Guarantee
Period which is subject to a Market Value Adjustment, then the Annuity Account
Value immediately before the withdrawal will not be altered to take into account
the Market Value Adjustment. As a result, for purposes of determining the
taxable portion of the partial withdrawal, the Annuity Account Value will not
reflect the amount, if any, deducted from or added to the Guarantee Period due
to the Market Value Adjustment. Full surrenders are treated as taxable income to
the extent that the amount received exceeds the "investment in the Contract."
The taxable portion of any annuity payout is taxed at ordinary income tax rates.
Annuity Payouts
Although the tax consequences may vary depending on the annuity form elected
under the Contract, in general, only the portion of the annuity payout that
represents the amount by which the Annuity Account Value exceeds the investment
in the Contract will be taxed. After the investment in the Contract is
recovered, the full amount of any additional annuity payouts is taxable. For
fixed annuity payouts, in general there is no tax on the portion of each payout
which represents the same ratio that the investment in the Contract bears to the
total expected value of the annuity payouts for the term of the payouts.
However, the remainder of each annuity payout is taxable. Once the investment in
the Contract has been fully recovered, the full amount of any additional annuity
payouts is taxable.
Penalty Tax
For distributions from a Non-Qualified Contract, there may be a federal income
tax penalty imposed equal to 10% of the amount treated as taxable income. In
general, however, there is no penalty tax on distributions: o Made on or after
the date on which the Owner reaches age 59 1/2. o Made as a result of death or
disability of the Owner. o Received in substantially equal periodic payouts (at
least annually) for
your life expectancy or the joint life expectancies of you and the
Beneficiary.
Other exemptions or tax penalties may apply to distributions from a
Non-Qualified Contract or certain distributions from an IRA. For more details
regarding these exemptions or penalties consult a competent tax adviser.
Taxation of Death Benefit proceeds Amounts may be distributed from the Contract
because of the death of an Owner or the Annuitant. Generally such amounts are
included in the income of the recipient as follows: o If distributed in a lump
sum, they are taxed in the same manner as a full surrender,
as described above.
o If distributed under an annuity form, they are taxed in the same manner as
annuity payouts, as described above.
Distribution at Death
In order to be treated as an annuity contract, the terms of the Contract must
provide the following two distribution rules: o If the Owner dies before the
date annuity
payouts start, your entire interest must generally be distributed within
five years after the date of your death. If payable to a designated
Beneficiary, the distributions may be paid over the life of that designated
Beneficiary or over a period not extending beyond the life expectancy of
that Beneficiary, so long as payouts start within one year of your death. If
the sole designated Beneficiary is your spouse, the Contract may be
continued in the name of the spouse as Owner.
o If the Owner dies on or after the date annuity payouts start, and before the
entire interest in the Contract has been distributed, the remainder of your
interest will be distributed on the same or on a more rapid schedule than
that provided for in the method in effect on the date of death.
If the Owner is not an individual, then for purposes of the distribution at
death rules, the Primary Annuitant is considered the Owner. In addition, when
the Owner is not an individual, a change in the Primary Annuitant is treated as
the death of the Owner.
Distributions made to a Beneficiary upon the Owner's death from an IRA must be
made pursuant to the rules in Section 401(a)(9) of the Internal Revenue Code.
Transfers, Assignments or Exchanges A transfer of ownership of a Contract, the
designation of an Annuitant, Payee or other Beneficiary who is not also the
Owner, or the exchange of a Contract may result in adverse tax consequences that
are not discussed in this Prospectus.
Multiple Contracts
All deferred, Non-Qualified Annuity Contracts that are issued by Great-West (or
our affiliates) to the same Owner during any calendar year will be treated as
one annuity contract for purposes of determining the taxable amount.
Withholding
Annuity distributions generally are subject to withholding at rates that vary
according to the type of distribution and the recipient's tax status.
Recipients, however, generally are provided the opportunity to elect not to have
tax withheld from distributions. Certain distributions from IRAs are subject to
mandatory federal income tax withholding.
Section 1035 Exchanges
Internal Revenue Code Section 1035 provides that no gain or loss shall be
recognized on the exchange of one insurance contract for another. Generally,
contracts issued in an exchange for another annuity contract are treated as new
for purposes of the penalty and distribution at death rules.
Individual Retirement Annuities The Contract may be used with IRAs as described
in Section 408 of the Internal Revenue Code which permits eligible individuals
to contribute to an individual retirement program known as an Individual
Retirement Annuity. Also, certain kinds of distributions from certain types of
qualified and non-qualified retirement plans may be "rolled over" following the
rules set out in the Internal Revenue Code. If you purchase this Contract for
use with an IRA, you will be provided with supplemental information. And, you
have the right to revoke your purchase within seven days of purchase of the IRA
Contract.
If a Contract is purchased to fund an IRA, the Annuitant must also be the Owner.
In addition, if a Contract is purchased to fund an IRA, minimum distributions
must commence not later than April 1st of the calendar year following the
calendar year in which you attain age 70 1/2. You should consult your tax
adviser concerning these matters.
Various tax penalties may apply to Contributions in excess of specified limits,
distributions that do not satisfy specified requirements, and certain other
transactions. The Contract will be amended as necessary to conform to the
requirements of the Internal Revenue Code if there is a change in the law.
Purchasers should seek competent advice as to the suitability of the Contract
for use with IRAs.
When you make your initial Contribution, you must specify whether you are
purchasing a Non-Qualified Contract or an IRA. If the initial Contribution is
made as a result of an exchange or surrender of another annuity contract, we may
require that you provide information with regard to the federal income tax
status of the previous annuity contract.
We will require that you purchase separate Contracts if you want to invest money
qualifying for different annuity tax treatment under the Internal Revenue Code.
For each separate Contract you will need to make the required minimum initial
Contribution. Additional Contributions under the Contract must qualify for the
same federal income tax treatment as the initial Contribution under the
Contract. We will not accept an additional Contribution under a Contract if the
federal income tax treatment of the Contribution would be different from the
initial Contribution.
If a Contract is issued in connection with an employer's Simplified Employee
Pension plan, Owners, Annuitants and Beneficiaries are cautioned that the rights
of any person to any of the benefits under the Contract will be subject to the
terms and conditions of the plan itself, regardless of the terms and conditions
of the Contract.
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Assignments or Pledges
Generally, rights in the Contract may be assigned or pledged for loans at any
time during the life of the Annuitant. However, if the Contract is an IRA, you
may not assign the Contract as collateral.
If a non-IRA Contract is assigned, the interest of the assignee has priority
over your interest and the interest of the Beneficiary. Any amount payable to
the assignee will be paid in a single sum.
A copy of any assignment must be submitted to the Schwab Insurance & Annuity
Service Center. All assignments are subject to any action taken or payout made
by Great-West before the assignment was processed. We are not responsible for
the validity or sufficiency of any assignment.
If any portion of the Annuity Account Value is assigned or pledged for a loan,
it may be treated as a distribution. Please consult a competent tax adviser for
further information.
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Performance Data
From time to time, we may advertise yields and average annual total returns for
the Sub-Accounts. In addition, we may advertise the effective yield of the
Schwab Money Market Sub-Account. These figures will be based on historical
information and are not intended to indicate future performance.
Money Market Yield
The yield of the Schwab Money Market Sub-Account refers to the annualized income
generated by an investment in that Sub-Account over a specified 7-day period. It
is calculated by assuming that the income generated for that seven-day period is
generated each 7-day period over a period of 52 weeks and is shown as a
percentage of the investment.
The effective yield is calculated similarly but, when annualized, the income
earned by an investment in that Sub-Account is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the
compounding effect of the assumed reinvestment.
Average Annual Total Return The table on the following page illustrates
standardized and non-standardized average annual total return for one-, three-,
five- and ten-year periods (or since inception, if less than ten years) ended
December 31, 1998. Average annual total return quotations represent the average
annual compounded rate of return that would equate an initial investment of
$1,000 to the redemption value of that investment (excluding Premium Taxes, if
any) as of the last day of each of the periods for which total return quotations
are provided.
Both the standardized and non-standardized data reflect the deduction of all
fees and charges under the Contract. The standardized data is calculated from
the inception date of the Sub-Account and the non-standardized data is
calculated for periods preceding the inception date of the Sub-Account. Some of
the Sub-Accounts do not have standardized performance information. For
additional information regarding yields and total returns calculated using the
standard methodologies briefly described herein, please refer to the Statement
of Additional Information.
Performance Data
Sub-Account 1 year 3 years 5 years 10 Since Inception Since Inception
years Inception of Date of Inception Date
Sub- Sub-Account of of
Sub-Account Underlying Underlying
Portfolio Portfolio
(if less
than 10 years)
Alger American Growth Portfolio 46.83% 22.16% 22.84% 33.63% 11/1/96 21.04% 1/9/89
American Century VP International 17.75% 16.13% N/A N/A 18.87% 11/1/96 11.27% 5/1/94
BT Insurance Funds Trust
EAFE Equity Index 20.57% N/A N/A N/A N/A 5/3/99 12.61% 8/22/97
BT Insurance Funds Trust Small Cap Index -3.01% N/A N/A N/A N/A 5/3/99 1.93% 8/25/97
Baron Capital Asset N/A N/A N/A N/A N/A 5/3/99 31.38% 10/1/98
Berger IPT-Small Company Growth 0.99% N/A N/A N/A 21.73% 5/1/97 7.13% 5/1/96
Dreyfus Variable Investment Fund Capital 29.12% 26.83% 22.47% N/A N/A 5/3/99 20.53% 4/5/93
Appreciation
Dreyfus Variable Investment Fund Growth 10.86% 15.20% N/A N/A N/A 5/3/99 20.70% 5/2/94
and Income
Federated American Leaders II 16.63% 22.53% N/A N/A 24.03% 11/1/96 19.54% 2/1/94
Federated U.S. Government Securities II 6.76% 5.65% N/A N/A 6.36% 11/1/96 5.61% 3/29/94
Federated Utility 12.99% 16.21% N/A N/A 22.66% 5/1/97 15.02% 4/14/94
Fund II
INVESCO VIF-High Yield 0.32% 10.50% N/A N/A 9.30% 11/1/96 10.81% 5/27/94
Portfolio
INVESCO VIF-Equity Income 14.36% 20.78% N/A N/A 21.22% 11/1/96 20.62% 8/10/94
Janus Aspen Growth 34.52% 24.25% 20.33% N/A 27.03% 11/1/96 19.80% 9/13/93
Janus Aspen Worldwide Growth 27.84% 25.56% 20.27% N/A 24.68% 11/1/96 22.96% 9/13/93
Portfolio
Janus Aspen Flexible Income 8.19% 9.06% 9.35% N/A N/A 5/3/99 8.89% 9/13/93
Janus Aspen International Growth 16.24% 22.17% N/A N/A N/A 5/3/99 17.82% 5/2/94
Montgomery Variable Series: Growth 2.05% N/A N/A N/A 14.72% 11/1/96 18.73% 2/9/96
Prudential Series Fund Equity N/A N/A N/A N/A N/A 5/3/99 N/A 5/3/99
SAFECO RST Equity 23.84% 23.78% 21.18% 25.69% 4/30/97 15.89% 4/3/87
SAFECO RST Growth 0.97% N/A 24.03% N/A N/A 5/3/99 25.97% 1/7/93
Schwab MarketTrack Growth II 12.11% N/A N/A N/A 18.10% 11/1/96 18.10% 11/1/96
Schwab S&P 500 26.99% N/A N/A N/A 29.64$ 11/1/96 29.63% 11/1/96
Scudder Variable Life Investment Fund:
Capital Growth 22.19% 25.10% 17.45% 15.81% N/A 5/3/99 N/A 7/16/85
Scudder Variable Life Investment Fund:
Growth and Income 6.27% 18.51% N/A N/A N/A 5/3/99 N/A 5/2/94
Strong Schafer Value II 1.32% N/A N/A N/A N/A 5/3/99 0.23% 10/1/97
Van Kampen LIT-Morgan Stanley Real -12.35% 13.73% N/A N/A -5.85% 9/15/97 14.13% 7/3/95
Estate Securities
Performance information and calculations for any Sub-Account are based only on
the performance of a hypothetical Contract under which the Annuity Account Value
is allocated to a Sub-Account during a particular time period. Performance
information should be considered in light of the investment objectives and
policies and characteristics of the Portfolios in which the Sub-Account invests
and the market conditions during the given time period. It should not be
considered as a representation of what may be achieved in the future.
Reports and promotional literature may also contain other information
including:
o the ranking of or asset allocation/investment strategy of any Sub-Account
derived from rankings of variable annuity separate accounts or their
investment products tracked by Lipper Analytical Services, Inc., VARDS,
Morningstar,
Value Line, IBC/Donoghue's Money Fund Report, Financial Planning Magazine,
Money Magazine, Bank Rate Monitor, Standard & Poor's Indices, Dow Jones
Industrial Average, and other rating services, companies, publications or
other people who rank separate accounts or other investment products on
overall performance or other criteria, and
o the effect of tax-deferred compounding on investment returns, or returns in
general, which may be illustrated by graphs, charts, or otherwise, and
which may include a comparison, at various points in time, of the return
from an investment in a Contract (or returns in general) on a tax-deferred
basis (assuming one or more tax rates) with the return on a currently
taxable basis. Other ranking services and indices may be used.
We may from time to time also advertise cumulative (non-annualized) total
returns, yield and standard total returns for the Sub-Accounts.
We may also advertise performance figures for the Sub-Accounts based on the
performance of a Portfolio prior to the time the Series Account commenced
operations.
For additional information regarding the calculation of other performance data,
please refer to the Statement of Additional Information.
- -------------------------------------
Distribution of the Contracts Charles Schwab & Co., Inc. (Schwab) is the
principal underwriter and distributor of the Contracts. Schwab is registered
with the Securities and Exchange Commission as a broker/dealer and is a member
of the National Association of Securities Dealers, Inc. (NASD). Its principal
offices are located at 101 Montgomery, San Francisco, California 94104,
telephone 800-838-0650.
Certain administrative services are provided by Schwab to assist Great-West in
processing the Contracts. These services are described in written agreements
between Schwab and Great-West. Great-West has agreed to indemnify Schwab (and
its agents, employees, and controlling persons) for certain damages arising out
of the sale of the Contracts, including those arising under the securities laws.
- --------------------------------------------------------------------------------
Selected Financial Data
On the following pages is a summary of certain financial data of Great-West.
This summary has been derived in part from, and should be read in conjunction
with, the financial statements of Great-West included at the end this
Prospectus.
Selected financial data
(in millions) Years ended December 31
1998 1997 1996 1995 1994
Income statement data-
Premiums $ 995 $ 833 $ 829 $ 732 $ 706
Fee income 516 420 347 335 294
Net investment income 897 882 835 835 768
Realized investment gains (losses) 38 10 (21) 8 (72)
----------- ----------- ----------- ----------- -----------
Total Revenues $ 2,446 2,145 1,990 1,910 1,696
Policyholder benefits $ 1,462 $ 1,385 $ 1,356 $ 1,269 $ 1,184
Operating expenses 688 552 469 464 409
----------- ----------- ----------- ----------- -----------
Total benefits and expenses 2,150 1,937 1,825 1,733 1,593
Income tax expense 99 49 30 49 29
----------- ----------- ----------- ----------- -----------
Net Income $ 197 $ 159 $ 135 $ 128 $ 74
Deposits for investment-type $ 1,344 $ 658 $ 815 $ 868 $ 1,006
contracts
Deposits to separate accounts 2,208 2,145 1,438 1,165 1,013
Self-funded Premium equivalents 2,606 2,039 1,940 2,140 1,907
Balance sheet data-
Investment assets $ 13,671 $ 13,206 $ 12,717 $ 12,473 $ 11,791
Separate account assets 10,100 7,847 5,485 3,999 2,555
Total assets 25,123 22,078 19,351 17,682 15,616
Total policyholder liabilities 12,583 11,706 11,600 11,408 10,859
Total long-term obligations1 35 118 120 122 124
Total stockholder's equity 1,199 1,186 1,034 993 777
Management's Discussion and Analysis of Financial Condition and Results of
Operations The Company Great-West Life & Annuity Insurance Company ("GWL&A") is
a stock life insurance company originally organized in 1907. GWL&A is domiciled
in Colorado.
GWL&A is an indirect wholly-owned subsidiary of The Great-West Life Assurance
Company ("Great-West Life"), a Canadian life insurance company. Great-West Life
is a subsidiary of Great-West Lifeco Inc. ("Great-West Lifeco"), a Canadian
holding company. Great-West Lifeco is a subsidiary of Power Financial
Corporation ("Power Financial"), a Canadian holding company with substantial
interests in the financial services industry. Power Financial Corporation is a
subsidiary of Power Corporation of Canada ("Power Corporation"), a Canadian
holding and management company. Mr. Paul Desmarais, through a group of private
holding companies, which he controls, has voting control of Power Corporation.
GWL&A is authorized to engage in the sale of life insurance, accident and health
insurance and annuities. It is qualified to do business in all states in the
United States except New York, and in the District of Columbia, Puerto Rico,
Guam and the U.S. Virgin Islands. GWL&A conducts business in New York through
its subsidiary, First Great-West Life & Annuity Insurance Company. GWL&A is also
a licensed reinsurer in the State of New York. As of December 31, 1997, GWL&A
ranked among the top 25 of all U.S. life insurance companies in terms of total
admitted assets.
GWL&A operates in the following two business segments: o Employee
Benefits--life, health and 401(k) products for group clients o Financial
Services--savings products for both public and non-profit
employers and individuals, and life insurance products for individuals and
businesses
The following discussion contains forward-looking statements. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments. In
particular, statements using verbs such as "expect," "anticipate," "believe" or
words of similar import generally involve forward-looking statements. Without
limiting the foregoing, forward-looking statements include statements which
represent GWL&A's beliefs concerning future or projected levels of sales of
GWL&A's products, investment spreads or yields, or the earnings or profitability
of GWL&A'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 GWL&A'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,
GWL&A. 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 GWL&A specifically,
such as credit, volatility and other risks associated with GWL&A's investment
portfolio, and other factors. Readers are also directed to consider other risks
and uncertainties discussed in documents filed by GWL&A and certain of its
subsidiaries with the Securities and Exchange Commission.
Management's discussion and analysis of financial condition and results of
operations of GWL&A for the three years ended December 31, 1998 follows.
Company Results of Operations Consolidated Results GWL&A's consolidated net
income increased $38.1 million or 24% in 1998 when compared to the year ended
December 31, 1997, reflecting improved results in both the Employee Benefits
segment and the Financial Services segment. The Employee Benefits segment
contributed $8.8 million or 23% to the improved consolidated results compared to
the Financial Services segment which contributed $29.3 million or 77% to the
overall improvement. Of total consolidated net income in 1998 and 1997, the
Employee Benefits segment contributed 54% and 62%, respectively, while the
Financial Services segment contributed 46% and 38%, respectively.
GWL&A's consolidated net income increased $24.2 million or 18% in 1997 when
compared to the year ended December 31, 1996. In 1997, the Employee Benefits
segment contributed $3.0 million or 12% to the overall growth and the Financial
Services segment contributed $21.2 million or 88% to the overall growth.
GWL&A's 1997 and 1996 consolidated net income increased by $21.1 million and
25.6 million, respectively, due to changes in income tax provisions for these
years. The current income tax provisions were decreased by $42.2 million and
$31.2 million for 1997 and 1996, respectively, due to the release of a
contingent liability relating to taxes of Great-West Life's U.S. branch
associated with the blocks of business that had been transferred from Great-West
Life's U.S. branch to GWL&A, as discussed below.
Of the amount released in 1997, $15.1 million was attributable to participating
policyholders and, therefore, had no effect on the net income of GWL&A.
In 1989, Great-West Life began a series of transactions to transfer its U.S.
business from its U.S. Branch to GWL&A; this process was essentially completed
in 1993. The objective of these transactions was to transfer to GWL&A all of the
risks and rewards of Great-West Life's U.S.-related business. The transfers of
insurance contracts and related assets were accomplished through several
reinsurance agreements executed by GWL&A and Great-West Life's U.S. Branch
during these years. As part of this transfer of Great-West Life's U.S. business,
GWL&A in 1993 entered into a tax agreement with Great-West Life in order to
transfer the tax liabilities associated with the insurance contracts and related
assets that had been transferred.
In addition to the contingent tax liability release described above, GWL&A's
income tax provisions for 1997 and 1996 also reflect increases for additional
contingent items related to open tax years where it was determined to be
probable that additional tax liabilities could be owed based on changes in facts
and circumstances. The increase in 1997 was $16.0 million, of which $10.1
million was attributable to participating policyholders and, therefore, had no
effect on the net income of GWL&A. The increase in 1996 was $5.6 million.
Certain reclassifications, primarily related to the classification of the
release of the contingent liability described above (see Note 10 to the
Consolidated Financial Statements), have been made to the 1997 and 1996
financial statements.
In 1998 total revenues increased $301.1 million or 14% to $2.4 billion when
compared to the year ended December 31, 1997. The growth in revenues in 1998 was
comprised of increased premium income of $161.7 million, increased fee income of
$95.3 million, increased net investment income of $15.7 million and increased
realized gains on investments of $28.4 million. In 1997 total revenues increased
$154.8 million or 8% to $2.1 billion when compared to the year ended December
31, 1996. The growth in revenues in 1997 was comprised of increased premium
income of $3.7 million, increased fee income of $73.2 million, increased net
investment income of $47.0 million and realized gains on investments of $9.8
million in 1997 versus realized losses in 1996 of $21.1 million.
The increased premium income in 1998 was comprised of growth in Employee
Benefits premium income of $281.8 million, offset by a decrease in Financial
Services premium income of $120.1 million. The growth in premium income in the
Employee Benefits segment primarily reflected $209.5 million of premium income
derived from the acquisition of Anthem Health & Life Insurance Company ("AH&L")
in July 1998 (see Other Matters below). The decrease of $120.1 million in
Financial Services premium income was due primarily to reinsurance transactions
in 1997 of $155.8 million versus only $46.2 million in premiums due to
reinsurance transactions in 1998. The increased premium income in 1997 was
comprised of a decrease in Employee Benefits premium income of $21.4 million,
offset by growth in Financial Services premium income of $25.1 million. The
decrease in Employee Benefits was attributable to terminations in 1996 which
impacted 1997 premiums. The increase in Financial Services premium income was
attributable to participating individual insurance.
The increased fee income in 1998 was comprised of growth in Employee Benefits
fee income and Financial Services fee income of $86.6 million and $8.7 million,
respectively. The growth in Employee Benefits fee income reflected $31.6 million
of fee income derived from the acquisition of AH&L. The remaining increase was
the result of new sales and increased fees on variable funds related to growth
in equity markets. The increase in fee income in 1997 was comprised of Employee
Benefits fee income and Financial Services fee income of $36.9 million and $36.3
million, respectively. The increase in both segments was attributable to new
sales and increased fees on variable funds related to growth in equity markets.
Realized investment gains increased in recent years from a realized investment
loss of $21.1 million in 1996 to realized investment gains of $9.8 million and
$38.2 million in 1997 and 1998, respectively. The decrease in interest rates in
1998 and 1997 resulted in gains on sales of fixed maturities totaling $38.4
million and $16.0 million in 1998 and 1997, respectively, while higher interest
rates contributed to $11.6 million of fixed maturity losses in 1996. Increases
in the provision for asset losses of $0.6 million and $7.6 million,
respectively, were recognized in 1998 and 1997.
Total benefits and expenses increased $213.9 million or 11% in 1998 when
compared to the year ended December 31, 1997. The increase in 1998 was due to a
combination of the acquisition of AH&L which resulted in benefits and expenses
of $258.3 million and overall growth in the group health business, partially
offset by a decrease in policyholder benefits related to reinsurance
transactions of $109.4 million. Excluding these items, benefits and expenses
would have increased $64.6 million or 3% in 1998. The increase from 1996 to 1997
was the result of increased operating expenses associated with the cost of
developing HMOs and FASCorp's business, and system enhancements.
In October 1996, GWL&A recaptured certain pieces of an individual participating
block of business previously reinsured to Great-West Life. In June 1997, GWL&A
recaptured all remaining pieces of that block of business. GWL&A recorded
various assets and liabilities related to the recaptures as discussed in Note 3
to the Consolidated Financial Statements. In recording the recaptures, both life
insurance premiums and benefits were increased by the amounts recaptured ($155.8
million and $164.8 million in 1997 and 1996, respectively). Consequently, the
net income of GWL&A was not impacted by the reinsurance transactions.
Income tax expense increased $49.0 million or 98% in 1998 when compared to the
year ended December 31, 1997. Income tax expense increased $19.5 million or 64%
in 1997 when compared to the year ended December 31, 1996. The increase in
income tax expense in 1998 reflects higher earnings in 1998, as well as the fact
that the 1997 income tax provision includes a net $26.2 million release of
contingent tax liabilities relating to prior open tax years, as discussed above.
The increase in income tax expense from 1996 to 1997 was partially attributable
to a growth in earnings in 1997, but also reflects net releases in 1997 and 1996
of $26.2 million and $25.6 million of contingent tax liabilities relating to
prior open tax years, as discussed above. Excluding these contingent tax
releases, GWL&A's income tax expense increased 30% and 27% in 1998 and 1997. See
Note 10 to the Consolidated Financial Statements for a discussion of GWL&A's
effective tax rates.
In evaluating its results of operations, GWL&A also considers net changes in
deposits received for investment-type contracts, deposits to separate accounts
and self-funded equivalents. Self-funded equivalents represent paid claims under
minimum premium and administrative services only contracts, which amounts
approximate the additional premiums that would have been earned under such
contracts if they had been written as traditional indemnity or HMO programs.
Deposits for investment-type contracts increased $686.0 million or 104% in 1998
when compared to the year ended December 31, 1997. Deposits for investment-type
contracts decreased $157.4 million or 19% in 1997 when compared to the year
ended December 31, 1996. The increase in 1998 was primarily due to two indemnity
reinsurance agreements with Great-West Life whereby GWL&A reinsured by
coinsurance certain Great-West Life individual non-participating life insurance
policies. This transaction increased deposits by $519.6 million in 1998 and
accounted for 78% of the growth. The 19% decrease in 1997 was the result of
decreased deposits related to COLI sales.
Deposits for separate accounts increased $63.7 million or 3% in 1998 when
compared to the year ended December 31, 1997. The increase in 1998 reflected a
continuing movement toward variable funds and away from fixed options. Deposits
for separate accounts increased $706.9 million or 49% in 1997 when compared to
the year ended December 31, 1996. The increase in 1997 was primarily due to
increased deposits in the Financial Services segment.
Self-funded premium equivalents increased $567.1 million or 28% in 1998 when
compared to the year ended December 31, 1997. Self-funded premium equivalents
increased $98.6 million or 5% in 1997 when compared to the year ended December
31, 1996. Approximately half of the 1998 increase ($281.3 million) was due to
the acquisition of AH&L, with the remainder coming from the growth in business.
Total assets increased $3.0 billion or 14% in 1998 when compared to the year
ended December 31, 1997. Separate account assets increased $2.3 billion
primarily due to the strength of the equity markets in the United States.
Invested assets increased $464.5 million, of which $258.6 million was
attributable to AH&L. The remaining growth of $205.9 million represents a 2%
increase in invested assets over 1997, which was primarily attributable to the
consideration received in connection with the reinsurance agreements discussed
previously.
Other Matters On July 8, 1998, GWL&A acquired the outstanding common stock of
AH&L, a subsidiary of Anthem, Inc. (the Blue Cross and Blue Shield licensee for
Indiana, Kentucky, Ohio, and Connecticut). This acquisition strengthened the
Employee Benefits segment by providing nearly $975.0 million of annualized
health and life premium income and self-funded premium equivalents, and
approximately 450,000 additional health care members and approximately 75 group
sales representatives.
The cost of the acquisition was $82.7 million. The purchase price was based on
adjusted book value and is subject to further minor adjustments. The acquisition
was accounted for as a purchase and was financed through internally generated
funds. The fair value of tangible assets acquired and liabilities assumed was
$379.9 million and $317.4 million, respectively. Goodwill of $20.2 million was
recorded at the time of the acquisition.
The majority of AH&L's customers are in GWL&A's target market of small to
mid-size employers who prefer to self-fund their benefit plans. As of November
1, 1998, GWL&A began integrating the AH&L business to a common systems platform
with a scheduled completion date of July 1999. New and existing customers are
being migrated to GWL&A's One Health Plan network, which will provide
substantial new growth for the One Health Plan subsidiary organization.
Life and health premium and fee income for AH&L since the date of acquisition
totaled $241.1 million, while self-funded premium equivalents were $281.3
million. GWL&A recorded a small loss associated with AH&L operations in 1998.
The results of AH&L since the date of acquisition are included in the Employee
Benefits segment.
Employee Benefits Results of Operations The following is a summary of certain
financial data of the Employee Benefits segment:
(Millions) Years Ended December 31,
INCOME STATEMENT DATA 1998 1997 1996
Premiums $ 747 $ 465 $ 486
Fee income 445 358 321
Net investment income 95 100 88
Realized investment gains (losses) 8 3 (3)
------------- ------------- --------------
Total Revenues 1,295 926 892
Policyholder benefits 590 371 406
Operating expenses 547 428 368
------------- ------------- --------------
------------- ------------- --------------
Total benefits and expenses 1,137 799 774
------------- ------------- --------------
Income from operations 158 127 118
Income tax expense 51 29 22
============= ============= ==============
Net Income $ 107 $ 98 $ 96
============= ============= ==============
Deposits for investment-type contracts $ 37 $ 25 $ 34
Deposits to separate accounts 1,568 1,403 1,109
Self-funded premium equivalents 2,606 2,039 1,940
During 1998, the Employee Benefits segment experienced:
o significant growth in 401(k) assets under administration,
o increased sales and improved customer retention in group life and health,
o favorable mortality results, and
o license approval for four HMO subsidiaries, for a total of 14 fully
operational HMOs.
Net income for Employee Benefits increased 9% in 1998 and 2% in 1997. The
improvement in earnings in 1998 and 1997 reflects increased fee income from the
variable 401(k) assets and improved group life mortality experience which more
than offset unfavorable morbidity experience and the increased level of
operating expenses associated with building the HMO network in 1998 and 1997.
The changes in income tax provisions discussed above under "Company Results of
Operations" resulted in increases in net income for the Employee Benefits
segment of $17.6 million and $18.2 million in 1997 and 1996, respectively.
401(k) premiums and deposits for 1998 and 1997 increased 14% and 25%,
respectively, as the result of higher recurring deposits from existing customers
and sales in 1997. Assets under administration (including third-party
administration) in 401(k) increased 26% over 1997 to $6.7 billion and 38% from
1996 to 1997, primarily due to strong equity markets.
Equivalent premium revenue and fee income for group life and health increased
32% from 1997 levels as the result of a combination of increased sales (41%) and
the AH&L acquisition (59%). From 1996 to 1997, equivalent premium revenue and
fee income had increased 4% as growth was constrained by competitive pressures.
Group Life and Health
The Employee Benefits segment experienced strong sales growth during 1998 with a
net increase of 593 group health care customers (versus 440 in 1997), which
added 143,699 new individual health care members, excluding the AH&L
acquisition. Much of the health care growth can be attributed to the
introduction of new HMOs in markets with high sales potential, and GWL&A's
ability to offer a choice of managed care products.
To position itself for the future, the Employee Benefits segment is focused on
putting in place the products, strategies and processes that will strengthen its
competitive position in the evolving managed care environment.
With a heightened sensitivity to price comes the demand for more tightly managed
health plans, which is why HMO development remains Employee Benefits' most
important product development initiative. In 1998, GWL&A licensed HMOs in
Arizona, Florida, Indiana and New Jersey and applied for licenses in North
Carolina and Pennsylvania. GWL&A also entered into agreements with another
insurance carrier which will exclusively market the HMO product in various
states. This type of arrangement will augment growth in GWL&A's HMO programs in
the future.
GWL&A experienced a 35% increase in total health care membership, including the
AH&L acquisition, from 1,675,800 at the end of 1997 to 2,266,700 at year-end
1998. Excluding the AH&L acquisition, which added 450,000 members, total health
care membership increased 8%. Gatekeeper (i.e., POS and HMO) members grew 34%
from 414,500 in 1997 to 556,800 in 1998 including 61,800 AH&L members. Excluding
the AH&L acquisition, gatekeeper members increased 19%. GWL&A expects this
segment of the business to grow as additional HMO licenses are obtained.
Total health care membership increased from 1996 to 1997 by 8% (1996 was the
first year GWL&A offered HMO plans). Gatekeeper members grew 18% from 1996 to
1997.
401(k)
The number of new 401(k) case sales (employer groups), including third-party
administration business generated through GWL&A's marketing and administration
arrangement with New England, decreased 33% to 800 in 1998 from 1,200 in 1997
(1,200 in 1996). The decrease in 1998 was the result of a shift in emphasis to
group life and health sales. The 401(k) block of business under administration
total 6,100 employer groups and more than 475,000 individual participants,
compared to 5,700 employer groups and 430,000 individual participants in 1997,
and 4,900 employer groups and 355,000 individual participants in 1996.
During 1998, the in-force block of 401(k) business continued to perform well,
with customer retention of 93% versus 94% in 1997. This, combined with strong
equity markets, resulted in a 26% and 39% increase in assets under management
during 1998 and 1997, respectively.
In addition to GWL&A's internally-managed funds, GWL&A offers externally-managed
funds from recognized mutual funds companies such as AIM, Fidelity, Putnam,
American Century, Founders and T. Rowe Price. This strategy, supported by
participant education efforts, is validated by the fact that 99% of assets
contributed in 1998 were allocated to variable funds.
To promote long-term asset retention, GWL&A enhanced a number of products and
services including prepackaged "lifestyle" funds (The Profile Series), expense
reductions for high-balance accounts, a rollover IRA product, more effective
enrollment communications, one-on-one retirement planning assistance and
personal plan illustrations.
Outlook
In 1999, GWL&A will continue to enhance managed care programs and services,
further HMO development, seek National Committee for Quality Assurance
accreditation for its HMOs, refine quality assurance programs and introduce
member communications directed at health improvements. Management intends to
enhance the health claims payment system in 1999 to provide medical
auto-adjudication capabilities to reduce administrative expenses and improve
claims processing time. GWL&A will enhance the 401(k) product for large cases by
adding additional investment fund options, reviewing and replacing current
funds, as well as offering funds outside the annuity contract. GWL&A plans to
add the 401(k) product to AH&L's product portfolio in the latter part of 1999.
Financial Services Results of Operations
The following is a summary of certain financial data of the Financial Services
segment:
(Millions) Years Ended December 31,
INCOME STATEMENT DATA 1998 1997 1996
Premiums $ 248 $ 368 $ 343
Fee income 71 62 26
Net investment income 802 782 747
Realized investment gains (losses) 30 7 (18)
------------ ------------ -------------
Total Revenues 1,151 1,219 1,098
Policyholder benefits 872 1,014 950
Operating expenses 141 124 101
------------ ------------ -------------
Total benefits and expenses 1,013 1,138 1,051
------------ ------------ -------------
Income from operations 138 81 47
Income tax expense 48 20 8
============ ============ =============
Net Income $ 90 $ 61 $ 39
============ ============ =============
Deposits for investment-type contracts $ 1,307 $ 633 $ 781
Deposits to separate accounts 640 742 329
During 1998, the Financial Services segment experienced:
o significant growth in participants and separate account funds primarily
attributable to the public/non-profit business,
o very good persistency in all lines of business, and
o strong sales of BOLI.
Net income for Financial Services increased 48% in 1998 and 56% in 1997. The
improvement in earnings in 1998 reflects higher earnings from an increased asset
base, an increase in investment margins, and larger capital gains on fixed
maturities. The 1997 earnings improvement was the result of a reduction of the
mortgage provision for asset impairments, increased fee income on a larger asset
base, capital gains on fixed maturities and an increase in investment margins.
The changes in income tax provisions discussed above under "Company Results of
Operations" resulted in increases in net income for the Financial Services
segment of $3.6 million and $7.4 million in 1997 and 1996, respectively.
Savings
Premiums decreased $5.9 million or 26%, from $22.6 million in 1997 to $16.8
million in 1998. Premiums decreased $4.0 million or 15%, from $26.7 million in
1996 to $22.6 million in 1997. The decrease in both years is attributable to the
continuing trend of policyholders selecting variable annuity options (separate
accounts) as opposed to the more traditional fixed annuity products.
Fee income increased $8.6 million or 14%, from $62.4 million in 1997 to $71.0
million in 1998. Fee income increased $36.1 million or 137%, from $26.3 million
in 1996 to $62.4 million in 1997. The growth in fee income in 1998 and 1997 was
the result of new sales and increased fees on variable funds related to growth
in equity markets.
Deposits for investment-type contracts increased $20.4 million or 9%, from
$218.6 million in 1997 to $239.0 million in 1998. Deposits for investment-type
contracts increased $4.3 million or 2%, from $214.3 million in 1996 to $218.6
million in 1997.
Deposits to separate accounts decreased $101.5 million or 14%, from $742.1
million in 1997 to $640.6 million in 1998. Deposits to separate accounts
increased $413.6 million or 126% from $328.5 million in 1996 to $742.1 million
in 1997. The decrease in 1998 was the result of 1997 being inflated by the
receipt of a large single deposit in the amount of $120.0 million. The increase
in 1997 was due to a combination of the $120.0 million deposit and the
commencement of marketing a new fixed and variable qualified and non-qualified
annuity product through Charles Schwab & Co., Inc., which resulted in $239.9
million in deposits to separate accounts (the amount of such deposits from
Schwab in 1998 was $204.7 million).
The Financial Services segment's core savings business is in the
public/non-profit pension market. The assets of the public/non-profit business,
including separate accounts but excluding Guaranteed Investment Contracts
("GICs"), increased 9% and 8% during 1998 and 1997 to $7.8 billion and $7.2
billion, respectively. Much of the growth came from the variable annuity
business, which was driven by premiums and deposits and strong investment
returns in the equity markets.
The Financial Services segment's savings business experienced strong growth in
1998. The number of new participants in 1998 was 151,300 compared to 129,200 in
1997 (51,900 in 1996), bringing the total lives under administration to 643,200
in 1998 and 536,200 in 1997. BenefitsCorp sold 21 new large employer cases
compared to 13 in 1997 and increased the penetration of existing cases by
enrolling new employees.
The Financial Services segment again experienced a very high retention rate in
public/non-profit contract renewals in 1998, renewing 100% of its own large case
state contracts. Part of this customer loyalty comes from initiatives to provide
high-quality service while controlling expenses.
GWL&A continued to limit sales of GICs and to allow this block of business to
contract in response to the highly competitive GIC market. As a result, GIC
assets decreased 33% in 1998, to $274.8 million. In 1997, GIC assets decreased
22% from 1996, to $409.1 million.
Customer demand for investment diversification continued to grow during 1998.
New contributions to variable business represented 63% of the total 1998
premiums versus 69% in 1997. GWL&A continues to expand the investment products
available through Maxim Series Fund, Inc., and through partnership arrangements
with external fund managers. Externally-managed funds offered to participants in
1998 included American Century, Ariel, Fidelity, Founders, INVESCO, Janus,
Loomis Sayles, Templeton, T. Rowe Price and Vista.
Customer participation in guaranteed separate accounts increased, as many
customers prefer the security of fixed income securities and separate account
assets. Assets under management for guaranteed separate account funds were
$562.3 million in 1998, compared to $466.2 million in 1997 and $392.8 million in
1996.
FASCorp administered records for approximately 1,304,000 participants in 1998
versus 1,000,000 in 1997.
Life Insurance
GWL&A continued its conservative approach to the manufacture and distribution of
traditional life insurance products, while focusing on customer retention and
expense management.
Individual life insurance revenue premiums and deposits of $1.3 billion in 1998
increased 71% from 1997 primarily due to reinsurance transactions with
Great-West Life, which resulted in $565.8 million of premiums and deposits in
1998 versus $155.8 million in 1997. Excluding these reinsurance transactions,
individual life insurance revenue premiums and deposits increased 14% from 1997
to 1998. GWL&A also experienced strong BOLI sales in 1998 which more than offset
reductions in COLI premiums. Individual life insurance premiums and deposits
decreased 14% from 1996 to 1997 due to the reduction of COLI premiums associated
with 1996 legislative changes.
During 1996, the U.S. Congress enacted legislation to phase out during 1997 and
1998 the tax deductibility of interest on policy loans on COLI products. Since
then, renewal premiums and deposits for COLI products have decreased to $179.8
million in 1998 from $299.8 million in 1997 and $384.2 million in 1996, and
GWL&A expects this decline to continue. As a result of these legislative
changes, GWL&A has shifted its emphasis from COLI to new sales in the BOLI
market. This product provides long-term benefits for bank employees and was not
affected by the 1996 legislative changes. BOLI premiums and deposits were $430.7
million during 1998, compared to $179.3 million in 1997. GWL&A continues working
closely with existing COLI customers to determine the options available to them
and is confident that the effect of the legislative changes will not be material
to GWL&A's operations.
Outlook
During 1999, GWL&A expects to continue its growth in the third party
administration area through FASCorp. Emphasis will also be placed on developing
the institutional insurance and annuity markets. During 1997, communications
were provided to policyholders in the public/non-profit market through the use
of the internet. Increased emphasis will be placed on improving internet
functionality during the upcoming year to improve this service for our
customers.
Investment Operations
GWL&A's primary investment objective is to acquire assets whose durations and
cash flows reflect the characteristics of GWL&A's liabilities, while meeting
industry, size, issuer and geographic diversification standards. Formal
liquidity and credit quality parameters have also been established.
GWL&A 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, GWL&A's assets will meet the cash flow
and income requirements of its liabilities. Through dynamic modeling, using
state-of-the-art software to analyze the effects of a wide range of possible
market changes upon investments and policyholder benefits, GWL&A ensures that
its investment portfolio is appropriately structured to fulfill financial
obligations to its policyholders.
A summary of GWL&A's general account invested assets follows:
(Millions) 1998 1997
Fixed maturities, available for sale, at $ 6,937 $ 6,698
fair value
Fixed maturities, held-to-maturity, at 2,200 2,083
amortized cost
Mortgage loans 1,133 1,236
Real estate and common stock 122 133
Short-term investments 420 399
Policy loans 2,859 2,657
----------- ------------
Total invested assets $ 13,671 $ 13,206
Fixed Maturities
Fixed maturity investments include public and privately placed corporate
bonds, public and privately placed structured assets and government bonds.
This latter category contains both asset-backed and mortgage-backed
securities, including collateralized mortgage obligations ("CMOs"). GWL&A's
strategy related to structured assets is to focus on those with lower
volatility and minimal credit risk. GWL&A does not invest in higher risk
CMOs such as interest-only and principal-only strips, and currently has no
plans to invest in such securities.
Private placement investments, which are primarily in the held-to-maturity
category, are generally less marketable than publicly traded assets, yet
they typically offer covenant protection which allows GWL&A, if necessary,
to take appropriate action to protect its investment. GWL&A believes that
the cost of the additional monitoring and analysis required by private
placements is more than offset by their enhanced yield.
One of GWL&A's primary objectives is to ensure that its fixed maturity
portfolio is maintained at a high average quality, so as to limit credit
risk. If not externally rated, the securities are rated by GWL&A on a basis
intended to be similar to that of the rating agencies.
The distribution of the fixed maturity portfolio (both available for sale
and held to maturity) by credit rating is summarized as:
Credit Rating 1998 1997
AAA 45.6 % 45.7 %
AA 9.4 8.8
A 23.8 23.8
BBB 20.7 20.7
BB and Below (non-investment 0.5 1.0
grade)
---------------- ----------------
TOTAL 100.0 % 100.0 %
At December 31, 1998 and 1997, GWL&A owned no bonds in default.
Mortgage Loans During 1998, the mortgage portfolio declined 8% to $1.1 billion,
net of impairment reserves. GWL&A has not actively sought new loan opportunities
since 1989 and, as such, has experienced an ongoing reduction in this
portfolio's balance.
GWL&A follows a comprehensive approach to the management of mortgage loans which
includes ongoing analysis of key mortgage characteristics such as debt service
coverage, net collateral cash flow, property condition, loan to value ratios and
market conditions. Collateral valuations are performed for those mortgages
which, after review, are determined by management to present possible risks and
exposures. These valuations are then incorporated into the determination of
GWL&A's allowance for credit losses.
The average balance of impaired loans continued to remain low at $31.2 million
in 1998, compared with $37.9 million in 1997, and foreclosures totaled $3.0
million and $14.1 million in 1998 and 1997, respectively. The low levels of
problematic mortgages relative to GWL&A's overall balance sheet are due to the
ongoing decrease in the size of the mortgage portfolio, GWL&A's active loan
management program and overall strength in market conditions.
Occasionally, GWL&A elects to restructure certain loans if the economic benefits
to GWL&A are believed to be more advantageous than those achieved by acquiring
the collateral through foreclosure. At December 31, 1998 and 1997, GWL&A's loan
portfolio included $52.9 million and $64.4 million, respectively, of
non-impaired restructured loans.
Real Estate and Common Stock GWL&A's real estate portfolio is composed primarily
of the Head Office property ($54.2 million) and properties acquired through the
foreclosure of troubled mortgages ($16.3 million). GWL&A operates a wholly-owned
real estate subsidiary, which attempts to maximize the value of these properties
through rehabilitation, leasing and sale. GWL&A is currently adding a third
tower to its Head Office complex, which it anticipates completing in the year
2000.
The common stock portfolio is composed of mutual fund seed money and some
private equity investments. GWL&A anticipates a limited participation in the
stock markets in 1999.
Derivatives
GWL&A uses certain derivatives, such as
futures, options and swaps, for purposes of hedging interest rate and foreign
exchange risk. These derivatives, when taken alone, may subject GWL&A to varying
degrees of market and credit risk; however, when used for hedging, these
instruments typically reduce risk. GWL&A controls the credit risk of its
financial contracts through credit approvals, limits and monitoring procedures.
GWL&A has also developed controls within its operations to ensure that only
Board authorized transactions are executed. Note 6 to the Consolidated Financial
Statements contains a summary of GWL&A's outstanding financial hedging
derivatives.
Outlook General economic conditions continued to remain strong during 1998.
GWL&A does not expect to recognize any asset writedowns or restructurings in
1999 that would result in a material adverse effect upon GWL&A's financial
condition.
Liquidity and Capital Resources GWL&A's operations have liquidity requirements
that vary among the principal product lines. Life insurance and pension plan
reserves are primarily long-term liabilities. Accident and health reserves,
including long-term disability, consist of both short-term and long-term
liabilities. Life insurance and pension plan reserve requirements are usually
stable and predictable, and are supported primarily by long-term, fixed income
investments. Accident and health claim demands are stable and predictable but
generally shorter term, requiring greater liquidity.
GWL&A has a commitment to fund an addition to its Head Office complex over the
next 18 months, totaling approximately $30.0 million.
Generally, GWL&A has met its operating requirements by maintaining appropriate
levels of liquidity in its investment portfolio and utilizing positive cash
flows from operations. Liquidity for GWL&A has remained strong, as evidenced by
significant amounts of short-term investments and cash, which totaled $596.3
million and $525.4 million as of December 31, 1998 and 1997, respectively.
Funds provided from premiums and fees, investment income and maturities of
investment assets are reasonably predictable and normally exceed liquidity
requirements for payment of claims, benefits and expenses. However, since the
timing of available funds cannot always be matched precisely to commitments,
imbalances may arise when demands for funds exceed those on hand. Also, a demand
for funds may arise as a result of GWL&A taking advantage of current investment
opportunities. GWL&A's capital resources represent funds available for long-term
business commitments and primarily consist of retained earnings and proceeds
from the issuance of commercial paper and equity securities. Capital resources
provide protection for policyholders and the 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 GWL&A'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 GWL&A's existing business.
GWL&A's financial strength provides the capacity and flexibility to enable it to
raise funds in the capital markets through the issuance of commercial paper.
GWL&A continues to be well capitalized, with sufficient borrowing capacity to
meet the anticipated needs of its business. GWL&A had $39.7 million of
commercial paper outstanding at December 31, 1998, compared with $54.1 million
at December 31, 1997. The commercial paper has been given a rating of A-1+ by
Standard & Poor's Corporation and a rating of P-1 by Moody's Investors Service,
each being the highest rating available.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and for Hedging Activities". This Statement provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. This Statement is effective for GWL&A beginning January 1,
2000, and earlier adoption is encouraged. GWL&A has not adopted this Statement
as of December 31, 1998. Management has not determined the impact of the
Statement on GWL&A's financial position or results of operations.
See the Note 1 to the Consolidated Financial Statements for additional
information regarding accounting pronouncements.
Year 2000 Issue The Year 2000 ("Y2K") problem arises when a computer performing
date-based computations or operations produces erroneous results due to the
historical practice of using two digit years within computer hardware and
software. This causes errors or misinterpretations of the century in date
calculations. Virtually all businesses, including GWL&A, are required to
determine the extent of their Y2K problems. Systems that have a Y2K problem must
then be converted or replaced by systems that will operate correctly with
respect to the year 2000 and beyond.
GWL&A has a written plan that encompasses all computer hardware, software,
networks, facilities (embedded systems) and telephone systems. The plan also
includes provisions for identifying and verifying that major vendors and
business partners are Y2K compliant. GWL&A is developing contingency plans to
address the possibility of both internal and external failures as well. The plan
calls for full Y2K compliance for core systems by June 30, 1999 and full Y2K
compliance for all Company systems by October 31, 1999.
GWL&A's plan establishes five phases for becoming Y2K compliant. Phase 1 is
"impact analysis" which includes initial inventory and preliminary assessment of
Y2K impact. Phase 2 is "solution planning" which includes system by system
planning to outline the approach and timing for reaching compliance. Phase 3 is
"conversion/renovation" which means the actual process of replacing or repairing
non-compliant systems. Phase 4 is "testing" to ensure that the systems function
correctly under a variety of different date scenarios including current dates,
year 2000 and leap year dates. Phase 5 is "implementation" which means putting
Y2K compliant systems back into production.
As of March 31, 1999, GWL&A had completed impact analysis (phase 1) and solution
planning (phase 2) for all of its core systems and was 99% complete for phases 1
and 2 with respect to its systems as a whole. In addition, GWL&A was
approximately 95% complete with respect to conversion and renovation (phase 3),
88% complete with respect to testing (phase 4), and 86% complete with respect to
implementation (phase 5).
In addition to ensuring that GWL&A's own systems are Y2K compliant, GWL&A has
identified third parties with which GWL&A has significant business relationships
in order to assess the potential impact on GWL&A of the third parties' Y2K
issues and plans. As of March 31, 1999, GWL&A had completed most of this
assessment process. GWL&A will continue investigating third party readiness and
will conduct system testing with selected third parties throughout 1999. GWL&A
does not have control over these third parties and cannot make any
representations as to what extent GWL&A's future operating results may be
adversely affected by the failure of any third party to address successfully its
own Y2K issues.
On the basis of currently available information, the expense incurred by GWL&A,
including anticipated future expenses, related to the Y2K issue has not and is
not expected to be material to GWL&A's financial condition or results of
operations. GWL&A has spent approximately $11.3 million on its Y2K project
through the end of March 1999 and expects to spend up to approximately $15.3
million on its Y2K project. All of these funds will come from GWL&A's cash flow
from operations. GWL&A has continued other scheduled non-Y2K information systems
changes and upgrades. Although work on Y2K issues may have resulted in minor
delays on the other projects, the delays are not expected to have a material
adverse effect on GWL&A's consolidated financial condition or results of
operations.
The most reasonably likely worst case Y2K scenario is that GWL&A will experience
isolated internal or third party computer failures and will be temporarily
unable to process insurance and annuity benefit transactions. All of GWL&A's Y2K
efforts have been designed to prevent such an occurrence. However, if GWL&A
identifies internal or third party Y2K issues which cannot be timely corrected,
there can be no assurance that GWL&A can avoid Y2K problems or that the cost of
curing the problem will not be material.
In an effort to mitigate risks associated with Y2K failures, GWL&A is in the
process of developing contingency plans to address core functions, including
relations with third parties. It is GWL&A's expectation that contingency plans
will address possible failures generated internally, by vendors or business
partners, and by customers. Possible general approaches include manual
processing, payments on an estimated basis and use of disaster recovery
facilities.
Regulation
Insurance Regulation The business of GWL&A is subject to comprehensive state and
federal regulation and supervision throughout the United States, which primarily
provides safeguards for policyholders rather than investors. The laws of the
various state jurisdictions establish supervisory agencies with broad
administrative powers with respect to such matters as admittance of assets,
premium rating methodology, policy forms, establishing reserve requirements and
solvency standards, maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, the type, amounts and
valuation of investments permitted and HMO operations.
GWL&A's operations and accounts are subject to examination by the Colorado
Insurance Division and other regulators at specified intervals. The latest
financial examination by the Colorado Insurance Division was completed in 1997,
and covered the five year period ending December 31, 1995. This examination
produced no significant adverse findings regarding GWL&A.
The National Association of Insurance Commissioners has adopted risk-based
capital rules and other financial ratios for life insurance companies. Based on
GWL&A's December 31, 1998 statutory financial reports, GWL&A has risk-based
capital well in excess of that required and was within the usual ranges of all
ratios.
Insurance Holding Company Regulations GWL&A is subject to and complies with
insurance holding company regulations in Colorado. These regulations contain
certain restrictions and reporting requirements for transactions between an
insurer and its affiliates, including the payments of dividends. They also
regulate changes in control of an insurance company.
Securities Laws GWL&A is subject to various levels of regulation under federal
securities laws. GWL&A's broker-dealer subsidiaries are regulated by the
Securities and Exchange Commission ("SEC") and the National Association of
Securities Dealers, Inc. GWL&A's investment advisor subsidiary and transfer
agent subsidiary are regulated by the SEC. Certain of GWL&A's separate accounts,
mutual funds and variable insurance and annuity products are registered under
the Investment Company Act of 1940 and the Securities Act of 1933.
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. GWL&A has
established a reserve of $6.6 million as of December 31, 1998 to cover future
assessments of known insolvencies. GWL&A has historically recovered more than
half of the guaranty fund assessments through statutorily permitted premium tax
offsets. GWL&A has a prepaid asset associated with guaranty fund assessments of
$4.5 million at December 31, 1998.
Canadian Regulation
Because GWL&A is a subsidiary of Great-West Life, which is a Canadian company,
the Office of the Superintendent of Financial Institutions Canada conducts
periodic examinations of GWL&A and approves certain investments in subsidiary
companies.
Potential Legislation United States legislation and administrative developments
in various areas, including pension regulation, financial services regulation,
health care legislation and the insurance industry could significantly and
adversely affect GWL&A in the future. For example, Congress is currently
considering legislation relating to health care reform and managed care issues
(including patients' rights, privacy of medical records and managed care plan or
enterprise liability), and legislation relating to the taxation of policyholder
surplus accounts and the capitalization of deferred acquisition costs. Congress
has from time to time also considered the deferral of taxation on the accretion
of value within certain annuities and life insurance products, financial
services reform legislation establishing frameworks for banks engaging in the
insurance business, changes in regulation for the Employee Retirement Income
Security Act of 1974 and the availability of Section 401(k) for individual
retirement accounts.
It is not possible to predict whether future legislation or regulation adversely
affecting the business of GWL&A will be enacted and, if enacted, the extent to
which such legislation or regulation will have an effect on GWL&A and its
competitors.
Ratings GWL&A is rated by a number of nationally recognized rating agencies. The
ratings represent the opinion of the rating agencies on the financial strength
of GWL&A and its ability to meet the obligations of its insurance policies.
Rating Agency Measurement Rating
A.M. Best Company Financial Condition and Operating A++*
Performance
Duff & Phelps Corporation Claims Paying Ability AAA*
Standard & Poor's Claims Paying Ability AA+**
Corporation
Moody's Investors Service Insurance Financial Strength Aa2***
*Highest ratings available.
**Second highest rating out of 19 rating categories.
***Third highest rating out of 19 rating categories.
Miscellaneous
No customer accounted for 10% or more of GWL&A's consolidated revenues in 1998.
In addition, no segment of GWL&A's business is dependent on a single customer or
a few customers, the loss of which would have a significant effect on GWL&A or
any of its business segments. The loss of business from any one, or a few,
independent brokers or agents would not have a material adverse effect on GWL&A
or any of its business segments.
GWL&A had approximately 6,500 employees at December 31, 1998.
The Head Office of GWL&A consists of a 517,633 square foot office complex
located in Englewood, Colorado. The office complex is owned by a subsidiary of
GWL&A.
Directors and Executive Officers
Following is information concerning GWL&A's directors and executive officers,
together with their principal occupation for the past five years. Unless
otherwise indicated, all of the directors and executive officers have been
engaged for not less than five years in their present principal occupations or
in another executive capacity with the companies or firms identified.
Directors are elected annually to serve until the following annual meeting of
shareholders.
The appointments of executive officers are confirmed annually.
Director Served as Principal Occupation(s) For Last Five
Director Years
From
James Balog (1)(2) 1993 Company Director
James W. Burns, O.C. (1)(2)(4) 1991 Chairman of the Boards of Great-West
Lifeco, Great-West Life, London
Insurance Group Inc. and London Life
Insurance Company; Deputy Chairman,
Power Corporation
Orest T. Dackow (1)(2)(4) 1991 President and Chief Executive Officer,
Great-West Lifeco
Andre Desmarais (1)(2)(4)(5) 1997 President and Co-Chief Executive
Officer, Power Corporation; Deputy
Chairman, Power Financial
Paul Desmarais, Jr. (1)(2)(4)(5) 1991 Chairman and Co-Chief Executive
Officer, Power Corporation; Chairman,
Power Financial
Robert G. Graham (1)(2)(4) 1991 Company Director since January 1996;
previously Chairman and Chief
Executive Officer, Inter-City Products
Corporation (a company engaged in the
manufacture and distribution of air
conditioning, heating and related
products)
Robert Gratton (1)(2)(4) 1991 Chairman of the Board of GWL&A;
President and Chief Executive Officer,
Power Financial
N. Berne Hart (1)(2)(3) 1991 Company Director
Kevin P. Kavanagh (1)(3)(4) 1986 Company Director; Chancellor, Brandon
University
William Mackness (1)(2) 1991 Company Director since July 1995;
previously Dean, Faculty of
Management, University of Manitoba
William T. McCallum (1)(2)(4) 1990 President and Chief Executive Officer
of GWL&A; President and Chief
Executive Officer, United States
Operations, Great-West Life
Jerry E.A. Nickerson (3)(4) 1994 Chairman of the Board, H.B. Nickerson
& Sons Limited (a management and
holding company)
The Honourable P. Michael 1991 Vice-Chairman, Power Corporation;
Pitfield, P.C., Q.C. (1)(2)(4) Member of the Senate of Canada
Michel Plessis-Belair, F.C.A. 1991 Vice-Chairman and Chief Financial
(1)(2)(3)(4) Officer, Power Corporation; Executive
Vice-President and Chief Financial
Officer, Power Financial
Brian E. Walsh (1)(2) 1995 Co-Founder and Managing Partner,
Veritas Capital Management, LLC (a
merchant banking company) since
September 1997; previously Partner,
Trinity L.P. (an investment company)
from January 1996; previously Managing
Director and Co-Head, Global
Investment Bank, Bankers Trust Company
(an investment/commercial bank)
(1) Member of the Executive Committee
(2) Member of the Investment and Credit Committee
(3) Member of the Audit Committee
(4) Also a director of Great-West Life
(5) Mr. Andre Desmarais and Mr. Paul Desmarais, Jr. are brothers.
Executive Officers
Executive Officer Served as Principal Occupation(s) For Last Five Years
Executive
Officer From
William T. McCallum 1984 President and Chief Executive Officer of
President and Chief GWL&A; President and Chief Executive
Executive Officer Officer, United States Operations,
Great-West Life
Mitchell T.G. Graye 1997 Executive Vice President and Chief
Executive Vice President and Financial Officer of GWL&A; Executive Vice
Chief Financial Officer President and Chief Financial Officer,
United States, Great-West Life
James D. Motz 1992 Executive Vice President, Employee Benefits
Executive Vice President, of GWL&A and Great-West Life
Employee Benefits
Douglas L. Wooden 1991 Executive Vice President, Financial
Executive Vice President, Services of GWL&A and Great-West Life
Financial Services
John A. Brown 1992 Senior Vice President, Sales, Financial
Senior Vice President, Services of GWL&A and Great-West Life
Sales, Financial Services
Donna A. Goldin 1996 Executive Vice President and Chief
Executive Vice President and Operating Officer, One Corporation since
Chief Operating Officer, June 1996; previously Executive Vice
One Corporation President and Chief Operating Officer,
Harris Methodist Health Plan (a health
maintenance organization) from March 1995;
previously Executive Vice President and
Chief Operating Officer, Private Healthcare
Systems, Inc. (a managed care company)
John T. Hughes 1989 Senior Vice President, Chief Investment
Senior Vice President, Officer of GWL&A; Senior Vice President,
Chief Investment Officer Chief Investment Officer, United States,
Great-West Life
D. Craig Lennox 1984 Senior Vice President, General Counsel and
Senior Vice President, Secretary of GWL&A; Senior Vice President
General Counsel and Secretary and Chief U.S. Legal Officer, Great-West
Life
Steve H. Miller 1997 Senior Vice President, Employee Benefits
Senior Vice President, Sales of GWL&A and Great-West Life
Employee Benefits Sales
Charles P. Nelson 1998 Senior Vice President,
Senior Vice President, Public Non-Profit Markets of GWL&A and
Public Non-Profit Markets Great-West Life
Martin Rosenbaum 1997 Senior Vice President, Employee Benefits
Senior Vice President, Operations of GWL&A and Great-West Life
Employee Benefits Operations
Gregory E. Selle 1999 Senior Vice President, Major Accounts of
Senior Vice President, Major GWL&A and Great-West Life
Accounts
Robert K. Shaw 1998 Senior Vice President, Individual Markets
Senior Vice President, of GWL&A and Great-West Life
Individual Markets
Executive Compensation The following table sets out all compensation paid to the
individuals who were, at December 31, 1998, the Chief Executive Officer and the
other four most highly compensated executive officers of GWL&A (collectively the
"Named Executive Officers") for services rendered to GWL&A and its subsidiaries,
and Great-West Life, in all capacities for fiscal years ended 1996, 1997 and
1998, respectively
- -------------------------------------------------------------------------------------------------
Summary Compensation Table
- -------------------------------------------------------------------------------------------------
Name and principal position Annual compensation Long-term compensation
awards
nnual Year Salary Bonus Options (1)
($) ($) (#)
- ---------------------------- ----------- ------------- ------------- ----------------------------
W.T. McCallum 1998 651,667 432,250 -
President and 1997 608,708 406,250 600,000 (3)
Chief Executive Officer 1996 561,818 370,500 600,000 (2)
- ---------------------------- ----------- ------------- ------------- ----------------------------
D.L. Wooden 1998 330,000 198,000 -
Executive Vice President, 1997 300,000 150,000 300,000 (3)
Financial Services 1996 287,000 143,500 200,000 (2)
- ---------------------------- ----------- ------------- ------------- ----------------------------
J.T. Hughes 1998 338,000 185,900 -
Senior Vice President, 1997 324,000 162,000 -
Chief Investment Officer 1996 312,000 136,968 160,000 (2)
- ---------------------------- ----------- ------------- ------------- ----------------------------
J.D. Motz 1998 350,000 157,500 -
Executive Vice President, 1997 300,000 151,300 100,000 (2)
Employee Benefits 300,000 (3)
1996 250,000 89,750 200,000 (2)
- ---------------------------- ----------- ------------- ------------- ----------------------------
M.T.G. Graye 1998 275,000 151,250 18,000 (2)
Executive Vice President 18,000 (3)
and Chief Financial Officer 1997 219,469 117,958 132,000 (3)
1996 183,824 73,810 132,000 (2)
- ---------------------------- ----------- ------------- ------------- ----------------------------
(1)The options set out are options for common shares of Great-West Lifeco which
are granted by Great-West Lifeco pursuant to the Great-West Lifeco Stock
Option Plan ("Lifeco Options").
(2)These Lifeco Options become exercisable 20% per year commencing on the first
anniversary of the grant and expire ten years after the date of the grant.
(3)All or portions of these Lifeco Options become exercisable if certain
financial targets are attained. If exercisable, the exercise period runs from
April 1, 2002 to June 26, 2007.
Options
The following table describes options granted to the Named Executive Officers
during the most recently completed fiscal year. All options are Lifeco Options
granted pursuant to the Great-West Lifeco Stock Option Plan. Lifeco Options are
issued with an exercise price in Canadian dollars. Canadian dollar amounts have
been translated to U.S. dollars at a rate of 1/1.53.
- ----------------------------------------------------------------------------------------------------
Option Grants in Last Fiscal Year
- ----------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------- -------------------------
Individual grants Potential realizable
value at assumed annual
rates of stock price
appreciation for option
term
- -------------------------------------------------------------------------- -------------------------
- ----------------- ----------- -------------- ----------- ----------------- ------------ ------------
Name Options Percent of Exercise Expiration date 5% 10%
granted total or base ($) ($)
options price
granted granted to ($/share)
(#) employees in
fiscal year
- ----------------- ----------- -------------- ----------- ----------------- ------------ ------------
Name Options Percent of Exercise Expiration date 5% ($) 10% ($)
granted total or bas
(#) options pricee
granted to price
employees in ($/share)
fiscal year
----------- -------------- ----------- ---------------- ------------
- ----------------- ----------- -------------- ----------- ----------------- ------------ ------------
M.T.G. Graye 18,000 .85 13.23 January 27, 2008 150,028 378,642
- ----------------- ----------- -------------- ----------- ----------------- ------------ ------------
- ----------------- ----------- -------------- ----------- ----------------- ------------ ------------
M.T.G. Graye 18,000 .85 13.23 June 26, 2007 138,121 350,066
- ----------------- ----------- -------------- ----------- ----------------- ------------ ------------
Prior to April 24,1996, the Named Executive Officers participated in the Power
Financial Employee Share Option Plan pursuant to which options to acquire common
shares of Power Financial ("PFC Options") were granted. The following table
describes all PFC Options exercised in 1998, and all unexercised PFC Options
held as of December 31, 1998, by the Named Executive Officers. PFC Options are
issued with an exercise price in Canadian dollars. Canadian dollar amounts have
been translated to U.S. dollars at a rate of 1/1.53.
AGGREGATED PFC OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
- --------------------------------------------------- --------------------------- ============================
Unexercised options at Value of unexercised
fiscal year-end in-the-money options at
(#) fiscal year-end
($)
- --------------------------------------------------- --------------------------- ============================
Shares
acquired Value
Name on exercise realized Exercisable Exercisable
(#) ($) Unexercisable Unexercisable
==================== ---------------- ------------- ------------- ------------- ------------- ==============
W.T. McCallum 80,000 1,064,134 - - - -
------------- ==============
==================== ---------------- ------------- ------------- ------------- ------------- ==============
D.L. Wooden - - 176,000 - 3,232,239 -
------------- ==============
- -------------------- ---------------- ------------- ------------- ------------- ------------- ==============
J.T. Hughes 240,000 3,115,195 - - - -
- -------------------- ---------------- ------------- ------------- ------------- ------------- ==============
==================== ================ ============= ============= ============= ============= ==============
M.T.G. Graye - - 140,000 - 2,573,243 -
==================== ================ ============= ============= ============= ============= ==============
Commencing April 24,1996, the Named Executive Officers began participating in
the Great-West Lifeco Stock Option Plan. The following table describes all
Lifeco Options exercised in 1998, and all unexercised Lifeco Options held as of
December 31, 1998, by the Named Executive Officers. Lifeco Options are issued
with an exercise price in Canadian dollars. Canadian dollar amounts have been
translated to U.S. dollars at a rate of 1/1.53.
AGGREGATED LIFECO OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
- --------------------------------------------------- --------------------------- ============================
Unexercised options at Value of unexercised
fiscal year-end in-the-money options at
(#) fiscal year-end
($)
- --------------------------------------------------- --------------------------- ============================
Shares
acquired Value
Name on exercise realized Exercisable Exercisable
(#) ($) Unexercisable Unexercisable
==================== ---------------- ------------- ------------- ------------- ------------- ==============
W.T. McCallum - - 240,000 960,000 2,748,543 7,952,872
------------- ==============
==================== ---------------- ------------- ------------- ------------- ------------- ==============
D.L. Wooden - - 80,000 420,000 916,181 3,289,300
------------- ==============
==================== ---------------- ------------- ------------- ------------- ------------- ==============
J.T. Hughes - - 64,000 96,000 732,945 1,099,417
------------- ==============
- -------------------- ---------------- ------------- ------------- ------------- ------------- ==============
J.D. Motz - - 100,000 500,000 1,108,898 4,060,166
- -------------------- ---------------- ------------- ------------- ------------- ------------- ==============
==================== ================ ============= ============= ============= ============= ==============
M.T.G. Graye - - 56,400 243,600 618,226 1,871,554
==================== ================ ============= ============= ============= ============= ==============
PENSION PLAN TABLE
The following table sets out the pension benefits payable to the Named Executive
Officers by Great-West Life or the Company.
PENSION PLAN TABLE
========================= =============================================================
Years of service
=============================================================
Remuneration
($)
15 20 25 30 35
========================= =============================================================
400,000 120,000 160,000 200,000 240,000 240,000
========================= =============================================================
500,000 150,000 200,000 250,000 300,000 300,000
========================= =============================================================
600,000 180,000 240,000 300,000 360,000 360,000
========================= =============================================================
700,000 210,000 280,000 350,000 420,000 420,000
- ------------------------- =============================================================
800,000 240,000 320,000 400,000 480,000 480,000
- ------------------------- =============================================================
- ------------------------- =============================================================
900,000 270,000 360,000 450,000 540,000 540,000
- ------------------------- =============================================================
========================= =============================================================
1,000,000 300,000 400,000 500,000 600,000 600,000
========================= =============================================================
The Named Executive Officers have the following years of service.
Name Years of Service
W.T. McCallum 33
D.L. Wooden 8
J.T. Hughes 9
J.D. Motz 28
M.T.G. Graye 5
For W.T. McCallum, the benefits shown are payable commencing December 31, 2000,
and remuneration is the average of the highest 36 consecutive months of
compensation during the last 84 months of employment. For M.T.G. Graye, J.T.
Hughes, J.D. Motz and D.L. Wooden, the benefits shown are payable upon the
attainment of age 62, and remuneration is the average of the highest 60
consecutive months of compensation during the last 84 months of employment.
Compensation includes salary and bonuses prior to any deferrals. The normal form
of pension is a life only annuity. Other optional forms of pension payment are
available on an actuarially equivalent basis. The benefits listed in the table
are subject to deduction for social security and other retirement benefits.
- --------
1 Represents long-term portion of "Due to Parent Corporation" amounts disclosed
in the Consolidated Financial Statements.
Compensation of Directors
For each director of GWL&A who is not also a director of Great-West Life, GWL&A
pays an annual fee of $17,500, and a meeting fee of $1,000 for each meeting of
the Board of Directors or a committee thereof attended. For each director of
GWL&A who is also a director of Great-West Life, GWL&A pays a meeting fee of
$1,000 for each meeting of the Board of Directors or a committee thereof
attended which is not coincident with a Great-West Life meeting. In addition,
all directors are reimbursed for incidental expenses.
The above amounts are paid in the currency of the country of residence of the
director.
Compensation Committee Interlocks and Insider Participation
Executive compensation is determined by GWL&A's Board of Directors. W.T.
McCallum, President and Chief Executive Officer of GWL&A, is a member of the
Board of Directors. Mr. McCallum participated in executive compensation matters
generally but was not present when his own compensation was discussed or
determined.
Security Ownership of Certain Beneficial Owners and Management Set forth below
is certain information, as of February 1, 1999, concerning beneficial ownership
of the voting securities of GWL&A by entities and persons who beneficially own
more than 5% of the voting securities of GWL&A. 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 GWL&A's 7,032,000 outstanding common shares are owned by GWL&A
Financial Inc., 8515 East Orchard Road, Englewood, Colorado 80111. (2) 100% of
the outstanding common shares of GWL&A Financial Inc. are owned by GWL&A
Financial (Nova Scotia) Co., Suite 800, 1959 Upper Water Street, Halifax, Nova
Scotia, Canada B3J 2X2. (3) 100% of the outstanding common shares of GWL&A
Financial (Nova Scotia) Co. are owned by The Great-West Life Assurance Company,
100 Osborne Street North, Winnipeg, Manitoba, Canada R3C 3A5. (4) 99.6% of the
outstanding common shares of The Great-West Life Assurance Company are owned by
Great-West Lifeco Inc., 100 Osborne Street North, Winnipeg, Manitoba, Canada R3C
3A5. (5) 81.1% of the outstanding common shares of Great-West Lifeco Inc. are
controlled by Power Financial Corporation, 751 Victoria Square, Montreal,
Quebec, Canada H2Y 2J3. (6) 67.5% of the outstanding common shares of Power
Financial Corporation are owned by 171263 Canada Inc., 751 Victoria Square,
Montreal, Quebec, Canada H2Y 2J3. (7) 100% of the outstanding common shares of
171263 Canada Inc. are owned by 2795957 Canada Inc., 751 Victoria Square,
Montreal, Quebec, Canada H2Y 2J3. (8) 100% of the outstanding common shares of
2795957 Canada Inc. are owned by Power Corporation of Canada, 751 Victoria
Square, Montreal, Quebec, Canada H2Y 2J3. (9) Mr. Paul Desmarais, 751 Victoria
Square, Montreal, Quebec, Canada H2Y 2J3, through a group of private holding
companies, which he controls, has voting control of Power Corporation of Canada.
As a result of the chain of ownership described in paragraphs (1) through (9)
above, each of the entities and persons listed in paragraphs (1) through (9)
would be considered under Rule 13d-3 of the Exchange Act to be a "beneficial
owner" of 100% of the outstanding voting securities of GWL&A.
Security Ownership of Management
The following table sets out the number of equity securities, and exercisable
options (including options which will become exercisable within 60 days) for
equity securities, of GWL&A or any of its parents or subsidiaries, beneficially
owned, as of February 1, 1999, by (i) the directors of GWL&A; (ii) the Named
Executive Officers; and (iii) the directors and executive officers of GWL&A as a
group.
- ------------------------ ------------------------------------------------------------------------
Company
------------------------------------------------------------------------
----------------- ---------------- ----------------- -------------------
The Great-West Great-West Power Financial Power Corporation
Life Assurance Lifeco Inc. Corporation of Canada
Company
(1) (2) (3) (4)
----------------- ---------------- ----------------- -------------------
Directors
- -------------------------------------------------------------------------------------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
J. Balog - - - -
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
J. W. Burns 50 112,000 8,000 400,640
200,000 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
101,750O.T. Dackow 16 72,837 - -
200,000 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
A. Desmarais 50 40,000 21,600 40,800
1,100,500 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
0
- ------------------------ ----------------- ---------------- ----------------- -------------------
P. Desmarais, Jr. 50 32,000 - 890,500 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
306,750R.G. Graham - - - -
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
R. Gratton - 330,000 310,000 5,000
5,280,000 300,000 options
options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
N.B. Hart - - - -
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
K. P. Kavanagh - 20,000 - -
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
W. Mackness - - - -
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
W.T. McCallum 17 71,362 80,000 -
240,000 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
J.E.A. Nickerson - - - -
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
P.M. Pitfield - 100,000 80,000 100,000
309,000 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
121,750M. - 20,000 2,000 15,800
Plessis-Belair 53,300 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
B.E. Walsh - - - -
- ------------------------ ----------------- ---------------- ----------------- -------------------
- -------------------------------------------------------------------------------------------------
Named Executive Officers
- -------------------------------------------------------------------------------------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
W.T. McCallum 17 71,362 80,000 -
240,000 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
D.L. Wooden - 80,000 options 176,000 options -
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
J.T. Hughes - 9,989 - -
64,000 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
J.D. Motz - 14,033 - -
100,000 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
M.T.G. Graye - 506 140,000 options -
56,400 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- -------------------------------------------------------------------------------------------------
Directors and Executive Officers as a Group
- -------------------------------------------------------------------------------------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
183 862,822 622,546 563,040
998,000 options 5,635,054 2,853,300 options
options
- ------------------------ ----------------- ---------------- ----------------- -------------------
(1) All holdings are common shares of The Great-West Life Assurance Company. (2)
All holdings are common shares, or where indicated, exercisable options for
common shares, of Great-West Lifeco Inc. (3) All holdings are common shares, or
where indicated, exercisable options for common shares, of Power Financial
Corporation. (4) All holdings are subordinate voting shares, or where indicated,
exercisable options for subordinate voting shares, of Power Corporation of
Canada.
The number of common shares and exercisable options for common shares of Power
Financial Corporation held by R. Gratton represents 1.6% of the total number of
common shares and exercisable options for common shares of Power Financial
Corporation outstanding. The number of common shares and exercisable options for
common shares of Power Financial Corporation held by the directors and executive
officers as a group represents 1.8% 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 the directors
and executive officers as a group represents 1.7% of the total number of
subordinate voting shares and exercisable options for subordinate voting shares
of Power Corporation of Canada outstanding. None of the remaining holdings set
out above exceed 1% of the total number of shares and exercisable options for
shares of the class outstanding.
- ---------------------
Voting Rights
In general, you do not have a direct right to vote the Portfolio shares held in
the Series Account. However, under current law, you are entitled to give us
instructions on how to vote the shares. We will vote the shares according to
those instructions at regular and special shareholder meetings. If the law
changes and we can vote the shares in our own right, we may elect to do so.
Before the Annuity Commencement Date, you have the voting interest. The number
of votes available to you will be calculated separately for each of your
Sub-Accounts. That number will be determined by applying your percentage
interest, if any, in a particular Sub-Account to the total number of votes
attributable to that Sub-Account. You hold a voting interest in each Sub-Account
to which your Annuity Account Value is allocated. If you select a variable
annuity option, the votes attributable to your Contract will decrease as annuity
payouts are made.
The number of votes of a Portfolio will be determined as of the date established
by that Portfolio for determining shareholders eligible to vote at the meeting
of the Portfolios. Voting instructions will be solicited by written
communication prior to such meeting in accordance with procedures established by
the respective Portfolios.
If we do not receive timely instructions and Owners have no beneficial interest
in shares held by us, we will vote according to the voting instructions as a
proportion of all Contracts participating in the Sub-Account. If you indicate in
your instructions that you do not wish to vote an item, we will apply your
instructions on a pro rata basis to reduce the votes eligible to be cast.
Each person or entity having a voting interest in a Sub-Account will receive
proxy material, reports and other material relating to the appropriate
Portfolio.
Please note, generally the Portfolios are not required to, and do not intend to,
hold annual or other regular meetings of shareholders.
Contract Owners have no voting rights in Great-West.
- ---------------------
Rights Reserved by Great-West
We reserve the right to make certain changes we feel would best serve the
interests of Owners and Annuitants or would be appropriate in carrying out the
purposes of the Contracts. Any changes will be made only to the extent and in
the manner permitted by applicable laws. Also, when required by law, we will
obtain your approval of the changes and approval from any appropriate regulatory
authority. Approval may not be required in all cases, however. Examples of the
changes we may make include: o To operate the Series Account in any form
permitted under the Investment Company Act of
1940 or in any other form permitted by law.
o To Transfer any assets in any Sub-Account to another Sub-Account, or to one
or more separate accounts, or to a Guarantee Period; or to add, combine or
remove Sub-Accounts of the Series Account.
o To substitute, for the Portfolio shares in any Sub-Account, the shares
of another Portfolio or shares of another investment company or any
other investment permitted by law.
o To make any changes required by the Internal Revenue Code or by any other
applicable law in order to continue treatment of the Contract as an
annuity.
o To change the time or time of day at which a valuation date is deemed to have
ended. o To make any other necessary technical changes in the Contract in order
to
conform with any action the above provisions permit us to take,
including changing the way we assess charges, without increasing them
for any outstanding Contract beyond the aggregate amount guaranteed.
- ---------------------
Legal Proceedings
Currently, the Series Account is not a party to, and its assets are not subject
to any material legal proceedings. And, Great-West is not currently a party to,
and its property is not currently subject to, any material legal proceedings.
The lawsuits to which Great-West is a party are, in the opinion of management,
in the ordinary course of business, and are not expected to have a material
adverse effect on the financial results, conditions or prospects of Great-West.
- ---------------------
Legal Matters
Advice regarding certain legal matters concerning the federal securities laws
applicable to the issue and sale of the Contract has been provided by Jorden
Burt Boros Cicchetti Berenson & Johnson LLP.
- ---------------------
Experts
The consolidated financial statements of Great-West Life & Annuity Insurance
Company as of December 31, 1998 and 1997, and for each of the three years in the
period ended December 31, 1998 included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein, and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
- ---------------------
Available Information
We have filed a registration statement ("Registration Statement") with the
Commission under the 1933 Act relating to the Contracts offered by this
Prospectus. This Prospectus has been filed as a part of the Registration
Statement and does not contain all of the information contained in the
Registration Statement and its exhibits. Additionally, statements in this
Prospectus about the content of the Contract and other legal instruments are
summaries. Please refer to the Registration Statement and its exhibits for
further information. You can review the Registration Statement and its exhibits
at the offices of the Commission located at 450 Fifth Street, N.W., Washington,
D.C.
The Statement of Additional Information contains more specific information
relating to the Series Account and Great-West, such as:
o general information
o information about Great-West Life & Annuity Insurance Company and the
Variable Annuity-1 Series Account o the calculation of annuity payouts o
postponement of payouts o services o withholding o calculation of performance
data
Appendix A--Condensed Financial Information
Selected data for accumulation units
Outstanding through each period ending December 31
Sub-Account 1998 1997 1996
Alger American Growth
Value at beginning of period $12.76 $10.24 $10.00
Value at end of period $18.74 $12.76 $10.24
Number of accumulation units outstanding at end 1,306,503.46 417,162.09 1,166.64
of period
American Century VP International
Value at beginning of period $12.35 $10.49 $10.00
Value at end of period $14.54 $12.35 $10.49
Number of accumulation units outstanding at end 560,116.89 298,156.62 13,399.99
of period
Berger Small Company Growth
Value at beginning of period $13.75 $10.00
Value at end of period $13.89 $13.75
Number of accumulation units outstanding at end 428,982.88 124,653.31
of period
Federated American Leaders Fund II
Value at beginning of period $13.67 $10.42 $10.00
Value at end of period $15.95 $13.67 $10.42
Number of accumulation units outstanding at end 1,763,028.09 1,426,437.13 65,888.88
of period
Federated Utility Fund II
Value at beginning of period $12.45 $10.00
Value at end of period $14.07 $12.45
Number of accumulation units outstanding at end 416,024.23 168,289.28
of period
Federated Fund for U.S. Government Securities II
Value at beginning of period $10.71 $9.97 $10.00
Value at end of period $11.43 $10.71 $9.97
Number of accumulation units outstanding at end 2,136,709.11 815,966.27 9,330.15
of period
INVESCO VIF - High Yield
Value at beginning of period $12.09 $10.39 $10.00
Value at end of period $12.13 $12.09 $10.39
Number of accumulation units outstanding at end 1,867,861.60 1,360,680.67 52,043.52
of period
INVESCO VIF - Equity Income
Value at beginning of period $13.27 $10.44 $10.00
Value at end of period $15.18 $13.27 $10.44
Number of accumulation units outstanding at end 1,639,584.27 1,271,028.35 68,873.87
of period
Janus Aspen Growth
Value at beginning of period $12.49 $10.26 $10.00
Value at end of period $16.79 $12.49 $10.26
Number of accumulation units outstanding at end 1,979,274.19 1,335,813.25 93,598.79
of period
Janus Aspen Worldwide Growth
Value at beginning of period $12.62 $10.42 $10.00
Value at end of period $16.13 $12.62 $10.42
Number of accumulation units outstanding at end 3,616,796.56 2,208,663.79 51,982.38
of period
Montgomery Variable Series Growth Fund
Value at beginning of period $13.20 $10.35 $10.00
Value at end of period $13.47 $13.20 $10.35
Number of accumulation units outstanding at end 601,168.28 643,624.38 11,226.77
of period
SAFECO RST Equity
Value at beginning of period $11.83 $10.00
Value at end of period $14.65 $11.83
Number of accumulation units outstanding at end 1,168,093.71 357,176.26
of period
Schwab MarketTrack Growth
Value at beginning of period $12.79 $10.35 $10.00
Value at end of period $14.34 $12.79 $10.35
Number of accumulation units outstanding at end 447,514.11 284,530.36 16,525.39
of period
Schwab Money Market
Value at beginning of period $10.49 $10.07 $10.00
Value at end of period $10.93 $10.49 $10.07
Number of accumulation units outstanding at end 6,649,980.31 4,114,002.58 297,045.95
of period
Schwab S&P 500
Value at beginning of period $13.81 $10.52 $10.00
Value at end of period $17.54 $13.81 $10.52
Number of accumulation units outstanding at end 4,084,834.46 2,115,859.53 62,674.08
of period
Van Kampen American Capital LIT-Morgan Stanley
Real Estate Securities Portfolio
Value at beginning of period $10.56 $10.00
Value at end of period $ 9.25 $10.56
Number of accumulation units outstanding at end 308,475.29 176,075.27
of period
Condensed financial information for formerly offered
Sub-Accounts Outstanding through each period ending
December 31
Sub-Account 1998 1997 1996
Alger American Small-Cap
Value at beginning of period $11.14 $10.09 $10.00
Value at end of period $12.76 $11.14 $10.09
Number of accumulation units outstanding at end 643,786.69 337,576.93 4,080.46
of period
American Century VP Capital Appreciation
Value at beginning of period $9.22 $9.61 $10.00
Value at end of period $8.94 $9.22 $9.61
Number of accumulation units outstanding at end 99,034.37 82,255.58 30,139.13
of period
INVESCO VIF - Total Return
Value at beginning of period $12.52 $10.27 $10.00
Value at end of period $13.61 $12.52 $10.27
Number of accumulation units outstanding at end 996,949.40 3,927.31
of period 1,269,709.44
Janus Aspen Aggressive Growth
Value at beginning of period $11.05 $9.89 $10.00
Value at end of period $14.71 $11.05 $9.89
Number of accumulation units outstanding at end 759,487.48 331,141.90 6,698.73
of period
Lexington Emerging Markets
Value at beginning of period $9.00 $10.26 $10.00
Value at end of period $6.40 $9.00 $10.26
Number of accumulation units outstanding at end 260,704.11 309,521.91 18,281.42
of period
SteinRoe Special Venture
Value at beginning of period $10.98 $10.27 $10.00
Value at end of period $ 9.00 $10.98 $10.27
Number of accumulation units outstanding at end 769,185.90 952,879.99 70,715.11
of period
Strong Discovery Fund II
Value at beginning of period $11.53 $10.44 $10.00
Value at end of period $12.26 $11.53 $10.44
Number of accumulation units outstanding at end 199,701.97 211,488.12 24,613.07
of period
Van Eck Worldwide Hard Assets
Value at beginning of period $10.04 $10.31 $10.00
Value at end of period $ 6.88 $10.04 $10.31
Number of accumulation units outstanding at end 80.398.85 132,622.35 2,220.85
of period
- ------------------------------------------------------------------------------
Appendix B--Market Value Adjustments
The amount available for a full surrender, partial withdrawal or Transfer equals
the amount requested plus the Market Value Adjustment (MVA). The MVA is
calculated by multiplying the amount requested by the Market Value Adjustment
Factor (MVAF).
The MVA formula
The MVA is determined using the following formula:
MVA = (amount applied) X (Market Value Adjustment Factor) The Market Value
Adjustment Factor is:
{[(1 + i)/(1 + j +.10%)] N/12} - 1
Where:
o i is the U.S. Treasury Strip ask side yield as published in the Wall Street
Journal on the last business day of the week prior to the date the stated
rate of interest was established for the Guarantee Period. The term of i is
measured in years and equals the term of the Guarantee Period.
o j is the U.S. Treasury Strip ask side yield as published in the Wall Street
Journal on the last business day of the week prior to the week the Guarantee
Period is broken. The term of j equals the remaining term to maturity of the
Guarantee Period, rounded up to the higher number of years.
o N is the number of complete months remaining until maturity.
The MVA will equal 0 if:
o i and j differ by less than .10%
o N is less than 6
Examples
Following are four examples of Market Value Adjustments illustrating (1)
increasing interest rates, (2) decreasing interest rates, (3) flat interest
rates (i and j are within .10% of each other), and (4) less than 6 months to
maturity.
Example 1--Increasing Interest Rates
- -------------------- -------------------------------
Deposit $25,000 on November 1, 1996
- -------------------- -------------------------------
- -------------------- -------------------------------
Maturity date December 31, 2005
- -------------------- -------------------------------
- -------------------- -------------------------------
Interest Guarantee 10 years
Period
- -------------------- -------------------------------
- -------------------- -------------------------------
i assumed to be 6.15%
- -------------------- -------------------------------
- -------------------- -------------------------------
Surrender date July 1, 2000
- -------------------- -------------------------------
- -------------------- -------------------------------
j 7.00%
- -------------------- -------------------------------
- -------------------- -------------------------------
Amount surrendered $10,000
- -------------------- -------------------------------
- -------------------- -------------------------------
N 65
- -------------------- -------------------------------
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1 = {[1.0615/1.071]65/12} - 1 =
.952885 - 1 = -.047115
MVA = (amount transferred or surrendered) x MVAF = $10,000 x - .047115 = -
$471.15
Surrender Value = (amount transferred or surrendered + MVA)
= ($10,000 + - $471.15)
= $9,528.85
Example 2--Decreasing Interest Rates
- --------------------- ------------------------------
Deposit $25,000 on November 1, 1996
- --------------------- ------------------------------
- --------------------- ------------------------------
Maturity date December 31, 2005
- --------------------- ------------------------------
- --------------------- ------------------------------
Interest Guarantee 10 years
Period
- --------------------- ------------------------------
- --------------------- ------------------------------
i assumed to be 6.15%
- --------------------- ------------------------------
- --------------------- ------------------------------
Surrender date July 1, 2000
- --------------------- ------------------------------
- --------------------- ------------------------------
j 5.00%
- --------------------- ------------------------------
- --------------------- ------------------------------
Amount surrendered $10,000
- --------------------- ------------------------------
- --------------------- ------------------------------
N 65
- --------------------- ------------------------------
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1 = {[1.0615/1.051]65/12} - 1 =
.055323
MVA = (amount transferred or surrendered) x MVAF
= $10,000 x .0055323
= $553.23
Surrender Value = (amount transferred or surrendered + MVA)
= ($10,000 + $553.23)
= $10,553.23
Example 3--Flat Interest Rates (i and j are within .10% of each other)
- --------------------- ------------------------------
Deposit $25,000 on November 1, 1996
- --------------------- ------------------------------
- --------------------- ------------------------------
Maturity date December 31, 2005
- --------------------- ------------------------------
- --------------------- ------------------------------
Interest Guarantee 10 years
Period
- --------------------- ------------------------------
- --------------------- ------------------------------
i assumed to be 6.15%
- --------------------- ------------------------------
- --------------------- ------------------------------
Surrender date July 1, 2000
- --------------------- ------------------------------
- --------------------- ------------------------------
j 6.24%
- --------------------- ------------------------------
- --------------------- ------------------------------
Amount surrendered $10,000
- --------------------- ------------------------------
- --------------------- ------------------------------
N 65
- --------------------- ------------------------------
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1 = {[1.0615/1.0634]65/12} - 1 =
.99036 - 1 = -.00964
However, [i-j] less than .10%, so MVAF = 0
MVA = (amount transferred or surrendered) x MVAF
= $10,000 x 0
= $0
Surrender Value = (amount transferred or surrendered + MVA)
= ($10,000 + $0)
= $10,000
Example 4--N equals less than 6 months to maturity
- --------------------- ------------------------------
Deposit $25,000 on November 1, 1996
- --------------------- ------------------------------
- --------------------- ------------------------------
Maturity date December 31, 2005
- --------------------- ------------------------------
- --------------------- ------------------------------
Interest Guarantee 10 years
Period
- --------------------- ------------------------------
- --------------------- ------------------------------
i assumed to be 6.15%
- --------------------- ------------------------------
- --------------------- ------------------------------
Surrender date July 1, 2005
- --------------------- ------------------------------
- --------------------- ------------------------------
j 7.00%
- --------------------- ------------------------------
- --------------------- ------------------------------
Amount surrendered $10,000
- --------------------- ------------------------------
- --------------------- ------------------------------
N 5
- --------------------- ------------------------------
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1 = {[1.0615/1.071]5/12} - 1 = .99629
- 1 = -.00371
However, N less than 6, so MVAF = 0
MVA = (amount transferred or surrendered) x MVAF
= $10,000 x 0
= $0
Surrender Value = (amount transferred or surrendered + MVA)
= ($10,000 + $0)
= $10,000
- ------------------------------------------------------------------------------
Appendix C--Net Investment Factor
The Net Investment Factor is determined by dividing (a) by (b), and subtracting
(c) from the result where:
(a) is the net result of:
1) the net asset value per share of the Portfolio shares determined as of
the end of the current Valuation Period, plus
2) the per share amount of any dividend (or, if applicable, capital gain
distributions) made by the Portfolio on shares if the "ex-dividend" date
occurs during the current Valuation Period, minus or plus
3) a per unit charge or credit for any taxes incurred by or provided for
in the Sub-Account, which is determined by GWL&A to have resulted from
the investment operations of the Sub-Account, and
(b) is the net asset value per share of the Portfolio shares determined as of
the end of the immediately preceding Valuation Period, and
(c) is an amount representing the Mortality and Expense Risk Charge deducted
from each Sub-Account on a daily basis. Such amount is equal to 0.85%.
The Net Investment Factor may be greater than, less than, or equal to one.
Therefore, the Accumulation Unit Value may increase, decrease or remain
unchanged.
The net asset value per share referred to in paragraphs (a)(1) and (b) above,
reflect the investment performance of the Portfolio as well as the payment of
Portfolio expenses.
- ------------------------------------------------------------------------------
Consolidated Financial Statements and Independent Auditor's Report On the
following pages, you'll find the consolidated financial statement and the
independent auditor's report for Great-West Life & Annuity Insurance Company for
the years ending December 1998, 1997 and 1996.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY (An
indirect wholly-owned subsidiary of The Great-West Life Assurance
Company)
Consolidated Financial Statements for the Years Ended
December 31, 1998, 1997, and 1996 and Independent
Auditors' Report
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY (An indirect wholly-owned
subsidiary of The Great-West Life Assurance Company)
Consolidated Financial Statements for the Years Ended December 31,
1998, 1997, and 1996 and Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
of Great-West Life & Annuity Insurance Company:
We have audited the accompanying consolidated balance sheets of Great-West Life
& Annuity Insurance Company (an indirect wholly-owned subsidiary of The
Great-West Life Assurance Company) and subsidiaries as of December 31, 1998 and
1997, 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,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Great-West Life & Annuity Insurance
Company and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
January 25, 1999
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(Dollars in Thousands)
1998 1997
-------------------- ------------------
ASSETS
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost (fair value
$2,298,936 and $2,151,476) $ 2,199,818 $ 2,082,716
Available-for-sale, at fair value (amortized
cost
$6,752,532 and $6,541,422) 6,936,726 6,698,629
Common stock, at fair value (cost $41,932 and 48,640 39,021
$34,414)
Mortgage loans on real estate, net 1,133,468 1,235,594
Real estate, net 73,042 93,775
Policy loans 2,858,673 2,657,116
Short-term investments, available-for-sale (cost
approximates fair value) 420,169 399,131
-------------------- ------------------
Total Investments 13,670,536 13,205,982
Cash 176,119 126,278
Reinsurance receivable
Related party 5,006 1,950
Other 187,952 82,414
Deferred policy acquisition costs 238,901 255,442
Investment income due and accrued 157,587 165,827
Other assets 311,078 121,543
Premiums in course of collection 84,940 77,008
Deferred income taxes 191,483 193,820
Separate account assets 10,099,543 7,847,451
-------------------- ------------------
TOTAL ASSETS $ 25,123,145 $ 22,077,715
==================== ==================
See notes to consolidated financial statements.
1998 1997
------------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves
Related party 555,300 17,774
Other 11,284,414 11,084,945
Policy and contract claims 491,932 375,499
Policyholders' funds 181,779 165,106
Provision for policyholders' dividends 69,530 62,937
GENERAL LIABILITIES:
Due to Parent Corporation 52,877 126,656
Repurchase agreements 244,258 325,538
Commercial paper 39,731 54,058
Other liabilities 761,505 689,967
Undistributed earnings on participating business 143,717 141,865
Separate account liabilities 10,099,543 7,847,451
------------- ------------
Total Liabilities 23,924,586 20,891,796
------------- ------------
COMMITMENTS AND CONTINGENCIES
1998 1997
STOCKHOLDER'S EQUITY: ------------- ------------
Preferred stock, $1 par value, 50,000,000 shares authorized
Series A, cumulative, 1,500 shares authorized,
liquidation value of $100,000 per share,
0 and 600 shares issued and outstanding 60,000
Series B, cumulative, 1,500 shares authorized,
liquidation value of $100,000 per share,
0 and 200 shares issued and outstanding 20,000
Series C, cumulative, 1,500 shares authorized,
none outstanding
Series D, cumulative, 1,500 shares authorized,
none outstanding
Series E, non-cumulative, 2,000,000 shares
authorized, liquidation value of $20.90 per share,
0 and 2,000,000 shares issued and outstanding 41,800
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 699,556 690,748
Accumulated other comprehensive income 61,560 52,807
Retained earnings 430,411 313,532
------------- --------------
Total Stockholder's Equity 1,198,559 1,185,919
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY 25,123,145 $ 22,077,715
============= ==============
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(Dollars in Thousands)
1998 1997 1996
------------- ------------- -------------
REVENUES:
Premiums
Related party (net of premiums
recaptured totaling $0,
$155,798, and $164,839) $ 46,191 $ 155,798 $ 164,839
Other (net of premiums ceded
totaling $86,409, $61,152, and $60,589) 948,672 677,381 664,610
Fee income 516,052 420,730 347,519
Net investment income
Related party (9,416) (8,957) (26,082)
Other 906,776 890,630 860,719
Net realized gains (losses) on investments 38,173 9,800 (21,078)
------------- ------------- -------------
2,446,448 2,145,382 1,990,527
------------- ------------- -------------
BENEFITS AND EXPENSES:
Life and other policy benefits (net of
reinsurance recoveries totaling $81,205,
$44,871 and $52,675) 768,474 543,903 515,750
Increase in reserves
Related party 46,191 155,798 164,839
Other 78,851 90,013 64,359
Interest paid or credited to contractholders 491,616 527,784 561,786
Provision for policyholders' share of earnings
(losses) on participating business 5,908 3,753 (7)
Dividends to policyholders 71,429 63,799 49,237
------------- ------------- -------------
1,462,469 1,385,050 1,355,964
Commissions 144,246 102,150 106,561
Operating expenses (income):
Related party (4,542) (6,292) 304,599
Other 517,676 431,714 33,435
Premium taxes 30,848 24,153 25,021
------------- ------------- -------------
2,150,697 1,936,775 1,825,580
INCOME BEFORE INCOME TAXES 295,751 208,607 164,947
------------- ------------- -------------
PROVISION FOR INCOME TAXES:
Current 81,770 61,644 45,934
Deferred 17,066 (11,797) (15,562)
------------- ------------- -------------
98,836 49,847 30,372
------------- ------------- -------------
NET INCOME $ 196,915 $ 158,760 $ 134,575
============= ============= =============
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(Dollars in Thousands)
Accumulated
Additional Other
Preferred Stock Common Stock Paid-in Comprehensive Retained
-------------------------- -----------------------
Shares Amount Shares Amount Capital Income Earnings Total
------------ ----------- ----------- --------- ------------- ------------- ---------- ------------
BALANCE, JANUARY 1, 1996 2,000,800 121,800 7,032,000 7,032 657,265 58,763 148,261 993,121
Net income 134,575 134,575
Other comprehensive loss (43,812) (43,812)
------------
Total comprehensive income 90,763
------------
Capital contributions 7,000 7,000
Dividends (56,670) (56,670)
------------ ----------- ----------- --------- -------------------------------------- ------------
BALANCE, DECEMBER 31, 1996 2,000,800 121,800 7,032,000 7,032 664,265 14,951 226,166 1,034,214
Net income 158,760 158,760
Other comprehensive income 37,856 37,856
------------
Total comprehensive income 196,616
------------
Capital contributions 26,483 26,483
Dividends (71,394) (71,394)
------------ ----------- ----------- --------- ------------- ------------- ---------- ------------
BALANCE, DECEMBER 31, 1997 2,000,800 121,800 7,032,000 7,032 690,748 52,807 313,532 1,185,919
Net income 196,915 196,915
Other comprehensive income 8,753 8,753
------------
Total comprehensive income 205,668
------------
Capital contributions 8,808 8,808
Dividends (80,036) (80,036)
Purchase of preferred shares (2,000,800) (121,800) (121,800)
------------ ----------- ----------- --------- ------------ -------------- ---------- ------------
BALANCE, DECEMBER 31, 1998 0 0 7,032,000 7,032 699,556 61,560 430,411 1,198,559
============ =========== =========== ========= =========== =============== ========== ============
See notes to consolidated financial statements.
87
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(Dollars in Thousands)
1998 1997 1996
------------- ------------- ------------
OPERATING ACTIVITIES:
Net income $ 196,915 $ 158,760 $ 134,575
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain (loss) allocated to participating
policyholders 5,908 3,753 (7)
Amortization of investments (15,068) 409 15,518
Realized losses (gains) on disposal of
investments and provisions for mortgage
loans and real estate (38,173) (9,800) 21,078
Amortization 55,550 46,929 49,454
Deferred income taxes 17,066 (11,824) (14,658)
Changes in assets and liabilities:
Policy benefit liabilities 938,444 498,114 358,393
Reinsurance receivable (43,643) 112,594 136,966
Accrued interest and other receivables 28,467 30,299 24,778
Other, net (184,536) 64,465 (13,676)
------------- ------------- ------------
Net cash provided by operating activities 960,930 893,699 712,421
------------- ------------- ------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to maturity
Sales 9,920
Maturities and redemptions 471,432 359,021 516,838
Available-for-sale
Sales 6,169,678 3,174,246 3,569,608
Maturities and redemptions 1,268,323 771,737 803,369
Mortgage loans 211,026 248,170 235,907
Real estate 16,456 36,624 2,607
Common stock 3,814 17,211 1,888
Purchases of investments:
Fixed maturities
Held-to-maturity (584,092) (439,269) (453,787)
Available-for-sale (7,410,485) (4,314,722) (4,753,154)
Mortgage loans (100,240) (2,532) (23,237)
Real estate (4,581) (64,205) (15,588)
Common stock (10,020) (29,608) (12,113)
------------- ------------- ------------
Net cash provided by (used in)
investing activities $ 41,231 $ (243,327) $ (127,662)
============= ============= ============
(Continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(Dollars in Thousands)
1998 1997 1996
-------------- -------------- -------------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (507,237) $ (577,538) $ (413,568)
Due to Parent Corporation (73,779) (19,522) 1,457
Dividends paid (80,036) (71,394) (56,670)
Net commercial paper repayments (14,327) (30,624) (172)
Net repurchase agreements (repayments)
borrowings (81,280) 38,802 (88,563)
Capital contributions 8,808 11,000 7,000
Purchase of preferred shares (121,800)
Acquisition of subsidiary (82,669)
-------------- -------------- -------------
-------------- -------------- -------------
Net cash used in financing activities (952,320) (649,276) (550,516)
-------------- -------------- -------------
NET INCREASE IN CASH 49,841 1,096 34,243
CASH, BEGINNING OF YEAR 126,278 125,182 90,939
-------------- -------------- -------------
CASH, END OF YEAR $ 176,119 $ 126,278 $ 125,182
============== ============== =============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 111,493 $ 86,829 $ 103,700
Interest 13,849 15,124 15,414
See notes to consolidated financial statements. (Concluded)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997,
AND 1996 (Amounts in Thousands, except Share Amounts)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Great-West Life & Annuity Insurance Company (the Company)
is an indirect wholly-owned subsidiary of The Great-West Life Assurance
Company (the Parent Corporation). The Company is an insurance company
domiciled in the State of Colorado. 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.
Basis of Presentation - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The consolidated financial
statements include the accounts of the Company and its subsidiaries. All
material intercompany transactions and balances have been eliminated in
consolidation.
Certain reclassifications, primarily related to the presentation of
related party transactions and the classification of the release of a
contingent liability (see Note 10) have been made to the 1997 and 1996
financial statements.
Investments - Investments are reported as follows:
1. Management determines the classification of fixed maturities at
the time of purchase. Fixed maturities are classified as
held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost unless fair value is less
than cost and the decline is deemed to be other than temporary,
in which case they are written down to fair value and a new cost
basis is established.
Fixed maturities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale securities
are carried at fair value, with the net unrealized gains and
losses reported as accumulated other comprehensive income in
stockholder's equity. The net unrealized gains and losses on
derivative financial instruments used to hedge available-for-sale
securities are also included in other comprehensive income.
The amortized cost of fixed maturities classified as
held-to-maturity or available-for-sale is adjusted for
amortization of premiums and accretion of discounts using the
effective interest method over the estimated life of the related
bonds. Such amortization is included in net investment income.
Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net realized gains (losses)
on investments.
2. Mortgage loans on real estate are carried at their unpaid
balances adjusted for any unamortized premiums or discounts and
any valuation reserves. Interest income is accrued on the unpaid
principal balance. Discounts and premiums are amortized to net
investment income using the effective interest method. Accrual of
interest is discontinued on any impaired loans where collection
of interest is doubtful.
The Company maintains an allowance for credit losses at a level
that, in management's opinion, is sufficient to absorb possible
credit losses on its impaired loans and to provide adequate
provision for any possible losses inherent in the loan portfolio.
Management's judgment is based on past loss experience, current
and projected economic conditions, and extensive situational
analysis of each individual loan. The measurement of impaired
loans is based on the fair value of the collateral.
3. Real estate is carried at cost. The carrying value of real estate
is subject to periodic evaluation of recoverability.
4. Investments in common stock are carried at fair value.
5. Policy loans are carried at their unpaid balances.
6. Short-term investments include securities purchased with initial
maturities of one year or less and are carried at amortized cost.
The Company considers short-term investments to be
available-for-sale and amortized cost approximates fair value.
7. Gains and losses realized on disposal of investments are
determined on a specific identification basis.
Cash - Cash includes only amounts in demand deposit accounts.
Deferred Policy Acquisition Costs - Policy acquisition costs, which
primarily consist of sales commissions related to the production of new
and renewal business, have been deferred to the extent recoverable.
Other costs capitalized include expenses associated with the Company's
group sales representatives. These costs are variable in nature and are
dependent upon sales volume. Deferred costs associated with the annuity
products are being amortized over the life of the contracts in
proportion to the emergence of gross profits. Retrospective adjustments
of these amounts are made when the Company revises its estimates of
current or future gross profits. Deferred costs associated with
traditional life insurance are amortized over the premium paying period
of the related policies in proportion to premium revenues recognized.
Amortization of deferred policy acquisition costs totaled $51,724,
$44,298, and $47,089 in 1998, 1997, and 1996, respectively.
Separate Accounts - Separate account assets and related liabilities are
carried at fair value. The Company's separate accounts invest in shares
of Maxim Series Fund, Inc. and Orchard Series Fund, Inc., both
diversified, open-end management investment companies which are
affiliates of the Company, shares of other external mutual funds, or
government or corporate bonds. Investment income and realized capital
gains and losses of the separate accounts accrue directly to the
contractholders and, therefore, are not included in the Company's
statements of income. Revenues to the Company from the separate accounts
consist of contract maintenance fees, administrative fees, and mortality
and expense risk charges.
Life Insurance and Annuity Reserves - Life insurance and annuity policy
reserves with life contingencies of $6,866,478 and $5,741,596 at
December 31, 1998 and 1997, respectively, are computed on the basis of
estimated mortality, investment yield, withdrawals, future maintenance
and settlement expenses, and retrospective experience rating premium
refunds. Annuity contract reserves without life contingencies of
$4,908,964 and $5,346,516 at December 31, 1998 and 1997, respectively,
are established at the contractholder's account value.
Reinsurance - Policy reserves ceded to other insurance companies are
carried as a reinsurance receivable on the balance sheet (see Note 3).
The cost of reinsurance related to long-duration contracts is accounted
for over the life of the underlying reinsured policies using assumptions
consistent with those used to account for the underlying policies.
Policy and Contract Claims - Policy and contract claims include
provisions for reported life and health claims in process of settlement,
valued in accordance with the terms of the related policies and
contracts, as well as provisions for claims incurred and unreported
based primarily on prior experience of the Company.
Participating Fund Account - Participating life and annuity policy
reserves are $4,108,314 and $3,901,297 at December 31, 1998 and 1997,
respectively. Participating business approximates 32.7% and 50.5% of the
Company's ordinary life insurance in force and 71.9% and 91.1% of
ordinary life insurance premium income at December 31, 1998 and 1997,
respectively.
The amount of dividends to be paid from undistributed earnings on
participating business is determined annually by the Board of Directors.
Amounts allocable to participating policyholders are consistent with
established Company practice.
The Company has established a Participating Policyholder Experience
Account (PPEA) for the benefit of all participating policyholders which
is included in the accompanying consolidated balance sheet. Earnings
associated with the operation of the PPEA are credited to the benefit of
all participating policyholders. In the event that the assets of the
PPEA are insufficient to provide contractually guaranteed benefits, the
Company must provide such benefits from its general assets.
The Company has also established a Participation Fund Account (PFA) for
the benefit of the participating policyholders previously transferred to
the Company from the Parent 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 acquired participating policyholders.
Recognition of Premium and Fee Income and Benefits and Expenses - Life
insurance premiums are recognized when due. Annuity premiums with life
contingencies are recognized as received. Accident and health premiums
are earned on a monthly pro rata basis. Revenues for annuity and other
contracts without significant life contingencies consist of contract
charges for the cost of insurance, contract administration, and
surrender fees that have been assessed against the contract account
balance during the period. Fee income is derived primarily from
contracts for claim processing or other administrative services 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 changes, are
recognized when due. Benefits and expenses on policies with life
contingencies impact premium income by means of the provision for future
policy benefit reserves, resulting in recognition of profits over the
life of the contracts. The average crediting rate on annuity products
was approximately 6.3%, 6.6%, and 6.8% in 1998, 1997, and 1996.
Income Taxes - Income taxes are recorded using the asset and liability
approach, which requires, among other provisions, the recognition of
deferred tax assets and liabilities for expected future tax consequences
of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, all
expected future events (other than the enactments or changes in the tax
laws or rules) are considered. Although realization is not assured,
management believes it is more likely than not that the deferred tax
asset, net of a valuation allowance, will be realized.
Repurchase Agreements and Securities Lending - The Company enters into
repurchase agreements with third-party broker/dealers in which the
Company sells securities and agrees to repurchase substantially similar
securities at a specified date and price. Such agreements are accounted
for as collateralized borrowings. Interest expense on repurchase
agreements is recorded at the coupon interest rate on the underlying
securities. The repurchase fee received or paid is amortized over the
term of the related agreement and recognized as an adjustment to
investment income.
The Company requires collateral in an amount greater than or equal to
102% of the borrowing for all securities lending transactions.
The Company implemented Statement of Financial Accounting Standards
(SFAS) No. 125 "Accounting for Transfer and Servicing of Financial
Assets and Extinguishments of Liabilities" in 1998 as it relates to
repurchase agreements and securities lending arrangements. The
implementation of this statement had no material effect on the Company's
financial statements.
Derivatives - The Company makes limited use of derivative financial
instruments to manage interest rate, market, and foreign exchange risk.
Such hedging activity consists of interest rate swap agreements,
interest rate floors and caps, foreign currency exchange contracts and
equity swaps. The differential paid or received under the terms of these
contracts is recognized as an adjustment to net investment income on the
accrual method. Gains and losses on foreign exchange contracts are
deferred and recognized in net investment income when the hedged
transactions are realized.
Interest rate swap agreements are used to convert the interest rate on
certain fixed maturities from a floating rate to a fixed rate. Interest
rate swap transactions generally involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying principal amount. Interest rate floors and caps are interest
rate protection instruments that require the payment by a counter-party
to the Company of an interest rate differential. 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. Equity swap transactions generally involve the
exchange of variable market performance of a basket of securities for a
fixed interest rate.
Although derivative financial instruments taken alone may expose the
Company to varying degrees of market and credit risk when used solely
for hedging purposes, these instruments typically reduce overall market
and interest rate risk. The Company controls the credit risk of its
financial contracts through credit approvals, limits, and monitoring
procedures. As the Company generally enters into transactions only with
high quality institutions, no losses associated with non-performance on
derivative financial instruments have occurred or are expected to occur.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting
for Derivative Instruments and for Hedging Activities". This Statement
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. This Statement is
effective for the Company beginning January 1, 2000, and earlier
adoption is encouraged. The Company has not adopted this Statement as of
December 31, 1998. Management has not determined the impact of the
Statement on the Company's financial position or results of operations.
Stock Options - In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation", which was effective for the
Company beginning January 1, 1996. This Statement requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured based
on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company has continued to apply APB Opinion No.
25 to stock-based compensation awards to employees and has disclosed the
required pro forma effect on net income (see Note 13).
2. ACQUISITION
On July 8, 1998, the Company paid $82,669 in cash to acquire all of the
outstanding shares of Anthem Health & Life Insurance Company (AH&L). The
purchase price was based on AH&L's adjusted book value, and is subject
to further minor adjustments. The results of AH&L's operations, which
had an insignificant effect on net income, have been combined with those
of the Company since the date of acquisition.
The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to the net
assets acquired based on their estimated fair values. The fair value of
tangible assets acquired and liabilities assumed was $379,934 and
$317,440, respectively. The balance of the purchase price, $20,175, was
recorded as excess cost over net assets acquired (goodwill) and is being
amortized over 30 years on a straight-line basis. Management intends to
finalize its allocation of the purchase price within a year of the
transaction, which will likely result in a reallocation of the purchase
price, which is not expected to be material.
3. RELATED-PARTY TRANSACTIONS
On December 31, 1998, the Company and the Parent Corporation entered
into an Indemnity Reinsurance Agreement pursuant to which the Company
reinsured by coinsurance certain Parent Corporation individual
non-participating life insurance policies. The Company recorded $859 in
premium income and an increase in reserves, associated with certain
policies, as a result of this transaction. Of the $137,638 in reserves
that were recorded as a result of this transaction, $136,779 was
recorded under SFAS No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains
and Losses from the Sale of Investments" ("SFAS No. 97"), accounting
principles. The Company recorded, at the Parent Corporation's carrying
amount, which approximates estimated fair value, the following at
December 31, 1998 as a result of this transaction:
Assets Liabilities and Stockholder's Equity
Cash 24,600 Policy reserves 137,638
Deferred income taxes 3,816
Policy loans 82,649
Due from Parent Corporation 19,753
Other 6,820
----------- -----------
137,638 137,638
In connection with this transaction, the Parent Corporation made a
capital contribution of $5,608 to the Company.
On September 30, 1998, the Company and the Parent Corporation entered
into an Indemnity Reinsurance Agreement pursuant to which the Company
reinsured by coinsurance certain Parent Corporation individual
non-participating life insurance policies. The Company recorded $45,332
in premium income and an increase in reserves as a result of this
transaction. Of the $428,152 in reserves that were recorded as a result
of this transaction, $382,820 was recorded under SFAS No. 97 accounting
principles. The Company recorded, at the Parent Corporation's carrying
amount, which approximates estimated fair value, the following at
September 30, 1998 as a result of this transaction:
Assets Liabilities and Stockholder's Equity
Bonds $ 147,475 Policy reserves $ 428,152
Mortgages 82,637 Due to Parent Corporation 20,820
Cash 134,900
Deferred policy acquisition 9,724
costs
Deferred income taxes 15,762
Policy loans 56,209
Other 2,265
---------- -----------
$ 448,972 $ 448,972
In connection with this transaction, the Parent Corporation made a
capital contribution of $3,200 to the Company.
On September 30, 1998, the Company purchased furniture, fixtures and
equipment from the Parent Corporation for $25,184. In February 1997, the
Company purchased the corporate headquarters properties from the Parent
Corporation for $63,700.
On June 30, 1997, the Company recaptured all remaining pieces of an
individual participating insurance block of business previously
reinsured to the Parent Corporation on December 31, 1992. The Company
recorded $155,798 in premium income and an increase in reserves as a
result of this transaction. The Company recorded, at the Parent
Corporation's carrying amount, which approximates estimated fair value,
the following at June 30, 1997 as a result of this transaction:
Assets Liabilities and Stockholder's Equity
Cash 160,000 Policy reserves 155,798
Bonds 17,975 Due to Parent Corporation 20,373
Other 60 Deferred income taxes 2,719
Undistributed earnings on
participating business (855)
----------- ---------------
178,035 178,035
In connection with this transaction, the Parent Corporation made a
capital contribution of $11,000 to the Company.
On October 31, 1996, the Company recaptured certain pieces of an
individual participating insurance block of business previously
reinsured to the Parent Corporation on December 31, 1992. The Company
recorded $164,839 in premium income and an increase in reserves as a
result of this transaction. The Company recorded, at the Parent
Corporation's carrying amount, which approximates estimated fair value,
the following at October 31, 1996 as a result of this transaction:
Assets Liabilities and Stockholder's Equity
Cash 162,000 Policy reserves 164,839
Mortgages 19,753 Due to Parent Corporation 16,180
Other 118 Deferred income taxes 1,283
Undistributed earnings on
participating business (431)
------------ --------------
181,871 181,871
In connection with this transaction, the Parent Corporation made a
capital contribution of $7,000 to the Company.
Effective January 1, 1997, all employees of the U.S. operations of the
Parent Corporation and the related benefit plans were transferred to the
Company. All related employee benefit plan assets and liabilities were
also transferred to the Company (see Note 9). The transfer did not have
a material effect on the Company's operating expenses as the actual
costs associated with the employees and the benefit plans were charged
previously to the Company under administrative service agreements
between the Company and the Parent Corporation.
Prior to January 1997, the Parent Corporation administered, distributed,
and underwrote business for the Company and administered the Company's
investment portfolio under various administrative agreements. Since
January 1, 1997, the Company has performed these services for the U.S.
operations of the Parent Corporation. The following represents revenue
from or payments made to the Parent Corporation for services provided
pursuant to these service agreements. The amounts recorded are based
upon management's best estimate of actual costs incurred and resources
expended based upon number of policies and/or certificates in force.
Years Ended December 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
Investment management revenue (expense) $ 475 $ 801 $ (14,800)
Administrative and underwriting revenue
(payments) 4,542 6,292 (304,599)
At December 31, 1998 and 1997, due to Parent Corporation includes
$17,930 and $8,957 due on demand and $34,947 and $117,699 of notes
payable which bear interest and mature at various dates through June 15,
2008. These notes may be prepaid in whole or in part at any time without
penalty; the issuer may not demand payment before the maturity date. The
amounts due on demand to the Parent Corporation bear interest at the
public bond rate (6.1% and 7.1% at December 31, 1998 and 1997,
respectively) while the remainder bear interest at various rates ranging
from 5.4% to 6.6%. Interest expense attributable to these payables was
$9,891, $9,758, and $11,282 for the years ended December 31, 1998, 1997
and 1996, respectively.
4. REINSURANCE
In the normal course of business, the Company seeks to limit its
exposure to loss on any single insured and to recover a portion of
benefits paid by ceding risks to other insurance enterprises under
excess coverage and co-insurance contracts. The Company retains a
maximum of $1.5 million of coverage per individual life.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk
arising from similar geographic regions, activities, or economic
characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. At December 31, 1998 and
1997, the reinsurance receivable had a carrying value of $192,958 and
$84,364, respectively.
The following schedule details life insurance in force and life and
accident/health premiums:
Ceded Assumed Percentage
Primarily to Primarily of Amount
Gross the Parent from Other Net Assumed
Amount Corporation Companies Amount to Net
------------- ------------- ------------- ------------- ------------
December 31, 1998:
Life insurance in force:
Individual $ 34,017,379 $ 4,785,079 $ 8,948,442 $ 38,180,742 23.44%
Group 81,907,539 2,213,372 84,120,911 2.63%
============= ============= ============= =============
Total $ 115,924,918 $ 4,785,079 $ 11,161,814 $ 122,301,653
============= ============= ============= =============
Premium Income:
Life $ 352,710 $ 24,720 $ 65,452 $ 393,442 16.6%
insurance
571,992 61,689 74,284 584,587 12.7%
Accident/health
============= ============= ============= =============
Total $ 924,702 $ 86,409 $ 139,736 $ 978,029
============= ============= ============= =============
December 31, 1997:
Life insurance in force:
Individual $ 24,598,679 $ 4,040,398 $ 3,667,235 $ 24,225,516 15.1%
Group 51,179,343 2,031,477 53,210,820 3.8%
============= ============= ============= =============
Total $ 75,778,022 $ 4,040,398 $ 5,698,712 $ 77,436,336
============= ============= ============= =============
Premium Income:
Life $ 320,456 $ (127,388) $ 19,923 $ 467,767 4.1%
insurance
341,837 32,645 34,994 344,186 10.0%
Accident/health
============= ============= ============= =============
Total $ 662,293 $ (94,743) $ 54,917 $ 811,953
============= ============= ============= =============
December 31, 1996:
Life insurance in force:
Individual $ 23,409,823 $ 5,246,079 $ 3,482,118 $ 21,645,862 16.1%
Group 47,682,237 1,817,511 49,499,748 3.7%
============= ============= ============= =============
Total $ 71,092,060 $ 5,246,079 $ 5,299,629 $ 71,145,610
============= ============= ============= =============
Premium Income:
Life $ 307,516 $ (111,743) $ 19,633 $ 438,892 4.2%
insurance
339,284 7,493 34,242 366,033 9.4%
Accident/health
============= ============= ============= =============
Total $ 646,800 $ (104,250) $ 53,875 $ 804,925
============= ============= ============= =============
5. NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS
Net investment income is summarized as follows:
Years Ended December 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
Investment income:
Fixed maturities and short-term $ 638,079 $ 633,975 $ 601,913
investments
Mortgage loans on real estate 110,170 118,274 140,823
Real estate 20,019 20,990 5,292
Policy loans 180,933 194,826 175,746
Other 285 18 1,316
------------- ------------- -------------
949,486 968,083 925,090
Investment expenses, including interest
on
amounts charged by the Parent 52,126 86,410 90,453
Corporation
of $9,891, $9,758, and $11,282
------------- ------------- -------------
Net investment income $ 897,360 $ 881,673 $ 834,637
============= ============= =============
Net realized gains (losses) on investments are as follows:
Years Ended December 31,
-------------------------------------------
1998 1997 1996
------------- ------------ --------------
Realized gains (losses):
Fixed maturities $ 38,391 $ 15,966 $ (11,624)
Mortgage loans on real estate 424 1,081 1,143
Real estate 363
Provisions (642) (7,610) (10,597)
============= ============ ==============
Net realized gains (losses) on investment $ 38,173 $ 9,800 $ (21,078)
============= ============ ==============
6. SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 1998 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ------------ ----------- ----------- -----------
Held-to-Maturity:
U.S. Treasury
Securities
and obligations of $ 34,374 $ 1,822 $ $ 36,196 $ 34,374
U.S.
Government Agencies
Collateralized mortgage
obligations 194
10,135 9,941 10,135
Public utilities 213,256 12,999 460 225,795 213,256
Corporate bonds 1,809,957 78,854 3,983 1,884,828 1,809,957
Foreign governments 782
10,133 10,915 10,133
State and 121,963 9,298 131,261 121,963
municipalities
----------- ------------ ----------- ----------- -----------
$ 2,199,818 $ 103,755 $ 4,637 $ 2,298,936 $ 2,199,818
=========== ============ ========= =========== ===========
Available-for-Sale:
U.S. Treasury
Securities
and obligations of
U.S.
Government Agencies:
Collateralized
mortgage
obligations $ 863,479 $ 39,855 $ 1,704 $ 901,630 $ 901,630
Direct mortgage
pass-
through 467,100 4,344 692 470,752 470,752
certificates
Other 191,138 1,765 788 192,115 192,115
Collateralized mortgage
obligations 926,797 16,260 1,949 941,108 941,108
Public utilities 464,096 14,929 36 478,989 478,989
Corporate bonds 3,557,209 123,318 17,420 3,663,107 3,663,107
Foreign governments 2,732
56,505 59,237 59,237
State and 226,208 4,588 1,008 229,788 229,788
municipalities
----------- ------------ ----------- ----------- -----------
$ 6,752,532 $ 207,791 $ 23,597 $ 6,936,726 $ 6,936,726
=========== ============ =========== =========== ===========
Fixed maturities owned at December 31, 1997 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ------------ ------------ ----------- -----------
Held-to-Maturity:
U.S. Treasury
Securities
and obligations of
U.S.
Government Agencies $ $ 1,186 $ 25 $ $
25,883 27,044 25,883
Collateralized
mortgage
obligations 174
5,006 5,180 5,006
Public utilities 11,214 3 256,605 245,394
245,394
Corporate bonds 1,668,710 57,036 3,069 1,722,677 1,668,710
Foreign governments 659
10,268 10,927 10,268
State and 1,588 129,043 127,455
municipalities 127,455
----------- ------------ ------------ ----------- -----------
$ 2,082,716 $ 71,857 $ 3,097 $ 2,151,476 $ 2,082,716
=========== ============ ============ =========== ===========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
------------ ----------- ----------- ----------- -----------
Available-for-Sale:
U.S. Treasury Securities
and obligations of
U.S.
Government Agencies:
Collateralized
mortgage
obligations $ $ 17,339 $ 310 $ 670,004 $ 670,004
652,975
Direct mortgage
pass-
through 7,911 2,668 922,459 922,459
certificates 917,216
Other 1,794 244 298,887 298,887
297,337
Collateralized mortgage
obligations 19,494 1,453 700,199 700,199
682,158
Public utilities 8,716 1,320 556,831 556,831
549,435
Corporate bonds 3,265,039 107,740 4,350 3,368,429 3,368,429
Foreign governments 4,115 60 135,641 135,641
131,586
State and municipalities 503 46,179 46,179
45,676
------------ ----------- ----------- ----------- -----------
$ 6,541,422 $ 167,612 $ 10,405 $ 6,698,629 $ 6,698,629
============ =========== =========== =========== ===========
The collateralized mortgage obligations consist primarily of sequential
and planned amortization classes with final stated maturities of two to
thirty years and average lives of less than one to fifteen years.
Prepayments on all mortgage-backed securities are monitored monthly and
amortization of the premium and/or the accretion of the discount
associated with the purchase of such securities is adjusted by such
prepayments.
See Note 8 for additional information on policies regarding estimated fair
value of fixed maturities.
The amortized cost and estimated fair value of fixed maturity investments
at December 31, 1998, by projected maturity, are shown below. Actual
maturities will likely differ from these projections because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Held-to-Maturity Available-for-Sale
------------------------------ --------- --------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
------------- -------------- ------------ --------------
Due in one year or less 316,174 321,228 235,842 252,067
Due after one year
through five years 925,016 961,592 1,279,123 1,309,202
Due after five years
through ten years 675,444 722,685 769,278 803,498
Due after ten years 130,480 138,119 449,273 457,785
Mortgage-backed
securities 10,135 9,941 2,257,376 2,313,490
Asset-backed securities 142,569 145,371 1,761,640 1,800,684
============= ============== ============= =============
2,199,818 2,298,936 6,752,532 6,936,726
============= ============== ============= =============
Proceeds from sales of securities available-for-sale were $6,169,678,
$3,174,246, and $3,569,608 during 1998, 1997, and 1996, respectively. The
realized gains on such sales totaled $41,136, $20,543, and $24,919 for
1998, 1997, and 1996, respectively. The realized losses totaled $8,643,
$10,643, and $40,748 for 1998, 1997, and 1996, respectively. During the
years 1998, 1997, and 1996 held-to-maturity securities with an amortized
cost of $9,920, $0, and $0 were sold due to credit deterioration with
insignificant gains and losses.
At December 31, 1998 and 1997, pursuant to fully collateralized securities
lending arrangements, the Company had loaned $115,168 and $162,817 of
fixed maturities, respectively.
The Company engages in hedging activities to manage interest rate and
exchange risk. The following table summarizes the 1998 financial hedge
instruments:
Notional Strike/Swap
December 31, 1998 Amount Rate Maturity
------------------------ -------------- ------------------------- ---------------------
Interest Rate Floor $ 100,000 4.50% (LIBOR) 11/99
Interest Rate Caps 1,070,000 6.75% - 11.82% (CMT) 12/99 - 10/03
Interest Rate Swaps 242,451 4.95% - 9.35% 08/99 - 02/03
Foreign Currency
Exchange Contracts 34,123 N/A 05/99 - 07/06
Equity Swap 95,652 4.00% 12/99
The following table summarizes the 1997 financial hedge instruments:
Notional Strike/Swap
December 31, 1997 Amount Rate Maturity
------------------------ -------------- -------------------------- ---------------------
Interest Rate Floor $ 100,000 4.5% (LIBOR) 1999
Interest Rate Caps 565,000 6.75% - 11.82% (CMT) 1999 - 2002
Interest Rate Swaps 212,139 6.20% - 9.35% 01/98 - 02/03
Foreign Currency
Exchange Contracts 57,168 N/A 09/98 - 07/06
Equity Swap 100,000 5.64% 12/98
LIBOR - London Interbank Offered Rate
CMT - Constant Maturity Treasury Rate
The Company has established specific investment guidelines designed to
emphasize a diversified and geographically dispersed portfolio of
mortgages collateralized by commercial and industrial properties located
in the United States. The Company's policy is to obtain collateral
sufficient to provide loan-to-value ratios of not greater than 75% at the
inception of the mortgages. At December 31, 1998, approximately 33% of the
Company's mortgage loans were collateralized by real estate located in
California.
The following represents impairments and other information with respect to
impaired loans:
1998 1997
--------------- -------------
Loans with related allowance for credit losses of
$2,492 and $2,493 $ 13,192 $ 13,193
Loans with no related allowance for credit losses 10,420 20,013
Average balance of impaired loans during the year 31,193 37,890
Interest income recognized (while impaired) 2,308 2,428
Interest income received and recorded (while impaired)
using the cash basis method of recognition 2,309 2,484
As part of an active loan management policy and in the interest of
maximizing the future return of each individual loan, the Company may from
time to time modify the original terms of certain loans. These
restructured loans, all performing in accordance with their modified terms
that are not impaired, aggregated $52,913 and $64,406 at December 31, 1998
and 1997, respectively.
The following table presents changes in allowance for credit losses:
1998 1997 1996
------------- ------------- --------------
Balance, beginning of year 67,242 65,242 63,994
Provision for loan losses 642 4,521 4,470
Chargeoffs (787) (2,521) (3,468)
Recoveries 145 246
============= ============= ==============
Balance, end of year 67,242 67,242 65,242
============= ============= ==============
7. COMMERCIAL PAPER
The Company has a commercial paper program that is partially supported by
a $50,000 standby letter-of-credit. At December 31, 1998, commercial paper
outstanding had maturities ranging from 69 to 118 days and interest rates
ranging from 5.10% to 5.22%. At December 31, 1997, maturities ranged from
41 to 99 days and interest rates ranged from 5.6% to 5.8%.
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
December 31,
----------------------------------------------------------
1998 1997
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------- ------------- -------------
ASSETS:
Fixed maturities and
short-term investments $ 9,556,713 $ 9,655,831 $ 9,180,476 $ 9,249,235
Mortgage loans on real
estate 1,133,468 1,160,568 1,235,594 1,261,949
Policy loans 2,858,673 2,858,673 2,657,116 2,657,116
Common stock 48,640 48,640 39,021 39,021
LIABILITIES:
Annuity contract reserves
without life contingencies 4,908,964 4,928,800 5,346,516 5,373,818
Policyholders' funds 181,779 181,779 165,106 165,106
Due to Parent Corporation 52,877 52,877 126,656 124,776
Repurchase agreements 244,258 244,258 325,538 325,538
Commercial paper 39,731 39,731 54,058 54,058
HEDGE CONTRACTS:
Interest rate floor 17 17 25 25
Interest rate caps 971 971 130 130
Interest rate swaps 6,125 6,125 4,265 4,265
Foreign currency exchange
contracts 689 689 3,381 3,381
Equity swap (8,150) (8,150) 856 856
The estimated fair value of financial instruments have been determined
using available information and appropriate valuation methodologies.
However, considerable judgement is necessarily required to interpret
market data to develop estimates of fair value. Accordingly, the estimates
presented are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
The estimated fair value of fixed maturities that are publicly traded are
obtained from an independent pricing service. To determine fair value for
fixed maturities not actively traded, the Company utilized discounted cash
flows calculated at current market rates on investments of similar quality
and term.
Mortgage loans fair value estimates generally are based on a discounted
cash flow basis. A discount rate "matrix" is incorporated whereby the
discount rate used in valuing a specific mortgage generally corresponds to
that mortgage's remaining term. The rates selected for inclusion in the
discount rate "matrix" reflect rates that the Company would quote if
placing loans representative in size and quality to those currently in the
portfolio.
Policy loans accrue interest generally at variable rates with no fixed
maturity dates and, therefore, estimated fair value approximates carrying
value.
The fair value of annuity contract reserves without life contingencies is
estimated by discounting the cash flows to maturity of the contracts,
utilizing current crediting rates for similar products.
The estimated fair value of policyholders' funds is the same as the
carrying amount as the Company can change the crediting rates with 30 days
notice.
The estimated fair value of due to Parent Corporation is based on
discounted cash flows at current market spread 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 the
liabilities.
The estimated fair value of financial hedge instruments, all of which are
held for other than trading purposes, is the estimated amount the Company
would receive or pay to terminate the agreement at each year-end, taking
into consideration current interest rates and other relevant factors.
Included in the net gain position for interest rates swaps are $0 of
unrealized losses in 1998 and 1997. Included in the net gain position for
foreign currency exchange contracts are $932 and $0 of loss exposures in
1998 and 1997, respectively.
9. EMPLOYEE BENEFIT PLANS
Effective January 1, 1997, all employees of the U.S. operations of the
Parent Corporation and the related benefit plans were transferred to the
Company. See Note 3 for further discussion.
The Company's Parent had previously accounted for the pension plan under
the Canadian Institute of Chartered Accountants (CICA) guidelines and had
recorded a prepaid pension asset of $19,091. As U.S. generally accepted
accounting principles do not materially differ from these CICA guidelines
and the transfer was between related parties, the prepaid pension asset
was transferred at carrying value. As a result, the Company recorded the
following effective January 1, 1997:
Prepaid pension cost 19,091 Undistributed earnings on 3,608
participating business
Stockholder's equity 15,483
------------ -----------
19,091 19,091
The following table summarizes changes from 1997 to 1998 and from 1996 to
1997, in the benefit obligations and in plan assets for the Company's
defined benefit pension plan and post-retirement medical plan. There is no
additional minimum pension liability required to be recognized. There were
no amendments to the plans due to the acquisition of AH&L.
Post-Retirement
Pension Benefits Medical Plan
------------------------- ------------------------
1998 1997 1998 1997
----------- ------------ ----------- -----------
Change in benefit obligation
Benefit obligation at beginning of $ 115,057 $ 96,417 $ 19,454 $ 16,160
year
Service cost 6,834 5,491 1,365 1,158
Interest cost 7,927 7,103 1,341 1,191
Actuarial gain (loss) 5,117 9,470 (1,613) 1,500
Benefits paid (3,630) (3,424) (603) (555)
----------- ------------ ----------- -----------
Benefit obligation at end of year 131,305 115,057 19,944 19,454
----------- ------------ ----------- -----------
Change in plan assets
Fair value of plan assets at
beginning of year 162,879 138,221
Actual return on plan assets 23,887 28,082
Benefits paid (3,630) (3,424)
----------- ------------ ----------- -----------
Fair value of plan assets at end of
year 183,136 162,879
----------- ------------ ----------- -----------
Funded status 51,831 47,822 (19,944) (19,454)
Unrecognized net actuarial loss (11,405) (6,326) (113) 1,500
Unrecognized net obligation or
(asset)
at transition (19,684) (21,198) 14,544 15,352
=========== ============ =========== ===========
Prepaid (accrued) benefit cost $ 20,742 $ 20,298 $ (5,513) $ (2,602)
=========== ============ =========== ===========
Weighted-average assumptions as of
December 31
Discount rate 6.50% 7.00% 6.50% 7.00%
Expected return on plan assets 8.50% 8.50% 8.50% 8.50%
Rate of compensation increase 4.00% 4.50% 4.00% 4.50%
Components of net periodic
benefit cost
Service cost $ 6,834 $ 5,491 $ 1,365 $ 1,158
Interest cost 7,927 7,103 1,341 1,191
Expected return on plan assets (13,691) (12,286)
Amortization of transition (1,514) (1,514) 808 808
obligation
----------- ----------- ---------- ----------
=========== =========== ========== ==========
Net periodic (benefit) cost $ (444) $ (1,206) $ 3,514 $ 3,157
=========== =========== ========== ==========
The Company-sponsored post-retirement medical plan (medical plan) provides
health benefits to employees. The medical plan is contributory and
contains other cost sharing features, which may be adjusted annually for
the expected general inflation rate. The Company's policy will be to fund
the cost of the medical plan benefits in amounts determined at the
discretion of management.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the medical plan. For measurement purposes, a 6.5% annual
rate of increase in the per capita cost of covered health care benefits
was assumed. A one-percentage-point change in assumed health care cost
trend rates would have the following effects:
1-Percentage 1-Percentage
Point Point
Increase Decrease
-------------- ----------------
Effect on total of service and interest cost
on components 649 1,140
Effect on post-retirement benefit obligation 4,129 3,098
The Company sponsors a defined contribution 401(k) retirement plan which
provides eligible participants with the opportunity to defer up to 15% of
base compensation. The Company matches 50% of the first 5% of participant
pre-tax contributions. Company contributions for the years ended December
31, 1998 and 1997 totaled $3,915 and $3,475, respectively.
The Company has a deferred compensation plan providing key executives with
the opportunity to participate in an unfunded, deferred compensation
program. Under the program, participants may defer base compensation and
bonuses, and earn interest on their deferred amounts. The program is not
qualified under Section 401 of the Internal Revenue Code. The total of
participant deferrals, which is reflected in other liabilities, was
$16,102 and $13,952 at December 31, 1998 and 1997, respectively. The
participant deferrals earn interest at a rate based on the average 10-year
composite government securities rate plus 1.5%. The interest expense
related to this plan was $1,185 and $1,019 in 1998 and 1997, respectively.
The Company also provides a supplemental executive retirement plan (SERP)
to certain key executives. This plan provides key executives with certain
benefits upon retirement, disability, or death based upon total
compensation. The Company has purchased individual life insurance policies
with respect to each employee covered by this plan. The Company is the
owner and beneficiary of the insurance contracts. The incremental expense
for this plan for 1998 and 1997 was $2,840 and $2,531, respectively. The
total liability of $9,349 and $6,509 as of December 31, 1998 and 1997 is
included in other liabilities.
10. FEDERAL INCOME TAXES
The following is a reconciliation between the federal income tax rate and
the Company's effective rate after giving effect to the reclassifications
discussed below:
1998 1997 1996
----------- ----------- ---------
Federal tax rate 35.0 % 35.0 % 35.0 %
Change in tax rate resulting from:
Settlement of Parent tax exposures (20.2) (18.9)
Provision for contingencies 7.7 3.4
Prior year tax adjustment (1.5) 0.5 (1.4)
Other, net (0.1) 0.9 0.3
=========== =========== =========
Total 33.4 % 23.9 % 18.4 %
=========== =========== =========
The Company's income tax provision was favorably impacted in 1997 and 1996
by releases of contingent liabilities relating to taxes of the Parent
Corporation's U.S. branch associated with blocks of business that were
transferred from the Parent Corporation's U.S. branch to the Company from
1989 to 1993; the Company had agreed to the transfer of these tax
liabilities as part of the transfer of this business. The releases
recorded in 1997 and 1996 reflected the resolution of certain tax issues
with the Internal Revenue Service (IRS) relating to the 1990-1991 and
1988-1989 audit years, respectively. The releases totaled $42,150 for 1997
and $31,200 for 1996; however, $15,100 of the release in 1997 was
attributable to participating policyholders and therefore had no effect on
the net income of the Company since that amount was credited to the
provision for policyholders' share of earnings (losses).
The 1997 and 1996 releases were recorded in revenues in the Company's
prior financial statements, but have been reclassified in the accompanying
consolidated financial statements as a component of the current income tax
provisions for those years.
In addition to these releases of contingent tax liabilities, the Company's
income tax provisions for 1997 and 1996 also reflect increases for other
contingent items relating to open tax years where the Company determined
it was probable that additional taxes could be owed based on changes in
facts and circumstances. The increase in 1997 was $16,000, of which
$10,100 was attributable to participating policyholders and therefore had
no effect on the net income of the Company. The increase in 1996 was
$5,600. These increases in contingent tax liabilities have been reflected
as a component of the deferred income tax provisions for 1997 and 1996 as
the Company does not expect near term resolution of these contingencies.
Excluding the effect of the 1997 and 1996 tax items discussed above, the
effective tax rates for 1997 and 1996 were 34.1% and 33.9%, respectively.
Temporary differences which give rise to the deferred tax assets and
liabilities as of December 31, 1998 and 1997 are as follows:
1998 1997
--------------------------- -------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
------------- ------------ ------------ -----------
Policyholder reserves 143,244 159,767
Deferred policy acquisition costs 39,933 47,463
Deferred acquisition cost proxy
tax 100,387 79,954
Investment assets 19,870 5,574
Net operating loss carryforwards 2,867 9,427
Other 6,566 1,279
------------- ------------ ------------ -----------
Subtotal 253,064 59,803 250,427 53,037
Valuation allowance (1,778) (3,570)
============= ============ ============ ===========
Total Deferred Taxes 251,286 59,803 246,857 53,037
============= ============ ============ ===========
Amounts included in investment assets above include $34,556 and $30,085
related to the unrealized gains on the Company's fixed maturities
available-for-sale at December 31, 1998 and 1997, respectively.
The Company files a separate tax return and, therefore, losses incurred by
subsidiaries cannot be offset against operating income of the Company. At
December 31, 1998, the Company's subsidiaries had approximately $8,193 of
net operating loss carryforwards, expiring through the year 2011. The tax
benefit of subsidiaries' net operating loss carryforwards, net of a
valuation allowance of $0 and $1,809 are included in the deferred tax
assets at December 31, 1998 and 1997, respectively.
The Company's valuation allowance was increased (decreased) in 1998, 1997,
and 1996 by $(1,792), $34, and $1,463, respectively, as a result of the
re-evaluation by management of future estimated taxable income in its
subsidiaries.
Under pre-1984 life insurance company income tax laws, a portion of life
insurance company gain from operations was not subject to current income
taxation but was accumulated, for tax purposes, in a memorandum account
designated as "policyholders' surplus account." The aggregate accumulation
in the account is $7,742 and the Company does not anticipate any
transactions, which would cause any part of the amount to become taxable.
Accordingly, no provision has been made for possible future federal income
taxes on this accumulation.
11. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income". This
Statement establishes new rules for reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no
impact on the Company's net income or stockholders' equity. This Statement
requires unrealized gains or losses on the Company's available-for-sale
securities and related offsets for reserves and deferred policy
acquisition costs, which prior to adoption were reported separately in
stockholder's equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the
requirements of Statement No. 130.
Other comprehensive income at December 31, 1998 is summarized as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
-------------- ------------------------------
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising
during
the period $ 39,430 $ (13,800) $ 25,630
Less: reclassification adjustment
for
(gains) losses realized in net (14,350) 5,022 (9,328)
income
-------------- ---------------- ------------
Net unrealized gains 25,080 (8,778) 16,302
Reserve and DAC adjustment (11,614) 4,065 (7,549)
-------------- ---------------- ------------
============== ================ ============
Other comprehensive income $ 13,466 $ (4,713) $ 8,753
============== ================ ============
Other comprehensive income at December 31, 1997 is summarized as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
-------------- ---------------- --------------
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising
during
the period $ 80,821 $ (28,313) $ 52,508
Less: reclassification adjustment
for
(gains) losses realized in net 2,012 (704) 1,308
income
-------------- ---------------- --------------
Net unrealized gains 82,833 (29,017) 53,816
Reserve and DAC adjustment (24,554) 8,594 (15,960)
============== ================ ==============
Other comprehensive income $ 58,279 $ (20,423) $ 37,856
============== ================ ==============
Other comprehensive loss at December 31, 1996 is summarized as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
-------------- ---------------- --------------
Unrealized gains on available-for-sale securities:
Unrealized holding gains (losses)
arising during the period $ (125,559) $ 43,971 $ (81,588)
Less: reclassification adjustment
for
(gains) losses realized in net 19,381 (6,783) 12,598
income
-------------- ---------------- --------------
Net unrealized gains (losses) (106,178) 37,188 (68,990)
--------------
Reserve and DAC adjustment 38,736 (13,558) 25,178
============== ================ ==============
Other comprehensive loss $ (67,442) $ 23,630 $ (43,812)
============== ================ ==============
12. STOCKHOLDER'S EQUITY, DIVIDEND RESTRICTIONS, AND OTHER MATTERS
Effective September 30, 1998, the Company purchased all of its outstanding
series of preferred stock, which were owned by the Parent Corporation, for
$121,800.
The Company's net income and capital and surplus, as determined in
accordance with statutory accounting principles and practices for December
31 are as follows:
1998 1997 1996
--------------- ------------- -------------
(Unaudited)
Net income 225,863 $ 181,312 $ 180,634
Capital and surplus 727,124 759,429 713,324
The maximum amount of dividends which can be paid to stockholders by
insurance companies domiciled in the State of Colorado are subject to
restrictions relating to statutory surplus and statutory net gain from
operations. Statutory surplus and net gains from operations at December
31, 1998 were $727,124 and $225,586 (unaudited), respectively. The Company
should be able to pay up to $225,586 (unaudited) of dividends in 1999.
Dividends of $6,692, $8,854, and $8,587 were paid on preferred stock in
1998, 1997, and 1996, respectively. In addition, dividends of $73,344,
$62,540, and $48,083 were paid on common stock in 1998, 1997, and 1996,
respectively. Dividends are paid as determined by the Board of Directors.
The Company is involved in various legal proceedings, which arise in the
ordinary course of its business. In the opinion of management, after
consultation with counsel, the resolution of these proceedings should not
have a material adverse effect on its financial position or results of
operations.
13. STOCK OPTIONS
The Company is an indirect subsidiary of Great-West Lifeco Inc. (Lifeco).
Lifeco has a stock option plan (the Lifeco plan) that provides for the
granting of options for common shares of Lifeco to certain officers and
employees of Lifeco and its subsidiaries, including the Company. Options
may be awarded at no less than the market price on the date of the grant.
Termination of employment prior to vesting results in forfeiture of the
options, unless otherwise determined by a committee that administers the
Lifeco plan. As of December 31, 1998, 1997 and 1996, stock available for
award under the Lifeco plan aggregated 1,424,400, 3,440,000 and 6,244,000
shares.
The plan provides for the granting of options with varying terms and
vesting requirements. The basic options under the plan become exercisable
twenty percent per year commencing on the first anniversary of the grant
and expire ten years from the date of grant. Options granted in 1997 and
1998 totaling 1,832,000 and 278,000, respectively, become exercisable if
certain long-term cumulative financial targets are attained. If
exercisable, the exercise period runs from April 1, 2002 to June 26, 2007.
Additional options granted in 1998 totaling 380,000 become exercisable if
certain sales or financial targets are attained. During 1998, 30,000 of
these options vested and accordingly, the Company recognized compensation
expense of $116. If exercisable, the exercise period runs from the date
that the particular options become exercisable until January 27, 2008.
The following table summarizes the status of, and changes in, Lifeco
options outstanding and the weighted-average exercise price (WAEP) for the
years ended December 31. As the options granted relate to Canadian stock,
the values, which are presented in U.S. dollars, will fluctuate as a
result of exchange rate fluctuations:
1998 1997 1996
---------------------- ---------------------- ----------------------
Options WAEP Options WAEP Options WAEP
------------ -------- ----------- -------- ----------- ---------
Outstanding, Jan. 1, 5,736,000 $ 7.71 4,104,000 $ 6.22 0 $ .00
Granted 988,000 13.90 1,932,000 10.82 4,104,000 6.62
Exercised 99,176 6.33 16,000 5.95 0 .00
Expired or canceled 80,000 13.05 284,000 6.12 0 .00
============ ======== =========== ======== =========== =========
Outstanding, Dec. 31, 6,544,824 8.07 5,736,000 7.71 4,104,000 6.22
============ ======== =========== ======== =========== =========
Options exercisable
at year-end 1,652,424 $ 5.72 760,800 $ 5.96 0 $ .00
============ ======== =========== ======== =========== =========
Weighted average fair
value of options
granted during year $ 1.18 $ 2.65 $ 4.46
============ =========== ===========
The following table summarizes the range of exercise prices for
outstanding Lifeco common stock options at December 31, 1998:
Outstanding Exercisable
---------------------------------------- ----------------------------
Average Average
Exercise Average Exercise Exercise
Price Range Options Life Price Options Price
------------------- -------------- ---------- ----------- ------------- ------------
$ 5.54 - $ 7.36 3,804,824 7.62 $ 5.61 1,622,424 $ 5.58
$10.61 - $13.23 2,740,000 8.70 $ 11.48 30,000 $ 13.23
Of the exercisable Lifeco options, 1,622,424 relate to basic option grants
and 30,000 relate to variable grants.
Power Financial Corporation (PFC), which is the parent corporation of
Lifeco, has a stock option plan (the PFC plan) that provides for the
granting of options for common shares of PFC to key employees of PFC and
its affiliates. Prior to the creation of the Lifeco plan in April 1996,
certain officers of the Company participated in the PFC plan. Under the
PFC plan, options may be awarded at no less than the market price on the
date of the grant. Termination of employment prior to vesting results in
forfeiture of the options, unless otherwise determined by a committee that
administers the PFC plan. As of December 31, 1998, 1997 and 1996, stock
available for award under the PFC plan aggregated 4,400,800, 4,400,800 and
5,440,800 shares.
Options granted to officers of the Company under the PFC plan become
exercisable twenty percent per year commencing on the date of the grant
and expire ten years from the date of grant.
The following table summarizes the status of, and changes in, PFC options
outstanding and the weighted-average exercise price (WAEP) for the years
ended December 31. As the options granted relate to Canadian stock, the
values, which are presented in U.S. dollars, will fluctuate as a result of
exchange rate fluctuations:
1998 1997 1996
---------------------- ---------------------- ---------------------
Options WAEP Options WAEP Options WAEP
----------- --------- ----------- -------- ----------- --------
Outstanding, Jan. 1, 1,076,000 $ 3.05 1,329,200 $ 3.14 1,436,000 $ 3.17
Exercised 720,946 3.60 253,200 2.68 106,800 2.95
=========== ========= =========== ======== =========== ========
Outstanding, Dec. 31, 355,054 2.89 1,076,000 3.05 1,329,200 3.14
=========== ========= =========== ======== =========== ========
Options exercisable
at year-end 355,054 $ 2.89 1,076,000 $ 3.05 1,301,200 $ 3.15
=========== ========= =========== ======== =========== ========
As of December 31, 1998, the PFC options outstanding have exercise prices
between $2.25 and $3.44 and a weighted-average remaining contractual life
of 2.99 years.
The Company accounts for stock-based compensation using the intrinsic
value method prescribed by APB No. 25, "Accounting for Stock Issued to
Employees", under which compensation expenses for stock options are
generally not recognized for stock option awards granted at or above fair
market value. Had compensation expense for the Company's stock option plan
been determined based upon fair values at the grant dates for awards under
the plan in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net income, would have been reduced by $727,
$608, and $257, in 1998, 1997, and 1996, respectively. The fair value of
each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumption used for those options granted in 1998, 1997, and 1996,
respectively: dividend yield of 3.00%, expected volatility of 34.05%,
24.04%, and 15.61%, risk-free interest rates of 4.79%, 4.72%, and 4.67%,
and expected lives of 7.5 years.
14. SEGMENT INFORMATION
The Company has two reportable segments: Employee Benefits and Financial
Services. The Employee Benefits segment markets group life and health and
401(k) products to small and mid-sized corporate employers. The Financial
Services segment markets and administers savings products to public and
not-for-profit employers and individuals and offers life insurance
products to individuals and businesses.
The accounting policies of the segments are the same as those described in
Note 1. The Company evaluates performance based on profit or loss from
operations after income taxes.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately as each
segment has unique distribution channels.
The Company's operations are not materially dependent on one or a few
customers, brokers or agents.
Summarized segment financial information for the year ended and as of
December 31 was as follows:
Year ended December 31, 1998
Operations:
Employee Financial Total
Benefits Services U.S.
-------------- -------------- -------------
Revenue:
Premium income $ 746,898 $ 247,965 $ 994,863
Fee income 444,649 71,403 516,052
Net investment income 95,118 802,242 897,360
Realized investment gains (losses) 8,145 30,028 38,173
-------------- -------------- -------------
Total revenue 1,294,810 1,151,638 2,446,448
Benefits and Expenses:
Benefits 590,058 872,411 1,462,469
Operating expenses 546,959 141,269 688,228
-------------- -------------- -------------
Total benefits and expenses 1,137,017 1,013,680 2,150,697
Net operating income before income
taxes 157,793 137,958 295,751
Income taxes 50,678 48,158 98,836
============== ============== =============
Net income $ 107,115 $ 89,800 $ 196,915
============== ============== =============
Assets:
Employee Financial Total
Benefits Services U.S.
--------------- -------------- --------------
Investment assets $ 1,434,691 $ 12,235,845 $ 13,670,536
Separate account assets 5,704,313 4,395,230 10,099,543
Other assets 567,126 785,940 1,353,066
=============== ============== ==============
Total assets $ 7,706,130 $ 17,417,015 $ 25,123,145
=============== ============== ==============
Year ended December 31, 1997
Operations:
Employee Financial Total
Benefits Services U.S.
-------------- ------------- -------------
Revenue:
Premium income $ 465,143 $ 368,036 $ 833,179
Fee income 358,005 62,725 420,730
Net investment income 100,067 781,606 881,673
Realized investment gains (losses) 3,059 6,741 9,800
-------------- ------------- -------------
Total revenue 926,274 1,219,108 2,145,382
Benefits and Expenses:
Benefits 371,333 1,013,717 1,385,050
Operating expenses 427,969 123,756 551,725
-------------- ------------- -------------
Total benefits and expenses 799,302 1,137,473 1,936,775
Net operating income before income
taxes 126,972 81,635 208,607
Income taxes 28,726 21,121 49,847
-------------
============== =============
Net income $ 98,246 $ 60,514 $ 158,760
============== =============
===============================================================================================================
Assets:
Employee Financial Total
Benefits Services U.S.
--------------- -------------- --------------
Investment assets $ 1,346,944 $ 11,859,038 $ 13,205,982
Separate account assets 4,533,516 3,313,935 7,847,451
Other assets 355,764 668,518 1,024,282
=============== ============== ==============
Total assets $ 6,236,224 $ 15,841,491 $ 22,077,715
=============== ============== ==============
Year ended December 31, 1996
Operations:
Employee Financial Total
Benefits Services U.S.
--------------- -------------- -------------
Revenue:
Premium income $ 486,565 $ 342,884 $ 829,449
Fee income 321,074 26,445 347,519
Net investment income 87,511 747,126 834,637
Realized investment gains (losses) (2,661) (18,417) (21,078)
--------------- -------------- -------------
Total revenue 892,489 1,098,038 1,990,527
Benefits and Expenses:
Benefits 406,143 949,821 1,355,964
Operating expenses 368,258 101,358 469,616
--------------- -------------- -------------
Total benefits and expenses 774,401 1,051,179 1,825,580
Net operating income before income
taxes 118,088 46,859 164,947
Income taxes 22,874 7,498 30,372
=============== ============== =============
Net income $ 95,214 $ 39,361 $ 134,575
=============== ============== =============
The following table, which summarizes premium and fee income by segment,
represents supplemental information:
1998 1997 1996
------------- ------------- -------------
Premium Income
Employee Benefits
Group Life & Health $ 746,898 $ 465,143 $ 486,565
------------- ------------- -------------
Total Employee Benefits 746,898 465,143 486,565
------------- ------------- -------------
Financial Services
Savings 16,765 22,634 26,655
Individual Insurance 231,200 345,402 316,229
------------- ------------- -------------
Total Financial Services 247,965 368,036 342,884
------------- ------------- -------------
Premium income $ 994,863 $ 833,179 $ 829,449
============= ============= =============
Fee Income
Employee Benefits
Group Life & Health $ 366,805 $ 305,302 $ 276,688
401(k) 77,844 52,703 44,386
------------- ------------- -------------
------------- ------------- -------------
Total Employee Benefits 444,649 358,005 321,074
------------- ------------- -------------
------------- ------------- -------------
Financial Services
Savings 71,403 62,725 26,445
------------- ------------- -------------
Total Financial Services 71,403 62,725 26,445
------------- ------------- -------------
============= ============= =============
Fee income $ 516,052 $ 420,730 $ 347,519
============= ============= =============
- -----------------------------------------------------------
Back Cover
The Securities and Exchange Commission maintains an Internet web site
(http://www.sec.gov) that contains additional information about Great-West Life
& Annuity Insurance Company, the Contract and the Series Account which may be of
interest to you. The web site also contains additional information about the
Portfolios.