As filed with the Securities and Exchange Commission on January , 2002
Registration No. 333-67902
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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GE LIFE AND ANNUITY ASSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Virginia 54-0283385 63
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(State or other (I.R.S. Employer (Primary Standard Industrial
jurisdiction Identification Number) Classification Code)
of incorporation
or organization)
6610 W. Broad Street
Richmond, Virginia 23230
(804) 281-6000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
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Heather C. Harker
Assistant Vice President and Associate General Counsel
GE Life and Annuity Assurance Company
6610 W. Broad Street
Richmond, Virginia 23230
(804) 281-6000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Stephen E. Roth, Esq.
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of the registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Title of each Proposed maximum
Class of Amount Proposed maximum aggregate Amount of
Securities to be to be offering price offering registration
Registered registered per unit price(1) fee**
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Scheduled Purchase
Payment Deferred
Variable Annuity
Contracts........ * * $11,640,000 $2,910
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* The proposed maximum aggregate offering price is estimated solely for the
purposes of determining the registration fee. The amount to be registered
and the proposed maximum offering price per unit are not applicable since
these securities are not issued in predetermined amounts or units.
** Registration fee paid with initial Registration Statement.
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The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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This Prospectus contained herein does not contain all of the information
permitted by the Securities and Exchange Commission. Therefore, this
registration statement on Form S-1 for GE Life and Annuity Assurance Company
incorporates by reference the Statement of Additional Information and Part C
contained in the filing of Pre-Effective Amendment No. 1 of the registration
statement on Form N-4 (1933 Act File No. 333- 67902), filed on the same date
as the date of filing of this registration statement, for GE Life & Annuity
Separate Account 4. This information may be obtained free of charge by writing
or calling our Home Office.
GE Life & Annuity Separate Account 4
Prospectus For Scheduled Purchase Payment
Variable Deferred Annuity Contract
issued by:
GE Life and Annuity Assurance Company
6610 West Broad Street
Richmond, Virginia 23230
Telephone: 1-(800)-352-9910
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This Prospectus gives details about the Contract that you should know before
investing. Please read this Prospectus carefully and keep it for future
reference.
This Prospectus describes a scheduled purchase payment variable deferred
annuity contract (the "Contract") for individuals or groups and certain
qualified and non-qualified retirement plans. GE Life and Annuity Assurance
Company (the "Company," "we," "us," or "our") issues the Contract.
The Contract offers you the payment of periodic annuity benefits and the
accumulation of Contract Value. If you satisfy certain conditions, you will
receive lifetime annuity payments of a guaranteed minimum amount (the
"Guaranteed Minimum Income Payments") and the potential to receive more than
the guaranteed minimum amount.
To be eligible to receive Guaranteed Minimum Income Payments, the Contract
requires you to make monthly Scheduled Installments in predetermined amounts.
We must receive these installments by a set date each month. We allocate your
Scheduled Installment to a Subaccount of the Variable Account ("GE Life &
Annuity Separate Account 4") a separate account that invests in shares of the
Total Return Fund of GE Investments Funds, Inc. If we receive your monthly
payment before its Monthly Due Date, we will allocate it to the Guarantee
Account until the due date for that payment. On that Monthly Due Date, we will
transfer the early payment to the Subaccount. If we receive your monthly
payment more than 30 days after its due date, we will require you to pay
interest on that payment (in addition to the monthly billing fee) and make the
payment within one year of its due date to retain your eligibility to receive
Guaranteed Minimum Income Payments.
We anticipate that you will make your monthly payments under the Contract by
submitting monthly Scheduled Purchase Payments. However, we also allow you to
supplement or prepay these monthly Scheduled Purchase Payments. You may do this
by making a lump sum Flexible Purchase Payment of at least a certain amount. We
will allocate these supplemental payments to the Immediate Installment Account,
a non-unitized separate account that we have established ("GE Life & Annuity
Separate Account 6"); amounts allocated to that account will earn a
predetermined rate of interest. Depending on your instructions, we will use
these supplemental payments to either lower the amount of all or some of the
Scheduled Purchase Payments you must make each month or to prepay the amount of
all or some of your remaining Scheduled Installment payments. If you do not
provide transfer instructions when you make a supplemental payment, we will
allocate that payment to our Guarantee Account until we receive your transfer
instructions.
Before your annuity payments begin, you may surrender or take withdrawals from
your Contract. Amounts you surrender or withdraw are subject to a surrender or
access charge we assess; amounts you surrender or withdraw from the Immediate
Installment Account may also be subject to a Market Value Adjustment. You must
repay any amount you withdraw from the Variable Account, plus interest, within
one year of the withdrawal to retain your eligibility to receive Guaranteed
Minimum Income Payments.
1
The value of your Contract before annuity payments begin, and the full amount
of your annuity payments (if you lose your eligibility to receive Guaranteed
Minimum Income Payments) afterwards, will depend upon the investment
performance of the Total Return Fund of GE Investment Funds, Inc. You bear the
risk of investment loss.
You should not purchase this Contract unless you believe you can make all
Scheduled Installments and you intend to take your annuity benefits in the form
of monthly income payments.
The Securities and Exchange Commission ("SEC") has not approved or disapproved
these securities, nor has the SEC determined if this Prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
This Prospectus does not constitute an offering in any jurisdiction in which
such offering may not be lawfully made.
Your investment in the Contract:
. is Not a deposit of a bank
. is Not insured or guaranteed by the Federal Deposit Insurance Corporation
or any government agency
. is Not available in every state
. is Not guaranteed by us unless you make all monthly Scheduled
Installments in accordance with the Contract and you elect to receive
Monthly Income Payments on the date you scheduled your annuity payments
to begin.
A Statement of Additional Information, dated , 2002, which contains
additional information about the Contract has been filed with the Securities
and Exchange Commission and is incorporated by reference into this Prospectus.
A table of contents for the Statement of Additional Information appears on the
last page of this Prospectus.
For general information or to obtain free copies of the:
. Statement of Additional Information;
. annual report for the Variable Account;
. prospectus, annual report or semi-annual report for the
Total Return Fund of GE Investments Funds, Inc.; or
. any required forms,
call us at 1-800-352-9910; or
write us at GE Life and Annuity Assurance Company
6610 West Broad Street
Richmond, Virginia 23230
The Statement of Additional Information and other material
incorporated by reference can be found on the Securities and Exchange
Commission's website at:
www.sec.gov
The date of this Prospectus is , 2002.
2
Table of Contents
Definitions.................................................................
Expense Table...............................................................
Annual Expenses -- Total Return Fund of GE Investments Funds, Inc. .........
Synopsis....................................................................
Condensed Financial Information.............................................
Investment Results..........................................................
Financial Statements........................................................
The Company.................................................................
The Variable Account........................................................
The Guarantee Account and the Immediate Installment Account.................
The Contract................................................................
Surrenders and Partial Withdrawals..........................................
Charges and Other Deductions................................................
The Death Benefit...........................................................
Benefits at Annuity Commencement Date.......................................
Guaranteed Minimum Income Payments..........................................
Optional Payment Plans......................................................
Federal Tax Matters.........................................................
Voting Rights...............................................................
Requesting Payments.........................................................
Sales of the Contract.......................................................
Additional Information......................................................
Appendix....................................................................
3
Definitions
The following defined terms are used throughout this prospectus:
Accumulation Period -- The period from the date your Contract is issued until
the date annuity payments begin.
Accumulation Unit -- An accounting unit of measure we use to calculate the
value of the Subaccount until the date annuity payments begin.
Adjustment Account -- An account that we establish for each Contract to keep
track of the cumulative amount, if any, by which the Calculated Level Monthly
Benefits fall short of the Guaranteed Minimum Income Payments.
Annual Variable Annuity Benefit -- The Income Payment calculated annually by
multiplying the number of Annuity Units for a Contract by the Annuity Unit
value as of the Annuity Commencement Date and each Annuity Commencement Date
Anniversary.
Annuitant/Joint Annuitant -- The person(s) named in the Contract whose age and,
where appropriate, gender, determine Monthly Income Payments. The Owner must
also be named as the Annuitant unless the named Owner is not a natural person.
Two natural persons who are Joint Owners must also be Joint Annuitants.
Annuity Commencement Date -- The date annuity payments are scheduled to begin.
This date is indicated on your Contract's data pages. You cannot change the
Annuity Commencement Date after the Contract is issued.
Annuity Unit -- An accounting unit of measure we use to calculate the amount of
the second and each subsequent Annual Variable Annuity Benefit.
Annuity Year -- The twelve-month period beginning on the Annuity Commencement
Date or any anniversary of that date thereafter.
Calculated Level Monthly Benefit -- One-twelfth of the Annual Variable Annuity
Benefit plus level interest over a twelve-month period.
Code -- The Internal Revenue Code of 1986, as amended.
Contract Date -- The date we issue your Contract. Your Contract Date is shown
on your Contract's data pages.
Contract Value -- The sum of your Contract's Guarantee Account Value,
Subaccount Value, and Immediate Installment Account Value.
Contract Year -- A one year period of time beginning on the date your Contract
is issued or a Contract anniversary.
Death Benefit -- The benefit payable under a Contract upon the death of any
Owner (or the Annuitant if the Owner is a non-natural person) before the
Annuity Commencement Date.
Designated Beneficiary(ies) -- The person(s) designated by the Owner to receive
the Death Benefit.
4
Flexible Purchase Payment -- A Purchase Payment that is not a Scheduled
Purchase Payment.
General Account -- Assets of the Company that are not segregated in any of our
separate accounts.
Guarantee Account -- An account established in our General Account to hold
certain amounts under the Contracts as described in this Prospectus.
Guarantee Account Value -- Your Guarantee Account Value equals Purchase
Payments allocated to the Guarantee Account plus interest credited on those
payments, minus transfers and/or withdrawals made from the Guarantee Account
(including premium tax and surrender charges).
Guaranteed Minimum Income Payment -- The minimum amount of each monthly annuity
payment paid to you upon annuitization of the Contract, provided all Scheduled
Installments have been made to the Subaccount in accordance with the terms of
the Contract. The amount of each Guaranteed Minimum Income Payment is shown on
your Contract's data pages.
Immediate Installments -- A monthly series of equal transfers from the
Immediate Installment Account to the Subaccount.
Immediate Installment Account -- GE Life & Annuity Separate Account 6, a
separate account of the Company to which your Flexible Purchase Payments are
allocated.
Immediate Installment Account Value -- The present value of the future
Immediate Installments to be made from the Immediate Installment Account. This
amount includes any applicable Market Value Adjustment.
Income Payment -- One of a series of payments made under either the monthly
income benefit or one of the Optional Payment Plans.
Market Value Adjustment -- A positive or negative adjustment included in the
Contract Value when any amounts are surrendered or withdrawn (including Death
Benefit payments) from the Immediate Installment Account.
Monthly Due Date -- The date each month on which Scheduled Installments and
Scheduled Purchase Payments are due. This date is the same day in each month as
your Contract date. If the Monthly Due Date is the 29th, 30th or 31st of a
Month, then for months without such dates, the last day of that month is the
Monthly Due Date. In addition, if the Monthly Due Date falls on any date when
the New York Stock Exchange is closed, the amount of the Scheduled Installment,
if received, will be invested in the Subaccount on the next Valuation Day.
Monthly Income Payment -- The Income Payments we make to the payee after the
Annuity Commencement Date. The amount of a Monthly Income Payment remains
5
constant throughout an Annuity Year, but may increase or decrease from Annuity
Year to Annuity Year. However, the amount of the Monthly Income Payment is
guaranteed to never be below the Guaranteed Miminum Income Payment, provided
all contractual requirements are satisified.
Owner -- The person or persons (in the case of Joint Owners) entitled to
exercise all ownership rights stated in the Contract. The Owners are shown in
the Contract's data pages. "You" or "your" refers to the Owner or Joint Owners.
Purchase Payment -- Any payment applied to the Contract.
Scheduled Installment -- The amount required to be transferred or paid to the
Subaccount on the Monthly Due Date in order to keep the Guaranteed Minimum
Income Payment in effect.
Scheduled Purchase Payment -- The monthly Purchase Payment we require on the
Monthly Due Date to ensure that the Scheduled Installment for that month is
paid. This amount is shown on your Contract's data pages.
Subaccount -- A subdivision of the Variable Account that invests exclusively in
shares of the Total Return Fund of GE Investments Funds, Inc.
Subaccount Value -- The Subaccount Value is equal to:
.the sum of all Scheduled Installments made to the Subaccount; plus
.amounts adjusted for the reinvestment of dividends; plus or minus
.net capital gains or losses (realized or unrealized); minus
. any Contract charges (including premium tax or surrender charges); plus or
minus
.withdrawals repaid to or taken from the Subaccount.
Surrender Value -- The value of the Contract as of the date we receive your
written request for surrender at our Home Office, less any applicable premium
tax, surrender charge, access charge, plus or minus a Market Value Adjustment
(assessed against assets in the Immediate Installment Account).
Valuation Day -- Each day the New York Stock Exchange is open for regular
trading, except for days that the Total Return Fund of GE Investments Funds,
Inc. does not value its shares.
Valuation Period -- The period that starts at the close of regular trading on
the New York Stock Exchange on any Valuation Day and ends at the close of
regular trading on the next succeeding Valuation Day.
Variable Account -- GE Life & Annuity Separate Account 4, a separate account we
established to receive and invest the Scheduled Installments you make under
this Contract, in addition to amounts received from other variable annuity
contracts we issue.
6
Expense Table
The following table describes the various costs and expenses that you will pay
(either directly or indirectly) if you purchase this Contract. The table
reflects Variable Account expenses and expenses assessed against amounts you
allocate to the Immediate Installment Account and Guarantee Account. For more
complete descriptions of the various costs and expenses involved, see the
"Charges and Other Deductions" provision later in this Prospectus. Premium tax
charges also may apply, although they are not reflected in the table.
Owner Transaction Expenses:
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Maximum Surrender Charge for the Variable Account and the Guarantee Account
(as a percentage of Scheduled Installments):.............................. 9%
Surrender Charge
Contract Year (as a Percentage of the lesser of
in Which Surrender or Scheduled Installments made to date not
Partial Withdrawal is Made previously withdrawn and the amount withdrawn)
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1 9%
2 8%
3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 and after 1%
A surrender charge will not be assessed if the Surrender Value is applied to Optional Payment Plan 1, Plan 2 (with a
certain period of 10 or more years), or Plan 5.
Maximum Access Charge for the Immediate Installment Account (as a percentage
of the Immediate Installment Account Value):.............................. 6%
Access Charge
(as a percentage of
Complete and Partial Years Remaining On Each Flexible Purchase Payment Immediate Installment
until the Date Established for Installment Transfers to End Account value withdrawn)
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6 and more 6%
5 5%
4 4%
3 3%
2 2%
1 1%
All surrenders and withdrawals from the Immediate Installment Account will be subject to a Market Value Adjustment as well
as an Access Charge.
Annual Interest Rate Charged on Late Scheduled Installments................ 6%
Annual Interest Rate Charged on Withdrawal Repayments...................... 6%
7
Annual Expenses (effective annual rate of Variable
Account charges as a percentage of the daily net
assets of the Subaccount):
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Mortality and Expense Risk Charge:.................. 1.35%
Administrative Expense Charge:...................... 0.15%
Total Annual Expenses:............................. 1.50%
Other Expenses:/1/
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Monthly Billing Fee:................................ $10
We will not assess a billing charge if Scheduled
Purchase Payments are paid by means of an
electronic fund transfer payment.
Optional Rider Fees: (shown as a range from minimum
to maximum expenses)
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Unemployment Benefit (per $100 of waived Scheduled
Purchase Payment).................................. $3.00
Minimum/Maximum Disability Benefit (per $100 of
waived Scheduled Purchase Payment)/2............/.. $0.76/$8.11
Maximum Joint Annuitant Life Benefit (per $100 of
waived Scheduled Purchase Payment)/2............/.. $0.98/$8.57
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/1/We take payment for fees listed in this section prior to applying the
Purchase Payment to the Subaccount, Immediate Installment Account and/or
Guarantee Account.
/2/The fees charged for the Optional Riders vary depending upon the age of
Annuitant, the Annuitant's gender and the amount and duration of Scheduled
Installments.
8
Annual Expenses -- Total Return Fund of GE Investments Funds, Inc.
Annual expenses of the Total Return Fund of GE Investments Funds, Inc. for the
year ended December 31, 2000 (as a percentage of its average net assets) were:
Total
Management Other 12b-1 Annual
Fees Expenses Fee Expenses
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GE Investments Funds, Inc.
Total Return Fund 0.50% 0.04% N/A 0.54%
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The Total Return Fund of GE Investments Funds, Inc. is not subject to any fee
waivers or expense reimbursements.
We offer other variable annuity contracts funded by the Variable Account which
also may invest in the Total Return Fund of GE Investments Funds, Inc. These
contracts have different charges and offer different benefits that could affect
their investment subdivisions' performance.
EXAMPLES
The following examples show the costs that would be incurred under certain
hypothetical situations. The examples do not represent past or future expenses.
Your actual expenses may be more or less than those shown. The examples are
based on the annual expenses of the Total Return Fund of GE Investments Funds,
Inc. for the year ended December 31, 2000 (as shown above) and therefore do not
show any Market Value Adjustment or Access Charge.
Example 1 reflects the surrender charges, the $10 Monthly Billing Fee, Variable
Account Charges of 1.50% and the total maximum charges of $19.68 for the Rider
Options.
Examples 2 and 3 reflect the $10 Monthly Billing Fee, Variable Account Charges
of 1.50% and the total maximum charges of $19.68 for the Rider Options.
Deductions for premium taxes are not reflected, but do apply.
* * *
9
Examples: An Owner would pay the following expenses on a single $1,000
Scheduled Purchase Payment received on a Monthly Due Date, assuming a 5% annual
return on assets and the charges and expenses reflected in the preceding
paragraph.
(1) If you surrender your Contract at the end of the applicable period:
Subaccount Investing In: 1 Year 3 Years 5 Years 10 Years
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GE Investments Funds, Inc.
Total Return Fund $317.50 $340.76 $366.62 $453.69
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(2) If you do not surrender your Contract at the end of the applicable period:
Subaccount Investing In: 1 Year 3 Years 5 Years 10 Years
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GE Investments Funds, Inc.
Total Return Fund $227.50 $270.76 $316.62 $443.69
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(3) If you annuitize your contract at the end of the applicable time period:
Subaccount Investing In: 1 Year 3 Years 5 Years 10 Years
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GE Investments Funds, Inc.
Total Return Fund * * * $443.69
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*This Contract may not be annuitized prior to the 10th anniversary of the
Contract Date.
10
Synopsis
How does this Contract work? The Contract permits you to make Purchase Payments
during the Accumulation Period. During this period, we invest your Purchase
Payments in the Subaccount, the Immediate Installment Account, or the Guarantee
Account.
Purchase Payments received will be allocated as follows:
(1) Any Scheduled Purchase Payment made on or after the Monthly Due Date
for purposes of satisfying a Scheduled Installment will be allocated to
the Subaccount.
(2) Any Scheduled Purchase Payment made for purposes of satisfying a
Scheduled Installment, but received prior to that installment's Monthly
Due Date, will be allocated to the Guarantee Account until the Monthly
Due Date. On the Monthly Due Date, that Purchase Payment will be
transferred to the Subaccount of the Variable Account.
(3) Any Flexible Purchase Payment received that is greater than 6 times the
amount of the Scheduled Purchase Payment and accompanied with complete
transfer instructions will be allocated to the Immediate Installment
Account. If no transfer instructions are received, the payment will be
allocated to the Guarantee Account. Should the payment received exceed
the amount required to make all remaining Scheduled Installments, the
excess amount will be returned to the Owner within 30 days.
(4) Any Flexible Purchase Payment received that is equal to or less than 6
times the amount of the Scheduled Purchase Payment will be allocated to
the Guarantee Account.
On the Annuity Commencement Date, we apply your Contract Value to purchase a
series of Income Payments (sometimes known as annuity payments). In turn, the
Income Payments will be made to you each month. Each Monthly Income Payment
during an Annuity Year is equal in amount. Because we base the Income Payments
on Subaccount performance, the amount of the payments may change from Annuity
Year to Annuity Year. However, the amount paid per month will not be less than
the Guaranteed Minimum Income Payment, provided all contractual requirements
have been satisfied for receipt of those guaranteed payments.
Investments in the Subaccount vary with the investment performance of the Total
Return Fund for the GE Investments Funds, Inc. Over time, we transfer Purchase
Payments invested in the Guarantee Account or the Immediate Installment
Account, plus any interest earned, to the Subaccount.
Certain features described in this Prospectus may vary from your Contract.
Please refer to your Contract for those benefits that apply specifically to
you.
11
What are the Guaranteed Minimum Income Payments? The Contract offers you
guaranteed periodic annuity benefits that can protect against the adverse
results of poor Subaccount performance. If you make all Scheduled Installments
on time and pay back the amount of any withdrawal from the Subaccount with
interest within one year of the withdrawal (but not later than the Annuity
Commencement Date), then we guarantee that no matter how the Subaccount
performs, each Monthly Income Payment you receive will never be less than the
amount of the Guaranteed Minimum Income Payment.
Should you miss a Scheduled Installment, you may still meet the requirement for
making Scheduled Installments:
(1) if you pay any missed Scheduled Installment(s) and any missed monthly
billing fee(s), with interest, within one year of the due date of the
missed Scheduled Installment (but not later than the Annuity
Commencement Date); and
(2) make no more than 24 Scheduled Installments over the life of the
Contract outside of the grace period (the grace period is 30 days after
the date each Scheduled Installment is due).
You can only maintain your right to Guaranteed Minimum Income Payments by
meeting the conditions listed above. If you fail to meet these conditions, you
will lose your right to Guaranteed Minimum Income Payments.
What happens if the Right to Guaranteed Minimum Income Payments is lost? If you
do not maintain the right to Guaranteed Minimum Income Payments by meeting the
contractual requirements as outlined above, you:
(1) remain subject to the Purchase Payment limitations under the Contract
(i.e., you may not make payments in excess of all your original
Scheduled Installment amounts; and
(2) will NOT have guaranteed minimum annuity payments when you annuitize
the Contract.
12
What are Scheduled Installments? When we issue the Contract, we will establish
a schedule of monthly payments to the Subaccount (called Scheduled
Installments) during the Accumulation Period. Once established, the amount and
frequency of Scheduled Installments cannot be changed. In addition, once the
Contract is issued, your Annuity Commencement Date may not be changed.
When you apply for a Contract, you provide us with:
. the length of the Accumulation Period you desire. The Accumulation Period
must be at least 10 years and cannot be changed after we issue your
Contract); and
. the minimum number of years (between 10 and 50, in five year increments)
for which you would like income payments to be made; and
. one of the following items of information:
-- the amount of the Guaranteed Minimum Income Payment you want; or
-- how much you want to pay per month and/or in a lump sum.
We use this information to establish your Scheduled Installments.
How do I pay the Scheduled Installments? You may pay Scheduled Installments by
making:
. Scheduled Purchase Payments;
. Flexible Purchase Payments; or
. a combination thereof.
See the "Purchase Payments" provision in this prospectus.
By paying the Scheduled Purchase Payments on time, you ensure that the
Scheduled Installments are met and your right to a Guaranteed Minimum Income
Payment is not lost.
You should not purchase the Contract described in this prospectus if you
believe that you CANNOT afford to make all of the Scheduled Installments.
May I pay my Scheduled Purchase Payments automatically? You may use Electronic
Fund Transfers to make your monthly Scheduled Purchase Payments. If you do not
use Electronic Fund Transfers for your Scheduled Purchase Payments, we will
charge you a $10 per month billing charge. See "The Contract" provision in this
prospectus.
13
How do Flexible Purchase Payments work? Although we designed the Contract as a
scheduled purchase payment contract, you may make Flexible Purchase Payments
subject to certain conditions. The amount of each Flexible Purchase Payment
must be greater than 6 Scheduled Purchase Payments and be accompanied with
sufficient transfer instructions in order for us to allocate the Flexible
Purchase Payment to the Immediate Installment Account. We will allocate the
Flexible Purchase Payment to the Guarantee Account if we do not receive
transfer instructions or we receive insufficient transfer instructions from the
Owner. Any Flexible Purchase Payment received that is less than or equal to 6
times the Scheduled Purchase Payments will be automatically allocated to the
Guarantee Account.
Amounts invested in the Immediate Installment Account earn interest at rates we
declare and guarantee at the time of purchase. Although the Immediate
Installment Account is a separate account, we assume the risk of investment
gain or loss on the Immediate Installment Account's assets. We transfer certain
amounts (called Immediate Installments) from the Immediate Installment Account
to the Subaccount on a monthly basis to make your Scheduled Installment or
supplement your Scheduled Purchase Payments. An amount transferred from the
Immediate Installment Account to the Subaccount will never exceed the amount of
your Scheduled Installment. Whether a transfer from the Immediate Installment
Account makes your Scheduled Installment or supplements your Scheduled Purchase
Payment is dependent upon the amount in the Immediate Installment Account and
transfer instructions at the time the Flexible Purchase Payment is received. We
determine the amount of the Immediate Installment we transfer each month to the
Subaccount on the date the Flexible Purchase Payment is received accompanied
with complete transfer instructions. This amount depends on:
. the amount of your Flexible Purchase Payment;
. the rate of interest that we credit to the Flexible Purchase Payment; and
. the number of installments you choose.
We will return to you any amount in excess of what is needed to make all
Scheduled Installments. The excess amount will be returned to you within 30
days of our receipt.
Is the Contract available to Qualified Plans? We designed the Contracts for use
in connection with certain types of retirement plans that receive favorable
treatment under the Internal Revenue Code of 1986, as amended (the "Code")
("Qualified Contracts"). We refer to Contracts issued in connection with
retirement plans that do not qualify for such favorable treatment under
the Code as "Non-Qualified Contracts."
14
What Surrender and Access Charges are associated with the Contract? If you
surrender your Contract or take partial withdrawals before your Annuity
Commencement Date, we may assess a surrender and/or access charge. ("Partial
withdrawals" may be referred to as "distributions" in the marketing materials
for this product.)
. For partial withdrawals or surrenders amounts withdrawn or surrendered from
the Subaccount and/or the Guarantee Account, we will assess a surrender
charge. We will determine this charge by assuming that the amount being
withdrawn on the date of the partial withdrawal or surrender comes entirely
from Scheduled Installments made to date and not previously withdrawn.
Depending upon the Contract Year of your surrender or partial withdrawal, the
surrender charge will be anywhere from 9% to 1% of the lesser of:
(1) Scheduled Installments made to date and not previously withdrawn; and
(2) the amount withdrawn.
. For amounts withdrawn or surrendered from the Immediate Installment Account,
we will assess an access charge. This charge will be anywhere from 6% to 1%
of the Immediate Installment Account Value withdrawn depending on the
duration of the remaining Immediate Installments. In addition, we will apply
a Market Value Adjustment to determine the Immediate Installment Account
Value and the amount available for a partial withdrawal or surrender from the
Immediate Installment Account.
We may waive surrender and access charges if you apply your Contract Value upon
surrender to certain Optional Payment Plans. See the "Charges and Other
Deductions" provision in this prospectus.
Are there any other charges? We assess a daily charge, equal to an effective
annual rate of 1.50%, against the average daily net assets of the Subaccount.
This charge consists of a 0.15% administrative expense charge and a 1.35%
mortality and expense risk charge.
A $10 monthly billing fee will be assessed with all direct billed Scheduled
Purchase Payments.
We will deduct any state assessed premium taxes either:
. at the time your Contract incurs such tax;
. at surrender or distribution of the Contract; or
. at any other time we choose.
Premium tax may be taken from Purchase Payments or from proceeds at surrender,
withdrawal, Annuity Commencement, and death, as applicable. See the "Charges
and Other Deductions" provision in this prospectus.
15
The Total Return Fund of GE Investments Funds, Inc. also has certain expenses.
These include management fees and other expenses associated with its daily
operation. See the "Expense Table" in this prospectus. In addition, these
expenses are more fully described in the prospectus for the Total Return Fund
of GE Investments Funds, Inc.
There are various charges assessed for Rider Options. The range of charges for
each Rider Option is listed in the "Expense Table" of this prospectus. For
additional information, see the "Optional Riders" provision in the section
entitled "The Contract" in this prospectus.
For a complete discussion of all charges associated with the Contract, see the
"Charges and Other Deductions" provision in this prospectus.
We pay compensation to broker-dealers who sell the Contracts. For a discussion
of this compensation, see the "Sales of the Contract" provision in this
prospectus.
How do you calculate my Monthly Income Payments? We will pay you a monthly
income for life with a guaranteed minimum period beginning on the Annuity
Commencement Date, provided the Annuitant is still living. The amount of your
Income Payments depends on:
. your Contract Value;
. whether you are receiving or have received Guaranteed Minimum Income
Payments;
. the age and gender of the Annuitant(s); and
. the specific payment plan you choose.
See the "Benefits at Annuity Commencement Date" provision in this prospectus.
What happens if an Owner dies before the Annuity Commencement Date? If any
Owner dies before the Annuity Commencement Date while the Contract is in force,
the Joint Owner or Designated Beneficiary becomes the sole Owner of the
Contract. Certain distribution rules imposed by Federal tax law also will
apply. We may pay a Death Benefit to the Designated Beneficiary. See "The Death
Benefit" provision in this prospectus.
May I surrender the Contract or take a partial withdrawal? You may surrender
the Contract for its Surrender Value at any time before the Annuity
Commencement Date. In addition, you may take partial withdrawals of at least
$100 from Contract Value. If you surrender the Contract or take a partial
withdrawal, we may assess a surrender and/or access charge. Partial withdrawals
will be made first from the Guarantee Account, then the Immediate Installment
Account, and finally, the Subaccount, unless you request otherwise. In
addition, you may be subject to income tax, and a 10% penalty tax if you are
younger than age 59 1/2 at the time of the surrender or partial
16
withdrawal. A surrender or a partial withdrawal may also be subject to income
tax withholding. See the "Federal Tax Matters" provision in this prospectus.
Unless you repay the amount of each withdrawal from the Subaccount, including
any applicable surrender charge, missed monthly billing fees, and any interest
(at an effective annual rate of 6%), within one year of the partial withdrawal,
you will lose your right to receive your Guaranteed Minimum Income Payments.
(Interest will be assessed from the date of the withdrawal to the date we
receive full repayment.) Partial withdrawals from the Immediate Installment
Account or Guarantee Account do not have to be repaid to receive your
Guaranteed Minimum Income Payment, but you may have to increase the amount of
your Scheduled Purchase Payments since amounts withdrawn from those accounts
will not be used to make Scheduled Installments.
In addition, a partial withdrawal may reduce your Death Benefit. See "The Death
Benefit" provision in this prospectus.
For more information on surrenders and withdrawals, see the "Surrenders and
Partial Withdrawals" provision in this prospectus.
Do I have a refund or return privilege? Yes. You have the right to return the
Contract to us at our Home Office within a certain number of days (usually 15
days from the date you receive the Contract, but some states require different
periods) and we will cancel the Contract.
If you exercise this right, we will cancel the Contract as of the day we
receive your written request to cancel accompanied by the Contract. Upon
receipt of such information, we will send you a refund equal to your Contract
Value plus any deductions we have made from your Purchase Payments before their
allocation to the Variable Account or Immediate Installment Account.
Alternatively, if required by the law of your state, we will refund your
Purchase Payments (less any withdrawals previously taken). See the "Additional
Information -- Return Privilege" provision in this prospectus.
Are there optional benefits available under the Contract? Optional benefits are
available by purchasing one or more of the following riders with the Contract.
(Not all of the rider options listed below may be available in all states.) The
riders are:
. Disability Benefit
. Unemployment Benefit
. Joint Annuitant Life Benefit
See "The Contract" provision later in this prospectus for additional
information.
17
Condensed Financial Information
The value of an Accumulation Unit is determined on the basis of Variable
Account Charges and the changes in the per share value of the Total Return Fund
of GE Investments Funds, Inc. As of the date of this Prospectus, there were no
Accumulation Unit values outstanding for the Contract.
18
Investment Results
At times, the Variable Account may compare its investment results to various
unmanaged indices or other variable annuities in reports to shareholders, sales
literature, and advertisements. We will calculate the results on a total return
basis for various periods, with or without surrender charges. Results
calculated without surrender charges will be higher. Total returns include the
reinvestment of all dividends and capital gains of the Total Return Fund of GE
Investments Funds, Inc., its charges and expenses, the Contract's mortality and
expense risk charge and administrative expense charge. Standardized total
returns also reflect the maximum charges for the Optional Riders and the $10
monthly billing fee. Non-standardized returns do not reflect charges for the
Optional Riders or the $10 monthly billing fee. Premium taxes are not reflected
in any of the calculations, but do apply. See "the Appendix" in this prospectus
and the Statement of Additional Information for further information.
19
Financial Statements
The consolidated financial statements for GE Life and Annuity Assurance Company
are set forth herein. The financial statements of the Variable Account are
located in the Statement of Additional Information. If you would like a free
copy of the Statement of Additional Information, call 1-800-352-9910 or write
the Company at the address listed on page 1 of this prospectus. In addition,
the Statement of Additional Information is available on the Securities and
Exchange Commission's website at http://www.sec.gov.
20
The Company
We are a stock life insurance company operating under a charter granted by the
Commonwealth of Virginia on March 21, 1871. We principally offer life insurance
and annuity contracts. We do business in 49 states and the District of
Columbia. Our principal offices are at 6610 West Broad Street, Richmond,
Virginia 23230. Before January 1, 1999, our name was The Life Insurance Company
of Virginia.
Capital Brokerage Corporation serves as principal underwriter for the Contracts
and is a broker/dealer registered with the U.S. Securities and Exchange
Commission. GNA Corporation directly owns the stock of Capital Brokerage
Corporation. GNA Corporation, Capital Brokerage Corporation, GE Financial
Assurance Holdings, Inc. and GE Investment Funds, Inc. are affiliates of the
Company.
We are a charter member of the Insurance Marketplace Standards Association
("IMSA"). We may use the IMSA membership logo and language in our
advertisements, as outlined in IMSA's Marketing and Graphics Guidelines.
Companies that belong to IMSA subscribe to a set of ethical standards covering
the various aspects of sales and service for individually sold life insurance
and annuities.
For more information about us, see the provision entitled "GE Life and Annuity
Assurance Company" in this prospectus.
21
The Variable Account
We established the Variable Account as a separate investment account on August
19, 1987. The Variable Account may invest in mutual funds, unit investment
trusts, managed separate accounts, and other portfolios. We use the Variable
Account to support the Contract as well as for other purposes permitted by law.
Currently, only one Subaccount of the Variable Account is available under the
Contract. The Subaccount invests exclusively in shares of the Total Return Fund
of GE Investments Funds, Inc.
The assets of the Variable Account belong to us. Nonetheless, we do not charge
the assets in the Variable Account with liabilities arising out of any other
business which we may conduct. The assets of the Variable Account shall,
however, be available to cover the liabilities of our General Account to the
extent that the assets of the Variable Account exceed its liabilities arising
under the Contracts supported by it. Income and both realized and unrealized
gains or losses from the assets of the Variable Account are credited to or
charged against the Variable Account without regard to the income, gains, or
losses arising out of any other business we may conduct.
We registered the Variable Account with the Securities and Exchange Commission
as a unit investment trust under the Investment Company Act of 1940 ("1940
Act"). The Variable Account meets the definition of a separate account under
the federal securities laws. Registration with the Securities and Exchange
Commission does not involve supervision of the management or investment
practices or policies of the Variable Account by the Securities and Exchange
Commission. You assume the full investment risk for all amounts you allocate to
the Variable Account.
THE SUBACCOUNT AND THE TOTAL RETURN FUND OF GE INVESTMENTS FUNDS, INC.
There is a Subaccount of the Variable Account which corresponds to the Total
Return Fund of GE Investments Funds, Inc. offered in the Contract. The Total
Return Fund of GE Investments Funds, Inc. is registered with the Securities and
Exchange Commission as an open-end management investment company under the 1940
Act.
Before investing in the Contract, carefully read the prospectus for the Total
Return Fund of GE Investments Funds, Inc., along with this Prospectus. We
summarize the investment objective of the Total Return Fund of GE Investments,
Inc. below. There is no assurance that the Total Return Fund of GE Investments
Funds, Inc. will meet this objective. We do not guarantee any minimum value for
the amounts allocated to the Variable Account. You bear the investment risk of
investing in the Total Return Fund of GE Investments Funds, Inc.
The investment objective and adviser to the Total Return Fund of GE Investments
Funds, Inc. is as follows.
22
Investment Objective Adviser
- -------------------------------------------------------------------------------
To provide the highest total return, composed GE Asset Management Incorporated
of current income and capital appreciation,
as is consistent with prudent investment risk
by investing in common stocks, bonds, and
money market instruments, the proportion of
each being continuously determined by the
investment adviser.
- -------------------------------------------------------------------------------
We will purchase shares of the Total Return Fund of GE Investments Funds, Inc.
at net asset value and direct them to the Subaccount. We will redeem sufficient
shares of the Total Return Fund of Ge Investments Funds, Inc. at net asset
value to pay Death Benefits, surrender proceeds, and withdrawals, to make
Income Payments, or for other purposes described in the Contract. We
automatically reinvest all dividend and capital gain distributions of the Total
Return Fund of GE Investments Funds, Inc. in shares of the Total Return Fund of
GE Investments Funds, Inc. at its net asset value on the date of distribution.
In other words, we do not pay dividends or capital gains of Total Return Funds
of GE Investments Funds, Inc. to Owners as additional units, but instead
reflect them in unit values.
Shares of the Total Return of GE Investments Funds, Inc. are not sold directly
to the general public. They are sold to us, and may be sold to other insurance
companies that issue variable annuity and variable life insurance contracts. In
addition, they may be sold to retirement plans.
When the Total Return Fund of GE Investments Funds, Inc. sells its shares both
to variable annuity and to variable life insurance separate accounts, it
engages in mixed funding. When the Total Return Fund of GE Investments Funds,
Inc. sells its shares to separate accounts of unaffiliated life insurance
companies, it engages in shared funding.
The Total Return Fund of GE Investments Funds, Inc. may engage in mixed and
shared funding. Therefore, due to differences in redemption rates or tax
treatment, or other considerations, the interests of various shareholders
participating in the Total Return Fund of GE Investments Funds, Inc. could
conflict. The Board of Directors of the Total Return Fund of GE Investments
Funds, Inc. will monitor for the existence of any material conflicts, and
determine what action, if any, should be taken. See the Prospectus for the
Total Return Fund of GE Investments Funds, Inc. for additional information.
CHANGES TO THE VARIABLE ACCOUNT AND THE SUBACCOUNT
We reserve the right, within the law, to make additions, deletions and
substitutions for the Total Return Fund of GE Investments Funds, Inc. We may
substitute shares of other portfolios for shares already purchased, or to be
purchased in the future, under the Contract. This substitution might occur if
shares of the Total Return Fund of GE Investments Funds, Inc. should no longer
be available, or if investment in the Total
23
Return Fund of GE Investments Funds, Inc. shares should become inappropriate,
in the judgment of our management, for the purposes of the Contract. The new
portfolio may have higher fees and charges than the one it replaced, and not
all portfolios may be available to all classes of Contracts. Currently, we have
no intention of substituting or deleting any current investment option,
however, we reserve our right to do so should the current investment options
become inappropriate to maintain the guarantees under the Contract. No
substitution or deletion will be made to the Contract without prior notice to
you and before approval of the Securities and Exchange Commission in accordance
with the 1940 Act.
We also reserve the right to establish additional subaccounts, each of which
would invest in a separate portfolio of GE Investments Funds, Inc, or in shares
of another investment company, with a specified investment objective. We may
also eliminate one or more subaccounts if, in our sole discretion, marketing,
tax, or investment conditions warrant. We will not eliminate a subaccount
without prior notice to you and before approval of the Securities and Exchange
Commission. Not all subaccounts may be available to all classes of contracts.
If permitted by law, we may deregister the Variable Account under the 1940 Act
in the event such registration is no longer required; manage the Variable
Account under the direction of a committee; or combine the Variable Account
with other separate accounts of the Company. Further, to the extent permitted
by applicable law, we may transfer the assets of the Variable Account to
another separate account.
24
The Guarantee Account And The Immediate Installment Account
THE GUARANTEE ACCOUNT
Amounts in the Guarantee Account are held in, and are part of, our General
Account. The General Account consists of our assets other than those allocated
to our separate accounts. Subject to statutory authority, we have sole
discretion over the investment of assets of the General Account. The assets in
the General Account are chargeable with liabilities arising out of any business
we may conduct.
Due to certain exemptive and exclusionary provisions of the federal securities
laws, we have not registered interests in the Guarantee Account under the
Securities Act of 1933 (the "1933 Act"), and we have not registered either the
Guarantee Account or our General Account as an investment company under the
1940 Act. Accordingly, neither our Guarantee Account nor our General Account is
generally subject to regulation under the 1933 Act and the 1940 Act.
Disclosures, or lack thereof, relating to the interests in the Guarantee
Account, and the General Account, however, may be subject to certain generally
applicable provisions of the federal securities laws relating to the accuracy
of statements made in a registration statement.
We allocate Scheduled Purchase Payments received in advance of the Monthly Due
Date to the Guarantee Account. We then will transfer the required amount to
fund the Scheduled Installment to the Subaccount as of the Monthly Due Date.
We also allocate Flexible Purchase Payments that we receive with insufficient
transfer instructions (i.e., you do not tell us whether you want your Flexible
Purchase Payment to (i) lower the amount of the Scheduled Purchase Payment you
must make each month, or (ii) completely prepay a certain number or all of your
remaining Scheduled Installments) to the Guarantee Account. The Flexible
Purchase Payment will remain in the Guarantee Account and earn interest until
we receive your instructions concerning the method of transfer. Once we have
these instructions, we will establish a schedule of Immediate Installments and
transfer your Flexible Purchase Payment from the Guarantee Account to the
Immediate Installment Account. See "The Contract" provision in this prospectus.
We credit amounts in the Guarantee Account with interest daily at an effective
annual interest rate of 3%. Amounts in the Guarantee Account do not reflect the
investment performance of our General Account, or any portion thereof.
THE IMMEDIATE INSTALLMENT ACCOUNT
Due to certain exclusionary provisions of the federal securities laws, we have
not registered the Immediate Installment Account as an investment company under
the 1940 Act. Accordingly, the Immediate Installment Account is not generally
subject to regulation under the 1940 Act. However, we have registered interests
in the Immediate Installment Account under the 1933 Act, and disclosures
relating to the interests in the Immediate Installment Account are subject to
the provisions of that Act.
25
The Immediate Installment Account is a non-unitized separate account that we
have established for the payment of future Immediate Installments. Provided we
have sufficient direction from you to do so, we commit to make all future
Immediate Installments at the time we accept your Flexible Purchase Payment and
place that Flexible Purchase Payment into the Immediate Installment Account.
The assets of the Immediate Installment Account equal, at the least, the
reserves and other Contract liabilities supported by the Immediate Installment
Account. Like the Variable Account, but unlike the Guarantee Account, we do not
charge the assets in the Immediate Installment Account with liabilities arising
out of any other business which we may conduct. The assets of the Immediate
Installment Account shall, however, be available to cover the liabilities of
our General Account to the extent that the assets of the Immediate Installment
Account exceed its liabilities arising under the Contracts supported by it.
Income and both realized and unrealized gains or losses from the assets of the
Immediate Installment Account are credited to or charged against the Immediate
Installment Account without regard to the income, gains, or losses arising out
of any other business we may conduct.
At the time we allocate your Flexible Purchase Payment to the Immediate
Installment Account, we impute a level discount interest rate on amounts
allocated to the Immediate Installment Account. This discount interest rate
determined at purchase does not change for the future Immediate Installments
related to a Flexible Purchase Payment. We have no specific formula for
determining the discount interest rate we credit to these amounts. Our
determination may be influenced by, but not necessarily correspond to, interest
rates available on fixed income investments that we may acquire with the
amounts we receive as Flexible Purchase Payments under the Contract. We will
invest these amounts primarily in investment-grade fixed income securities
including:
. securities issued by the U.S. Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the U.S.
Government;
. debt securities that have an investment grade, at the time of purchase,
within the four highest grades assigned by Moody's Investor Services,
Inc., Standard & Poor's Corporation, or any other nationally recognized
rating service;
. mortgage-backed securities collateralized by real estate mortgage loans,
or securities collateralized by other assets, that are insured or
guaranteed by the Federal Home Loan Mortgage Association, the Federal
National Mortgage Association, or the Government National Mortgage
Association, or that have an investment grade at the time of purchase
within the four highest grades described above;
. other debt instruments, commercial paper, cash or cash equivalents.
26
You will have no direct or indirect interest in these investments, and you do
not share in the investment performance of the assets of the Immediate
Installment Account. We also will consider other factors in determining the
interest we credit on amounts allocated to the Immediate Installment Account
including regulatory and tax requirements, sales commissions, administrative
expenses borne by us, general economic trends and competitive factors. Our
management will make the final determination on the interest we credit. We
cannot predict or guarantee the level of future discount interest rates,
however once a discount interest rate has been declared and your payment is
invested in the Immediate Installment Account, that discount rate is guaranteed
until the entire amount of that Flexible Purchase Payment has been transferred
to the Subaccount through Immediate Installments.
A market value adjustment can increase or decrease the amounts distributed from
the Immediate Installment Account depending on current discount interest rate
fluctuations. A Market Value Adjustment is not taken for amounts transferred
from the Immediate Installment Account to the Subaccount for purposes of making
a Scheduled Installment.) When actual discount interest rates are higher than
the discount interest rate declared for your Flexible Purchase Payment(s), a
market value adjustment would reduce the value of the amount distributed. When
actual interest rates are lower than the discount interest rate declared for
your Flexible Purchase Payment(s), a Market Value Adjustment would increase the
value of the amount distributed. Consequently, the Immediate Installment
Account Value will vary based on changes in interest rates since the date of
your Flexible Purchase Payment, transfers of Immediate Installments and any
partial withdrawals from the Immediate Installment Account. (See the "Charges
and Other Deductions" provision in this prospectus.) The Company does not
guarantee the Immediate Installment Account Value.
27
The Contract
The Contract is an individual or group scheduled purchase payment variable
deferred annuity contract. We describe your rights and benefits below and in
the Contract. Your Contract may differ in certain respects from the description
in this Prospectus due to variations in state insurance law requirements. Your
Contract reflects exactly what applies to you.
PURCHASING A CONTRACT
You may purchase a Contract through an authorized sales representative. The
sales representative will send your completed application to us, and we will
decide whether to accept or reject it. If we accept your application, our
legally authorized officers prepare and execute a Contract. We then send the
Contract to you through your sales representative. See the "Sales of the
Contract" provision in this prospectus.
If we receive a completed application and all other information necessary for
processing a purchase order, we will apply your initial Purchase Payment, which
can be either a Scheduled Purchase Payment, a Flexible Purchase Payment or
both, no later than two business days after we receive the order. While
attempting to finish an incomplete application, we may hold your initial
Purchase Payment for no more than five business days. If the application cannot
be completed within those five days, we will inform you of the reasons, and
will return your initial Purchase Payment immediately (unless you specifically
authorize us to keep the Purchase Payment until the application is complete).
Once you complete your application, we must apply the initial Purchase Payment
within two business days. Scheduled Purchase Payments will be applied to the
Subaccount. Flexible Purchase Payments received with the application will be
applied to the Immediate Installment Account or Guarantee Account (see the
"Purchase Payment" provision in this prospectus). Whichever date we apply the
initial Purchase Payment becomes the Contract Date. We will apply any
additional Purchase Payments received after the Contract Date on the Valuation
Day on which they are received.
To apply for a Contract, the person(s) designated as the Annuitant(s) must be
younger than age 71. We may sell the Contract for use with certain qualified
retirement plans. If you are purchasing the Contract for use with such a plan,
you must be eligible to participate in the plan. Please be aware that if you
are purchasing the Contract for use with a qualified retirement plan, the
Contract includes features such as tax deferral on accumulated earnings.
Qualified retirement plans provide their own tax deferral benefit. Please
consult a tax adviser to determine whether this Contract is an appropriate
investment for you.
Purchasing the Contract through a Tax Free "Section 1035" Exchange. Section
1035 of the Code generally permits you to exchange one annuity contract for
another in a "tax-free exchange." Therefore, you can use the proceeds from
another annuity
28
contract to make Scheduled or Flexible Purchase Payments. Before making an
exchange to acquire this Contract, you should carefully compare the Contract to
your current contract. You may have to pay a surrender charge under your
current contract to exchange it for this Contract, and this Contract has its
own surrender charges which would apply to you. The other fees and charges
under this Contract may be higher (or lower), and the benefits may be
different, than those of your current contract. In addition, you may have to
pay federal income and penalty taxes on the exchange if it does not qualify for
Section 1035 treatment. You should not exchange another contract for this
Contract unless you determine, after evaluating all of the facts, that the
exchange is in your best interest. Please note that the person who sells you
this Contract generally will earn a commission.
OWNERSHIP
As Owner(s), you have all the rights under the Contract, subject to the rights
of any irrevocable beneficiary. Ownership rights may be restricted by court
orders, child support or tax collection actions or other legal proceedings.
Two persons may apply for a Contract as Joint Owners. Joint Owners have equal
undivided interests in their Contract. This means that each may exercise any
ownership rights on behalf of the other except for ownership changes. Joint
Owners also have the right of survivorship. This means if a Joint Owner dies,
his or her interest in the Contract passes to the surviving Owner. You must
have our approval to add a Joint Owner after we issue the Contract. We may
require additional information, such as a copy of your marriage certificate, if
Joint Ownership is requested after the Contract Date. During the Annuitant(s)'s
life, you can change any non-natural Owner to another non-natural Owner.
Except for non-natural Owners, an Owner must be an Annuitant. Therefore, if two
natural persons are Joint Owners, they must be Joint Annuitants as well. You
cannot change the Annuitant(s) without our consent. If any Owner is not a
natural person, a second (Joint) Annuitant cannot be added nor can a Joint
Annuitant be removed.
GUARANTEED MINIMUM INCOME PAYMENTS
The Contract offers you guaranteed periodic annuity benefits that can protect
your investment against the adverse results of poor Subaccount performance. If
you make all Scheduled Installments on time and pay back the amount of any
withdrawal from the Subaccount with interest within one year of the withdrawal
(but not later than the Annuity Commencement Date), then we guarantee that no
matter how the Subaccount performs, each Monthly Income Payment you receive
will never be less than the amount of the Guaranteed Minimum Income Payment.
Should you miss a Scheduled Installment, you may still meet the requirement for
making Scheduled Installments:
(1) if you pay any missed Scheduled Installment(s) and any missed monthly
billing fee(s), with interest, within one year of the due date of the
missed Scheduled
29
Installment (but not later than the Annuity Commencement Date); and
(2) make no more than 24 Scheduled Installments over the life of the
Contract outside of the grace period (the grace period 30 days after
the date each Scheduled Installment is due)
You can only maintain your right to Guaranteed Minimum Income Payments by
meeting the conditions listed above. If you fail to meet these conditions, you
will lose your right to Guaranteed Minimum Income Payments.
PURCHASE PAYMENTS
General. Purchase Payments can be Scheduled Purchase Payments or Flexible
Purchase Payments. How we allocate these Payments depends on your instructions,
when we receive the Payment and the amount of the Payment received.
Purchase Payments received will be allocated as follows:
(1) Any Scheduled Purchase Payment made on or after the Monthly Due Date
for purposes of satisfying a Scheduled Installment will be allocated to
the Subaccount;
(2) Any Scheduled Purchase Payment made for purposes of satisfying a
Scheduled Installment, but received prior to that installment's Monthly
Due Date will be allocated to the Guarantee Account until the Monthly
Due Date. On the Monthly Due Date, that Purchase Payment will be
transferred to the Subaccount of the Variable Account.
(3) Any Flexible Purchase Payment received that is greater than 6 times the
amount of the Scheduled Purchase Payment and accompanied with complete
transfer instructions will be allocated to the Immediate Installment
Account. If no transfer instructions are received, the payment will be
allocated to the Guarantee Account. Should the payment received exceed
the amount required to make all remaining Scheduled Installments, the
excess amount will be returned to the Owner within 30 days.
(4) Any Flexible Purchase Payment received that is equal to or less than 6
times the amount of the Scheduled Installment will be allocated to the
Guarantee Account.
If we receive a Flexible Purchase Payment that is in an amount greater than 6
times the amount of the Scheduled Purchase Payment and with instructions as to
how you want it transferred to the Subaccount (that is, either to fully pay the
Scheduled Installment or to lower the amount of the Scheduled Purchase
Payments), we will invest your Flexible Purchase Payment in the Immediate
Installment Account. Otherwise, we will invest your Flexible Purchase Payment
in the Guarantee Account.
30
Once we receive sufficient transfer instructions, we will transfer your
Flexible Purchase Payment from the Guarantee Account to the Immediate
Installment Account. Flexible Purchase Payments received that are equal to or
less than 6 times the amount of the Scheduled Purchase Payment will be invested
in the Guarantee Account and cannot be transferred to the Immediate Installment
Account. Assets in the Guarantee Account, however, can be used to make
Scheduled Installments.
Transfers or payments to the Subaccount cannot be greater than the Scheduled
Installment amount. The Scheduled Installment can be made by:
(1) Scheduled Purchase Payment;
(2) Immediate Installment from the Immediate Installment Account;
(3) transfer from the Guarantee Account; or
(4) a combination of any of the above.
The total Purchase Payments for all Contracts issued to any one Owner cannot
exceed $2,000,000 without prior Home Office approval.
Establishing the Schedule of Installments. We determine your right to receive
the Guaranteed Minimum Income Payment in part by the timely payment of the
Scheduled Installments. Scheduled Installments are the monthly investments that
you must make in the Subaccount during the Accumulation Period of your
Contract. You may make Scheduled Installments through a combination of
Scheduled Purchase Payments and Flexible Purchase Payments.
We establish the amount and number of your Scheduled Installments when we issue
your Contract. Once established, the number and amount of the Monthly Scheduled
Installments cannot be changed. The amount and number of Monthly Scheduled
Installments depends in part on the amount of Guaranteed Minimum Income
Payments and the Annuity Commencement Date you request at the time of
application.
Guaranteed Minimum Income Payments and Amount of Scheduled Installments. The
Guaranteed Minimum Income Payment is the minimum Monthly Income Payment we
promise to pay beginning on the Annuity Commencement Date for the lifetime of
the Annuitant(s) or, if such Annuitant(s) dies before the end of a certain
stated number of years, for that number of years, if you have met the
conditions necessary to receive the payments.
In the event that a single Owner marries after we issue the Contract, upon our
approval, he or she may add their spouse as a Joint Owner/Annuitant before the
Annuity Commencement Date. If we approve the change, we will reduce the amount
of your Guaranteed Minimum Income Payments because we expect to make those
payments for a longer period of time (i.e., until the death of the last
surviving
31
spouse). The Guaranteed Minimum Income Payments will be reduced as if the
spousal Joint Owner was added to the Contract on the Contract Date.
When you apply for a Contract, your application must provide us with:
. the age (and for Non-Qualified Contracts, the gender) of the Annuitant(s);
. the Accumulation Period (it must be at least 10 years and cannot be changed
after we issue your Contract);
. the certain period you want; or
. one of the following items of information:
-- the amount of the Guaranteed Minimum Income Payment you want; and
-- how much you want to pay in Scheduled Purchase Payments and/or Flexible
Purchase Payments.
With either item of information, we can determine the other item.
When we compute the amount of your Guaranteed Minimum Income Payments that your
Scheduled Installments purchase, we consider a number of factors, including:
. expected mortality;
. persistency;
. length of Accumulation Period;
. length of certain period;
. expected investment performance; and
. length of maintenance, acquisition and distribution expenses.
These factors may vary from one Owner and/or one market to another. Of the
factors listed, the ones most likely to vary by market are: expected mortality,
expected persistency, as well as acquisition and distribution expenses.
Mortality is dependent on many things, including age, gender, occupation,
smoking status, socio-economic status, marital status, place of residence, etc.
Age and gender are expressly reflected in the calculation of the Guaranteed
Minimum Income Payment.
Persistency is also (or can be) impacted by age, occupation, socio-economic
status, marital status, whether a Flexible Purchase Payment has been made, etc.
Persistency is not directly used in the calculation of the Guaranteed Minimum
Income Payment but is an important consideration in the pricing process that
determines the level of Guaranteed Minimum Income Payment we can offer.
32
Acquisition and distribution expenses vary by the market in which the Contract
is sold, e.g. a group sale generally has lower distribution costs per dollar of
Purchase Payment than an equivalent number of individual sales. Distribution
expenses are not directly reflected in the calculation of the Guaranteed
Minimum Income Payment but are an important consideration in the pricing
process.
We will not necessarily reflect any or all of these factors in determining the
Guaranteed Minimum Income Payment formula for a given market. We reserve the
right to recognize the impact of these differences should we sell into markets
that are homogeneous with respect to one or more of the factors.
See the "Guaranteed Minimum Income Payments" provision in this prospectus.
Making Scheduled Installments. You must make Scheduled Installments on the
Monthly Due Date. The minimum monthly Scheduled Installment is $100. You may
make Scheduled Installments to the Subaccount in one of the following ways:
(1) By a transfer of money from the Guarantee Account;
(2) By a transfer of money from the Immediate Installment Account;
(3) By making Scheduled Purchase Payments when due; or
(4) By any combination of methods 1, 2, and 3.
The amount of your Scheduled Purchase Payments will vary based on whether an
Immediate Installment is being transferred to the Subaccount. For any month, an
Immediate Installment will decrease or eliminate the amount of a Scheduled
Purchase Payment that would have been required had there not been an Immediate
Installment.
We deposit a Scheduled Purchase Payment received before its Monthly Due Date in
the Guarantee Account. We will transfer that early payment from the Guarantee
Account to the Subaccount on the Monthly Due Date. In the event that we do not
receive your Scheduled Purchase Payment on or before its Monthly Due Date, we
will use any Guarantee Account Value to make up the missed Scheduled Purchase
Payment. If the Guarantee Account Value is insufficient for this purpose, then
that Scheduled Installment is in default.
Grace Period. The Contract permits a 30-day grace period for the payment of
each Scheduled Installment. This grace period begins the day after the Monthly
Due Date for the Scheduled Installment. If the Scheduled Installment remains in
default past the end of the grace period an interest rate at an effective
annual rate of 6% will be applied to all outstanding amounts. If the Scheduled
Installment(s) remains in default past 12 months from the original due date,
you will lose the right to Guaranteed Minimum Income Payments.
33
Reinstatement. We will notify you of any delinquent payments on subsequent
billing notices. In addition, if more than 9 months have passed from the date
of the missed Scheduled Installment, we will send you notices once per month,
up to the 12th month, that you are in danger of forfeiting your right to the
Guaranteed Minimum Income Payments. You may reinstate your right to the
Guaranteed Minimum Income Payment by paying the missed Scheduled
Installment(s), or the missing portion thereof, within the earlier of:
(1) one year of its Monthly Due Date; or
(2) the Annuity Commencement Date.
You also must pay us any monthly billing fee associated with the defaulted
Scheduled Installment, as well as interest on both at an annual rate of 6%.
Interest accrues from the date of the end of the grace period for the defaulted
Scheduled Installment (or portion thereof) until the date of the next Monthly
Due Date following the receipt of the payment. We will notify you of the exact
amount you owe.
We allocate Purchase Payments of the missed portion of the Scheduled
Installments to the Subaccount as of the date that we receive them.
We apply Purchase Payments representing less than the full amount owed in
connection with a missed Scheduled Installment in the following order:
(1) missed portion of the Scheduled Installment;
(2) any rider Purchase Payments;
(3) any applicable monthly billing fees; and
(4) interest.
If more than one Scheduled Installment is in default, we apply any Purchase
Payment you make to pay the most recently missed Scheduled Installment (or
portion thereof). We will reinstate your right to receive Guaranteed Minimum
Income Payments only after you have paid us all of your missed Scheduled
Installments, all monthly billing fees, and all interest you owe on the
foregoing. To retain your right to Guaranteed Minimum Income Payments, you may
make no more than 24 Scheduled Installments outside the grace period over the
life of your Contract. If you fail to pay any Scheduled Installment with any
applicable monthly billing fee, and interest that is charged on it within one
year from its Monthly Due Date (but not later than the Annuity Commencement
Date), you forfeit your right to receive the Guaranteed Minimum Income Payments
and you cannot reinstate it.
Scheduled Purchase Payments. When we issue a Contract, and whenever we allocate
a Flexible Purchase Payment to the Immediate Installment Account, we will send
you
34
a new Contract data page which includes your revised schedule of Scheduled
Purchase Payments. Thus, month-by-month, Scheduled Purchase Payments always
equal the difference between Scheduled Installments and Immediate Installments.
The minimum Scheduled Purchase Payment is $25.
You may make Scheduled Purchase Payments through automatic transfers from your
bank account (i.e., electronic fund transfers). Doing this helps ensure that
you will make your Scheduled Purchase Payments on the Monthly Due Date. If you
do not use Electronic Fund Transfers to make your Scheduled Purchase Payments,
we charge a monthly fee of $10.00 for sending you monthly "bills" and manually
processing the payments. This $10.00 fee is in addition to any required
Scheduled Purchase Payment. The $10.00 fee is taken prior to investment in the
Subaccount.
Flexible Purchase Payments and Immediate Installments. You also may make your
Scheduled Installments through Flexible Purchase Payments. Flexible Purchase
Payments received on or before the Contract Date will be allocated to the
Immediate Installment Account. For Flexible Purchase Payments received after
the Contract Date in amounts greater than 6 Scheduled Purchase Payments
(computed as of the date that we receive the Flexible Purchase Payment), we
will invest such payments in the Immediate Installment Account, provided we
have sufficient transfer instructions. We will deposit Flexible Purchase
Payments received after the Contract Date in the Guarantee Account for Flexible
Purchase Payments that are equal to or less than 6 times the Scheduled Purchase
Payments, or for those Flexible Purchase Payments that are greater than or
equal to 6 times the Scheduled Purchase Payments, but not accompanied by
sufficient transfer instructions.
We use Flexible Purchase Payments allocated to the Immediate Installment
Account to "fund" or generate a series of monthly Immediate Installments that
we transfer to the Subaccount on the Monthly Due Dates to "pay" all or part of
the Scheduled Installments. See the Purchase Payment Allocation Table below.
Immediate Installments have the effect of reducing or eliminating the required
Scheduled Purchase Payments for all or part of the Accumulation Period,
depending on the method you select for the installments. Each Flexible Purchase
Payment supports a separate series of Immediate Installments, with each series
having a starting date and an ending date. The starting date is generally the
Monthly Due Date following the allocation of the payment to the Immediate
Installment Account and the ending date depends on the Immediate Installment
method you select. However, if you elect one of our optional riders (described
in the "Optional Riders" provision), Flexible Purchase Payments must end on the
earlier of the Annuity Commencement Date or age 65 of the covered Annuitant.
35
For each series of Immediate Installments, each monthly Installment must be of
the same amount. For any Flexible Purchase Payment, the fewer the number of
Immediate Installments, the larger such Installments can be. Conversely, the
smaller each Immediate Installment, the greater the number of Installments that
the Flexible Purchase Payment can support. Since Immediate Installments may be
transferred only on Monthly Due Dates, a greater number of Installments
translates into a longer portion of the Accumulation Period over which such
Installments are made. Thus, you may use a Flexible Purchase Payment to
eliminate a number of Scheduled Installments or to "buy down" the amount of
some greater number of Scheduled Purchase Payments. Exactly how much you can
eliminate or "buy down," depends on the amount of the Flexible Purchase
Payment, the rate of interest that we credit to Immediate Installment Account
Value as determined on the date of purchase and the number of installments.
We compute the series of Installments for each Flexible Purchase Payment
allocated to the Immediate Installment Account by crediting discounted interest
at a rate that we determine for each Flexible Purchase Payment at the time that
you make the Flexible Purchase Payment. Using that discounted interest rate and
knowing either the amount of the Installments or the number of Installments you
want, we determine the amount and number of the Installments. Your Immediate
Installments reflect the fact that discounted interest is credited each month
on a declining balance as Immediate Installments are transferred to the
Subaccount. For example, assume that you want 120 Installments (i.e., ten years
of Installments) from your Flexible Purchase Payment beginning immediately. We
calculate a level Installment to be transferred each month. This Installment is
the amount that will result in the Flexible Purchase Payment (net of any
applicable premium tax), and all interest earned on it, being completely
transferred to the Subaccount by the end of the 10 years.
We will return the portion of any Flexible Purchase Payment that is more than
the amount needed to pay all future Scheduled Installments within 30 days of
receipt. The total Purchase Payments for all Contracts issued to any one Owner
cannot exceed $2,000,000 without prior Home Office approval.
Allocation of Purchase Payments. We allocate Scheduled Purchase Payments
received on the Monthly Due Date, as well as any Payments past due that we
receive, directly to the Subaccount on the Valuation Day we receive such
Payment. We allocate any Scheduled Purchase Payment we receive before the
Monthly Due Date to the Guarantee Account, and transfer that payment to the
Subaccount as of the Monthly Due Date. We allocate Flexible Purchase Payments
that are received in an amount greater than 6 Scheduled Purchase Payments
directly to the Immediate Installment Account, provided we have sufficient
transfer instructions to determine a payment method for your Immediate
Installments. If we do not receive sufficient
36
transfer instructions, we will allocate that Flexible Purchase Payment to the
Guarantee Account until we receive sufficient instructions. In addition, any
Flexible Purchase Payment received that is equal to or less than 6 Scheduled
Purchase Payments will be directed to the Guarantee Account.
Purchase Payment Allocation Table
Type of Payment When Received Where Allocated
- ------------------------------------------------------------------------------
Scheduled Purchase Monthly Due Date Subaccount
Payment or portion
thereof
- ------------------------------------------------------------------------------
Scheduled Purchase Before Monthly Due Guarantee Account
Payment or portion Date
thereof
- ------------------------------------------------------------------------------
Scheduled Purchase After Monthly Due Subaccount for any past
Payment or portion Date due Scheduled Installment,
thereof then Guarantee Account for
remainder
- ------------------------------------------------------------------------------
Flexible Purchase Payment On or After Contract Immediate Installment
that is greater than 6 Date Account
Scheduled Purchase
Payments with
instructions
- ------------------------------------------------------------------------------
Flexible Purchase Payment On or After Contract Guarantee Account until
that is greater than 6 Date instructions received,
Scheduled Purchase then transferred to
Payments without Immediate Installment
instructions Account
- ------------------------------------------------------------------------------
Flexible Purchase Payment On or After Contract Guarantee Account
that is equal to or less Date
than 6 Scheduled Purchase
Payments
Optional Riders. To reduce the risk that unforeseen events could leave you
without the resources to make Scheduled Purchase Payments, we offer three
optional riders that you may purchase at Contract issue or Contract
Anniversary, provided that you remain eligible to receive Guaranteed Minimum
Income Payments. These are:
. Disability Benefit Rider -- This rider provides that, during the life of the
covered Annuitant, if that covered Annuitant becomes totally disabled (as
defined in the rider), all or a portion of the Scheduled Purchase Payments
due during the period of total disability will be waived. Also, we will waive
all or a portion of Purchase Payments for other riders due during the period
of total disability for the period when we waive Scheduled Purchase Payments.
(Portions of a Scheduled Purchase Payment may be waived in cases of Joint
Owners/Joint Annuitants where one spouse becomes disabled. For instance, if
the husband is covered for 60% of a
37
Scheduled Purchase Payment and he becomes totally disabled, as defined by the
rider, AND the husband is the covered Annuitant, then we will waive 60% of the
Scheduled Purchase Payment.) We will calculate the Monthly Income Benefit and
Death Benefit under the Contract as if you had paid the waived Scheduled
Purchase Payment when due. However, the waived Scheduled Purchase Payments do
not increase the Surrender Value of the Contract. If you surrender the
Contract, the Monthly Income Benefit and the Death Benefit associated with the
waived Scheduled Purchase Payments will remain in effect.
We will credit the disability benefit provided under this rider on each
Monthly Due Date during a period beginning from the date of total disability
to the earliest of:
(1) the Contract Anniversary on or next following the covered Annuitant's
65th birthday,
(2) the Annuity Commencement Date,
(3) recovery from total disability, or
(4) the covered Annuitant's death.
Benefits take effect only after 90 days of continuous total disability. If
the benefits take effect, we will waive Scheduled Purchase Payments missed
during the 90 day period and, will reapply any Scheduled Purchase Payments
you made during that period to the Guarantee Account.
. Unemployment Benefit Rider -- This rider provides that, during the life of
the covered Annuitant, if that Annuitant becomes unemployed (if state
unemployment benefits have been received for at least 90 consecutive days),
all or a portion of the Scheduled Purchase Payments due during the period of
unemployment will be waived. Also, we will waive all or a portion of Purchase
Payments for other riders due during the period of unemployment during the
period when we waive Scheduled Purchase Payments. (Portions of a Scheduled
Purchase Payment may be waived in cases of Joint Owners/Joint Annuitants
where one spouse becomes unemployed. For instance, if the husband is covered
for 60% of a Scheduled Purchase Payment and he becomes totally unemployed AND
the husband is the covered Annuitant, then we will waive 60% of the Scheduled
Purchase Payment.) We will calculate the Monthly Income Benefit and Death
Benefit under the Contract as if you had paid the waived Scheduled Purchase
Payment when due. However, the waived Scheduled Purchase Payments do not
increase the Surrender Value of the Contract. If you surrender the Contract,
the Monthly Income Benefit and the Death Benefit associated with the waived
Scheduled Purchase Payments will remain in effect.
38
We will credit the unemployment benefit provided under this rider on each
Monthly Due Date during a period beginning from the date of the first waived
Scheduled Purchase Payment to the earliest of:
(1) the Contract Anniversary on or next following the covered Annuitant's
65th birthday;
(2) the Annuity Commencement Date;
(3) the covered Annuitant's loss of state employment benefits; or
(4) the covered Annuitant's death.
Benefits take effect one year from the date of the first waived Scheduled
Purchase Payment during any five year period only after 90 days of continuous
unemployment and after the rider has been in effect for one year and a full
year of the benefit period has not been completed. If multiple periods of
unemployment are separated by less than 30 days and a full year of the
benefit period has not been completed, we will consider the multiple
unemployments as one benefit period. If the benefit becomes effective, we
will waive Scheduled Purchase Payments missed during the 90 day period and,
will reapply any Scheduled Purchase Payments you made during that period to
the Guarantee Account.
. Joint Annuitant Life Rider -- This rider is only available for spouses. This
rider provides that if a covered Joint Annuitant dies, all or a portion of
the Scheduled Purchase Payments will be waived. (Portions of Scheduled
Purchase Payments are waived in cases of Joint Owners/Joint Annuitants where
one spouse dies. For example, if a husband is covered for 60% of the monthly
Scheduled Purchase Payment and he passes away, then we will waive 60% of the
Scheduled Purchase Payment from the date of the husband's death until the
Annuity Commencement Date.) We will calculate the Monthly Income Benefit and
Death Benefit under this Contract as if the Scheduled Purchase Payments
waived had been paid when due. However, the waived Scheduled Purchase
Payments do not increase the Surrender Value of the Contract. If you
surrender the Contract, the Monthly Income Benefit and the Death Benefit
associated with the waived Scheduled Purchase Payments will remain in effect.
Benefits under this rider will be covered from the date of the covered
Annuitant's death until the earlier of:
(1) the Contract Anniversary on or next following the surviving Joint
Annuitant's 65th birthday, or
(2) the Annuity Commencement Date.
The charges for the optional riders are in addition to your Scheduled
Purchase Payments. The amount paid for the optional riders is taken prior to
investing in any
39
Account. The riders and your Contract's data pages provide more detailed
information about the riders including certain conditions and limitations.
The riders may not be available in qualified plans, in all states, or in all
markets.
VALUATION OF ACCUMULATION UNITS
Upon allocation or transfer to the Subaccount, we convert Scheduled Purchase
Payments and Immediate Installments into Accumulation Units. We determine the
number of Accumulation Units credited by dividing the dollar amount directed to
the Subaccount by the value of an Accumulation Unit for the Subaccount on the
Valuation Day on which the Scheduled Purchase Payment or Immediate Installment
is invested in the Subaccount. Therefore, Scheduled Purchase Payment allocated
or Immediate Installments transferred to the Subaccount increase the number of
Accumulation Units credited to the Contract.
Withdrawals, surrenders, payment of a Death Benefit, and the application of
Subaccount Value to acquire Monthly Income Payments on the Annuity Commencement
Date all result in the cancellation of an appropriate number of Accumulation
Units. We cancel Accumulation Units as of the end of the Valuation Period in
which we receive notice or instructions relating to the event.
The Accumulation Unit value at the end of every Valuation Day equals the
Accumulation Unit value at the end of the preceding Valuation Day multiplied by
the net investment factor (described below). We arbitrarily set the
Accumulation Unit value at the inception of the Subaccount at $10.00. On any
Valuation Day, we determine your Subaccount Value by multiplying the number of
Accumulation Units attributable to your Contract by the Accumulation Unit value
for that day.
The net investment factor is an index used to measure the investment
performance of the Subaccount from one Valuation Period to the next. The net
investment factor for the Subaccount for any Valuation Period reflects the
change in the net asset value per share of the Portfolio from one Valuation
Period to the next, adjusted for the daily deduction of the administrative
expense and mortality and expense risk charges from assets in the Subaccount.
If any "ex-dividend" date occurs during the Valuation Period, we take into
account the per share amount of any dividend or capital gain distribution.
Also, we take into account a charge or credit for any taxes reserved which we
determine to have resulted from the operations of the Subaccount.
The value of an accumulation unit may increase or decrease based on the net
investment factor. Changes in the net investment factor may not be directly
proportional to changes in the net asset value of the Total Return Fund of GE
Investments Funds, Inc. because of the deduction of variable account charges.
Though the number of accumulation units will not change as a result of
investment experience, the value of an accumulation unit may increase or
decrease from Valuation Period to Valuation Period.
40
Surrenders And Partial Withdrawals
We will allow the surrender of the Contract or a partial withdrawal of your
Contract Value, subject to the conditions set forth below.
You may take a partial withdrawal or surrender at any time before the Annuity
Commencement Date. Withdrawals must be at least $100. A withdrawal or surrender
is effective as of the date we receive your request at our Home Office in a
form acceptable to us. Unless you request otherwise, we will take any partial
withdrawal or surrender:
(1) first from the Guarantee Account;
(2) then from the Immediate Installment Account; and
(3) finally from the Subaccount.
You will need to make Scheduled Purchase Payments when you otherwise would not
have to, if you have made withdrawals from the Guarantee Account and/or the
Immediate Installment Account and the amounts remaining in such accounts are
insufficient to fully make your Scheduled Installments.
Partial withdrawals and surrenders may be subject to surrender and/or access
charges and a Market Value Adjustment. See the "Charges and Other Deductions"
provision in this prospectus. A partial withdrawal may also reduce the amount
of your Death Benefit. See "The Death Benefit" provision in this prospectus.
In addition, you may be subject to an ordinary income tax and, if you are
younger than age 59 1/2 at the time of the surrender or partial withdrawal, a
10% penalty tax. A surrender or a partial withdrawal may also be subject to
income tax withholding. See the "Federal Tax Matters" provision in this
prospectus.
Telephone Withdrawals. You may make withdrawals under your Contract by writing
us in a form acceptable to us, or calling us provided we received your prior
written authorization to make partial withdrawals over the telephone at our
Home Office. You only can surrender your contract by writing our Home Office.
We will employ reasonable procedures to confirm that instructions we receive
are genuine. Such procedures may include, among others:
. requiring you or a third party you authorized to provide some form of
personal identification before we act on the telephone instructions;
. confirming the telephone transaction in writing to you or a third party
you authorized; and/or
. tape-recording telephone instructions.
41
If we do not follow reasonable procedures, we may be liable for any losses due
to unauthorized or fraudulent instructions. We reserve the right to limit or
prohibit telephone withdrawals.
To request a telephone withdrawal, please call us at 1-800-352-9910.
Special Note on Reliability. Please note that our telephone system may not
always be available. Any telephone system, whether it is yours, your service
provider's or your registered representative's, can experience unscheduled
outages or slowdowns for a variety of reasons. These outages or slowdowns may
delay or prevent our processing of your request. Although we have taken
precautions to help our systems handle heavy use, we cannot promise complete
reliability under all circumstances. If you are experiencing problems, you can
make your transaction request by writing our Home Office at the address listed
on page 1 of this prospectus.
Repayment of Withdrawals of Subaccount Value. To remain eligible to receive
Guaranteed Minimum Income Payments, you must repay the amount of any withdrawal
(this includes the surrender charge) from the Subaccount plus any applicable
interest within one year from the date of the partial withdrawal, but no later
than the Annuity Commencement Date. If the repayment is not made by the Monthly
Due Date next following the date of the partial withdrawal, we will charge you
interest at an effective annual rate of 6% on the total amount withdrawn from
the Subaccount.
It is important to understand that, because surrender charges may apply, the
amount you receive from the Subaccount may not be the same as the amount we
withdraw from the Subaccount. You must repay the amount we withdraw from the
Subaccount plus interest. Therefore, the amount you repay includes:
. the amount you receive from the Subaccount; plus
. the amount of the surrender charge assessed on amounts withdrawn from the
Subaccount; plus
. the amount of any premium taxes assessed on amounts withdrawn from the
Subaccount; plus
. interest we assess from the date of withdrawal until the date of
repayment.
We allocate any repayment (after deducting for interest) to the Subaccount as
of the date we receive it.
Consult your tax advisor concerning repayments as we consider repayments after
deducting interest charges to be new Purchase Payments for tax purposes (i.e.,
if the repayment is withdrawn again, that partial withdrawal will be taxed). In
addition, taking a partial withdrawal may subject you to an ordinary income
tax, AND a 10%
42
penalty tax if you are younger than 59 1/2 at the time the partial withdrawal
is taken. You may be subject to the income tax and penalty tax EVEN IF YOU
REPAY ALL AMOUNTS OUTSTANDING. Consequently, it is very important that you
consult your tax advisor prior to taking any partial withdrawals.
If you take multiple withdrawals, we will apply repayments to the most recent
withdrawals first.
Withdrawals from the Guarantee Account and the Immediate Installment Account do
not have to be repaid. Generally, taking partial withdrawals from the Guarantee
Account or Immediate Installment Account will not affect your right to receive
Guaranteed Minimum Income Payments. However taking such withdrawals may require
you to make Scheduled Purchase Payments (or higher Scheduled Purchase
Payments). If such Scheduled Purchase Payments are not made, you will lose your
right to receive the Guaranteed Minimum Income Payments.
Surrender Value. The amount payable on surrender of the Contract is the
Surrender Value as of the date we receive your surrender request in a form
acceptable to us. The Surrender Value equals the Contract Value on the date we
receive your request, less any applicable surrender charge, access charge, and
premium tax charge. We will pay the Surrender Value in a lump sum, unless you
elect one of the Optional Payment Plans. See the "Optional Payment Plans"
provision in this prospectus. We may waive surrender charges and access charges
upon surrender if you elect certain Optional Payment Plans. See the "Charges
and Other Deductions" provision in this prospectus.
43
Charges And Other Deductions
We will deduct the charges described below to cover our costs and expenses, the
services provided, and our risks assumed under the Contracts. We incur certain
costs and expenses for the distribution and administration of the Contracts and
for providing the benefits payable thereunder. Our administrative services
include:
. processing applications for and issuing the Contracts;
. maintaining records;
. monthly billing and Electronic Fund Transfer transactions;
. administering Income Payments;
. furnishing accounting and valuation services (including the calculation
and monitoring of daily Subaccount values);
. reconciling and depositing cash receipts;
. providing Contract confirmations and periodic statements;
. maintaining an internet service site; and
. providing toll-free inquiry services.
The risks we assume include:
. the risk that the Guaranteed Minimum Income Payments will exceed the
calculated variable Income Payments;
. the risk that the Death Benefit will be greater than the Surrender Value;
. the risk that Annuitants will live longer than we assumed in calculating
our guarantees (these guarantees are incorporated in the Contract and
cannot be changed); and
. the risk that our costs in providing the services will exceed our
revenues from Contract charges (which cannot be changed).
The amount of a charge may not necessarily correspond to the costs associated
with providing the services or benefits stated in the Contract. For example,
surrender charges we collect may not fully cover all of the sales and
distribution expenses we actually incur. We also may realize a profit on one or
more of the charges. We may use any such profits for any corporate purpose,
including the payment of sales expenses.
44
SURRENDER CHARGES, ACCESS CHARGES, AND MARKET VALUE ADJUSTMENTS
We may assess a surrender charge (on amounts in the Subaccount and Guarantee
Account) or an access charge (on amounts in the Immediate Installment Account)
on partial withdrawals or surrenders of Contract Value. We will also apply a
Market Value Adjustment to determine the Immediate Installment Account Value
available for partial withdrawal or surrender from the Immediate Installment
Account.
Unless we receive other instructions, we will first withdraw amounts from:
(1) the Guarantee Account; then
(2) from the Immediate Installment Account; and lastly
(3) from the Subaccount.
We will deduct any surrender charge and access charge from the amounts you
withdraw.
Surrender Charge for the Subaccount and the Guarantee Account. The surrender
charge for amounts withdrawn or surrendered from the Subaccount and/or the
Guarantee Account is a percentage of the lesser of:
(1) Scheduled Installments made to date and not previously withdrawn; and
(2) the amount withdrawn.
We do not assess surrender charges on Scheduled Installments previously
withdrawn and later repaid to the Subaccount.
The surrender charge percentage is as follows:
Surrender Charge
(as a Percentage of the lesser of
Contract Year in Scheduled Installments made to
Which Surrender or Partial date not previously withdrawn
Withdrawal is Made and the amount withdrawn)
------------------------------------------------------------------
1 9%
2 8%
3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 and after 1%
------------------------------------------------------------------
45
Examples:
Assuming:
. you have made Purchase Payments of $18,000,
. your Contract Value is $20,000 ($17,000 in
the Subaccount and $3,000 in the Guarantee
Account), $15,000 of which is from Scheduled
Installments,
. you have no value in the Immediate
Installment Account,
. you have not withdrawn any previous
Scheduled Installments that were assessed a
surrender charge, and
. you request a withdrawal of $10,000 in
Contract Year 5.
Your surrender charge will be $500 (the lesser of
5% of $10,000 and 5% of $15,000). We take the
withdrawal from the Guarantee Account ($3,000)
and from the Subaccount ($7,000). You will
receive a net check of $9,500 assuming there are
no premium taxes or income taxes withheld. To
reinstate your Guaranteed Minimum Income Payment
you must repay the $7,000 to the Subaccount
within 12 months of the withdrawal. (This
includes the surrender charge of $350 taken from
amounts in the Subaccount.) In addition, you must
pay interest to us (assessed on the $7000
withdrawn) within 12 months of the withdrawal.
The following chart depicts the withdrawal.
Amount to
Reinstate
Guaranteed
Minimum Account
Beginning Remaining Income Value
Contract Amount Contract Surrender Net to Payment After
Account Value Withdrawn Value Charge You (+ Interest) Repayment*
- -----------------------------------------------------------------------------------
Subaccount $17,000 $ 7,000 $10,000 $(350) $6,650 $ 7,000 $17,000
(+ interest)
- -----------------------------------------------------------------------------------
Guarantee $ 3,000 $ 3,000 $ 0 $(150) $2,850 $ 0 $ 0
Account
- -----------------------------------------------------------------------------------
Total $20,000 $10,000 $10,000 $(500) $9,500 $ 7,000 $17,000
(+ interest)
- -----------------------------------------------------------------------------------
* Assuming no growth in the Subaccount.
However, if you withdraw $17,000, your surrender
charge will be $750 (5% of $15,000). The
remaining Contract Value in the Guarantee Account
is zero and in the Subaccount is $3,000. You will
receive a net check of $16,250 assuming there are
no premium taxes or income taxes withheld. To
reinstate your Guaranteed Minimum Income Payment
you must repay to the Subaccount $14,000 within
12 months of the withdrawal. (This includes the
surrender charge of $600 taken from amounts in
the Subaccount.) In addition, you must pay
interest to us (assessed on the $14,000
withdrawn) within 12 months of the withdrawal.
You will not be assessed a surrender charge on
any amounts withdrawn greater than the amount of
Scheduled Installments made.
46
Current market conditions may affect the impact of the surrender charges on
your Contract.
Assuming the amount of Scheduled Installments
made to date and not previously withdrawn equals
$10,000, your Contract Value equals $20,000, and
you fully surrender your Contract in the third
Contract Year, we would assess a surrender charge
of $700 (7% of $10,000) with a net check to you
of $19,300 assuming there are no premium taxes or
income taxes withheld. However, if there is a
market decline so your Contract Value is $9,000,
and you request a full surrender, we would assess
a surrender charge of $630 (the lesser of 7% of
$9,000 and 7% of $10,000) with a net check to you
of $8,370 assuming there are no premium taxes or
income taxes withheld.
Access Charge and Market Value Adjustment for the Immediate Installment
Account. We apply a Market Value Adjustment when we determine the amount
available as a Death Benefit, surrender, or partial withdrawal from the
Immediate Installment Account. We will also deduct an access charge from your
partial withdrawal or surrender, but not from the amount we pay as a Death
Benefit.
We treat a partial withdrawal or surrender of Contract Value in the Immediate
Installment Account as a proportional withdrawal or surrender of each of the
remaining future Immediate Installments. We also assess an access charge on
amounts you surrender or withdraw from the Immediate Installment Account. This
charge is a percentage of the Immediate Installment Account Value withdrawn as
shown in the table below.
The concept of calculating a Market Value Adjustment on the Immediate
Installment Account is different from many other Market Value Adjustment
calculations. Unlike traditional Market Value Adjustments where the present
value of the Account Value is known, here we know the future value of the
Immediate Installments and need to calculate the present value. Therefore, we
must determine the present value before we can determine what you receive upon
surrender or partial withdrawal.
First, we use the discount interest rate in effect when you made your Flexible
Purchase Payment into the Immediate Installment Account to discount each future
Immediate Installment back to its present book value. We then sum all of these
present values to calculate the value, before the application of any Market
Value Adjustment, of the Immediate Installment Account.
Next, we determine your Immediate Installment Account Value by applying the
Market Value Adjustment. We calculate the Market Value Adjustment factor
separately for each Immediate Installment. The Market Value Adjustment for each
Immediate Installment is equal to the present book value of that installment
times the Market Value Adjustment factor for that installment. The Market Value
Adjustment factor is:
((1 + i) / (1 + j))n - 1
47
where:
n = the number of months until the last Immediate Installment for a
particular Flexible Purchase Payment will be transferred to the
Subaccount
i = the original discount interest rate we used for the Immediate
Installment when you made the Flexible Purchase Payment to the Immediate
Installment Account
j = the current discount interest rate we use for a new Flexible Purchase
Payment of (m/12) years that we currently make available for the
Immediate Installment Account ((m/12) is rounded up to a whole number of
years)
m = the number of months until the last Immediate Installment for that
Flexible Purchase Payment will be transferred to the Subaccount.
The total Market Value Adjustment for the Contract is the sum of each Market
Value Adjustment calculated for each Immediate Installment. The Immediate
Installment Account Value is the sum of the present book value of each
Immediate Installment plus the total Market Value Adjustment for the Contract.
Two examples of how the Market Value Adjustment would work follow.
48
EXAMPLES:
Example 1
Example of Withdrawal from Immediate Installment Account
Assuming:
. At issue, you made a Flexible Purchase Payment with transfers of $645 for
264 months
. On the first Contract Anniversary, you made a Flexible Purchase Payment with
transfers of $90 for 72 months
. Your value (before the application of any Market Value Adjustment) in the
Immediate Installment Account at the end of the second Contract Year is
$98,380. Of this amount, $93,400 is attributable to the initial Flexible
Purchase Payment; the remaining $4,980 is attributable to the Flexible
Purchase Payment paid on the first Contract Anniversary
. Your Immediate Installment Account Value at the end of the second Contract
Year is $100,000. Of this amount, $95,000 is attributable to the initial
Flexible Purchase Payment; the remaining $5,000 is attributable to the
Flexible Purchase Payment paid on the first Contract Anniversary
. You have no value in the Guarantee Account
. You have not previously withdrawn amounts from the Immediate Installment
Account
. You request a withdrawal of $2000 at the end of Year 2
. At the end of Year 2, the access charge for transfers established for the
initial Flexible Purchase Payment is 6%.
. At the end of Year 2, the access charge for transfers established for the
second Flexible Purchase Payment is 5% (because there are 60 transfers
remaining).
The amount of withdrawal of value attributable to the initial Flexible Purchase
Payment is $1,900 ($2000 x $95,000/$100,000). The remaining $100 is withdrawn
from the value attributable to the second Flexible Purchase Payment. Your
access charge will be $119 (6% of $1,900 plus 5% of $100). You will receive a
net check of $1,881 assuming there are no premium taxes or income taxes
withheld.
Transfers for the initial Flexible Purchase Payment will be reduced by $12.90
($645 x $2,000/$100,000) so the amount of the transfer subsequent to the
withdrawal will be $632.10. Transfers for the second Flexible Purchase Payment
will be reduced by $1.80 ($90 x $2,000/$100,000) so the amount of its transfer
subsequent to the withdrawal will be $88.20.
49
Example 2
The second example below shows the total impact of the Market Value Adjustments
applicable to each future Immediate Installment. It shows the effect on the
value in the Immediate Installment Account if discount interest rates drop
(value is adjusted up), rise (value is adjusted down), or are the same (no
adjustment).
Beginning Beginning
of Month of Month
Value Value
(before (before Level Current
Market Market Monthly Level Current
Value Immediate Value Discount Monthly Market Immediate
Adjust- Installment Adjustment Interest Discount Value Installment Access
Valuation ment and Transfer and after Rate at Interest Adjustment Account Charge Surrender
Date transfer) Amount transfer) Purchase Rate Amount Value Percentage Value
- ------------------------------------------------------------------------------------------------------------
Date of
Purchase $90,524 $1,000 $89,524 0.5% 0.5% $ 0 $89,524 6% $84,153
1 Month
after
Purchase $89,971 $1,000 $88,971 0.5% 0.4167% $ 4,093 $93,064 6% $87,480
2 Months
after
Purchase $89,416 $1,000 $88,416 0.5% 0.5833% $(3,791) $84,625 6% $79,547
3 Months
after
Purchase $88,858 $1,000 $87,858 0.5% 0.5% $ 0 $87,858 6% $82,587
- ------------------------------------------------------------------------------------------------------------
. Issued under the following terms: Flexible Purchase Payment = $90,524
(assumes no premium tax); Immediate Installment = $1,000; Level Monthly
Interest Rate = 0.5%; Immediate Installments made for 120 months beginning on
date of Flexible Purchase Payment.
. Discount interest rates are assumed to be volatile during the 3 months
following the Flexible Purchase Payment. In the first month following the
Flexible Purchase Payment, monthly discount interest rates for a similar
Flexible Purchase Payment have dropped to 0.4167%. In the second month
following the Flexible Purchase Payment, monthly discount interest rates for
a similar Flexible Purchase Payment have increased to 0.5833%. In the third
month following the Flexible Purchase Payment, interest rates for a similar
Flexible Purchase Payment have decreased to 0.5%.
50
Example 3
The third example shows the actual calculation of the Market Value Adjustment
for a representative number of Immediate Installments. The total Market Value
Adjustment at any time will be the sum of the Market Value Adjustments for all
remaining Immediate Installments.
Level Current
Monthly Present Level Current
Immediate Discount Value at Monthly Market Current Present
Installment Months Interest Purchase Discount Value Market Value of
Future Until Rate at Discount Interest Adjustment Value Immediate
Value Transfer Purchase Rate Rate Factor Adjustment Installment
- -----------------------------------------------------------------------------------------------
$ 1,000 118 0.5% $ 557.92 0.4167% .10284 $ 56.86 $ 614.78
$ 1,000 117 0.5% $ 560.71 0.4167% .10192 $ 56.64 $ 617.34
$ 1,000 116 0.5% $ 563.51 0.4167% .10101 $ 56.40 $ 619.92
... ... 0.5% ... 0.4167% ... ... ...
... ... ... ... ... ...
... ... ... ... ...
$ 1,000 2 0.5% $ 990.07 0.4167% .00166 $ 1.64 $ 991.71
$ 1,000 1 0.5% $ 995.02 0.4167% .00083 $ .83 $ 995.85
$ 1,000 0 0.5% $ 1,000.00 0.4167% 0 $ 0 $ 1,000.00
- -----------------------------------------------------------------------------------------------
TOTAL
PRIOR TO
TRANSFER $119,000 $89,971.44 $4,093.06 $94,064.50
- -----------------------------------------------------------------------------------------------
TOTAL
AFTER
TRANSFER $118,000 $88,971.44 $4,093.06 $93,064.50
- -----------------------------------------------------------------------------------------------
. Issued under the following terms: Flexible Purchase Payment = $90,524
(assumes no premium tax); Immediate Installment = $1,000; Level Monthly
Discount Interest Rate = 0.5%; Immediate Installments made for 120 months
beginning on date of Flexible Purchase Payment
. The date of valuation and any Market Value Adjustment is one month after the
Flexible Purchase Payment. In that first month, monthly discount interest
rates for a similar Flexible Purchase Payment have dropped to 0.4167%.
51
After we calculate the Market Value Adjustment, we determine the Surrender
Value. To determine Surrender Value from the Immediate Installment Account, we
subtract the appropriate access charge (determined separately for the Immediate
Installments of each Flexible Purchase Payment) from the Immediate Installment
Account Value.
We calculate the access charge as a percentage of the Immediate Installment
Account Value withdrawn. The closer the surrender or partial withdrawal is to
the date established for Immediate Installment transfers for that particular
Flexible Purchase Payment to end, the lower the amount of the access charge
will be. The amount of the access charge is as follows:
Complete and Partial Years
Remaining on Each Flexible Access Charge
Purchase Payment (as a percentage of
Until the Date Immediate
Established for Installment Installment Account
Transfers to End Value withdrawn)
----------------------------------------------------------
6 and more 6%
5 5%
4 4%
3 3%
2 2%
1 1%
----------------------------------------------------------
The amount payable for a partial withdrawal or surrender from the Immediate
Installment Account will be:
(1) the amount of the partial withdrawal or surrender minus any access
charge; minus
(2) any applicable premium taxes.
Because we take the withdrawal proportionally from each future Immediate
Installment, the access charge is a weighted average of the access charge for
each such installment. This weighted average is:
(1 minus the ratio of Surrender Value for the Immediate Installment Account
to the Immediate Installment Account Value).
The amount payable for a withdrawal is therefore the amount of the withdrawal
multiplied by the ratio of the Surrender Value for the Immediate Installment
Account to the Immediate Installment Account Value.
Waiver of Surrender and Access Charges. We will waive all surrender charges and
access charges if you surrender your Contract and apply your Contract Value to
one of the following Optional Payment Plans:
(1) Plan 1 (Life Income with Period Certain);
52
(2) Plan 2 (Income for a Fixed Period of 10 or more years); or
(3) Plan 5 (Joint Life and Survivor Income).
If you elect one of the above Optional Payment Plans, then the amount applied
to the plan will be your Contract Value, which includes any applicable Market
Value Adjustment, minus any premium tax.
You may also select Optional Payment Plan 3 or Plan 4 upon surrender, although
we will assess surrender charges and access charges (as well as any applicable
market value adjustment and premium tax) against your Contract Value. We will
apply the Surrender Value to the selected plan.
See the "Optional Payment Plans" provision in this prospectus.
ASSET CHARGE
We deduct from the Subaccount an amount, computed daily, equal to an effective
annual rate of 1.50% of the average daily net assets of the Subaccount. We
assess this charge when we compute the net investment factor. The asset charge
reduces the value of Accumulation Units and Annuity Units. The charge consists
of an administrative expense charge at an effective annual rate of 0.15% and a
mortality and expense risk charge at an effective annual rate of 1.35%.
MONTHLY BILLING FEE
If you do not make your Scheduled Purchase Payment by means of an Electronic
Fund Transfer payment, we will charge a $10 billing fee each month. We will add
the monthly billing fee to the amount of your Scheduled Purchase Payment, and
deduct the charge from your Payment before we apply that Scheduled Purchase
Payment.
DEDUCTIONS FOR TAXES
We will deduct charges for any premium tax or other tax levied by any
governmental entity either from Purchase Payments or the Contract Value when
the premium tax is incurred or when we pay proceeds under the Contract
(proceeds include surrenders, partial withdrawals, annuity payments, and death
benefit payments).
The applicable premium tax rates that states and other governmental entities
impose on the purchase of an annuity are subject to change by legislation, by
administrative interpretation, or by judicial action. The amount of premium tax
assessed depends upon the laws of your state. The premium tax generally ranges
from 0.0% to 3.5%.
PURCHASE PAYMENTS FOR THE OPTIONAL RIDERS
The cost of the optional Waiver of Scheduled Purchase Payments Upon Disability
Rider, Waiver of Scheduled Purchase Payments Upon Unemployment Rider, and
Waiver of Scheduled Purchase Payments Joint Annuitant Life Rider varies based
on
53
the owner's age, gender, and the amount and duration of the Scheduled Purchase
Payments. Purchase Payments for riders are due with your Scheduled Purchase
Payments. (See the "Expense Table" for the range of charges for the Optional
Riders.)
OTHER CHARGES AND DEDUCTIONS
The Total Return Fund of GE Investments Funds, Inc. incurs certain fees and
expenses. To pay for these charges, the Total Return Fund of GE Investments
Funds, Inc. makes deductions from its assets. The deductions are described more
fully in the Prospectus for the Total Return Fund of GE Investments Funds, Inc.
We also assess interest charges at an effective annual rate of 6% on any missed
Scheduled Installment and $10 monthly billing fee from the date of the partial
withdrawal to the date of repayment for any Scheduled Installments withdrawn
from the Subaccount. See "The Contract" and the "Surrenders and Withdrawals"
provisions in this prospectus.
We sell the Contracts through registered representatives of broker-dealers.
These registered representatives are also appointed and licensed as insurance
agents of the Company. We pay commissions to broker-dealers for selling the
Contracts. You do not directly pay these commissions, we do. We intend to
recover the commissions, marketing, administrative and other expenses and the
cost of Contract benefits through fees and charges imposed under the Contract.
See the "Sales of the Contract" provision in this prospectus.
54
The Death Benefit
DEATH BENEFIT UPON DEATH OF AN OWNER BEFORE THE ANNUITY COMMENCEMENT DATE
If any Owner, other than a Spousal Joint Owner (or Annuitant other than a
Spousal Joint Annuitant if the Owner is a non-natural person) dies before the
Annuity Commencement Date, we will pay a Death Benefit to the Designated
Beneficiary, as listed in the "Required Distributions" provision below. The
amount of proceeds available is the Death Benefit.
We calculate the Death Benefit as of the date that we receive due proof of
death. Until we receive due proof of death, Immediate Installments will
continue to be transferred from the Immediate Installment Account, and Purchase
Payments, if received, will continue to be applied to the Immediate Installment
Account, Guarantee Account and/or the Subaccount. Further, until we receive
complete written settlement instructions from the Designated Beneficiary,
values adjusted for transfers will remain in the Variable Account, the
Guarantee Account, and the Immediate Installment Account. The Death Benefit
therefore will fluctuate with the performance of the Variable Account.
Upon receipt of due proof of death (generally, due proof is a certified copy of
the death certificate or a certified copy of the decree of a court of competent
jurisdiction as to a finding of death), we will process the Death Benefit in
accordance with your and/or your Designated Beneficiary's instructions, subject
to distribution rules and termination of contract provisions described
elsewhere.
Unless otherwise required to be distributed pursuant to the distribution rules
stated below, we will pay Death Benefit proceeds in one lump sum unless you or
your Designated Beneficiary elect one of our Optional Payment Plans. See the
"Optional Payment Plans" provisions in this prospectus.
DEATH BENEFIT AMOUNT
The Death Benefit equals the greater of:
. the sum of Purchase Payments received (excluding payments made for riders)
minus withdrawals as of the date of receipt of due proof of death; and
. the Contract Value (including any market value adjustment) as of the date
of receipt of due proof of death.
REQUIRED DISTRIBUTIONS
General: In certain circumstances, federal tax law requires that distributions
be made under the Contract upon the first death of:
. an Owner or Joint Owner, or
. the Annuitant or Joint Annuitant if any Owner is a non-natural person (an
entity, such as a trust or corporation).
The discussion below describes the methods available for distributing the value
of the Contract upon death.
55
Designated Beneficiary: At the death of any Owner (or any Annuitant, if the
Owner is a non-natural entity), the person or entity first listed below who is
alive or in existence on the date of that death will become the Designated
Beneficiary:
(1) Owner or Joint Owners;
(2) Primary Beneficiary;
(3) Contingent Beneficiary; or
(4) Owner's estate.
If there is more than one Designated Beneficiary, we will treat each one
separately in applying the distribution rules prescribed by the tax laws as
briefly described in the "Distribution Rules" provision of this prospectus.
DISTRIBUTION RULES:
The distributions required by federal tax law differ depending on whether the
Designated Beneficiary is the spouse of the deceased Owner (or of the
Annuitant, if the Contract is owned by a non-natural entity). Upon receipt of
due proof of death, the Designated Beneficiary will instruct us how to treat
the proceeds subject to the distribution rules discussed below.
. Spouses -- If the Designated Beneficiary is the surviving spouse of the
deceased and a Joint Annuitant, we will continue the Contract in force
with the surviving spouse as the new Owner and as the sole Annuitant. At
the death of the surviving spouse, this provision may not be used again,
even if the surviving spouse remarries. In that case, the rules for non-
spouses will apply. If the Designated Beneficiary is the surviving spouse
of the deceased person but not a Joint Annuitant, the rules for non-
spouses will apply.
. Non-Spouses -- If the Designated Beneficiary is not the surviving spouse
of the deceased person, the Contract cannot be continued in force
indefinitely. Instead, upon the death of any Owner (or any Annuitant, if
any Owner is a non-natural entity), payments must be made to (or for the
benefit of) the Designated Beneficiary under one of the following payment
choices:
(1) Receive the Death Benefit and any interest that has been earned in one
lump sum payment upon receipt of due proof of death.
(2) Receive the Death Benefit at any time during the five year period
following the date of death. See the "Requesting Payments" provision
in this prospectus.
(3) Apply the Death Benefit to provide an Income Payment under Optional
Payment Plan 1 or 2. The first Income Payment must be made no later
than one year after the date of death. Also, the Income Payment period
must be
56
either the lifetime of the Designated Beneficiary or a period not
exceeding the Designated Beneficiary's life expectancy.
If the Designated Beneficiary makes no choice within 30 days following receipt
of due proof of death, we will pay the Death Benefit at any time during the
five year period following the date of death (Option 2 above). Due proof of
death must be provided within 90 days of the date of death. If due proof of
death is not provided within 90 days of the date of death, we will pay the
Contract Value as of the date of receipt of due proof of death. We will not
accept any Purchase Payments after we receive due proof of the non-spouse's
death. If the Designated Beneficiary dies before we distribute the entire Death
Benefit, we will pay in a lump sum any value still remaining to the person
named by the Designated Beneficiary. If no person is so named, we will pay the
Designated Beneficiary's estate.
Under payment choices (1) and (2), the Contract will terminate when we pay the
Death Benefit. Under payment choice (3), this Contract will terminate when we
apply the Death Benefit to provide Income Payments.
Within 30 days of the date of receipt of due proof of death, a non-spousal
Joint Annuitant that is also the surviving Owner may use the proceeds from (1)
above to purchase a new contract with current terms and values substantially
similar to this Contract, as of the date of receipt of due proof of death,
including but not limited to the Guaranteed Minimum Income Payment, the value
in each investment, Scheduled Installments, Scheduled Purchase Payments,
surrender and access charges, and Annuity Commencement Date. Missed Scheduled
Installments will still be due.
DEATH BENEFIT AFTER THE ANNUITY COMMENCEMENT DATE
If any Annuitant dies after the Annuity Commencement Date, Monthly Income
Payments will be made as stated in the section discussing monthly income
benefits. See the "Benefits at Annuity Commencement Date" provision in this
prospectus.
57
Benefits At Annuity Commencement Date
You must select an Annuity Commencement Date on your application. This date
cannot be any later than the Contract anniversary following the younger
Annuitant's 90th birthday. You cannot change the Annuity Commencement Date once
we issue the Contract.
If the sole or last surviving Annuitant is still living on the Annuity
Commencement Date, we will pay you or your designated payee the Monthly Income
Payments described below beginning on that date. As provided in your Contract,
we may adjust the Annuitant(s)' age(s) used to determine the first Annual
Variable Income Benefit, and we may deduct premium taxes from your payments.
Monthly Income Payments are made under a life annuity payment plan with a
period certain of 10, 15, 20, 25, 30, 35, 40, 45, or 50 years. If you do not
select a certain period we will use a life annuity payment plan with a 10 year
period certain. If the Annuitant dies after the Annuity Commencement Date, AND
Monthly Income Payments were being made under a life annuity payment plan with
a period certain, payments will continue to be made to the named
Beneficiary(ies) until the end of the period certain. For instance, if Monthly
Income Payments are being paid under a life annuity payment plan with a period
certain of 20 years and the Annuitant dies in the 10th year of Monthly Income
Payments, payments will continue to be made to the Annuitant's named
Beneficiary(ies) for a period of 10 more years.
We determine your Monthly Income Payments based on the Calculated Level Monthly
Benefit. The Calculated Level Monthly Benefit is derived from the Annual
Variable Annuity Benefit. The Calculated Level Monthly Benefit is one-twelfth
of the Annual Variable Annuity Benefit plus level interest over a twelve-month
period. The interest rate for each Annuity Year is the rate we declare for a
twelve-month certain single premium immediate fixed annuity, as of the Annuity
Commencement Date or applicable Annuity Commencement Date Anniversary, for this
Contract.
The dollar amount of the first Annual Variable Annuity Benefit is a function
of:
. the amount of your Annuity Commencement Value; and
. the annuity purchase rates shown in your Contract.
The annuity purchase rates vary based on the age (and, for certain Contracts,
gender) of the Annuitant(s) as well as the certain period that was selected.
Generally, the longer the life expectancy of the Annuitant(s) or the longer the
certain period selected, the smaller the first Annual Variable Annuity Benefit
will be. The benefit is calculated by:
(1) dividing the Annuity Commencement Value (less any applicable premium
tax) being applied by $1,000; and
(2) multiplying the result by the applicable annuity purchase rate.
58
This amount is "applied" to "acquire" Annuity Units. We determine the number of
Annuity Units credited to a Contract by dividing the dollar amount of the first
Annual Variable Annuity Benefit by the Annuity Unit value for the Valuation
Period ending on the Annuity Commencement Date (or the first Valuation Period
ending after the Annuity Commencement Date if the Annuity Commencement Date
falls on a date when the New York Stock Exchange is closed or the Total Return
Fund of GE Investments Funds, Inc. does not value its shares). The value of
your Annuity Units changes daily as a result of the investment performance of
the Subaccount.
We determine the dollar amount of each subsequent Annual Variable Annuity
Benefit on each Annuity Commencement Date Anniversary by multiplying the
Annuity Unit value for the Valuation Period (or the first Valuation Period
ending after the Annuity Commencement Date if the Annuity Commencement Date
Anniversary falls on a date when the New York Stock Exchange is closed or days
when the Total Return Fund of GE Investments Funds, Inc. does not value its
shares) by the number of Annuity Units credited to the Contract.
The Annuity Unit value equals (a) x (b) where:
(a) equals the Annuity Unit value for the preceding Valuation Period; and
(b) equals (i) x (ii) where:
(i) is the net investment factor for the Valuation Period for which we
are calculating the Annuity Unit value; and
(ii) is an assumed discount rate equal to .99990575 raised to a power
equal to the number of days in the Valuation Period.
If the Guaranteed Minimum Income Payment does not apply and the net investment
return for the Subaccount over an Annuity Year is equal to 3.5% (the interest
rate we use in calculating the amount of the Annual Variable Annuity Benefit),
the Annual Variable Annuity Benefit for that Annuity Year will equal the
Benefit for the prior year. To the extent that such net investment return
exceeds 3.5% for an Annuity Year, the Annual Variable Annuity Benefit for that
Annuity Year will be greater than the Benefit for the prior year. To the extent
that such net investment return falls short of 3.5% for an Annuity Year, the
Annual Variable Annuity Benefit for that Annuity Year will be less than the
Benefit for the prior year.
59
Guaranteed Minimum Income Payments
IF THE GUARANTEED MINIMUM INCOME PAYMENT IS IN EFFECT
If you meet the conditions required under the Contract for receipt of
Guaranteed Minimum Income Payments (that is, within the time allowed, you paid
all your Scheduled Installments and repaid the amount of any withdrawal from
the Subaccount plus interest), your Monthly Income Payments after the Annuity
Commencement Date will be at least equal to the Guaranteed Minimum Income
Payments.
You may elect to forego Income Payments and receive the value of the Contract
on or before the Annuity Commencement Date in the form of a lump sum payment.
If you intend to receive a lump sum on or before the Annuity Commencement Date,
this Contract may not be suitable for your needs. Please consult your advisor
as to the suitability of this Contract. We offer other contracts with various
fees and charges that may be more appropriate for you if you intend to receive
your Contract Value on the Annuity Commencement Date.
We will calculate your initial Calculated Level Monthly Benefit as discussed
above under the "Benefits at Annuity Commencement Date" provision. If the
initial Monthly Income Payment is less than the Guaranteed Minimum Income
Payment, your initial Monthly Income Payment will equal the Guaranteed Minimum
Income Payment. If this occurs, we will track the difference in the Adjustment
Account that we establish on the Annuity Commencement Date. The value of the
Adjustment Account will equal the greater of (a) and (b), where:
(a) is zero (0); and
(b) is 12 times the Guaranteed Minimum Income Payment minus 12 times the
initial Calculated Level Monthly Benefit.
Monthly Income Payments will remain constant for an Annuity Year. At the
beginning of each subsequent Annuity Year, we will determine the amount of the
Monthly Income Payments for that Annuity Year.
For Monthly Income Payments after the first Annuity Year, the actual payment is
the greater of (a) and (b), where:
(a) is the subsequent Calculated Level Monthly Income Benefit minus 1/12 of
any value in the Adjustment Account as of the date of the last Monthly
Income Payment; and
(b) is the Guaranteed Minimum Income Payment.
60
For subsequent Monthly Income Payments after the first Annuity Year, the value
of the Adjustment Account will be the greater of (a) and (b), where:
(a) is zero (0); and
(b) is the value of the Adjustment Account as of the date that we determined
the last Monthly Income Payment, plus 12 times the actual subsequent
Monthly Income Payment, minus 12 times the subsequent Calculated Level
Monthly Benefit.
In other words, you will not receive any of the Subaccount's gain until you
have paid back the Adjustment Account.
IF THE GUARANTEED MINIMUM INCOME PAYMENT IS NOT IN EFFECT
If the Guaranteed Minimum Income Payment is not in effect you may still receive
Income Payments or elect to forego Income Payments and receive the value of the
Contract on or before the Annuity Commencement Date in the form of a lump sum
payment. If you elect to receive Income Payments, your actual Income Payments
will be in the form of an annual variable Income Payment similar to a variable
Income Payment described above under the "Benefits at Annuity Commencement
Date" provision. There will be no Adjustment Account established.
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Optional Payment Plans
You may apply your Death Benefit proceeds or your Surrender Value to an
Optional Payment Plan. If you surrender the Contract and select Plan 1, Plan 2
(with a certain period of 10 or more years), or Plan 5, then the amount applied
to the Optional Payment Plan is the Contract Value, which includes any
applicable Market Value Adjustment, minus any premium tax (i.e., the Surrender
Value with the surrender and access charge added back in).
The amount we apply to calculate Income Payments is net of premium tax. During
the Annuitant's life, you (or the Designated Beneficiary at your death) can
choose an Optional Payment Plan. If you change a Designated Beneficiary, your
Optional Payment Plan selection will remain in effect unless you make a new
selection. Any election or change in an Optional Payment Plan must be sent to
our Home Office in a form acceptable to us. We do not allow any changes after
Income Payments begin. If an Optional Payment Plan has not been chosen at the
death of the Annuitant or Owner, your Designated Beneficiary can choose an
Optional Payment Plan when we pay the Death Benefit. If the Designated
Beneficiary is the surviving spouse of the deceased person and a Joint
Annuitant, no Death Benefit is payable and the Contract will continue with the
surviving spouse as sole Owner and Annuitant. See "The Death Benefit" provision
in this prospectus.
We will make Income Payments under one of the Optional Payment Plans annually.
The amount of each payment under an Optional Payment Plan must be at least
$100. Payments made under an Optional Payment Plan at the death of any Owner
(or the Annuitant if the Owner is a non-natural person), must conform to the
rules in the "Death Benefit" provisions.
We may make an age adjustment to determine the amount of the Income Payments.
We will adjust the age according to the age adjustment table shown in your
Contract.
Fixed Income Payments. We will transfer proceeds applied to a fixed income
option to our General Account. Payments made will equal or exceed those
required by the state where we deliver the Contract. We determine fixed Income
Payments on the date we receive due proof of the Owner's death or on surrender.
Payments under Optional Payment Plan 4 (Interest Income) will begin at the end
of the first interest period after the date proceeds are otherwise payable.
Variable Income Payments. We will transfer proceeds applied to a variable
income option to the Subaccount. Your Income Payments, after the first payment,
will reflect the investment experience of the Subaccount. No minimum amount is
guaranteed. Income Payments begin after the date we receive due proof of any
Owner's death or a surrender. We will calculate your variable Income Payments
in the manner described above under the "Benefits at Annuity Commencement Date"
provision of this prospectus.
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Optional Payment Plans. The Contract provides five Optional Payment Plans, each
of which is payable on a fixed basis. Optional Payment Plans 1 and 5 are also
available on a variable basis. If any payee is not a natural person, our
consent must be obtained before selecting an Optional Payment Plan. Guaranteed
amounts payable are determined assuming an interest rate of 3.5% compounded
yearly. We may increase this rate and the amount of any payment. Following are
explanations of the Optional Payment Plans available.
Plan 1 -- Life Income with Period Certain. This option guarantees annual
payments for the lifetime of the payee with a minimum number of years of
payments. If the payee lives longer than the minimum period, payments will
continue for his or her life. The minimum period can be 10, 15, or 20 years.
Payments are determined according to the table in the Monthly Income Benefit
section of your Contract. We determine the guaranteed amounts payable under
the plan. The payee selects the designated period. If the payee dies during
the minimum period, we may offer to pay the discounted sum of the remaining
guaranteed payments in one payment.
Plan 2 -- Income for a Fixed Period. This option guarantees annual payments
for a fixed period not longer than 30 years. Payments will be made according
to the table in your Contract. If the payee dies, we may offer to pay the
discounted amount of the remaining guaranteed payments in one payment.
Plan 3 -- Income of a Definite Amount. This option provides annual payments
of a definite amount to be paid. The amount paid each year must be at least
$120 for each $1,000 of proceeds. Payments will continue until the proceeds
are exhausted. The last payment will equal the amount of any unpaid
proceeds. If we increase the interest rate on amounts payable above the
guaranteed rate, we will extend the payment period. If the payee dies, we
may offer to pay the amount of the remaining proceeds with earned interest
in one payment.
Plan 4 -- Interest Income. This option provides for annual payments of
interest earned from the proceeds left with us. Payments will begin at the
end of the first period chosen. If the payee dies, we will pay the amount of
remaining proceeds and any earned but unpaid interest in one payment.
Plan 5 -- Joint Life and Survivor Income. This option provides for us to
make annual payments to two payees for a guaranteed minimum of 10 years.
Each payee must be at least 35 years old when payments begin. Payments will
continue as long as either payee is living. If both payees die before the
end of the minimum period, we may offer to pay the discounted amount of the
remaining payments for the 10-year period in one payment.
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Federal Tax Matters
INTRODUCTION
This part of the prospectus discusses the Federal income tax treatment of the
Contract. The Federal income tax treatment of the Contract is complex and
sometimes uncertain. The Federal income tax rules may vary with your particular
circumstances. This discussion does not address all of the federal income tax
rules that may affect you and your Contract. This discussion also does not
address other Federal tax consequences, or state or local tax consequences,
associated with a Contract. As a result, you should always consult a tax
advisor about the application of tax rules to your individual situation.
TAXATION OF NON-QUALIFIED CONTRACTS
This part of the discussion describes some of the Federal income tax rules
applicable to Non-Qualified Contracts. A Non-Qualified Contract is a Contract
not issued in connection with a retirement plan receiving special tax treatment
under the Code, such as an individual retirement annuity or a Section 401(k)
plan.
Tax Deferral on Earnings. The Federal income tax law does not tax any increase
in an Owner's Contract Value until there is a distribution from the Contract.
However, certain requirements must be satisfied in order for this general rule
to apply. Such requirements include that:
. An individual must own the Contract (or the tax law must treat the
Contract as owned by an individual);
. The investments of the Variable Account must be "adequately diversified"
in accordance with regulations of the Internal Revenue Service ("IRS");
and
. The Contract's Annuity Commencement Date must not occur near the end of
the Annuitant's life expectancy.
Contracts Not Owned by an Individual -- No Tax Deferral and Loss of Interest
Deduction. As a general rule, the Code does not treat a Contract that is owned
by an entity (rather than an individual) as an annuity contract for Federal
income tax purposes. The entity owning the Contract pays tax each year on the
excess of the annual increase in Contract Value over the annual Purchase
Payments paid for the Contract. Contracts issued to a corporation or a trust
are examples of Contracts where the Owner is currently taxable on the
Contract's earnings.
There are several exceptions to this rule. For example, the Code treats a
Contract as owned by an individual if the nominal owner is a trust or other
entity that holds the Contract as an agent for an individual. However, this
exception does not apply in the case of any employer that owns a Contract to
provide deferred compensation for its employees.
In the case of a Contract issued after June 8, 1997 to a taxpayer that is not
an individual, or a Contract held for the benefit of an entity, the entity will
lose its
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deduction for a portion of its otherwise deductible interest expenses. This
disallowance does not apply if the nonnatural Owner (entity) is taxable on the
annual increase in the Contract Value in excess of the Purchase Payments made
that year. Entities that are considering purchasing the Contract, or entities
that will benefit from someone else's ownership of a Contract, should consult a
tax advisor.
Investments in the Variable Account Must be Diversified. For a Contract to be
treated as an annuity contract for Federal income tax purposes, the investments
of a separate account such as the Variable Account must be "adequately
diversified." The IRS has issued regulations that prescribe standards for
determining whether the investments of the Variable Account are adequately
diversified. If the Variable Account fails to comply with these diversification
standards, the Owner could be required to pay tax for the year of such failure
and each subsequent year on the untaxed-income accumulated in the Contract.
Although we do not control the investments of the Total Return Fund of GE
Investments Funds, Inc. (we only indirectly control such investments through an
affiliated company), we expect that the Total Return Fund of GE Investments
Funds, Inc. will comply with IRS regulations so that the Variable Account will
be considered "adequately diversified."
Age at which Annuity Payouts Must Begin. Federal income tax rules do not
expressly identify a particular age by which annuity payouts must begin.
However, those rules do require that an annuity contract provide for
amortization, through annuity payouts, of the contract's purchase payments paid
and earnings. If annuity payments begin at a date that the IRS determines does
not satisfy these rules, interest and gains under the Contract could be taxable
each year as they accrue.
No Guarantees Regarding Tax Treatment. We make no guarantees regarding the tax
treatment of any Contract or of any transaction involving a Contract. However,
the remainder of this discussion assumes that your Contract will be treated as
an annuity contract for Federal income tax purposes and that the tax law will
not impose tax on any increase in your Contract Value until there is a
distribution from your Contract.
Partial Withdrawals and Surrenders. A partial withdrawal occurs when you
receive less than the total amount of the Contract's Surrender Value. In the
case of a partial withdrawal, you will pay tax on the amount you receive to the
extent of the gain in your Contract, i.e., the excess of your Contract Value
before the partial withdrawal over your "investment in the contract." (This
term is explained below.) This income (and all other income from your Contract)
is ordinary income. The Code imposes a higher rate of tax on ordinary income
than it does on capital gains.
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A surrender occurs when you receive the total amount of the Contract's
Surrender Value. In the case of a surrender, you will pay tax on the amount you
receive to the extent it exceeds your "investment in the contract."
Your "investment in the contract" generally equals the total of your Purchase
Payments under the Contract, reduced by any amounts you previously received
from the Contract that you did not include in your income. In applying the
above rules, it is possible that certain additional amounts could be included
in the gain under your Contract for purposes of determining the tax treatment
of withdrawals, e.g., amounts attributable to the Guaranteed Minimum Income
Payment feature of the Contract or to benefits under the Waiver of Scheduled
Purchase Payment Upon Disability Rider.
Assignments and Pledges. The Code treats any assignment or pledge of (or
agreement to assign or pledge) any portion of your Contract Value as a
withdrawal of such amount or portion.
Gifting a Contract. If you transfer ownership of your Contract -- without
receiving a payment equal to your Contract's value -- to a person other than
your spouse (or to your former spouse incident to divorce), you will pay tax on
your Contract Value to the extent it exceeds your "investment in the contract."
In such a case, the new owner's "investment in the contract" will be increased
to reflect the amount included in your income. Our determination of the
Contract Value may not be accepted by the IRS as the value of your gift,
resulting in increased income and gift taxes.
Taxation of Annuity Payouts. The Code imposes tax on a portion of each annuity
payout (at ordinary income tax rates) and treats a portion as a nontaxable
return of your "investment in the contract." We will notify you annually of the
taxable amount of your annuity payout.
Pursuant to the Code, you will pay tax on the full amount of your annuity
payouts once you have recovered the total amount of the "investment in the
contract." If annuity payouts cease because of the death of the Annuitant(s)
and before the total amount of the "investment in the contract" has been
recovered, the unrecovered amount generally will be deductible.
If proceeds are left with us (Optional Payment Plan 4), they are taxed in the
same manner as a surrender. The Owner must pay tax currently on the interest
credited on these proceeds. This treatment could also apply to Plan 3 if the
payee is at an advanced age, such as age 80 or older.
Taxation of Death Benefits. We may distribute amounts from your Contract
because of the death of an Owner, a Joint Owner, or if an Owner is a non-
natural person, an Annuitant. The tax treatment of these amounts depends on
whether the Owner, Joint Owner, or Annuitant dies before or after the
Contract's Annuity Commencement Date.
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Before the Contract's Annuity Commencement Date. The Death Benefit is taxed in
the same manner as annuity payouts, if the Death Benefit is received under an
annuity payout option.
If not received under an annuity payout option, Death Benefits are taxed in the
same manner as a withdrawal.
After the Contract's Annuity Commencement Date. The Death Benefit is excludable
from income to the extent that it does not exceed the unrecovered "investment
in the contract, provided the Death Benefit is received in accordance with the
existing annuity payment option." All annuity payouts in excess of the
unrecovered "investment in the contract" are includible in income.
The tax law imposes tax on Death Benefits received in a lump sum to the extent
that they exceed the unrecovered "investment in the contract" at the time of
payment.
Penalty Taxes Payable on Partial Withdrawals, Surrenders, or Annuity
Payouts. The Code may impose a penalty tax equal to 10% of the amount of any
payment from your Contract that is included in your gross income. The Code does
not impose the 10% penalty tax if one of several exceptions applies. These
exceptions include partial withdrawals, surrenders, or annuity payouts that:
. you receive on or after you reach age 59 1/2;
. you receive because you became disabled (as defined in the tax law);
. a Designated Beneficiary receives on or after the death of the Owner; or
. you receive as a series of substantially equal periodic payments for the
life (or life expectancy) of the taxpayer.
Special Rules If You Own More Than One Contract. In certain circumstances, you
must combine some or all of the Non-Qualified Contracts you own in order to
determine the amount of an annuity payout, a surrender, or a withdrawal that
you must include in income. For example:
. If you purchase a Contract offered by this Prospectus and also purchase
at approximately the same time an immediate annuity, the IRS may treat
the two contracts as one contract.
. If you purchase two or more deferred annuity contracts from the same life
insurance company (or its affiliates) during any calendar year, the Code
treats all such contracts as one contract.
The effects of such aggregation are not clear. However, it could affect:
. the amount of a surrender, a withdrawal or an annuity payout that you
must include in income; and
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. the amount that might be subject to a penalty tax.
Tax Treatment of Rider Benefits. The Contract may be issued with certain
riders, i.e., the Waiver of Scheduled Purchase Payment Upon Unemployment Rider,
Waiver of Scheduled Purchase Payment Upon Disability Rider, and Waiver of
Scheduled Purchase Payment Joint Annuitant Life Rider, that provide benefits
upon unemployment, disability, or death. These benefits include the waiver of
Scheduled Installments relating to entitlement to Guaranteed Minimum Income
Payments, and also certain increases in annuity payments that are calculated on
the Annuity Commencement Date.
The tax treatment of these benefits is not clear in all instances. For example,
while benefits received under the Waiver of Scheduled Purchase Payment Upon
Unemployment Rider will be taxable, there is uncertainty regarding the amount
and timing of the taxation of benefits under this rider. We believe that
benefits from this rider should be taxable upon the Annuity Commencement Date,
but it is possible that amounts could be subject to tax earlier. The investment
in the contract generally would be increased by any amount that is taxable.
With respect to the Waiver of Scheduled Purchase Payment Upon Disability Rider
and Waiver of Scheduled Purchase Payment Joint Annuitant Life Rider, a portion
of benefits may be excludable from income. There is uncertainty, however,
regarding the scope of any available exclusion, as well as the time when any
non-excludable benefits would be subject to tax.
We will tax report that portion of any benefit payment which we believe is
subject to tax with respect to all the rider benefits.
Section 1035 Exchanges. Under section 1035 of the Code, the exchange of one
annuity contract for another annuity contract generally is not taxed (unless
cash is distributed or a loan is reduced or forgiven). To qualify as a
nontaxable exchange however, certain conditions must be satisfied, e.g., the
obligee(s) under the new annuity contract must be the same obligee(s) as under
the original Contract.
Upon death of a non-spousal Joint Owner, the Contract provides the surviving
Joint Owner with the option of using the proceeds of this Contract to purchase
a separate annuity contract with terms and values that are substantially
similar to those of this Contract. Exercise of this option generally will not
qualify as a tax-free exchange under section 1035.
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QUALIFIED RETIREMENT PLANS
We also designed the Contracts for use in connection with certain types of
retirement plans that receive favorable treatment under the Code. Contracts
issued to or in connection with retirement plans that receive special tax
treatment are called "Qualified Contracts." We do not currently offer all of
the types of Qualified Contracts described, and may not offer them in the
future. Prospective purchasers should contact our Home Office to learn the
availability of Qualified Contracts at any given time.
The Federal income tax rules applicable to qualified plans are complex and
varied. As a result, this Prospectus makes no attempt to provide more than
general information about use of the Contract with the various types of
qualified plans and individual retirement arrangements. Persons intending to
use the Contract in connection with a qualified plan should obtain advice from
a competent advisor.
Types of Qualified Contracts. Some of the different types of Qualified
Contracts include:
. Individual Retirement Accounts and Annuities ("Traditional IRAs")
. Roth IRAs
. Simplified Employee Pensions ("SEP's")
. Savings Incentive Matched Plan for Employees ("SIMPLE plans," including
"SIMPLE IRAs")
. Public school system and tax-exempt organization annuity plans ("403(b)
plans")
. Qualified corporate employee pension and profit-sharing plans ("401(a)
plans"), including "401(k) plans," and qualified annuity plans ("403(a)
plans")
. Self-employed individual plans ("H.R. 10 plans" or "Keogh Plans")
. Deferred compensation plans of state and local governments and tax-exempt
organizations ("457 plans")
Terms of Qualified Plans and Qualified Contracts. The terms of a qualified
retirement plan may affect your rights under a Qualified Contract. When issued
in connection with a qualified plan, we will amend a Contract as generally
necessary to conform to the requirements of that type of plan. However, the
rights of any person to any benefits under qualified plans may be subject to
the terms and conditions of the plans themselves, regardless of the terms and
conditions of the Contract. In addition, we are not bound by the terms and
conditions of qualified retirement plans to the extent such terms and
conditions contradict the Contract, unless we consent.
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Guaranteed Minimum Income Payments. Distributions from Qualified Contracts
generally must satisfy certain required "minimum distribution rules." It is
unclear whether variable annuity payments subject to the Contract's Guaranteed
Minimum Income Payments feature will satisfy these rules. As a result, the
availability of such payments could cause the disqualification of a Qualified
Contract, which could result in increased taxes to the Owner. We reserve the
right to limit the availability of such payments, or to modify such payments,
as necessary to preclude any such disqualification.
Treatment of Qualified Contracts Compared With Non-Qualified Contracts.
Although some of the Federal income tax rules are the same for both Qualified
and Non-Qualified Contracts, many of the rules are different. For example:
. the Code generally does not impose tax on the earnings under either
Qualified or Non-Qualified Contracts until the earnings are distributed;
. the Code does not limit the amount of Purchase Payments and the time at
which Purchase Payments can be made under Non-Qualified Contracts.
However, the Code does limit both the amount and frequency of Purchase
Payments made to Qualified Contracts;
. the Code does not allow a deduction for Purchase Payments made for Non-
Qualified Contracts, but sometimes allows a deduction or exclusion from
income for Purchase Payments made to a Qualified Contract.
The Federal income tax rules applicable to qualified plans and Qualified
Contracts vary with the type of plan and Contract. For example, Federal tax
rules limit the amount of Purchase Payments that can be made, and the tax
deduction or exclusion that may be allowed for the Purchase Payments. These
limits vary depending on the type of qualified plan and the circumstances of
the plan participant, e.g., the participant's compensation.
Under most qualified plans, e.g., 403(b) plans and Traditional IRAs, the Owner
must begin receiving payments from the Contract in certain minimum amounts by a
certain age, typically age 70 1/2. However, these "minimum distribution rules"
generally do not apply to a Roth IRA.
Amounts Received Under Qualified Contracts. Federal income tax rules generally
include distributions from a Qualified Contract in your income as ordinary
income. Purchase Payments that are deductible or excludible from income do not
create "investment in the contract." Thus, under many Qualified Contracts there
will be no "investment in the contract" and you must include the total amount
you receive in your income. There are exceptions. For example, you do not
include amounts received
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from a Roth IRA after 2002 if certain conditions are satisfied. Additional
Federal taxes may be payable in connection with a Qualified Contract. For
example, failure to comply with the minimum distribution rules applicable to
certain qualified plans, such as Traditional IRAs, will result in the
imposition of an excise tax. This excise tax generally equals 50% of the amount
by which a minimum required distribution exceeds the actual distribution from
the qualified plan.
Federal Penalty Taxes Payable on Distributions. The Code may impose a penalty
tax equal to 10% of the amount of any payment from your Qualified Contract that
is includible in your income. The Code does not impose the penalty tax if one
of several exceptions apply. The exceptions vary depending on the type of
Qualified Contract you purchase. For example, in the case of an IRA, exceptions
provide that the penalty tax does not apply to a withdrawal, surrender, or
annuity payout:
. received on or after the Owner reaches age 59 1/2;
. received on or after the Owner's death or because of the Owner's
disability (as defined in the tax law);
. received as a series of substantially equal periodic payments for the life
(or life expectancy) of the taxpayer; or
. received as reimbursement for certain amounts paid for medical care.
These exceptions, as well as certain others not described here, generally apply
to taxable distributions from other qualified plans. However, the specific
requirements of the exception may vary.
Moving Money from One Qualified Contract or Qualified Plan to Another.
Rollovers and Transfers: In many circumstances you may move money between
Qualified Contracts and qualified plans by means of a rollover or a transfer.
Recent legislation has expanded these rollover options, including permitting
for the first time the rollover of your after-tax contributions, for
distributions made between 2002 and 2011. Special rules apply to such rollovers
and transfers. If you do not follow the applicable rules, you may suffer
adverse Federal income tax consequences, including paying taxes which you might
not otherwise have had to pay. You should always consult a qualified advisor
before you move or attempt to move funds between any Qualified Contract or plan
and another Qualified Contract or plan.
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Direct Rollovers. The direct rollover rules apply to certain payments (called
"eligible rollover distributions") from section 401(a) plans, section 403(a) or
(b) plans, H.R. 10 plans, and Qualified Contracts used in connection with these
types of plans. (The direct rollover rules do not apply to distributions from
IRAs or section 457 plans). The direct rollover rules require Federal income
tax equal to 20% of the eligible rollover distribution to be withheld from the
amount of the distribution, unless the Owner elects to have the amount directly
transferred to certain Qualified Contracts or plans.
Prior to receiving an eligible rollover distribution from us, we will provide
you with a notice explaining these requirements and the procedure for avoiding
20% withholding by electing a direct rollover.
FEDERAL INCOME TAX WITHHOLDING
We will withhold and remit to the IRS a part of the taxable portion of each
distribution made under a Contract unless the distributee notifies us at or
before the time of the distribution that he or she elects not to have any
amounts withheld. In certain circumstances, Federal income tax rules may
require us to withhold tax. At the time you request a withdrawal, surrender, or
annuity payout, we will send you forms that explain the withholding
requirements.
STATE INCOME TAX WITHHOLDING
If required by the law of your state, we will also withhold state income tax
from the taxable portion of each distribution made under the Contract, unless
you make an available election to avoid withholding. If permitted under state
law, we will honor your request for voluntary state withholding.
TAX STATUS OF THE COMPANY
Under existing Federal income tax laws, we do not pay tax on investment income
and realized capital gains of the Variable Account. We do not anticipate that
we will incur any Federal income tax liability on the income and gains earned
by the Variable Account. We, therefore, do not impose a charge for Federal
income taxes. If Federal income tax law changes and we must pay tax on some or
all of the income and gains earned by the Variable Account, we may impose a
charge against the Variable Account to pay the taxes.
CHANGES IN THE LAW
This discussion is based on the Code, IRS regulations, and interpretations
existing on the date of this prospectus. Congress, the IRS, and the courts may
modify these authorities, however, sometimes retroactively.
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Voting Rights
As required by law, we will vote shares of the Total Return Fund of GE
Investments Funds, Inc. held by the Subaccount attributable to Owners at
special shareholder meetings based on instructions from such Owners. The voting
will be done according to your instructions if you have Subaccount Value or are
receiving variable Income Payments. However, if the law changes and we are
allowed to vote in our own right, we may elect to do so.
Before the Annuity Commencement Date, we will determine the number of votes
which an Owner has the right to cast by dividing the value in the Subaccount by
the net asset value of the Total Return Fund of GE Investments Funds, Inc. In
determining the number of votes, we will recognize fractional shares. On or
after the Annuity Commencement Date, an Owner's voting interest, if any, is
determined by dividing the dollar value of the liability for future variable
Income Payments to be paid from the Subaccount by the net asset value of the
Total Return Fund of GE Investments Funds, Inc. We will designate a date for
this determination not more than 90 days before the shareholder meeting.
We will vote shares of the Total Return Fund of GE Investments Funds, Inc. for
which no timely instructions are received in the same proportion as those that
are received. We will apply voting instructions to abstain on any item to be
voted on a pro-rata basis to reduce the number of votes eligible to be cast.
Whenever the Total Return Fund of GE Investments Funds, Inc. calls a
shareholders meeting, Owners with voting interests in the Total Return Fund of
GE Investments Funds, Inc. will be notified of issues requiring the
shareholders' vote as soon as possible before the shareholder meeting. Each
person having a voting interest in the Subaccount will receive proxy voting
materials, reports, other materials, and a form with which to give us voting
instructions.
Since the Total Return Fund of GE Investments Funds, Inc. may engage in shared
funding, other persons or entities besides us may vote shares of the Total
Return Fund of GE Investments Funds, Inc. See "The Variable Account" provision
in this prospectus.
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Requesting Payments
To request a payment, you must provide us with notice in a form satisfactory to
us. We will ordinarily pay any partial withdrawal or surrender proceeds from
the Subaccount within seven days after receipt at our Home Office of a request
in good order for a partial withdrawal or surrender. We also will ordinarily
make payment of lump sum Death Benefit proceeds from the Subaccount within
seven days from the receipt of due proof of death. We will determine payment
amounts as of the end of the Valuation Period during which our Home Office
receives the payment request or due proof of death.
In most cases, when we pay Death Benefit proceeds in a lump sum, we will pay
these proceeds either:
(1) to your Designated Beneficiary directly in the form of a check; or
(2) by establishing an interest bearing account, called the "GE Secure
Access Account," for the Designated Beneficiary, in the amount of the
Death Benefit proceeds payable.
When establishing the GE Secure Access Account we will send the beneficiary a
checkbook within 7 days after we receive all the required documents, and the
beneficiary will have immediate access to the account simply by writing a check
for all or any part of the amount of the Death Benefit proceeds payable. The GE
Secure Access Account is part of our general account. It is not a bank account
and it is not insured by the FDIC or any other government agency. As part of
our General Account, it is subject to the claims of our creditors. We receive a
benefit from all amounts left in the GE Secure Access Account. If we do not
receive instructions from the Designated Beneficiary with regard to the form of
Death Benefit Payment, we will automatically establish the GE Secure Access
Account.
We may delay making a payment from the Subaccount or applying Subaccount Value
to a payment plan if:
(1) the disposal or valuation of the Subaccount is not reasonably
practicable because:
. the SEC declares that an emergency exists (due to the emergency the
disposal or valuation of the Variable Account's assets is not
reasonably practicable);
. the New York Stock Exchange is closed for other than a regular
holiday or weekend;
. trading is restricted by the Securities and Exchange Commission; or
(2) the Securities and Exchange Commission, by order, permits postponement
of payment to protect our Owners.
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We also may defer making any payments attributable to a check or draft that has
not cleared until we are satisfied that the check or draft has been paid by the
bank on which it is drawn.
State law requires that we reserve the right to defer payments from the
Guarantee Account and the Immediate Installment Account for a withdrawal or
surrender for up to six months from the date we receive your payment request.
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Sales Of The Contract
Capital Brokerage Corporation (doing business in Indiana, Minnesota, New
Mexico, and Texas as GE Capital Brokerage Corporation) ("Capital Brokerage") is
the distributor and principal underwriter of the Contracts. Capital Brokerage,
a Washington corporation and an affiliate of ours, is located at 6630 W. Broad
Street, Richmond, Virginia 23230. Capital Brokerage is registered with the
Securities and Exchange Commission under the Securities Exchange Act of 1934
("1934 Act") as a broker-dealer, and is a member of the National Association of
Securities Dealers, Inc. ("NASD").
Capital Brokerage offers the Contracts through its registered representatives
who are registered with the NASD and with the states in which they do business.
More information about Capital Brokerage and its registered representatives is
available at http:/www.nasdr.com or by calling 1-800-289-9999. You also can
obtain an investor brochure from NASD Regulation describing its Public
Disclosure Program. Registered representatives with Capital Brokerage are also
licensed as insurance agents in the states in which they do business and are
appointed by the Company.
We pay commissions and other marketing related expenses associated with the
promotion and sales of the Contracts to Capital Brokerage. The amount of the
commission varies but is not expected to exceed approximately 15% of your first
year Scheduled Purchase Payments and 6% of your Flexible Purchase Payments. We
may, on occasion, pay a higher commission for a short period of time as a
special promotion. We pay commissions either as a percentage of Purchase
Payments at the time we receive them, as a percentage of Contract Value on an
ongoing basis, or in some cases, a combination of both. The commission or a
portion of it will be returned to us if the Contract is surrendered during the
first Contract year.
The amount of commissions we pay may vary based on the optional benefits an
Owner may elect when he or she purchases the Contract. We may offer a range of
initial commission and trail commission options (which will take into account,
among other things, the length of time Purchase Payments have been held under
the Contract, Contract Values, and elected features and benefits).
When a Contract is sold through a registered representative of Capital
Brokerage, Capital Brokerage passes through a portion of the sales commission
to the registered representative who sold the Contract. Because registered
representatives of Capital Brokerage are also agents of ours, they may be
eligible for various cash benefits, such as bonuses, insurance benefits and
financing arrangements, and non-cash compensation programs that we offer, such
as conferences, trips, prizes, and awards.
Capital Brokerage may enter into selling agreements with other broker-dealers
(including our affiliate, Terra Securities Corporation) registered under the
1934 Act to
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sell the Contracts. Under these agreements, the commission paid to the broker-
dealer is not expected to exceed the amount described above. When a Contract is
sold through another broker-dealer, Capital Brokerage passes through the entire
amount of the sales commission to the selling broker-dealer; that broker-dealer
may retain a portion of the commission before it pays the registered
representative who sold the Contract.
We also may make other payments for services that do not directly involve the
sales of the Contracts. These services may include the recruitment and training
of personnel, production of promotional literature, and similar services.
We intend to recover commissions, marketing, administrative and investment
expenses and costs of Contract benefits through fees and charges imposed under
the Contracts. Commissions paid on the Contracts, including other incentives
and payments, are not charged directly to you or to the Variable Account.
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Additional Information
OWNER QUESTIONS
The obligations to Owners under the Contracts are ours. Please direct your
questions and concerns to us at our Home Office.
RETURN PRIVILEGE
Within the 15-day free-look period after you receive the Contract, you may
cancel it for any reason by delivering or mailing it postage prepaid, to our
Home Office, Annuity New Business, 6610 W. Broad Street, Richmond, Virginia
23230. If you cancel your Contract, it will be void. Unless state law requires
that we return your Purchase Payments, the amount of the refund you receive
will equal your Contract Value and any rider Purchase Payments received plus
any adjustments required by applicable law or regulation on the date we receive
the Contract, but without reduction for any surrender charge. If state law
requires that we return your Purchase Payments, the amount of the refund will
equal the Purchase Payments made less any withdrawals you previously made. In
certain states, you may have more than 15 days to return the Contract for a
refund.
STATE REGULATION
As a life insurance company organized and operated under the laws of the
Commonwealth of Virginia, we are subject to provisions governing life insurers
and to regulation by the Virginia Commissioner of Insurance.
Our books and accounts are subject to review and examination by the State
Corporation Commission of the Commonwealth of Virginia at all times. That
Commission conducts a full examination of our operations at least every five
years.
RECORDS AND REPORTS
As presently required by the 1940 Act and applicable regulations, we are
responsible for maintaining all records and accounts relating to the Variable
Account. At least once each year, we will send you a report showing information
about your Contract for the period covered by the report. The report will show
the Contract Value in the Subaccount and/or the Guarantee Account. The report
also will show Purchase Payments and charges made during the statement period.
We also will send you an annual and a semi-annual report for the Total Return
Fund of GE Investments Funds, Inc., as required by the 1940 Act. In addition,
when you make Purchase Payments or withdrawals, you will receive a written
confirmation of these transactions.
OTHER INFORMATION
We have filed a Registration Statement with the SEC, under the 1933 Act, for
the Contracts being offered here. This Prospectus does not contain all the
information in the Registration Statement, its amendments and exhibits. Please
refer to the Registration Statement for further information about the Variable
Account, the
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Company, and the Contracts offered. Statements in this Prospectus about the
content of Contracts and other legal instruments are summaries. For the
complete text of those Contracts and instruments, please refer to those
documents as filed with the Securities and Exchange Commission and available on
the Securities and Exchange Commission's website at http://www.sec.gov.
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GE Life and Annuity Assurance Company
BUSINESS
We are a stock life insurance company operating under a charter granted by the
Commonwealth of Virginia on March 21, 1871 to The Life Insurance Company of
Virginia. General Electric Capital Corporation ("GE Capital") acquired us from
Aon Corporation on April 1, 1996. GE Capital subsequently contributed the
Company to its wholly owned subsidiary, GE Financial Assurance Holdings, Inc.
("GE Financial Assurance"). As part of an internal reorganization of GE
Financial Assurance's insurance subsidiaries, The Harvest Life Insurance
Company ("Harvest") merged into the Company on January 1, 1999. At this time we
were renamed GE Life and Annuity Assurance Company. Harvest's former parent,
Federal Home Life Insurance Company ("Federal"), received common stock of the
Company in exchange for its interest in Harvest.
We principally offer, annuity contracts, GICs and funding agreements, and life
insurance. We do business in the District of Columbia and all states except New
York. Our principal offices are at 6610 West Broad Street, Richmond, Virginia
23230.
We are one of a number of subsidiaries of GE Financial Assurance, a holding
company that, through its subsidiaries, provides consumers financial security
solutions by selling a wide variety of insurance, investment and retirement
products and income protection packages in North America and Asia. GE Financial
Assurance's product offerings are divided along three major segments of
consumer needs: (1) Wealth Accumulation and Transfer, (2) Lifestyle Protection
and Enhancement, and (3) Mortgage Insurance.
As an integral part of GE Financial Assurance, we are able to leverage the
strengths of a global organization. We do so to offer consumers a wide variety
of products through the convenience of diverse distribution channels. In
addition, we are able to utilize GE Financial Assurance's centers of excellence
to provide world class customer service within a competitive cost structure.
OWNERSHIP
GE Financial Assurance indirectly owns approximately ninety-seven percent of
our outstanding common stock. The stock is owned directly by General Electric
Capital Assurance Company ("GE Capital Assurance") and by Federal. Both GE
Capital Assurance, which directly owns approximately eighty-five percent of our
outstanding common stock, and Federal, which owns approximately twelve percent
of our outstanding common stock, are indirectly owned by GE Financial
Assurance. The remaining shares of our outstanding common stock are owned by
Phoenix Life Insurance Company ("Phoenix"). All of our outstanding non-voting
preferred stock is owned by GE Financial Assurance. GE Financial Assurance is a
wholly-owned subsidiary of GE Capital which in turn is wholly owned, directly
or indirectly, by General Electric Company ("GE").
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None of GE Capital Assurance, Federal, Phoenix, GE Financial Assurance, GE
Capital, or GE guarantees the Contract.
GENERAL
Our products are divided along two of GE Financial Assurance's three major
segments of consumer needs:
. Wealth Accumulation and Transfer, and
. Lifestyle Protection and Enhancement.
Our principal product lines under the Wealth Accumulation and Transfer segment
are:
. deferred annuities (variable and fixed);
. guaranteed investment contracts, or GICs, and funding agreements; and
. life insurance (universal, variable, and ordinary).
Customers use Wealth Accumulation and Transfer products as vehicles for
accumulating wealth, often on a tax-deferred basis, providing income during
retirement, transferring wealth to beneficiaries, or providing a means to
replace the insured's income in the event of premature death.
Our principal product line under the Lifestyle Protection and Enhancement
segment is supplemental accident and health insurance. Customers use Lifestyle
Protection and Enhancement products to protect their income and assets from the
adverse economic impacts of significant health care costs or other
unanticipated events that cause temporary or permanent loss of earnings
capabilities.
We currently distribute our products through two primary distribution methods:
. intermediaries; and
. career or dedicated sales forces.
STRATEGY
We believe that the following trends have increased and will continue to
increase the demand for innovative products and services to solve individual
financial challenges:
. changes in demographics such as the increased number of baby boomers entering
middle and late middle age;
. longer life expectancies due to medical advances;
. the reduction in government- and employer-sponsored benefit programs; and
. the continuing need for estate planning for the most affluent group of
retirees in history.
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Our strategy, which is integrated with the strategy of GE Financial Assurance's
other insurance companies, is designed to meet the financial needs of these
trends by offering a broad array of products and services through our two
primary channels of distribution.
Our approach to this opportunity is to maintain product and distribution
capabilities designed to deliver innovative products and services associated
with accumulating and transferring the consumer's wealth. Most of our products
are targeted at middle- to upper-income consumers. To date, we have operated
entirely in the United States.
Our strategy is to be a consumer financial solutions provider through:
. intense customer focus;
. generation of core business line growth; and
. competitive cost leadership.
These elements are further supported by a strong foundation of operating
fundamentals. Our strategy consists of the following four elements:
Customer Focus. We focus on two sets of customers on two fronts: (1) end
consumers, and (2) distribution partners/producers. Our core concept is to be
customer needs driven and to simplify consumers' financial lives. To accomplish
this, we offer not only products but also financial planning tools and
education to enable personalized solutions that provide options and choices for
consumers and their advisors. By providing financial solutions for every stage
of a consumer's life, either directly or through our affiliates, we believe we
will differentiate ourselves from our competitors and create an affinity with
customers that will translate into lifetime relationships. In addition, we
focus on continuously expanding the support services and technology offered to
our distribution channels.
Growth. This element begins with our focus on driving core business growth,
building our distribution capabilities, and maintaining a broad range of fresh,
innovative products and services. We focus on key customer groups and
distribution channels that are well positioned to maximize marketplace
penetration. We believe that our customers are becoming increasingly
sophisticated in assessing their needs for savings, insurance and retirement.
Our products and services are designed to meet needs based on input from
consumers and the distributors who service them. To enable us to obtain this
input, we endeavor to create and maintain direct contact with our key consumer
groups, as well as the distributors who service them. We see branding as
increasingly important in the competitive financial security industry. We
therefore actively promote the GE brand, which is highly attractive to
consumers and distributors. While doing this, we also ensure all appropriate
legal and regulatory disclosures are made.
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Our distribution strategy is focused on penetrating our targeted markets
through two types of distribution methods:
. intermediaries; and
. career or dedicated sales forces.
Through each distribution method, we believe core growth will be driven by the
following factors:
. strong product development;
. disciplined marketing and sales;
. expansion of specific distribution relationships; and
. selective cross-marketing of products.
In addition, we believe our commitment to e-commerce has allowed us to
capitalize on two fundamental opportunities to further accelerate our growth:
(1) making our existing businesses and ways of serving consumers more effective
by being faster and more cost efficient; and (2) creating entirely new product
and service capabilities or processes to build new ways of reaching consumers
and our distributors.
Although our primary focus will be on increasing our sales of existing products
by enhancing our marketing, sales, product development, and service
capabilities, we will continue to consider opportunities to enter new markets.
We believe entry into these new markets will be accomplished through:
. development of new products for sale through existing channels;
. development of new products to serve new channels;
. creation of new distribution segments within established channels; and
. alliances with entities with an established presence in existing markets or
distribution channels.
Leadership in Cost Competitiveness and Productivity. We recognize that
consolidation in the financial services industry will create fewer, but larger,
competitors. Our ability to effectively compete will be dependent upon many
factors, including our ability to maintain operating scale and reduce our
expenses through the elimination of duplicate functions and the use of enhanced
technology. Our continued commitment to integrating GE Financial Assurance's
life insurance and other financial institution acquisitions into platforms with
common information systems is designed to create a competitive advantage in the
marketplace. While we believe that the diversity of GE Financial Assurance's
distribution channels is also a competitive advantage, we recognize the need to
coordinate our efforts with our affiliates to
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provide a unified face to our customers and distributors. We are committed to
service excellence through the implementation of quality initiatives and
technology to provide timely and efficient response to all consumer inquiries,
needs and requests. In addition, we are continuously analyzing means by which
we can digitize and e-enable processes. We believe the benefits from this
initiative include improved customer service, expanded product and service
offerings, and increased operating efficiency for both our customers and us. We
believe that our continued success will be predicated upon our ability to
achieve game-changing efficiencies through the use of digitization and the
Internet.
Strong Foundation of Operating Fundamentals. Our dedication to providing
quality products to our customers rests on maintaining a strong risk
management, compliance, and controllership focus and simultaneously using
technology for competitive advantage. We believe this focus provides a solid
foundation for our successful execution of our business strategy. We believe
risk management, compliance, and controllership processes and practices have
been a long-standing strength of ours. We have developed processes and
practices appropriate for our operating businesses by leveraging the experience
of the GE system.
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Products
WEALTH ACCUMULATION AND TRANSFER PRODUCTS
Deferred Annuities
Premiums related to single and flexible premium deferred annuities are reported
as deposit liabilities in accordance with U.S. generally accepted accounting
principles ("GAAP").
Fixed Annuities. Our deposit liabilities for fixed annuities for the years
ended December 31, 2000, 1999, and 1998 were $1,158 million, $1,537 million,
and $1,395 million, respectively. Our deposits received for these same periods
were $1.2 million, $5.5 million, and $8.7 million, respectively. A fixed single
premium deferred annuity ("SPDA") provides for a single premium payment at time
of issue, an accumulation period, and an annuity payout period at some future
date. A flexible premium deferred annuity ("FPDA") provides the same features
but allows the owner to make additional payments into the contract. Initially,
the insurance company credits the account value of the annuity with interest
earnings at a current interest rate (the crediting rate) that is guaranteed for
a period of one to five years. After this period, the crediting rate is subject
to change based on prevailing market rates and product profitability. Each
contract also has a minimum guaranteed rate. The accrual of interest during the
accumulation period is on a tax-deferred basis to the contractholder. After the
number of years specified in the annuity contract, the owner may elect to take
the proceeds of the annuity as a single payment, a specified income for life,
or a specified income for a fixed number of years. The annuitant is permitted
at any time during the accumulation period to withdraw all or part of the
premium paid plus the amount credited to his account subject to contract
provisions.
At least once each month, we establish an interest-crediting rate for our new
fixed SPDA policies and new deposits into FPDA policies. In determining our
interest-crediting rate on new deposits, management considers our competitive
position, prevailing market rates, and the profitability of the annuity
product. After contract issue, we maintain the initial crediting rate for a
minimum period of one year. Thereafter, we may adjust the crediting rate not
more frequently than once per year for a given contract. Interest rates
credited on our in-force SPDA and FPDA policies ranged from 4.1% to 6.1% during
2000. All of our annuity products have minimum guaranteed crediting rates
ranging from 3.5% to 4.0% for the life of the contract.
Variable Annuities. A variable annuity, including the Contract, has an
accumulation period and a payout period. The main difference from fixed
annuities is that the contractholder can place all or a portion of their
premiums in a separate account
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maintained for variable annuities. These accounts are distinct from our general
assets and liabilities. Assets held in separate accounts supporting variable
annuity contracts, as well as variable life insurance policies, amounted to
$10,393 million, $9,246 million, and $5,529 million at December 31, 2000, 1999,
and 1998, respectively. Our deposit liabilities not held in the separate
account for variable annuities were $541 million, $673 million, and $571
million for December 31, 2000, 1999 and 1998, respectively. Our deposits
received for variable annuities during these same periods were $3,152 million,
$2,442 million, and $916 million, respectively.
Contractholders may elect to allocate their premiums among several investment
subaccounts with varying degrees of risk and investment objectives. The cash
surrender value of a variable annuity contract depends on the age of the policy
and the performance of these subaccounts, which the contractholder may
reallocate from time to time. There is no guaranteed minimum rate in the
subaccount components of variable annuity contracts. Similarly, during the
variable annuity's payout period, the payments distributed to the annuitant may
fluctuate with the performance of the subaccounts selected by the owner. A
fixed payout may also be available depending upon individual contract
provisions. Variable annuities provide us with fee-based revenue in the form of
mortality and expense fees charged to the contractholder's account.
GICs and Funding Agreements
Our deposit liabilities for GICs and funding agreements for the years ended
December 31, 2000, 1999, and 1998 were $5,568 million, $4,174 million, and
$2,374 million, respectively. Our deposits received for these same periods were
$1,904 million, $2,057 million, and $1,090 million, respectively.
GICs are deposit-type products that provide a guaranteed return on a fixed or
indexed basis to the contractholder. GICs are purchased by Employee Retirement
Income Security Act ("ERISA") qualified defined contribution plans. These plans
include 401(k) plans where plan participants elect a stable value option.
Funding agreements operate substantially similarly to GICs. Funding agreements
are purchased by institutional accredited investors for various kinds of funds
and accounts that are not ERISA qualified. Money market funds, bank common
trust funds, and other corporate and trust accounts are examples of purchasers
of funding agreements. Nearly all of our funding agreements are on a floating-
rate basis, which means interest is credited to them on an indexed basis.
GICs typically credit interest at a fixed interest rate that is determined by
market conditions. GICs also have a fixed maturity typically ranging from 2 to
6 years. Both rates and maturities are set at the time of sale. Substantially
all GICs allow for the payment of benefits at contract value to ERISA plan
participants in the event of
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death, disability, retirement, or change in investment election. We underwrite
these risks before issuing a GIC to a plan. In addition, we require plans
buying our GICs to have certain restrictions on participant transfers to money
market and similar funds in order to reduce disintermediation risk.
Contractholders can also terminate our GICs prior to their maturity. However,
they can only be terminated after an adjustment to the contract value for
changes in the level of interest rates and the application of a significant
penalty.
Our floating-rate funding agreements credit interest at a rate that is indexed
to an external index typically the London Interbank Offered Rate. These
contracts are typically renewed annually. However, we can terminate the funding
agreement after giving notice within the contract's specified notice period.
Contractholders are also able to terminate after giving notice within the
specified notice period. This notice period is generally 90 days or less. The
aggregate amount of our outstanding funding agreements with put option features
was approximately $2,295 million as of December 31, 2000. We have established a
line of credit with GNA Corporation, an indirect parent, to provide liquidity
in the event of an unusual level of early terminations. We also have issued
$439 million of longer term funding agreements. These contracts have maturities
of up to 7 years and contain no early termination provision.
Life Insurance
Our annualized premiums of life insurance in-force for the years ended December
31, 2000, 1999, and 1998 were $265.9 million, $271.5 million, and $310.1
million, respectively. First year premiums received for these same periods were
$47.3 million, $37.2 million, and $52.4 million, respectively. We predominantly
offer "permanent" life insurance as opposed to "term" life insurance. Term life
insurance provides life insurance protection for a limited time, and a death
benefit is paid only if the insured dies during the specified term. Our
permanent life insurance products provide protection for the entire life of the
insured and allow for cash value accumulation. These products include variable
life, interest-sensitive whole life insurance ("ISWL"), and universal life
insurance ("UL").
Our life insurance policies provide a death benefit payable upon death of the
insured. Owners of permanent insurance pay premiums that are applied to account
value, net of any expense charges. We deduct cost of insurance charges, which
vary by age, gender, plan and class of insurance from the account value. We
determine our cost of insurance each year in advance, which is subject to a
maximum stated in each policy. The owner may access account value through
policy loans, partial withdrawals, and full surrender of the policy. Some
withdrawals and surrenders are subject to surrender charges.
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We credit the account value for ISWL and UL policies with interest at an
interest rate we determine in advance and generally guarantee for a policy year
at a time. Policies have a minimum credited interest rate, which varies by
policy and ranges from 4.0% to 5.5%. ISWL and UL differ in two major ways. ISWL
requires the contractholder to pay a fixed premium we determine each year,
while UL allows a contractholder to determine the amount of premium to be paid,
subject to certain minimum and maximum values. Also, the ISWL death benefit is
fixed at issue, while the contractholder may decrease and (subject to evidence
of good health) increase the death benefit on a UL policy.
The main difference between variable life insurance and variable UL from non-
variable life insurance is that the policyholder can place all or a portion of
their premiums in a separate account that is maintained for the relevant
variable life insurance policies and that is distinct from our general assets
and liabilities. Policyholders may elect to allocate their premiums among
several investment subaccounts with varying degrees of risk and investment
objectives. A variable life insurance policy's cash surrender value depends on
the policy's age and the performance of these underlying funds. There is no
guaranteed minimum rate in the subaccount components of variable life
insurance. Variable life insurance policies provide us with fee-based revenue
in the form of mortality and expense fees charged to the policyholder's
separate account.
LIFESTYLE PROTECTION AND ENHANCEMENT PRODUCTS
Our principal product line under the Lifestyle Protection and Enhancement
segment is supplemental accident and health insurance. Our annualized premiums
for supplemental accident and health insurance for the years ended December 31,
2000, 1999, and 1998 were $61.0 million, $56.1 million, and $53.4 million,
respectively.
We offer supplemental accident and health insurance products to individuals. We
market supplemental accident and health products because we believe that
offering a broad range of products is essential in order to be a preferred
provider of benefits and to effectively meet the needs of employers and
consumers.
PRODUCT/SERVICE CENTERS
Our primary product service centers for creating and servicing our products are
as follows:
. the annuity and GIC and funding agreement businesses operate primarily in
Richmond, Virginia;
. the life business operates primarily in Lynchburg, Virginia; and
. the accident and health business operates primarily in Schaumburg, Illinois.
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We leverage GE Financial Assurance's global presence to support these service
centers through an affiliate's operations in India. The Indian operations
provide call center support, internet assistance, and new business
administration to promote cost efficiencies and to enhance customer service.
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Marketing and Distribution
We currently distribute our products through two primary channels:
. intermediaries, such as banks, securities brokerage firms, brokerage general
agencies ("BGAs"), financial planners, accountants, producer groups, and
specialized brokers; and
. career or dedicated sales forces.
GE Financial Assurance has developed a web portal called GEFinancialPro.com for
our distribution channels and for those of our affiliates. This web portal
improves productivity for financial intermediaries and agents by enabling
business submissions, account tracking, and status updates through the World
Wide Web. In addition, GE Financial Assurance has developed The GE Financial
Service site, GEFinancialService.com, for intermediaries and consumers. The GE
Financial Service site provides similar services for these customers, giving
them the ability to change everything from their address to investment accounts
online.
INTERMEDIARIES
Banks and Securities Brokerages. Banks and securities brokerage firms are a
significant and growing distribution channel for our fixed and variable
annuities, and life insurance products. Over the last few years, distribution
of our products through securities brokerage firms has substantially increased
primarily due to our distribution of variable annuity products through a large
network of securities brokerage firms.
Approximately 25% of our variable product sales in 2000 were through two
national stock brokerage firms. However, we do not believe that the loss of
such business would have a long-term adverse effect on our business and
operations due to our competitive position in the marketplace, the availability
of business from other distributors, the growth of the independent broker-
dealer and financial planner channels, and our mix and penetration of other
products.
BGAs. We, as well as our affiliates, distribute many of our products through
more than 200 independent insurance brokerage firms located throughout the
United States. These BGAs market our products through approximately 135,000
licensed insurance agents or brokers, who also represent other companies. We
believe our consistent commitment to this system has helped us earn a
reputation as a leading provider of insurance products among BGAs.
Financial Planners, Accountants, and Producer Groups. We sell some of our
products through financial planners, accountants, and producer groups. These
groups emphasize providing investment and insurance products to one of our
target customer groups. We believe that financial planners, accountants, and
producer groups present an opportunity for growth within the intermediary
distribution channel.
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Specialized Brokers. We also sell GICs through specialized GIC brokers, fund
managers, employee benefit investment advisors, and directly to large employee
benefit plans. We sell funding agreements directly, as well as through brokers,
institutional accredited investors, and banks acting in a fiduciary capacity.
CAREER OR DEDICATED SALES FORCES
Our career or dedicated sales forces consist primarily of non-employees who
sell our products on an exclusive basis. All non-employee dedicated sales force
agents are affiliated with an insurance agency. We compensate dedicated sales
forces primarily on a commission basis.
These agents develop customized solutions for customers' future financial
requirements by using our annuity and life insurance products. They offer
customers financial profiles to assist their understanding and development of
financial objectives. They identify prospective customers through:
. direct mail solicitation;
. educational seminars;
. policyholder referrals; and
. targeted promotions linked to our national advertising campaigns.
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Competition
We operate in a highly competitive environment. We believe GE Financial
Assurance has assembled a unique collection of products and distribution
channels. However, there are competitors that also have assembled a similar
array of financial products and have similar strategic goals. We believe that
the principal competitive factors in the sale of insurance and annuity products
are:
. product features;
. commission structure;
. perceived stability of the insurer;
. claims paying ability ratings;
. service;
. brand recognition;
. price; and
. cost efficiency.
Many other companies are capable of competing for sales in our target markets.
Our ability to compete is affected in part by our ability to provide
competitive products and quality service to the consumer, general agents,
licensed insurance agents, and brokers. However, we believe that we compete
primarily on the basis of our high level of customer focus, our financial
strength, and our competitively priced products.
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Risk Management, Compliance, and Controllership
We maintain a strong commitment to risk management, compliance, and
controllership. We avail ourselves of the long-standing strength and experience
of GE Capital and GE. The commitment to risk management, compliance, and
controllership begins with the initial sales contact and extends through
ongoing policy servicing at the customer level. Formal internal reviews of our
product performance, administrative processes, pricing strategy, and
competitive position are conducted on a periodic basis, occurring at least once
a year. These reviews are completed by cross-functional teams and formally
presented to senior management. We have obtained membership in Insurance
Marketplace Standards Association, a voluntary membership organization
dedicated to promoting high ethical standards in the sale of individual life
insurance, long-term care insurance, and annuities. We have instituted company-
wide compliance initiatives such as centralized complaint databases and agent
complaint tracking and licensing. We are periodically examined by the insurance
department of our domiciliary state (Virginia), by certain other states where
we sell our products, and by the Securities and Exchange Commission. Where
necessary, we respond to the relevant examination reports by implementing
recommended changes.
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Underwriting
Our dedicated underwriting staff reviews and analyzes applications for most of
our underwritten insurance related products individually. The review and
analysis is conducted based on standardized underwriting guidelines and
procedures. After initial processing, each file is reviewed and additional
information (such as medical examinations, attending physician's statements,
and special medical tests, if applicable) is obtained to make an underwriting
decision. The independent sales agents and our own sales staff do not retain
any underwriting authority.
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Reserves
We establish and carry as liabilities actuarially determined reserves that are
calculated to meet our future obligations. These reserves are based on
actuarially recognized methods. These reserves use prescribed morbidity and
mortality tables in general use in the United States modified to reflect our
actual experience when appropriate. These reserves are computed at amounts
that, with additions from premiums to be received and with interest on such
reserves compounded annually at certain assumed rates, are expected to be
sufficient to meet our policy obligations. Reserves include:
. unearned premiums;
. premium deposits;
. claims reported but not yet paid;
. claims incurred but not reported; and
. claims in the process of settlement.
For interest-sensitive life and annuity policies, reserves are set according to
premiums collected, plus interest, less charges. Reserves for fixed life and
accident and health policies are based on:
. assumed investment yield;
. persistency;
. mortality and morbidity as per commonly used actuarial tables;
. expenses; and
. margins for adverse deviations.
The stability of our annuity and life insurance reserves is enhanced by policy
restrictions on withdrawals of funds. Withdrawals in excess of allowable
penalty-free amounts are generally assessed a surrender charge during a penalty
period ranging from 5 to 20 years. The basis for surrender charges varies by
product and can be either a percentage of premium, of accumulation value, or
related to face amount of insurance, and generally decreases gradually during
the penalty period. Surrender charges are set at levels to protect us from loss
on early terminations. This lengthens the effective duration of policy
liabilities and improves our ability to maintain profitability on such
policies. Our reserves comply in all material respects with state insurance
department statutory requirements. In the consolidated financial statements,
however, insurance reserves are determined in accordance with GAAP, which may
vary from statutory requirements.
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Reinsurance
We follow the usual industry practice of reinsuring (ceding) portions of our
life insurance risks to other companies. The use of reinsurance permits us to
write policies in amounts larger than the risk we are willing to retain on any
one life, and also to continue writing a larger volume of new business. The
maximum amount of individual life insurance we normally retain on any one
insured is $1 million. Certain supplemental accident and health insurance
policies are reinsured on either a quota share or excess of risk basis. We cede
insurance primarily on a "treaty" basis, under which risks are ceded to a
reinsurer on specific blocks of business where the underlying risks meet
certain predetermined criteria. To a lesser extent, we cede insurance risks on
a "facultative" basis, under which the reinsurer's prior approval is required
on each risk reinsured. The types of reinsurance we use do not discharge us
from liability on the insurance ceded. We are required to pay the full amount
of our insurance obligations regardless of whether we are entitled or able to
receive payments from the reinsurer. We do not have significant concentrations
of reinsurance risk with any one reinsurer.
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Regulation
GENERAL REGULATION AT STATE LEVEL
Our insurance business is subject to comprehensive state regulation and
supervision throughout the United States. The laws of the various jurisdictions
establish supervisory agencies with broad administrative powers with respect
to, among other things:
. licensing to transact business;
. licensing agents;
. admitting of assets;
. regulating premium rates;
. approving policy forms;
. regulating unfair trade and claims practices;
. establishing reserve requirements and solvency standards;
. fixing maximum interest rates on life insurance policy loans and minimum
rates for accumulation of surrender values;
. restricting certain transactions between affiliates; and
. regulating the type, amounts, and valuations of investments permitted.
State statutory and regulatory restrictions limit the amount of dividends or
distributions an insurance company may pay to its shareholders without
regulatory approval.
Virginia, our state of domicile, allows insurance companies domiciled in the
state to pay dividends up to the lesser of 10% of prior year statutory surplus
or 100% of prior year statutory net gain from operations. However, dividends
paid or distributed within any twelve consecutive months in excess of the
prescribed limits are deemed extraordinary and require formal approval by the
Virginia State Corporation Commission, Bureau of Insurance (the "Commission").
Virginia insurance laws provide that no person may acquire control of us
without the prior approval of the Commission. Any person who acquires
beneficial ownership of 10% or more of our voting securities would be presumed
to have acquired control. However, the Commission may, upon application,
determine otherwise.
We are required to file detailed annual reports with the Commission and with
insurance supervisory departments in each of the jurisdictions in which we do
business. Our operations and accounts are subject to examination by these
departments at regular intervals. We prepare statutory financial statements in
accordance with accounting practices prescribed or permitted by the Commission,
our principal insurance regulator. Prescribed statutory accounting practices
include
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publications of the National Association of Insurance Commissioners ("NAIC"),
as well as state laws, regulations, and general administrative rules.
Life insurance companies are required to establish an asset valuation reserve
("AVR"), consisting of two components:
. a "default component" that provides for future credit-related losses on
fixed maturity investments; and
. an "equity component" which provides for losses on all types of equity
investments, including real estate.
The amount of AVR required to be held by us totaled $129.6 million, $110.4
million, and $90.2 million at December 31, 2000, 1999, and 1998, respectively.
The default component totaled $120.5 million, $103.4 million and $79.9 million,
while the equity component totaled $9.1 million, $7.0 million, and $10.3
million at December 31, 2000, 1999, and 1998, respectively.
Insurers are also required to establish an interest maintenance reserve ("IMR")
for fixed maturity net realized capital gains and losses, net of tax, related
to changes in interest rates. The IMR is required to be amortized into
statutory earnings on a basis reflecting the remaining period to maturity of
the fixed maturity securities sold. The amount of IMR required to be held by us
totaled $10.9 million, $18.2 million, and $11.3 million at December 31, 2000,
1999, and 1998, respectively. State insurance regulatory authorities require
that these reserves be established as a liability on a life insurer's statutory
financial statements. However, this does not affect our financial statements
prepared in accordance with GAAP. Future additions to AVR will reduce our
future statutory surplus. However, we do not believe that the impact under
current regulations of these reserve requirements will materially affect our
ability to grow our statutory surplus and pay dividends to our shareholders in
the future.
The NAIC has established risk-based capital ("RBC") standards to determine the
amount of total adjusted capital (as defined by the NAIC) that an insurance
company must have. The RBC standards take into account the risk characteristics
of the insurance company's investments and liabilities. The formula establishes
a standard of capital adequacy that is related to risk. The RBC formula
establishes capital requirements for four categories of risk:
. asset risk;
. insurance risk;
. interest rate risk; and
. business risk.
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For each category, the capital requirements are determined by applying
specified factors to various asset, premium, reserve, and other items. The
factor will be higher for items with greater underlying risk and lower for
items with less risk. Insurance regulators use the formula as an early warning
tool to identify deteriorating or weakly capitalized companies for the purpose
of initiating regulatory action.
The NAIC's RBC requirements provide for four levels of regulatory attention
depending on the ratio of the company's total adjusted capital to its
authorized control level RBC ("ACL"), as defined by the NAIC. A company must
submit a comprehensive plan to the regulatory authority that discusses proposed
corrective actions to improve its capital position if:
. the company's total adjusted capital is less than 200% of its ACL but greater
than or equal to 150% of its ACL, or
. if a negative trend has occurred (as defined by the NAIC) and total adjusted
capital is less than 250% of its ACL.
If a company's total adjusted capital is less than 150% of its ACL but greater
than or equal to 100% of its ACL, then the regulatory authority will perform a
special examination of the company and issue an order specifying corrective
actions that must be followed. In addition, the company must undertake the
actions described above. If a company's total adjusted capital is less than
100% of its ACL but greater than or equal to 70% of its ACL, then the
regulatory authority may take any action it deems necessary, including placing
the company under its control. In addition, in this circumstance, the company
must undertake the actions described above. If a company's total adjusted
capital is less than 70% of its ACL, the regulatory authority is mandated to
place the company under its control. Our total adjusted capital is in excess of
250% of our ACL at December 31, 2000.
In addition, as part of their routine regulatory oversight process, state
insurance departments conduct detailed examinations periodically of the books,
records, accounts and market conduct of insurance companies doing business in
their states. These examinations generally occur once every three to five
years. None of the recent regulatory examinations have disclosed any findings
that would have a material adverse impact on us.
REGULATORY INITIATIVES
State insurance regulators and the NAIC are continually re-examining existing
laws and regulations, with a specific focus on:
. insurance company investments and solvency issues;
. risk-adjusted capital guidelines;
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. interpretation of existing laws;
. development of new laws;
. implementation of non-statutory guidelines; and
. circumstances under which dividends may be paid.
These initiatives may be adopted by the various states in which we are
licensed. However, the ultimate content and timing of any statutes and
regulations adopted by the states cannot be determined at this time. It is
impossible to predict the future impact of changing state and federal
regulations on our operations. In addition, there can be no assurance that
existing or future insurance-related laws and regulations will not become more
restrictive.
The NAIC has adopted model regulations regarding the treatment of personal
financial and health information to comply with the privacy requirements of the
federal Gramm-Leach-Bliley Act. Under the model regulation, insurance companies
must disclose their policies with respect to the privacy of personal financial
and health information. These policies must give consumers the opportunity to
"opt-out" by choosing not to allow their personal financial information to be
shared with third parties. The model regulation also requires that an insurance
company may not share health information with third parties, unless the
consumer "opts-in" by authorizing the insurance company to share such
information. Insurance companies were required to deliver an initial privacy
disclosure statement to their existing customers by July 1, 2001. Thereafter,
companies are required to make an annual privacy disclosure for existing
customers and make a disclosure to new customers when a policy is issued. We
have been complying with existing privacy laws and have implemented the privacy
requirements of the model regulation.
STATUTORY ACCOUNTING CHANGES
The NAIC adopted model statutory accounting practices which took effect at the
beginning of 2001. Statutory accounting practices determine, among other
things, the statutory surplus of an insurance company and, therefore, the
amount of funds that we can pay as dividends to our shareholders. Insurance
regulators and the insurance industry are continuing to develop interpretations
of the NAIC model. Adoption of the statutory accounting practices increased
statutory capital and surplus by $15.9 million as of January 1, 2001.
ASSESSMENTS AGAINST INSURERS
Under the insurance guaranty fund laws existing in each state, the District of
Columbia, and Puerto Rico, licensed insurers can be assessed by state insurance
guaranty associations for some obligations of insolvent insurance companies to
contractholders and claimants. Regulatory actions against certain unrelated
life
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insurers encountering financial difficulty have prompted various state
insurance guaranty associations to begin assessing life insurance companies for
the deemed losses. Most of these states do provide, however, that an assessment
may be excused or deferred if it would threaten an insurer's solvency. Most of
these states further provide for annual limits on these assessments. A large
part of the assessments paid by us under these laws may be used as credits for
a portion of our premium taxes in future years. We paid assessments of $0.5,
$0.1, and $3.1 million to various state guaranty associations in 2000, 1999,
and 1998, respectively. These assessments are typically not made for several
years after an insurer fails and depend upon the final outcome of liquidation
or rehabilitation proceedings. Therefore, we cannot accurately determine the
ultimate amount or timing of any future assessment. However, based on the best
information presently available, management believes our accrued amounts are
sufficient.
REGULATION AT FEDERAL LEVEL
Although the federal government does not directly regulate the business of
insurance, federal legislation and administrative policies in several areas,
including financial services regulation, pension regulation, and federal
taxation, can significantly and adversely affect the insurance industry and our
business. For example, the Gramm-Leach-Bliley Act permits mergers that combine
commercial banks, insurers, and securities firms under one holding company.
Prior to passage of the Gramm-Leach-Bliley Act, the Bank Holding Company Act of
1956, as amended, had restricted banks from being affiliated with insurance
companies. With the passage of the Gramm-Leach-Bliley Act, bank holding
companies may acquire insurers, and insurance holding companies may acquire
banks. The effect of the Gramm-Leach-Bliley Act on us is uncertain. However,
the ability of banks to affiliate with insurance companies could materially and
adversely affect sales of our products by substantially increasing the number
and financial strength of potential competitors.
In addition, the federal government has from time to time considered other
legislative or regulatory changes that could affect us. This includes:
. legislation relating to the deferral of taxation on the accretion of value
within certain annuities and life insurance products;
. changes in ERISA regulations; and
. the alteration of the federal income tax structure.
The ultimate effect of any of these changes, if implemented, is uncertain.
However, both the persistency of our existing products and our ability to sell
products may be materially impacted in the future.
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Another recent legislative change that could affect us is the implementation of
the Health Insurance Portability and Accountability Act of 1996 ("HIPAA").
HIPAA established various requirements related to health benefit plans
including medical, dental, and long-term care insurance plans. It generally
applies to insurers, providers, and employers. When enacted in 1996, its
initial focus was on health benefit plan portability. HIPAA also contains
administrative simplification and privacy provisions that were designed to
encourage the electronic exchange of health care information and the protection
of personal health information. These provisions were implemented through
regulations issued by the Secretary of Health and Human Services in December
2000. The earliest compliance date for the new regulations is October 2002.
HIPAA provides for significant fines and other penalties for wrongful
disclosure of protected health information. We anticipate that we will have to
modify certain of our infrastructure and procedures to comply with the new
requirements. However, we do not expect these changes to have a material impact
on our business.
E-Commerce Regulation
We have become involved in e-commerce activities. E-commerce is subject to a
new and rapidly evolving regulatory environment. Regulation occurs at the state
and federal levels in the United States, as well as internationally. The scope
and interaction of these various levels of regulation are unclear at this time,
and many new regulations are being proposed and adopted. It is difficult to
predict precisely how this evolving area of regulation may affect our current
and planned e-commerce activities.
Securities Laws
Some of our policies and contracts are subject to regulation under the federal
securities laws administered by the SEC and certain state insurance laws. Some
of our separate accounts are registered as unit investment trusts under the
1940 Act. Some of our annuity contracts and all of our variable life insurance
policies are registered under the 1933 Act. Distribution of our variable
products is subject to broker-dealer regulation by the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.
Federal and state securities laws and regulations are primarily intended to
benefit owners of our variable annuity and variable life insurance products.
These laws and regulations generally grant supervisory agencies broad
administrative powers, including the power to limit or restrict the carrying on
of business for failure to comply with these laws and regulations. In that
event, the possible sanctions that may be imposed include suspension of
individual employees, suspension or revocation of one or more registered
separate account's registration as an investment company, censure, and fines.
ERISA Considerations
The Small Business Protection Job Act ("SBPJA"), offers insurers protection
from potential litigation exposure prompted by the 1993 U.S. Supreme Court
decision in
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John Hancock Mutual Life Insurance Company v. Harris Trust & Savings Bank. In
the Harris Trust case, the Court held that an insurer is subject to the
fiduciary requirements of ERISA, with respect to a portion of the funds held
under certain general account group annuity contracts. The pertinent SBPJA
provisions provide that generally all persons are protected from liability
under the fiduciary responsibility provisions of ERISA and the prohibited
transactions provisions of the Code on the basis of a claim that the assets of
an insurer (other than plan assets held in separate accounts) constitute assets
of the plan, for conduct which occurs before July 5, 2000. However, insurers
remain subject to federal criminal law and liable for actions brought by the
Secretary of Labor alleging breaches of fiduciary duties that also constitute a
violation of federal or state criminal law. The SBPJA also provides that, from
and after July 5, 2000, with respect to contracts issued from an insurer's
general account on or before December 31, 1998 that are not guaranteed benefit
policies, the insurer will be deemed to be in compliance with the provisions of
Sections 404, 406, and 407 of ERISA (relating to fiduciary duties, prohibited
transactions, and limitations relating to the acquisition and holding of
employer securities) if the insurer meets the requirements of the regulations
of the Department of Labor. The SBPJA further provides that contracts issued
from an insurer's general account after December 31, 1998, that are not
guaranteed benefit policies, will continue to be subject to the applicable
provisions of ERISA. We do not believe that the decision in the Harris Trust
case had a material adverse effect on our business, financial condition, or
results of operations. However, we supported and welcomed the enactment of the
aforementioned provisions of the SBPJA as a means to remove an area of
potential exposure for the insurance industry generally.
With respect to employee welfare benefit plans subject to ERISA, Congress
periodically has considered amendments to the law's federal preemption
provision which would expose us, and the insurance industry generally, to state
law causes of action, and accompanying extra-contractual (e.g., punitive)
damages in lawsuits involving, for example, group life and group disability
claims. To date, all such amendments to ERISA have been defeated.
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Properties
The company conducts business from various facilities, all of which are leased
except for one building in Richmond, Virginia, which we own.
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Market Price of and Dividends on the Registrant's Common Equity and Related
Stockholder Matters
All of our common stock, our sole class of common equity on the date hereof, is
owned by GE Capital Assurance, Federal, and Phoenix. Accordingly, there is no
public trading market for our common equity.
As previously discussed, our ability to pay dividends is restricted by state
insurance law. (See "Regulation, General Regulation at State Level.")
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Risk Factors
The operating results of companies in the insurance industry have historically
been subject to significant fluctuations. The factors that could affect our
future results include, but are not limited to, general economic conditions and
certain known trends and uncertainties that are discussed more fully below.
We are exposed to many types of risks that could negatively affect our
business. There are many types of risks that all companies are exposed to in
their businesses. For example, companies are exposed to the risks of natural
disasters, malicious acts, computer viruses, and other perils. While we have
obtained insurance, implemented risk management and contingency plans, and
taken preventive measures and other precautions, no assurance can be given that
there are not scenarios that could have an adverse effect on us.
We operate in a mature, highly competitive industry, which could limit our
ability to gain or maintain market share in the industry. Life and health
insurance is a mature industry. In recent years, the industry has experienced
little growth in life insurance sales, though the aging population has
increased the demand for retirement savings products. Life and health insurance
is a highly competitive industry. We encounter significant competition in all
lines of business from other insurance companies, many of which have greater
financial resources than we do, as well as competition from other providers of
financial services. Competition could result in, among other things, lower
sales or higher lapses of existing products.
The life and health insurance industry is consolidating with larger,
potentially more efficient organizations emerging from consolidation. Also,
some mutual insurance companies are converting to stock ownership, which will
give them greater access to capital markets. Additionally, commercial banks,
insurance companies, and investment banks may now combine, provided certain
requirements are satisfied.
Our ability to compete is dependent upon, among other things, our ability to
attract and retain distribution channels to market our insurance and investment
products, our ability to develop competitive and profitable products, our
ability to maintain low unit costs, and our maintenance of strong ratings from
rating agencies. A ratings downgrade could adversely affect our ability to
compete. Ratings are an important factor in our competitive position. Rating
organizations periodically review the financial performance and condition of
insurers, including us. A downgrade in our ratings could adversely affect our
ability to sell our products and retain existing business.
For the past several years rating downgrades in the industry have exceeded
upgrades. Rating organizations assign ratings based upon several factors. While
most of the factors relate to the rated company, some of the factors relate to
the views of the rating organization, general economic conditions, and
circumstances outside the rated company's control. We cannot predict what
actions the rating organizations may
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take, or what actions we may be required to take in response to the actions of
the rating organizations, which could adversely affect us.
We could be forced to sell investments at a loss to cover policyholder
withdrawals. Many of the products we offer, including funding agreements with
put options, allow policyholders and contractholders to withdraw their funds
under defined circumstances. We manage liabilities and configure our investment
portfolios so as to provide and maintain sufficient liquidity to support
anticipated withdrawal demands and contract benefits and maturities. While we
own a significant amount of liquid assets, a certain portion of our assets is
relatively illiquid. Unanticipated withdrawal or surrender activity could,
under some circumstances, compel us to dispose of assets on unfavorable terms,
which could have an adverse effect on us. We have established a line of credit
with GNA Corporation, an indirect parent, to provide liquidity in the event of
an unusual level of early terminations. However, this line of credit may not
provide sufficient liquidity in the event that extraordinary circumstances
cause a significant amount of unanticipated early withdrawals.
Market fluctuations could negatively affect our business. Significant changes
in market conditions expose insurance companies to the risk of not earning
anticipated policy fees from variable products affected by the performance of
the equity markets. Market fluctuations may also increase trade volumes that
could expose insurers to gains or losses in traded securities underlying its
separate accounts. Declining market returns may result in lower sales of
certain of our variable products.
Interest-rate fluctuations could negatively affect our spread income or
otherwise impact our business. Significant changes in interest rates expose
insurance companies to the risk of not earning anticipated spreads between the
interest rate earned on investments and the credited interest rates paid on in-
force policies. Both rising and declining interest rates can negatively affect
our spread income. While we develop and maintain asset/liability management
programs and procedures designed to preserve spread income in rising or falling
interest rate environments, no assurance can be given that changes in interest
rates will not affect such spreads.
Changes in interest rates may also impact our business in other ways. Interest
rate changes may have temporary effects on the sale and profitability of our
annuity, universal life, and other investment products. For example, if
interest rates rise, competing investments (such as annuities or life insurance
offered by our competitors, certificates of deposit, mutual funds, and similar
instruments) may become more attractive to potential purchasers of our
products. Competing investments may also become more attractive to existing
contractholders and policyholders, resulting in contract and policy surrenders.
We may be forced to raise certain crediting rates on our line of products in
order to meet competitive pressures.
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If interest rates decrease, we may experience lower sales of certain of our
insurance and investment products. We constantly monitor our investment income
on existing assets and yields available on new investments and sell policies
and annuities that permit flexible responses to interest rate changes as part
of our management of interest spreads. In addition, certain of our insurance
and investment products guarantee a minimum credited interest rate.
Higher interest rates may create a less favorable environment for the
origination of mortgage loans and decrease the investment income we receive in
the form of prepayment fees, make-whole payments, and mortgage participation
income. Higher interest rates may also increase the cost of debt and other
obligations having floating rate or rate reset provisions, and may result in
lower sales of variable products.
Additionally, our asset/liability management programs and procedures
incorporate assumptions about the relationship between short-term and long-term
interest rates (i.e., the slope of the yield curve), relationships between
risk-adjusted and risk-free interest rates, market liquidity, and other
factors. The effectiveness of our asset/liability management programs and
procedures may be negatively affected whenever actual results differ from these
assumptions.
Insurance companies are highly regulated. We are subject to government
regulation in each of the states in which we conduct business. Such regulation
is vested in state agencies having broad administrative power dealing with many
aspects of the insurance business, which may include premium rates, marketing
practices, advertising, policy forms, and capital adequacy, and is concerned
primarily with the protection of contractholders rather than share owners. We
cannot predict what regulatory initiatives may be enacted which could adversely
affect us.
We may be subject to regulation by the United States Department of Labor when
providing a variety of products and services to employee benefit plans governed
by ERISA. Such regulation seeks to protect the retirement and welfare benefits
of workers, primarily by imposing duties on fiduciaries to prudently manage
benefit plans. Severe civil and criminal penalties may be imposed for breach of
duties under ERISA.
Certain policies, contracts, and annuities we offer are subject to regulation
under the federal securities laws administered by the SEC. The federal
securities laws contain regulatory restrictions and criminal, administrative,
and private remedial provisions.
Tax law changes could adversely affect our ability to compete with non-
insurance products or reduce the demand for certain insurance products. Under
the Code, income tax payable by contractholders on investment earnings is
deferred during the accumulation period of certain life insurance and annuity
products. This favorable tax
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treatment may give certain of our products a competitive advantage over certain
investment-oriented products that do not qualify as insurance. To the extent
that the Code is revised to reduce the tax-deferred status of life insurance
and annuity products, or to increase the tax-deferred status of competing
products, the entire life insurance industry could be adversely affected and
lose market share. In addition, life insurance and annuity products are
potentially affected by changes in the federal estate tax. Recently enacted
changes -- gradually reducing estate tax rates until the estate tax is repealed
in 2010, for one year only -- have created uncertainty regarding the final
status of the estate tax. The changes, and the uncertainty itself, may reduce
demand for certain life insurance products. Finally, we cannot predict what
other tax law changes with adverse effects may be enacted by Congress or
promulgated by the Internal Revenue Service and Treasury.
Financial services companies are frequently the targets of litigation,
including class action litigation, which could result in substantial
judgments. A number of civil jury verdicts have been returned against insurers
and other providers of financial services involving sales practices, alleged
agent misconduct, failure to properly supervise representatives, and other
matters. Increasingly these lawsuits have resulted in the award of substantial
judgments that are disproportionate to the actual damages, including material
amounts of punitive damages. In some states, juries have substantial discretion
in awarding punitive and non-economic compensatory damages, which creates the
potential for unpredictable material adverse judgments in any given lawsuit. In
addition, in some class action and other lawsuits, companies have made material
settlement payments. We, like other financial services companies, in the
ordinary course of business, are involved in such litigation or, alternatively,
in arbitration. We cannot predict the outcome of any such litigation or
arbitration.
A decrease in sales or persistency could negatively affect our results. Our
ability to maintain low unit costs is dependent upon the level of sales and
persistency. A decrease in sales or persistency without a corresponding
reduction in expenses will result in higher unit costs.
Additionally, a decrease in persistency may result in higher amortization of
deferred policy acquisition costs and the present value of future profits.
Although many of our products contain surrender charges, the charges decrease
over time and may not be sufficient to cover the unamortized deferred policy
acquisition costs with respect to the insurance policy or annuity contract
being surrendered.
Our investments are subject to risks. Our invested assets are subject to
customary risks of credit defaults and changes in market values. The value of
our commercial mortgage loan portfolio depends in part on the financial
condition of the tenants occupying the properties that we have financed.
Factors that may affect the overall
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default rate on, and market value of, our invested assets and mortgage loans
include interest rate levels, financial market performance, and general
economic conditions as well as particular circumstances affecting the
businesses of individual borrowers and tenants.
We are dependent on the performance of others. Our results may be affected by
the performance of others because we have entered into various arrangements
involving other parties. Examples include, but are not limited to, the
following: many of our products are sold through independent distribution
channels; and the variable annuity deposits are invested in funds managed by
third parties. We may also use third-party administrators to collect premiums,
pay claims, and/or perform customer service functions. Additionally, our
operations are dependent on various technologies, some of which are provided
and/or maintained by other parties.
As with all financial services companies, our ability to conduct business is
dependent upon consumer confidence in the industry and its products. Actions of
competitors, and financial difficulties of other companies in the industry,
could undermine consumer confidence and adversely affect us.
Our reinsurance program involves risks. We cede insurance to other insurance
companies through reinsurance. However, we remain liable with respect to ceded
insurance should any reinsurer fail to meet the obligations assumed by it.
The cost of reinsurance is, in some cases, reflected in the premium rates we
charge. Under certain reinsurance agreements, the reinsurer may increase the
rate it charges us for the reinsurance, though we do not anticipate increases
to occur. Therefore, if the cost of reinsurance were to increase or if
reinsurance were to become unavailable, we could be adversely affected.
Additionally, we may assume policies of other insurers. Any regulatory or other
adverse development affecting the ceding insurer could also have an adverse
effect on us.
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Selected Financial Data
The following selected financial data should be read in conjunction with our
consolidated financial statements and the related notes to these financial
statements. Our consolidated financial statements include the historical
operations and accounts of our subsidiary, Assigned Settlements Inc. In
addition, the merger of Harvest into the Company was accounted for in a manner
similar to a pooling of interest. Accordingly, our financial statements have
been restated to reflect this transaction.
September 29 September 30 December 31
------------ ------------ -----------------------------
2001 2000 2000 1999 1998
------------ ------------ --------- --------- ---------
(Dollars in millions)
Total Investments (1) $ 10,917.6 $ 9,859.7 $10,656.5 $ 9,082.4 $ 8,163.3
Separate Account Assets 8,169.1 11,325.1 10,393.2 9,245.8 5,528.7
Total Assets 20,988.9 22,757.3 22,612.5 19,957.3 14,760.9
Policyholders Liabilities (2) 10,562.8 9,802.2 10,238.7 9,312.5 7,811.2
Shareholders' Interest 1,602.3 1,347.9 1,474.7 1,205.7 1,293.8
For the Year-to-Date Period
Then Ended
Total Revenues 856.5 855.7 1,153.4 1,017.9 939.0
Income before cumulative
effect of changes in
accounting principle(s) 93.3 114.7 163.1 107.9 105.8
Net Income (3) (4) 87.6 114.7 163.1 112.9 105.8
- --------------------------------------------------------------------------------------
December 31
-------------------
1997 1996
--------- ---------
(Dollars in
millions)
Total Investments (1) $ 7,677.1 $ 7,301.8
Separate Account Assets 4,066.4 2,762.7
Total Assets 12,727.1 11,053.4
Policyholders Liabilities (2) 7,091.7 6,775.5
Shareholders' Interest 1,329.8 1,170.5
For the Year-to-Date Period Then Ended
Total Revenues 974.4 1,012.0
Income before cumulative effect of changes in accounting
principle(s) 107.4 77.5
Net Income (3) (4) 107.4 77.5
- -----------------------------------------------------------------------------
(1) The balances prior to September 29, 2001 have not been restated to reflect
the reclassification of certain short-term investments to cash and cash
equivalents.
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(2) Policyholder liabilities consists of future annuity and contract benefits,
liability for policy and contract claims, and other policyholder
liabilities (but excludes separate account liabilities) on the Consolidated
Balance Sheets.
(3) Effective January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position No. 97-3, Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments. The
Company has reported the effect of this adoption as a cumulative effect of
a change in accounting principle, which served to increase 1999 net income
by $5.0 million (net of income taxes of $2.8 million).
(4) Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 Accounting for Derivative Instruments and
Hedging Activities, as amended. The Company has reported the effect of this
adoption as a cumulative effect of a change in accounting principle, which
served to decrease net income for the nine months ended September 29, 2001
by $5.7 million (net of income taxes of $3.0 million) and decrease
Shareholders' Interest as of January 1, 2001 by $7.8 million (net of income
taxes of $4.4 million).
112
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This prospectus and information incorporated by reference may include "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements are based on management's current
expectations and are subject to uncertainty and changes in circumstances.
Actual results may differ materially from these expectations as a result of
changes in global economic, business, competitive market and regulatory
factors.
The following analysis of the consolidated financial condition and results of
our operations should be read in conjunction with our consolidated financial
statements and their accompanying notes.
OPERATING RESULTS
Nine Month Period Ended September 29, 2001 Compared to
Nine Month Period Ended September 30, 2000
Net Investment Income. Net investment income increased $18.1 million, or 3.5%,
to $531.5 million for the nine month period ended September 29, 2001 from
$513.4 million for the comparable 2000 period. The increase was primarily a
result of higher levels of average invested assets ($10,831 million at
September 29, 2001 vs. $9,630 million at September 30, 2000). This increase was
partially offset by a decrease in weighted average yield rates to 6.71% during
the nine months ended September 29, 2001 from 7.30% during the comparable 2000
period.
Net Realized Investment Gains. Net realized investment gains increased $7.6
million to $14.1 million for the nine month period ended September 29, 2001
from $6.5 million for the comparable 2000 period. This increase arose primarily
from the securitization of certain financial assets. Net realized gains were
also impacted by our decision to sell certain assets in connection with our
credit and asset/liability risk management policies. We continue to monitor
events affecting the underlying value of our investment portfolio and recognize
adjustments to reflect other than temporary declines in book value, as needed.
Premiums. Premiums, which include premium revenues from traditional life and
life contingent annuity contracts, decreased $7.4 million or 8.3% to $81.5
million for the nine month period ended September 29, 2001 from $88.9 million
for the comparable 2000 period. This decrease was primarily a result of lower
levels of renewal premiums on term and whole life policies.
Variable Product Fees. Variable product fees decreased $9.5 million to $100.3
million for the nine month period ended September 29, 2001 from $109.8 million
for the comparable 2000 period. The decrease in variable product fees primarily
resulted from a decline in separate account values as a result of unfavorable
conditions in the equity markets in 2001.
113
Other Income. Other income, which includes surrender fee income, decreased
$10.9 million, or 25.7%, to $31.5 million for the nine month period ended
September 29, 2001 from $42.4 million for the comparable 2000 period. This
decrease primarily relates to the recapture in 2000 of certain credit life and
accident and health business upon termination of a reinsurance ceding
arrangement with an affiliate.
Interest Credited. Interest credited increased $21.5 million, or 5.5%, to
$408.9 million for the nine month period ended September 29, 2001 from $387.4
million for the comparable 2000 period. This increase was a result of
additional sales of GICs and funding agreements, life products and annuity
products. The growth in interest credited reflected the increase in policy
reserves for these products, which was partially offset by lower average
crediting rates on fixed annuities.
Our weighted average crediting rates for annuities decreased to 4.79% for the
nine month period ended September 29, 2001 from 4.97% for the comparable 2000
period. Our weighted average crediting rates for interest-sensitive life
products increased to 5.74% for the nine month period ended September 29, 2001
from 5.65% for the comparable 2000 period. Changes in our base crediting rates
are implemented in response to changes in market conditions, the prevailing
interest rate environment, contractual provisions and other factors. We monitor
market conditions closely and reset interest crediting rates as deemed
appropriate in accordance with the terms of the underlying contracts.
Benefits and Other Changes in Policy Reserves. Benefits and other changes in
policy reserves include activity related to future policy benefits on long-
duration life products and health products, as well as claim costs incurred
during the year under such contracts. In addition, the bonus feature of certain
variable annuity products is initially accounted for as a benefit. Benefits and
other changes in policy reserves decreased $31.0 million, or 18.1%, to $140.5
million for the nine month period ended September 29, 2001 from $171.5 million
for the comparable 2000 period. This decrease was a result of lower sales of
our bonus variable annuity products during the nine month period ended
September 29, 2001 as compared to the same 2000 period.
Commission Expenses. Commission expense decreased $55.8 million, or 30.5%, to
$126.9 million for the nine month period ended September 29, 2001 from $182.7
million for the comparable 2000 period. This decrease was primarily a result of
a decline in variable annuity sales. This decline in sales was attributable to
unfavorable conditions in the equity markets which generally lowered demand for
variable products.
General Expenses. General expenses increased $6.4 million, or 7.2%, to $95.9
million for the nine month period ended September 29, 2001 from $89.5 million
for
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the comparable 2000 period. This increase was primarily a result of increases
in sales related expenses and certain training costs associated with our
productivity initiatives.
Amortization of Intangibles, Net. Our intangible assets consist primarily of
two components which result from our acquisition by GE Capital and the Harvest
merger -- (1) present value of future profits ("PVFP"), representing the
estimated future gross profits in acquired insurance and investment contracts,
and (2) goodwill, representing the excess of purchase price over the fair value
of identified net assets. Amortization of intangibles increased $0.3 million,
or 0.8%, to $36.2 million for the nine month period ended September 29, 2001
from $35.9 million for the comparable 2000 period. The increase primarily
resulted from an adjustment to the PVFP amortization to reflect an anticipated
change in underlying gross profits of the related business. Adjustment to PVFP
amortization occurs in the ordinary course of business.
Change in Deferred Acquisition Costs, Net. Deferred acquisition costs include
costs and expenses that vary with and are primarily related to the acquisition
of insurance and investment contracts. These costs and expenses include
commissions, printing, underwriting, policy issuance costs and the bonus
feature of certain variable annuity products. Under GAAP, these costs are
deferred and recognized, over time, in relation to either the premiums or gross
profits from the underlying contracts. The change in net deferred acquisition
costs decreased $89.3 million, or 47.4%, to $99.1 million for the nine month
period ended September 29, 2001 from $188.4 million for the comparable 2000
period. This decrease is primarily a result of a decrease in commission expense
and other sales related expenses.
Interest Expense. Interest expense increased $1.6 million, to $2.2 million for
the nine month period ended September 29, 2001 from $0.6 million for the
comparable 2000 period. This increase is related primarily to the cession to a
third party reinsurer of weekly premium and monthly ordinary life (traditional)
policies. The effective date of this reinsurance transaction was retroactive,
which required us to pay interest to the reinsurer on the value of statutory
reserves transferred for the period from July 1, 2000 to the date of the
transfer.
Net Income. Net income before cumulative effect of change in accounting
principle were $93.3 million for the nine month period ended September 29,
2001, a $21.4 million, or 18.7% decrease from $114.7 million for the comparable
2000 period. The largest factor contributing to this decrease was the decline
in fee revenue from our variable annuity product line. We did not experience
material losses in connection with the events of September 11th.
115
Year Ended December 31, 2000 Compared to
Year Ended December 31, 1999
Net Investment Income. Net investment income increased $70.7 million, or 11.1%,
to $708.9 million in 2000 from $638.2 million in 1999. The increase was
primarily attributable to higher levels of average invested assets ($9,842
million at year end 2000 as compared to $8,690 million at year end 1999). This
increase was partially offset by a decrease in weighted average yields to 7.47%
in 2000 from 7.62% in 1999.
Net Realized Investment Gains. Net realized investment gains were $4.3 million
in 2000 and $12.0 million in 1999. This change was attributable to our decision
to sell certain assets in connection with our credit and asset/liability risk
management policies. We continue to monitor events affecting the underlying
value of our investment portfolio and recognize adjustments to reflect other
than temporary declines in book value, as needed.
Premiums. Premiums, which include premium revenues from traditional life and
life contingent annuity contracts, decreased $7.6 million, or 6.1%, to $116.3
million in 2000 from $123.9 million in 1999. This decrease was primarily a
result of a decline in whole life and group life sales resulting from the
termination of two large accounts.
Variable Product Fees. Variable product fees increased $58.5 million to $148.7
million in 2000 from $90.2 million in 1999. This increase was primarily a
result of growth in variable annuity fees attributable to the increase in
separate account assets under management.
Other Income. Other income, which includes surrender fee income, increased
$24.6 million, or 100.0%, to $49.2 million in 2000 from $24.6 million in 1999.
This increase relates to the recapture in 2000 of certain credit life and
accident and health business upon termination of a reinsurance arrangement with
an affiliate, the renegotiation of fee share agreements with mutual fund
companies, and increased surrenders of our variable annuity products.
Interest Credited. Interest credited increased $91.8 million, or 20.8%, to
$532.6 million in 2000 from $440.8 million in 1999. This increase was a result
of additional sales of GICs and funding agreements life products and annuity
products. The growth in interest credited reflects the increase in policy
reserves for these products and higher average crediting rates.
Our weighted average crediting rates for annuities increased to 5.03% in 2000
from 4.61% in 1999. Our weighted average crediting rates for interest-sensitive
life products increased to 5.68% in 2000 from 5.61% in 1999. Changes in our
base crediting rates are implemented in response to changes in market
conditions, the prevailing interest rate environment, contractual provisions,
and other factors. We
116
monitor market conditions closely and reset interest crediting rates as deemed
appropriate in accordance with the terms of the underlying contracts.
Benefits and Other Changes in Policy Reserves. Benefits and other changes in
policy reserves includes both activity related to future policy benefits on
long-duration life products and health products as well as claim costs incurred
during the year under such contracts. In addition, the bonus feature of certain
variable annuity products is initially accounted for as a benefit. Benefits and
other changes in policy reserves increased $8.9 million, or 4.1%, to $223.6
million in 2000 from $214.7 million in 1999, primarily as a result of an
increase in sales of our bonus variable annuity products.
Commission Expenses. Commission expense increased $37.2 million, or 19.4%, to
$229.3 million in 2000 from $192.1 million in 1999. This increase was primarily
a result of an increase in variable annuity sales attributable to the favorable
conditions in the equity markets during the first part of 2000.
Amortization of Intangibles, Net. Our intangible assets consist primarily of
two components which result from our acquisition by GE Capital and the Harvest
merger--(1) present value of future profits ("PVFP"), representing the
estimated future gross profits in acquired insurance and investment contracts,
and (2) goodwill, representing the excess of purchase price over the fair value
of identified net assets. Amortization of intangibles decreased $14.6 million,
or 25.0%, to $43.7 million in 2000 from $58.3 million in 1999. The decrease
primarily resulted from an adjustment to the PVFP amortization to reflect an
anticipated change in underlying gross profits of the related business.
Adjustment to PVFP amortization occurs in the ordinary course of business.
Change in Deferred Acquisition Costs, Net. Deferred acquisition costs include
costs and expenses that vary with and are primarily related to the acquisition
of insurance and investment contracts. These costs and expenses include
commissions, printing, underwriting, policy issuance costs and the bonus
feature of certain variable annuity products. The change in net deferred
acquisition costs increased $58.6 million, or 32.7%, to $237.7 million in 2000
from $179.1 million in 1999. This increase was primarily a result of an
increase in commission expense and other sales related expenses.
Interest Expense. Interest expense decreased $0.8 million, or 42.1%, to $1.1
million in 2000 from $1.9 million in 1999. This decrease related primarily to
lower outstanding balances under our credit line with GNA Corporation.
Provision for Income Taxes. Our provision for income taxes increased $16.3
million, or 28.8%, to $72.9 million in 2000 from $56.6 million in 1999. Our
effective tax rate of 30.9% in 2000 was 3.5 percentage points lower than the
effective tax rate of 34.4% in 1999. The lower effective tax rate in 2000 was
primarily the result of an
117
intercompany agreement with an affiliate which assumed, on a non-recourse
basis, the liability for certain tax exposure items. Accordingly, the
previously held reserves were no longer required.
Net Income. Net income before cumulative effect of change in accounting
principle were $163.1 million in 2000, a $55.2 million, or 51.2% increase from
$107.9 million in 1999. The largest factor contributing to the increase was the
higher fees earned in connection with our variable annuity products.
Year Ended December 31, 1999 Compared to
Year Ended December 31, 1998
Net Investment Income. Net investment income increased $63.5 million, or 11.0%,
to $638.2 million in 1999 from $574.7 million in 1998. The increase was a
result of higher levels of average invested assets ($8,690 million in 1999 as
compared to $7,622 million in 1998). This increase is partially offset by a
decrease in weighted average yield rates to 7.62% in 1999 from 7.84% in 1998.
Net Realized Investment Gains. Net realized investment gains were $12.0 million
in 1999 and $29.6 million in 1998. This decrease is primarily related to our
decision to sell certain assets in connection with our credit and
asset/liability risk management policies.
Premiums. Premiums increased $0.8 million, or 0.7%, to $123.9 million in 1999
from $123.1 million in 1998. This increase was primarily a result of growth in
sales of certain life products.
Variable Product Fees. Variable product fees increased $29.4 million, or 48.4%,
to $90.2 million in 1999 from $60.8 million in 1998. This increase was
primarily a result of growth in variable annuity fees attributable to the
increase in separate account assets under management.
Other Income. Other income, which includes surrender fee income, increased $2.3
million, or 10.3%, to $24.6 million in 1999 from $22.3 million in 1998. The
increase primarily relates to surrender fee income that resulted from increased
surrenders in variable annuity products.
Interest Credited. Interest credited increased $62.4 million, or 16.5%, in 1999
to $440.8 million from $378.4 million in 1998. This increase was a result of
additional sales of certain life and annuity products. The growth in interest
credited also reflected the increase in policy reserves for these products,
partially offset by lower average crediting rates.
Our weighted average crediting rates for annuities decreased to 4.61% in 1999
from 4.93% in 1998. Our weighted average crediting rates for interest-sensitive
life products decreased to 5.61% in 1999 from 5.80% in 1998.
118
Benefits and Other Changes in Policy Reserves. Benefits and other changes in
policy reserves increased $36.3 million, or 20.3%, to $214.7 million in 1999
from $178.4 million in 1998. This increase primarily resulted from an increase
in sales of our bonus variable annuity products.
Commission Expenses. Commission expense increased $79.3 million, or 70.3%, to
$192.1 million in 1999 from $112.8 million in 1998. This increase was
attributable to higher sales of variable annuity products as demand for these
products increased with the favorable conditions in the equity markets
throughout 1999.
General Expenses. General expenses increased $13.7 million, or 12.3%, to $124.7
million in 1999 from $111.0 million in 1998. This increase was primarily a
result of core growth, additional guarantee fund assessments and increases in
sales related expenses.
Amortization of Intangibles, Net. Amortization of intangibles decreased $6.5
million, or 10.0%, to $58.3 million in 1999 from $64.8 million in 1998. The
decrease primarily resulted from an adjustment to the PVFP amortization to
reflect an anticipated change in underlying gross profits of the related
business. Adjustment to PVFP amortization occurs in the ordinary course of
business.
Change in Deferred Acquisition Costs, Net. The change in net deferred
acquisition costs increased $104.4 million to $179.1 million in 1999 from $74.7
million in 1998. This increase was primarily a result of an increase in
commission expense and other sales related expenses.
Provision for Income Taxes. The effective tax rate of 34.4% in 1999 was 1.9%
lower than the effective tax rate of 36.3% in 1998 primarily as a result of
additional tax benefits realized in connection with our variable products.
Net Income. Net income before cumulative effect of change in accounting
principle were $107.9 million in 1999, a $2.1 million, or 2.0%, increase from
$105.8 million in 1998. The largest factor contributing to the increase was the
higher fees earned in connection with our variable annuity products.
119
SEGMENT OPERATIONS
Wealth Accumulation and Transfer
The following table sets forth certain summarized financial data for our Wealth
Accumulation and Transfer segment for the nine month periods ended September
29, 2001 and September 30, 2000 and for the years ended December 31, 2000, 1999
and 1998.
For the Nine Month Periods For the Years Ended
Ended December 31,
--------------------------- ----------------------
September 29, September 30,
2001 2000 2000 1999 1998
------------- ------------- -------- ------ ------
(Dollars in Millions)
Revenues:
Net investment income $529.1 $509.7 $ 703.5 $634.2 $569.4
Net realized investment
gains 14.1 6.5 4.3 12.0 29.6
Other revenues 265.3 279.7 371.5 311.4 312.5
------ ------ -------- ------ ------
Total revenues 808.5 795.9 1,079.3 957.6 911.5
------ ------ -------- ------ ------
Benefits and expenses:
Interest Credited 408.9 387.4 532.6 440.8 378.4
Benefits and other changes
in policy reserves 109.3 140.4 182.7 176.2 182.3
Other operating costs and
expenses 146.0 98.7 134.6 180.8 187.3
------ ------ -------- ------ ------
Total benefits and
expenses 664.2 626.5 849.9 797.8 748.0
------ ------ -------- ------ ------
Income before income taxes,
and cumulative effect of
change in accounting
principle (operating
income) $144.3 $169.4 $ 229.4 $159.8 $163.5
====== ====== ======== ====== ======
- -------------------------------------------------------------------------------
Nine Month Period Ended September 29, 2001 Compared to
Nine Month Period Ended September 30, 2000
Total revenues in this segment increased $12.6 to $808.5 million for the nine
month period ended September 29, 2001 from $795.9 million for the comparable
2000 period. This increase was primarily a result of higher investment income
caused by an increased level of invested assets from additional sales of GICs
and funding agreements. Among our principal product lines in this segment,
sales of deferred variable annuities decreased 42.8% for the nine months ended
September 29, 2001 to $1,485 million from $2,598 million for the comparable
2000 period. This decrease was primarily attributable to the unfavorable
conditions in the equity markets in 2001. Sales of GICs and funding agreements
decreased 27.5% to $911 million for the period ended September 29, 2001 from
$1,257 million for the comparable 2000 period. This decrease was primarily a
result of our reaching internal underwriting limits with some of our major
customers. Sales of deferred fixed annuities increased to $71.6 million for the
nine months ended September 29, 2001 from $1.1 million for the comparable 2000
period. The higher sales in 2001 were primarily attributable to sales of
products designed for two national stock brokerage firms through which we had
not previously sold fixed annuities.
120
Operating income from this segment represented 99.5% and 96.0% of our total
operating income for the nine month periods ended September 29, 2001 and
September 30, 2000, respectively. Our operating income from the Wealth
Accumulation and Transfer segment decreased 14.8% for the nine month period
ended September 29, 2001 to $144.3 million from $169.4 million for the
comparable 2000 period. These changes were attributable primarily to declining
policy fees earned on separate account assets as a result of the unfavorable
conditions in the equity markets.
Year Ended December 31, 2000 Compared to
Year Ended December 31, 1999
Total revenues in the Wealth Accumulation and Transfer segment increased to
$1,079.3 million in 2000 from $957.6 million in 1999, an increase of $121.7
million, primarily as a result of increases in net investment income and
variable product fees. Among our principal product lines in this segment, sales
of deferred variable annuities increased 29.1% in 2000 to $3,152 million from
$2,442 million in 1999. This increase was primarily a result of the favorable
conditions in the equity markets in the first part 2000 and higher demand for
our bonus variable annuity product. Sales of GICs and funding agreements
decreased 7.4% in 2000 to $1,904 from $2,057 in 1999. This decrease was a
result of a general decline in demand for funding agreements. Sales of deferred
fixed annuities declined 78.2% to $1.2 million in 2000 from $5.5 million in
1999. We did not actively market deferred fixed annuity products during these
periods.
Operating income from this segment represented 97.2% and 97.1% of our total
operating income for the years ended December 31, 2000 and 1999, respectively.
Our operating income from this segment increased 43.6% in 2000 to $229.4
million from $159.8 million in 1999. The increase in 2000 was primarily
attributable to increased fee income from our variable annuity products.
Year Ended December 31, 1999 Compared to
Year Ended December 31, 1998
Total revenues in the Wealth Accumulation and Transfer segment increased $46.1
million to $957.6 million in 1999 from $911.5 million in 1998, primarily as a
result of an increase in net investment income and an increase in variable
product fees. Among our principal product lines in this segment, sales of
deferred variable annuities increased $1,526 million to $2,442 million in 1999
from $916 million in 1998. This increase was primarily a result of the
introduction of our bonus annuity product and the favorable conditions in the
equity market during the year. Sales of GICs and funding agreements increased
$967 million, or 88.7% to $2,057 million in 1999 from $1,090 million in 1998.
This increase was primarily attributable to our reentry into the funding
agreement market in the fourth quarter of 1998. Sales of
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deferred fixed annuities decreased 36.8% to $5.5 million in 1999 from $8.7
million in 1998. We did not actively market deferred fixed annuity products
during these periods.
Operating income from this segment represented 97.1% and 98.4% of our total
operating income for the years ended December 31, 1999 and 1998, respectively.
Our operating income from the Wealth Accumulation and Transfer segment
decreased 2.3% in 1999 to $159.8 million from $163.5 million in 1998.
Lifestyle Protection and Enhancement
The following table sets forth certain summarized financial data for our
Lifestyle Protection and Enhancement segment for the nine month periods ended
September 29, 2001 and September 30, 2000 and the years ended December 31,
2000, 1999, and 1998.
For the Years
For the Nine Month Ended
Periods Ended December 31,
--------------------------- -----------------
September 29, September 30,
2001 2000 2000 1999 1998
------------- ------------- ----- ----- -----
(Dollars in Millions)
Revenues:
Net investment income $ 2.4 $ 3.7 $ 5.4 $ 4.0 $ 5.3
Premiums 45.5 46.0 61.0 56.1 21.7
Other revenues 0.1 10.1 7.7 0.2 0.5
----- ----- ----- ----- -----
Total revenues 48.0 59.8 74.1 60.3 27.5
----- ----- ----- ----- -----
Benefits and expenses:
Benefits and other changes in
policy reserves 31.2 31.1 40.9 38.5 (3.9)
Other operating costs and
expenses 16.1 21.6 26.6 17.1 28.8
----- ----- ----- ----- -----
Total benefits and expenses 47.3 52.7 67.5 55.6 24.9
----- ----- ----- ----- -----
Income before income taxes, and
cumulative effect of change in
accounting principle
(operating income) $ 0.7 $ 7.1 $ 6.6 $ 4.7 $ 2.6
===== ===== ===== ===== =====
- ------------------------------------------------------------------------------
Nine Month Period Ended September 29, 2001 Compared to
Nine Month Period Ended September 30, 2000
Total revenues in the Lifestyle Protection and Enhancement segment decreased
$11.8 million, or 19.7%, for the nine month period ended September 29, 2001
from $59.8 million in the comparable 2000 period. This decrease resulted from a
decline in other revenues caused by the recapture in 2000 of certain credit
accident and health reinsurance previously ceded to an affiliate which resulted
in a significant, non-recurring increase in other income in the 2000 period.
Operating income from this segment represented 0.5% and 4.0% of our total
operating income for the nine month periods ended September 29, 2001 and
September 30, 2000, respectively. Our operating income from this segment
decreased 90.1% to $0.7 million for the 2001 period from $7.1 million for the
2000
122
period. This decrease resulted from a decline in other revenues caused by the
recapture of certain credit accident and health reinsurance as described above,
which resulted in a significant, non-recurring increase in other income in the
2000 period.
Year Ended December 31, 2000 Compared to
Year Ended December 31, 1999
Revenues increased for the Lifestyle Protection and Enhancement segment in 2000
to $74.1 million from $60.3 million in 1999, a 22.9% increase, primarily as a
result of an increase in supplemental accident and health sales and the
recapture in 2000 of certain credit accident and health reinsurance previously
ceded to an affiliate, which resulted in a significant, non-recurring increase
in other income in 2000.
Operating income from this segment represented 2.8% and 2.9% of our total
results for the years ended December 31, 2000 and 1999, respectively. Our
operating income from this segment increased 40.4% in 2000 to $6.6 million from
$4.7 million in 1999. The increase is primarily a result of the recapture of
certain credit accident and health reinsurance in 2000 described above, offset
by an increase in commissions paid associated with our Medicare supplement
product line.
Year Ended December 31, 1999 Compared to
Year Ended December 31, 1998
Revenues for the Lifestyle Protection and Enhancement segment increased $32.8
million to $60.3 million in 1999 from $27.5 million in 1998. Premiums grew in
1999 to $56.1 million from $21.7 million in 1998. However, the 1998 premiums
were reduced by $31.7 million through the cession of our long term care
insurance block to an affiliate. Without this reinsurance transaction premiums
would have been $53.4 million in 1998.
Operating income from this segment represented 2.9% and 1.6% of our total
results for the years ended December 31, 1999 and 1998, respectively. Our
operating income from this segment increased $2.1 million, or 80.8% to $4.7
million in 1999 from $2.6 million in 1998. The increases were primarily
attributable to the increased sales over the period.
FINANCIAL CONDITION
Total Assets. Total assets decreased $1,624 million, or 7.2%, to $20,989
million at September 29, 2001 from $22,613 million at December 31, 2000. Total
assets increased $2,656 million, or 13.3%, to $22,613 million at December 31,
2000 from $19,957 million at December 31, 1999. Changes in assets are discussed
in more detail below.
Total Investments. Total investments increased $261 million, or 2.5%, to
$10,918 million at September 29, 2001 from $10,657 million at December 31, 2000
(after
123
reclassification of certain short-term investments to cash and cash
equivalents). The increase is primarily a result of growth in invested assets
from additional sales of GICs and funding agreements. Total investments
increased $1,575 million, or 17.3%, to $10,657 million at December 31, 2000
from $9,082 million at December 31, 1999. The increase is primarily a result of
growth in invested assets from additional sales of GICs and funding agreements.
Deferred Acquisition Costs (DAC). Deferred acquisition costs increased $88.0
million, or 12.3%, to $803.7 million at September 29, 2001 from $715.7 million
at December 31, 2000. This increase was primarily related to increased product
sales, primarily of variable annuity products. Deferred acquisition costs
increased $233.2 million, or 48.3%, to $715.7 million at December 31, 2000 from
$482.5 million at December 31, 1999. This increase was primarily related to
increased product sales, primarily of variable annuity products.
Intangible Assets. Intangible assets, which primarily includes PVFP and
goodwill, decreased $51.7 million, or 12.9%, to $348.7 million at September 29,
2001 from $400.4 million at December 31, 2000. This decrease primarily relates
to normal amortization of previously capitalized costs and the cession to a
third party reinsurer of weekly premium and monthly debit ordinary life
(traditional) products. Intangible assets decreased $72.4 million, or 15.3%, to
$400.4 million at December 31, 2000 from $472.8 million at December 31, 1999.
This decrease primarily relates to normal amortization of previously
capitalized costs.
Other Assets. Other assets increased $130.4 million, to $200.3 million at
September 29, 2001 from $69.9 million at December 31, 2000. This increase was
primarily a result of assets maintained with the Company by policy
beneficiaries following the payment of a claim and an increase in the balances
due from brokers relating to the timing of investment transactions pending
settlement. Other assets decreased $199.8 million, or 74.1%, to $69.9 million
at December 31, 2000 from $269.7 million at December 31, 1999. This decrease
was primarily a result of a decrease in the balances due from brokers relating
to the timing of investment transaction settlements.
Separate Account Assets and Liabilities. Separate account assets and
liabilities represent funds held for the exclusive benefit of variable annuity
and variable life contractholders. As of September 29, 2001, we held $8,169
million of separate account assets and liabilities. The decrease of $2,224
million, or 21.4%, from $10,393 million at December 31, 2000 was related
primarily to the overall decreased market value of the underlying investment
funds. The increase of $1,147 million, or 12.4%, from $9,246 million at
December 31, 1999 was related primarily to sales of variable annuity products.
124
Total Liabilities. Total liabilities decreased $1,751 million, or 8.3%, to
$19,387 million at September 29, 2001 from $21,138 million at December 31,
2000. Total liabilities increased $2,386 million, or 12.7%, to $21,138 million
at December 31, 2000 from $18,752 million at December 31, 1999. Changes in
liabilities are discussed in more detail below.
Future Annuity and Contract Benefits. Future annuity and contract benefits
increased $246.4 million, or 2.5%, to $10,181 million at September 29, 2001
from $9,934 million at December 31, 2000. The increase resulted primarily from
growth in reserves as a result of additional sales of GICs and funding
agreements. Future annuity and contract benefits increased $871.3 million, or
9.6%, to $9,934 million at December 31, 2000 from $9,063 million at December
31, 1999. The increase resulted primarily from growth in reserves as a result
of additional sales of GICs and funding agreements partially offset by a
decline in deferred annuity reserves.
Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses
increased $95.6 million to $569.5 million at September 29, 2001 from $473.9
million at December 31, 2000. The increase was a result of several factors,
including the timing of settlement of trades related to investments, increased
balances payable to brokers, an increase in amounts payable to affiliates and
normal business activity associated with core growth in certain product lines.
Accounts payable and accrued expenses increased $280.6 million to $473.9
million at December 31, 2000 from $193.3 million at December 31, 1999. The
increase is primarily attributable to the timing of settlement of trades
related to investments, increased balances payable to brokers, an increase in
amounts payable to affiliates and normal business activity associated with core
growth in certain product lines.
Deferred Taxes. Deferred tax liabilities increased $53.2 million to $85.2
million at September 29, 2001 from $32.0 million at December 31, 2000,
primarily as a result of current year changes in the net unrealized gains on
our investment portfolio. Deferred taxes decreased $152.3 million to a deferred
tax liability balance of $32.0 million at December 31, 2000 from a deferred tax
asset of $120.3 million at December 31, 1999, primarily as a result of
decreases in net unrealized losses in our investment portfolio during 2000.
125
Liquidity and Capital Resources
Our principal liquidity requirements are our contractual obligations to
policyholders, contractholders and annuitants. Contractual obligations include
payments of surrender benefits, contract withdrawals, claims under outstanding
insurance policies and annuities, and policy loans. The primary sources for
meeting these contractual requirements are investment income, scheduled
principal repayments from our investment portfolio and a portion of our policy
fee income. To provide for additional liquidity to meet normal variations in
cash requirements, we maintain cash and short-term investments. We also
maintain a credit line with an indirect parent, GNA Corporation, to provide
liquidity to meet normal variation in cash requirements.
For the years ended December 31, 2000, 1999 and 1998 cash flows from operating
and certain financing activities were $1,414.1 million, $1,325.7 million and
$638.6 million, respectively. These amounts include net cash provided by
financing activities relating to investment contract issues and redemptions of
$327.6 million, $1,124.2 million, and $263.8 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
The nature and quality of the various types of investments purchased by a life
insurance company must comply with the statutes and regulations imposed by the
various jurisdictions in which those entities are incorporated. We primarily
purchase investment-grade (BBB-/Baa or above) bonds. At September 29, 2001,
$8,727.1 million, or 89.9%, of the fixed maturity securities held by us were
bonds rated by a rating agency (Standard & Poor's or Moody's), or were
government/agency bonds. The remaining $978.2 million, or 10.1% was comprised
primarily of private placement bonds not rated by either rating agency. At
September 29, 2001, we held $425.2 million of bonds rated below investment
grade. In addition, we held $55.0 million of "not-rated" bonds that we believe
are below investment grade. Below investment grade bonds include those bonds
originally purchased as investment grade but subsequently downgraded in rating,
as well as bonds purchased as below investment grade.
Certain of our products contain provisions for penalty charges for surrender of
the policy. At September 29, 2001 and December 31, 2000 approximately 79% and
80%, respectively, of our annuity contracts were subject to surrender penalties
or contained non-surrender provisions. Certain of our funding agreements may be
terminated early by the contractholders. Our line of credit with GNA
Corporation would provide liquidity in the event of an unusual level of early
terminations. However, this line of credit may not provide sufficient liquidity
in the event that extraordinary circumstances cause a significant number of
unanticipated early terminations of funding agreements.
126
Interest Rate Changes
Interest rate changes may have temporary effects on the sale and profitability
of our annuity, universal life and other investment products. For example, if
interest rates rise, competing investments (such as annuities or life insurance
offered by our competitors, certificates of deposit, mutual funds, and similar
instruments) may become more attractive to potential purchasers of our
products. We may be forced to raise certain crediting rates on our line of
products in order to meet competitive pressures. Similarly, our profitability
may also be impacted by interest rate changes that narrow the spread between
the rates of interest we pay or credit on our products and the yields on our
investments. We constantly monitor interest earnings on existing assets and
yields available on new investments and sell policies and annuities that permit
flexible responses to interest rate changes as part of our management of
interest spreads.
127
Investments
The following discussion pertains to investment of our general account assets,
which are separate and distinct from the assets of our other separate
accounts. We manage our investment portfolio to meet the diversification,
credit quality, yield and liquidity requirements of our policy liabilities by
investing primarily in fixed maturity instruments and mortgage loans. We
generally purchase our investments with the intent to hold to maturity by
purchasing investments that match future cash flow needs, and our investment
philosophy focuses on purchasing assets the durations of which approximate
contractholder obligations. However, we may sell any of our investments to
maintain proper matching of assets and liabilities or to address issues
related to credit-quality. Accordingly, we have classified our fixed
maturities (bonds, notes, mortgage-backed securities, asset-backed securities,
and redeemable preferred stock) and equity securities (common and non-
redeemable preferred stock) as "available for sale."
At September 29, 2001, we held $9,705 million, or 88.9%, of our investment
portfolio in fixed maturity instruments. We also invest in equity securities,
mortgage loans, policy loans, and other investments, which comprised 11.1% of
our investment portfolio at September 29, 2001.
INVESTMENT PORTFOLIO
The following table summarizes our investment results for the periods
indicated.
September 29, 2001
--------------------
Fair Percentage
Value of Total
--------- ----------
(Dollars in
Millions)
Fixed Maturity Securities -- Available-For-Sale (1)
U.S. Government and Agencies $ 19.9 0.18%
State, Municipal, and Non-U.S.Government 4.4 0.04%
U.S. Corporate 5,647.0 51.72%
Non-U.S. Corporate 800.0 7.33%
Mortgage and Asset-Backed (2) 3,234.0 29.62%
--------- ------
Total Fixed Maturity Securities 9,705.3 88.89%
--------- ------
Equity Securities -- Available-For-Sale (3)
Common Stock 22.7 0.21%
Preferred Stock, Non-Redeemable 23.5 0.22%
--------- ------
Total Equity Securities 46.2 0.43%
--------- ------
Mortgage Loans on Real Estate, Net 941.0 8.62%
Policy Loans 103.3 0.95%
Investment In Affiliate 2.6 0.02%
Real Estate Owned 3.5 0.03%
Total Other Invested Assets 115.7 1.06%
--------- ------
Total Investments $10,917.6 100.00%
========= ======
- -------------------------------------------------------------------------
128
(1) Fixed maturity securities available-for-sale are stated at fair values.
Amortized cost of fixed maturity securities available-for-sale at September
29, 2001 was $9,627 million, representing net unrealized gains of $78.3
million. Changes in fair value, net of the effect on present value of
future profits, deferred acquistion costs and deferred federal income
taxes, are reflected as unrealized appreciation directly in shareholders'
interest and, accordingly, have no effect on net income, but is shown as a
separate component of accumulated non-owner changes in equity.
(2) Mortgage and asset-backed securities are comprised of collateralized
mortgage obligations ($1,873 million), asset-backed securities ($1,152
million) and pass-through securities ($209 million).
(3) Equity securities available-for-sale are stated at fair market values. The
cost basis of equity securities available-for-sale at September 29, 2001
was $41.9 million, representing net unrealized losses of $4.3 million.
Changes in market value, net of the effect on present value of future
profits, deferred policy acquisition costs and deferred federal income
taxes, are reflected as unrealized appreciation or depreciation directly in
shareholders' interest and, accordingly, have no effect on net income, but
are shown as a separate component of accumulated non-owner changes in
equity.
(Restated)
December 31, 2000
---------------------
Percentage
Fair Value of Total
---------- ----------
(Dollars in Millions)
Fixed Maturity Securities -- Available-For-Sale (1)
U.S. Government and Agencies $ 10.6 0.10%
State, Municipal, and Non-U.S.Government 4.3 0.04%
U.S. Corporate 5,580.9 52.38%
Non-U.S. Corporate 884.3 8.30%
Mortgage and Asset-Backed (2) 2,780.4 26.09%
--------- ------
Total Fixed Maturity Securities 9,260.5 86.91%
--------- ------
Equity Securities -- Available-For-Sale (3)
Common Stock 15.3 0.14%
Preferred Stock, Non-Redeemable 20.8 0.20%
--------- ------
Total Equity Securities 36.1 0.34%
--------- ------
Mortgage Loans on Real Estate, Net 1,130.0 10.60%
Policy Loans 89.0 0.85%
Investment In Affiliate 2.6 0.02%
Real Estate Owned 2.5 0.02%
Total Other Invested Assets 134.7 1.26%
--------- ------
Total Investments $10,655.4 100.00%
========= ======
- --------------------------------------------------------------------------
129
(1) Fixed maturity securities available-for-sale are stated at fair values.
Amortized cost of fixed maturity securities available-for-sale at December
31, 2000 was $9,295 million, representing net unrealized losses of $34.4
million. Changes in fair value, net of the effect on present value of
future profits, deferred acquisition costs and deferred federal income
taxes, are reflected as unrealized appreciation directly in shareholders'
interest and, accordingly, have no effect on net income, but is shown as a
separate component of accumulated non-owner changes in equity.
(2) Mortgage and asset-backed securities are comprised of collateralized
mortgage obligations ($1,510 million), asset-backed securities ($974
million) and pass-through securities ($296 million).
(3) Equity securities available-for-sale are stated at fair market values. The
cost basis of equity securities available-for-sale at December 31, 2000 was
$37.7 million, representing net unrealized losses of $1.6 million. Changes
in market value, net of the effect on present value of future profits,
deferred policy acquisition costs and deferred federal income taxes, are
reflected as unrealized appreciation or depreciation directly in
shareholders' interest and, accordingly, have no effect on net income, but
are shown as a separate component of accumulated non-owner changes in
equity.
INVESTMENT RESULTS
The following table summarizes our investment results for the periods
indicated.
Nine Months
Ended Year Ended
------------- --------------------------------------
September 29, December 31, December 31, December 31,
2001 2000 1999 1998
------------- ------------ ------------ ------------
(Dollars in Millions)
Total Average Invested
Assets (1) $10,831 $9,842 $8,690 $7,622
Net Investment Income (2) $ 531.5 $708.9 $638.2 $574.7
Effective Yield (3) 6.71% 7.47% 7.62% 7.84%
Net Realized Investment
Gains (4) $ 14.1 $ 4.3 $ 12.0 $ 29.6
- -------------------------------------------------------------------------------
(1) Average of cash and cash equivalents and total invested assets on an
amortized cost basis.
(2) Net investment income is net of investment expenses and excludes capital
gains or losses or provision for income taxes.
(3) Net investment income divided by the sum of the (i) average cash and cash
equivalents and total invested assets minus (ii) one-half of net investment
income.
(4) Excludes provision for income taxes.
As of September 29, 2001, approximately 33.2%, 25.6% and 22.9% of our
investment portfolio was comprised of securities issued by the manufacturing,
financial and utility industries, respectively, the vast majority of which are
rated
130
investment grade. No other industry group comprises more than 10% of our
investment portfolio. Our portfolio is widely diversified among various
geographic regions in the United States, and is not dependent on the economic
stability of one particular region.
As required by law, we have investments on deposit with governmental
authorities and banks for the protection of contractholders of $5.5 million as
of September 29, 2001.
Under certain securities lending transactions, we require that the borrower
provide collateral, consisting primarily of cash and government securities, on
a daily basis, in amounts equal to or exceeding 102% of the market value of the
applicable securities loaned.
131
FIXED MATURITIES
We obtain ratings of our fixed maturity debt instruments from Moody's and
Standard & Poor's. The credit quality of our fixed maturity portfolio at
September 29, 2001, December 31, 2000 and December 31, 1999 is as follows. The
categories are based on the higher of the ratings published by Moody's or
Standard & Poor's.
September 29, 2001
---------------------
Fair
Value Percent
---------- ----------
Agencies and treasuries $ 187.7 1.9%
AAA/Aaa 2,692.7 27.7
AA/Aa 757.3 7.8
A/A 2,400.9 24.8
BBB/Baa 2,263.3 23.3
BB/Ba 314.0 3.3
B/B 89.8 0.9
CCC/Ca 17.1 0.2
CC/Ca 4.3 0.0
C 0.0 0.0
D 0.0 0.0
Not rated 978.2 10.1
---------- -------
Totals $ 9,705.3 100.0%
========== =======
-----------------------------------------------
2000 1999
---------------- ----------------
Fair Fair
Value Percent Value Percent
-------- ------- -------- -------
Agencies and
treasuries $ 226.8 2.5% $ 284.7 3.5%
AAA/Aaa 2,406.5 26.0 2,080.7 25.9
AA/Aa 645.7 7.0 461.7 5.7
A/A 2,161.3 23.3 1,807.5 22.5
BBB/Baa 2,259.4 24.4 2,078.2 25.9
BB/Ba 365.9 4.0 368.2 4.6
B/B 168.0 1.8 191.6 2.4
CCC/Ca 10.1 0.1 0.7 0.0
CC/Ca 2.9 0.0 0.1 0.0
C 0.0 0.0 0.0 0.0
D 4.4 0.0 0.0 0.0
Not rated 1,009.5 10.9 760.3 9.5
-------- ----- -------- -----
Totals $9,260.5 100.0% $8,033.7 100.0%
======== ===== ======== =====
------------------------------------------------------
Our bond portfolio has an average Moody's rating of A-2. Bonds with ratings
ranging from AAA/Aaa to BBB-/Baa are generally regarded as investment grade
securities. As of September 29, 2001, 95% of our rated bond and note portfolio
is investment grade. Some agency and treasury securities are not rated, but all
are considered to be investment grade securities. Some securities, such as
private placements, have not been assigned a rating by any rating service and
are therefore categorized as "not rated." This has neither positive nor
negative implications regarding the value of the security.
132
The NAIC also rates the credit worthiness of life insurance company bond
holdings and issues Standard Valuation Office ("SVO") ratings. Our insurance
regulators evaluate our satisfaction of capital and other financial
requirements by reference to these SVO ratings. The chart below compares SVO
ratings with those of Moody's and Standard & Poor's:
NAIC SVO Ratings Moody's Standard & Poor's
-------------------------------------------------------------------------------------
1 Aaa AAA
Aa 1, 2, 3 AA+, AA, AA-
A 1, 2, 3 A+, A, A-
2 Baa 1, 2, 3 BBB+, BBB, BBB-
3 Ba 1, 2, 3 BB+, BB, BB-
4 B 1, 2, 3 B+, B, B-
5 Caa, Ca, C/2/ CCC+, CCC, CCC-, CC, C
6 D CI, D
----------------------------------------------------------------------------
As demonstrated in the above chart, bonds classified as SVO 1 are regarded as
highest in quality, bonds with SVO ratings 1 and 2 are considered investment
grade, and bonds with SVO ratings 3 to 6 have increasing levels of investment
risk, with 6 being the least secure. As of September 29, 2001, December 31,
2000 and December 31, 1999 there were less than 1% of our bond portfolio value
in ratings 5 and 6 combined.
As of September 29, 2001, December 31, 2000 and 1999, we did not hold any fixed
maturity securities that exceeded 10% of shareholders' interest.
At September 29, 2001, December 31, 2000 and 1999, there were fixed maturities
in default with a fair value of $11.5 million, $6.4 million and $1.0 million,
respectively.
133
MORTGAGE AND REAL ESTATE PORTFOLIO
Our mortgage and real estate portfolio is distributed by geographic location
and type. We have concentration exposures in certain regions and in certain
types. As of September 29, 2001, 32.3% of our mortgage loans were in the
Pacific region and 26.9% of our mortgage loans and 100% of our real estate
investments were in the South Atlantic region. As of December 31, 2000, 26.8%
of our mortgage loans were in the Pacific region and 30.5% of our mortgage
loans and 100% of our real estate investments were in the South Atlantic region
of the United States.
The following tables show a breakdown of our mortgage loan portfolio by
property type at September 29, 2001 and December 31, 2000:
September 29, 2001
--------------------
Mortgage Real Estate
Property Type -------- -----------
Office Building 27.8% 0%
Retail 25.9 100
Industrial 27.7 0
Apartments 13.5 0
Other 5.1 0
---- ---
Totals 100% 100%
==== ===
December 31, 2000
--------------------
Mortgage Real Estate
Property Type -------- -----------
Office Building 26.6% 0%
Retail 26.5 100
Industrial 34.6 0
Apartments 8.8 0
Other 3.5 0
---- ---
Totals 100% 100%
==== ===
The maximum and minimum lending rates for mortgage loans during 2000 were
11.38% and 5.50%, respectively. The maximum and minimum lending rates for
mortgage loans during 2001 are 10.38% and 5.20%, respectively. The maximum
loan-to-value ratio for new loans, exclusive of insured, guaranteed, or
purchase money mortgages, was 75%.
Impaired loans are defined under GAAP as loans for which it is likely that we
will be unable to collect all amounts due under the loan agreement. Because
this definition excludes leases or large groups of smaller-balance homogenous
loans, impaired loans apply principally to our commercial loans. We had two
types of impaired loans as of September 29, 2001 and December 31, 2000 and
1999: loans requiring allowances for losses (none as of September 29, 2001 and
December 31, 2000 and 1999) and loans expected to be fully recoverable because
the carrying amount had been reduced previously through charge-offs or deferral
of income recognition. In 2001 we wrote off $92,000 of impaired loans. There
were no write-offs of impaired loans in the years ended December 31, 2000 and
1999. Average investment in
134
impaired loans during September 2001 was $7.7 million and interest income
earned on these loans while they were considered impaired was $0.7 million for
year to date 2001. Average investment in impaired loans for the years ended
December 31, 2000, 1999, and 1998 were $11.5 million, $15.0 million, and $20.0
million and interest income recognized on these loans while they were
considered impaired was $0.8 million, $2.6 million, and $1.8 million for the
years ended 2000, 1999, and 1998, respectively. The average size of loans made
during 2001 was $4.2 million. The average mortgage loan in our portfolio is
approximately $2.7 million. The largest single loan amount is $44.1 million.
The average size of loans originated during 2000 was $5.7 million.
For further information regarding our investments, the maturity of and the
concentration of risk among our invested assets, and liquidity, see the notes
to our consolidated financial statements.
135
New Accounting Standards
As more fully discussed in the notes to the interim financial statements, the
company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" as amended on January 1, 2001. Under SFAS No. 133 all derivative
instruments (including certain derivative instruments embedded in other
contracts) are recognized in the balance sheet at their fair values and changes
in fair value are recognized immediately in earnings, unless the derivatives
qualify as hedges of future cash flows. For derivatives qualifying as hedges of
future cash flows, the effective portion of changes in fair value is recorded
temporarily in equity, then recognized in earnings along with the related
effects of the hedged items. Any ineffective portion of a hedge is reported in
earnings as it occurs.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," a
replacement of SFAS No. 125. SFAS No. 140 revises the standards of accounting
for securitizations and other transfers of financial assets. This statement is
effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. The impact of adoption did not
have a material impact on our financial statements.
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets," modify the accounting for business combinations. All
business combinations initiated after June 30, 2001 must be accounted for by
the purchase method. Goodwill in such acquisitions will not be amortized, but
will be written down when specified tests indicate that the goodwill is
impaired, that is, fair value is lower than carrying value. Certain intangible
assets will be required to be recognized separately from goodwill, and will be
amortized over their useful lives. As of January 1, 2002, all goodwill must be
tested for impairment and a transition adjustment recognized at that time.
Goodwill amortization will also cease at that date and, thereafter, all
goodwill will be tested at least annually for impairment. If these rules had
applied to goodwill for 2001, management believes that full year 2001 net
earnings would have increased by approximately $7 million. Management has not
yet determined the extent of impaired goodwill, if any, that will be recognized
as of January 1, 2002.
136
Quantitative and Qualitative Disclosures About Market Risk, Interest Rate and
Currency Risk Management
In normal operations, we must deal with the effects of changes in interest
rates. The following discussion presents an overview of how such changes are
managed and a view of their potential effects.
We use various financial instruments, particularly interest rate swaps and
option contracts, to manage interest rate risks. We are exclusively an end user
of these instruments, which are commonly referred to as derivatives. We do not
engage in any derivatives trading, market-making, or other speculative
activities in the derivative markets. More detailed information regarding these
financial instruments, as well as the strategies and policies for their use, is
contained in the notes to our consolidated financial statements.
We manage our exposure to changes in interest rates, in part, by matching the
duration of our investment portfolio with our liabilities. Established
practices require that derivative financial instruments relate to specific
asset or liablity transactions or to currency exposure, if any.
We are exposed to prepayment risk in certain of our business activities, such
as in our investment portfolio and annuities activities. In order to hedge
those exposures, we use swaps and option-based financial instruments. These
instruments generally behave based on limits ("caps," "floors," or "collars")
on interest rate movement. These swaps and option-based instruments are
governed by the credit risk policies described below and are transacted in
either exchange-traded or over-the-counter markets.
As a result of our use of interest rate swaps and option contracts, the
principal risk is credit risk -- risk that counterparties will be financially
unable to make payments in accordance with the agreements. Associated market
risk is meaningful only as it relates to how changes in the market value affect
credit exposure to individual counterparties. All swaps and purchased options
are carried out within the following credit policy constraints.
Once a counterparty reaches a credit exposure limit (see table below), no
additional transactions with that counterparty are permitted until the exposure
to that counterparty is reduced to an amount that is within the established
limit. Open contracts remain in force.
Counterparty exposure limits are established at the GE Financial Assurance
level, not for each subsidiary entity. GE Financial Assurance manages
counterparty risk at the consolidated level.
137
Credit rating
Counterparty Credit Criteria Standard & Poor's
---------------------------- -----------------
Term of Transaction
Between one and five years AA
Greater than five years AAA
Credit exposure limits
Up to $50 million AA
Up to $75 million AAA
-------------------------------------------------
All swaps are executed under master swap agreements containing mutual credit
downgrade provisions that provide the ability to require assignment or
termination of the swap in the event either party is downgraded below A3 or A-.
More credit latitude is permitted for transactions having original maturities
shorter than one year because of their lower risk.
The conversion of interest rate risk into credit risk results in a need to
monitor counterparty credit risk actively. At both September 29, 2001 and
December 31, 2000, there were no notional amounts of long-term derivatives for
which the counterparty credit criteria was rated below A3/A-.
Following is an analysis of credit risk exposures:
Percentage of Notional Derivative Exposure by Counterparty Credit Rating
Standard September 29, December 31, December 31,
& Poor's 2001 2000 1999
-------- ------------- ------------ ------------
AAA 70% 5% 3%
AA 30% 95% 97%
The SEC requires that registrants disclose information about potential effects
of changes in interest rates. Although the rules offer alternatives for
presenting this information, none of the alternatives is without limitations.
The following discussion is based on so-called "shock-tests," which model
effects of interest rate shifts on the reporting company. Shock tests, while
probably the most meaningful analysis permitted, are constrained by several
factors, including the necessity to conduct the analysis based on a single
point in time and by their inability to include the extraordinarily complex
market reactions that normally would arise from the market shifts modeled.
While the following results of shock tests for interest rates may have some
limited use as benchmarks, they should not be viewed as forecasts.
One means of assessing exposure to interest rate changes is a duration-based
analysis that measures the potential loss in net earnings resulting from a
hypothetical increase in interest rates of 100 basis points across all
maturities
138
(sometimes referred to as a "parallel shift in the yield curve"). Under this
model, it is estimated that, all else constant, such an increase, including
repricing effects in the securities portfolio, would not significantly impact
2001 earnings based on our current derivative positions.
SIGNIFICANT ACQUISITIONS
Other than the merger of Harvest into the Company, as discussed above, we have
not engaged in any significant acquisitions in the past five years.
139
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below are the names and addresses of the persons who beneficially own
more than 5% of the Company's common or preferred stock.
Name and Address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
-------------- --------------------------- -------------------------------------- --------
Common Stock, General Electric Company/1/ 24,851 shares/2/ 96.9%
par value $1,000 owned beneficially through two
per share wholly-owned subsidiaries
- ----------------------------------------------------------------------------------------------
Series A General Electric Company/1/ 120,000 shares/3 100%
Preferred Stock, / owned beneficially through a wholly-
par value $1,000 owned subsidiary
per share
- ----------------------------------------------------------------------------------------------
/1/The address of GE is 3135 Easton Turnpike, Fairfield, CT 06431.
/2/The shares of the Company's common stock listed above are owned directly by
two indirect wholly-owned subsidiaries of GE, GE Capital Assurance and
Federal. GE Capital Assurance owns approximately 85.2% of the outstanding
shares of the Company and Federal owns approximately 11.7% of the
outstanding shares of the Company. Together, GE Capital Assurance and
Federal have complete voting and investment power with respect to the
shares listed above.
/3/All of the issued and outstanding shares of preferred stock are owned
directly by an indirect wholly-owned subsidiary of GE, GE Financial
Assurance Holdings, Inc., which has sole investment control over the shares
listed above. Shares of the Company's preferred stock have no voting
rights.
140
Related Party Transactions
We pay investment advisory fees and other fees to affiliates. Amounts incurred
for these items totaled $11.1 million, $14.8 million, and $11.5 million for the
years ended December 31, 2000, 1999, and 1998, respectively. For the nine month
periods ended September 29, 2001 and September 30, 2000 we paid $12.9 million
and $8.2 million, respectively, in investment advisory fees. We also charge
affiliates for certain services and for the use of facilities and equipment;
such charges totaled $55.2 million, $45.1 million, and $19.1 million for the
years ended December 31, 2000, 1999, and 1998, respectively. For the nine month
periods ended September 29, 2001 and September 30, 2000 we charged affiliates
$49.4 million and $44.9 million, respectively, for certain services and for the
use of facilities and equipment. The insurance law of our domiciliary state
requires that transactions involving the Company and its affiliates, including
service arrangements, be on fair and reasonable terms. In addition, our
executive officers also serve as executive officers and/or directors of one or
more of our affiliates. Compensation allocations are made based upon the
percentage of time devoted by the executive to the relevant affiliate.
As of December 31, 2000, we had an outstanding loan of $85.7 million under our
credit line with GNA Corporation, our indirect parent. The principal is payable
upon written demand of GNA Corporation or at our discretion. We pay interest on
this amount, and our interest expense under this agreement was $1.1 million for
the year ended December 31, 2000. We pay interest at the cost of funds of GNA
Corporation, which was 3.95% as of September 29, 2001. Subject to GNA
Corporation's sole discretion, we may borrow up to $500 million in the
aggregate under the line of credit without obtaining prior approval from our
domiciliary state insurance regulator.
During 1999 and 2000, we paid dividends in an amount of $9.6 million each year
to GE Financial Assurance, our sole preferred shareholder.
As of September 29, 2001, we have paid subsidiaries of SunGard Data Systems
Inc. ("SunGard") approximately $640,684 for services rendered. James L. Mann,
father of the Company's Controller, Susan M. Mann, is the Chairman and Chief
Executive Officer of SunGard. The contract with SunGard preceded Ms. Mann's
employment with the Company.
141
Employees
At December 31, 2000 we had approximately 973 employees. Most employees are
covered by contributory medical and long-term disability insurance plans.
Company paid dental and group life are also available. In addition,
substantially all of the employees are covered by a pension plan, as discussed
below, and a 401(k) Plan. We also match a portion of contributions to our
401(k) Plan.
EXECUTIVE OFFICERS AND DIRECTORS
We are managed by a board of directors. The following table sets forth the
name, age (as of December 1, 2001), and principal occupations during the past
five years of each of our executive officers and directors.
Pamela S. Schutz 47 Director and President, GE Life and Annuity Life
Assurance Company since May 1998; Chief Executive
Officer, GE Life and Annuity Assurance Company
since June 2000; President, The Harvest Life
Insurance Company May 1997-November 1998;
President, GE Capital Commercial Real Estate (an
affiliate) May 1994-November 1998.
Selwyn L. Flournoy, Jr. 60 Director, GE Life and Annuity Assurance Company
since May 1989; Senior Vice President, GE Life and
Annuity Assurance Company since 1980 and Chief
Financial Officer 1980-1997.
Thomas M. Stinson(1) 38 Director and Senior Vice President, GE Life and
Annuity Assurance Company since April 2000;
President, Personal Financial Services of GE Life
and Annuity Assurance Company since 1998; General
Manager of Home Depot Credit Services Account, GE
Card Services (an affiliate) 1993-1998.
Elliot A. Rosenthal 50 Director, GE Life and Annuity Assurance Company
since June 2000; Senior Vice President of GE Life
and Annuity Assurance Company since 1996.
Leon E. Roday(2) 47 Director, GE Life and Annuity Assurance Company
since June 1999; Senior Vice President, GE Life
and Annuity Assurance Company since May 1998;
Director, Senior Vice President, General Counsel
and Secretary, GE Financial Assurance Holdings,
Inc. (an affiliate) since 1996.
Geoffrey S. Stiff 49 Director, GE Life and Annuity Assurance Company
since May 1996; Senior Vice President, GE Life and
Annuity Assurance Company since March 1999; Vice
President, GE Life and Annuity Assurance Company
May 1996-March 1999; Director and Chief Executive
Officer of General Electric Capital Assurance
Company (an affiliate) since 1996.
Timothy C. Stonesifer 34 Senior Vice President and Chief Financial Officer
of GE Life and Annuity Assurance Company since
July 2000; Chief Financial Officer of Union
Fidelity Life Insurance Company, February 1998 to
July 2000; Auditor and Financial Analyst, General
Electric Company, (an affiliate) July 1989-
February 1998.
Donita M. King 47 Senior Vice President, General Counsel and
Secretary, GE Life and Annuity Assurance Company
since March 1999; Associate General Counsel,
Prudential Insurance Company of America, March
1989-March 1999.
Susan M. Mann 45 Vice President and Controller, GE Life and Annuity
Assurance Company since April 2001; Vice President
and Controller, AMF Bowling, Inc. July 1998-
December 2000; Chief Financial Officer, World
Access, Inc. (provider of travel insurance,
assistance and financial market enhancement
related products and services) April 1991-July
1998.
142
Bethann Roberts 42 Senior Vice President, Retirement Income Services, GE
Life and Annuity Assurance Company since June 2000;
Senior Vice President, Securities Brokerage Services,
GE Life and Annuity Assurance Company from January
1999-June 2000; Senior Vice President, GE Capital
Commercial Real Estate from January 1997-July 1998;
Chief Executive Officer, GE Capital Mortgage Services
(an affiliate) from March 1996-October 1997.
Gary T. Prizzia(3) 39 Treasurer, GE Life and Annuity Assurance Company since
January 2000; Assistant Treasurer GE Financial
Assurance Holdings, Inc. (an affiliate) since January
2000; Treasurer/Risk Manager, Budapest Bank, October
1996-January 2000.
The principal business address of each person listed, unless otherwise
indicated, is GE Life and Annuity Assurance Company, 6610 W. Broad Street,
Richmond, Virginia 23230.
(1) The principal business address for Mr. Stinson is GE Financial Assurance,
1650 Los Gamos Drive, San Rafael, CA 94903.
(2) The principal business address for Mr. Roday is GE Financial Assurance
Holdings, Inc., 6620 W. Broad Street, Richmond, Virginia 23230.
(3) The principal business address for Mr. Prizzia is GE Financial Assurance
Holdings, Inc., 6620 W. Broad Street, Richmond, Virginia 23230.
Executive officers serve at the pleasure of the Board of Directors and
directors are elected annually by GE Life and Annuity Assurance Company's
shareholders.
143
MANAGEMENT OWNERSHIP OF GENERAL ELECTRIC COMPANY STOCK
None of our directors or Named Executives (as defined under "Executive
Compensation," below) owns any shares of common stock, preferred stock or other
equity securities issued by us or by any of our affiliates, other than GE. Set
forth below are the shares of GE common stock and restricted stock (including
stock, restricted stock and deferred stock "units") beneficially owned by the
directors and Named Executives of the Company, as defined below, and by all
directors and executive officers as a group, in each case as of November 1,
2001, along with a description of the nature of such beneficial ownership:
Security Ownership of Directors and Executive Officers
Amount of
GE Common Stock and
Nature of Beneficial Percentage of Outstanding
Name Ownership/1/ GE Stock/5/
- ---------------------------------------------------------------------------
Selwyn L. Flournoy, Jr. 3,600 --
Donita M. King 1,374 --
Bethann C. Roberts 12,489 --
Leon E. Roday 24,420/2/ --
Elliot A. Rosenthal 3,272 --
Pamela S. Schutz 143,777/3/ --
Geoffrey S. Stiff 227,800/4/ --
Thomas M. Stinson 24,750 --
All Directors and Executive
Officers as a Group -- 11
total 466,070 --
- ---------------------------------------------------------------------------
/1/As to shares beneficially owned, each person has sole voting and investment
power except that Mr. Flournoy shares voting and investment power with
another person with respect to the number of shares shown above. This table
includes the following shares which are subject to acquisition within 60
days of November 1, 2001 by the exercise of outstanding stock options: Mr.
Flournoy, 1,500 shares; Ms. King, 600 shares; Ms. Roberts, 8,250 shares;
Mr. Roday, 6000 shares; Mr. Rosenthal, 1,875 shares; Ms. Schutz, 66,750
shares; Mr. Stiff, 211,500 shares and Mr. Stinson, 24,750 shares.
Where applicable, "share" amounts include deferred stock units, stock
units, and restricted stock units (i.e., still subject to certain lapse-of-
time and continued service restrictions). Stock units, restricted stock
units and deferred stock units are non-transferable accounting-entry
"units," the value of which is the same as the value of the corresponding
number of shares of GE common stock.
/2/Of the amounts shown for Mr. Roday, 15,000 are restricted stock. Mr. Roday
has no voting or investment power as to the restricted stock units listed
above.
/3/Of the amounts shown for Ms. Schutz, 3,258 shares are deferred stock units,
6,000 are stock units, and 30,000 are restricted stock. Ms. Schutz has no
voting or investment power as to the stock units, restricted stock units
and deferred stock units listed above.
/4/Of the amounts shown for Mr. Stiff, 5,647 shares are deferred stock units.
Mr. Stiff has no voting or investment power as to the deferred stock units
listed above.
/5/Each of these amounts represents less than 1% of the outstanding shares of
common stock of GE as of November 1, 2001.
144
Executive Compensation
Our executive officers also serve as executive officers and/or directors of one
or more affiliate companies of GE Financial Assurance. Compensation allocations
are made as to each individual's time devoted to duties as an executive officer
of our affiliates and us. All of our directors are also employees of one or
more affiliates of GE Financial Assurance and receive no compensation in
addition to their compensation as employees. We participate in GE's deferred
compensation plan whereby our directors and Named Executives, among others may
voluntarily elect to defer to a specified date receipt of a portion of their
earned income.
The following table sets forth certain information regarding the portion of
compensation paid to the Chief Executive Officer and our four most highly
compensated executive officers (collectively, the "Named Executives") for
services provided to the Company during or with respect to fiscal year 2000.
SUMMARY COMPENSATION TABLE/1/
Long-Term Compensation
-------------------------------
Annual Compensation Awards Payout
------------------------- --------------------- ---------
Other Securities All
Annual Restricted Underlying Other
Compen- Stock Options/ LTIP Compen-
Name and Salary Bonus sation Awards SARs Payout(s) sation
Principal Position Year ($)/2/ ($)/3/ ($)/4/ ($)/5/ (#)/6/ ($) ($)/7/
- ------------------------------------------------------------------------------------------------
Pamela S. Schutz
Chairman, President and
Chief Executive Officer 2000 $195,160 $275,400 0 $534,208 14,280 0 $8,700
Selwyn L. Flournoy, Jr.
Senior Vice President 2000 $103,991 $ 58,800 0 0 0 0 $7,414
Geoffrey S. Stiff
Senior Vice President 2000 $ 97,993 $ 83,250 0 0 0 0 $8,039
Bethann C. Roberts
Senior Vice President 2000 $ 82,361 $ 59,983 0 0 1,710 0 $2,749
Donita M. King
Senior Vice President,
General Counsel and
Secretary 2000 $ 91,718 $ 37,632 0 0 840 0 $3,923
- ------------------------------------------------------------------------------------------------
/1/All amounts shown on this table have been prorated to account for the
amount of the relevant Named Executive's time that is allocable to
performing services for the Company.
/2/Includes amounts deferred at the election of the relevant Named Executive
as follows: Ms. Schutz, $45,900; Mr. Flournoy, $26,250; and Mr. Stiff,
$48,368.
145
/3/Includes $68,850 and $41,250 deferred at the election of Ms. Schutz and Mr.
Stiff, respectively.
/4/The perquisites or other benefits received by each of the Named Executives
did not exceed the lesser of $50,000 or 10% of his or her base salary and
annual bonus during the period reported and, therefore, are not required to
be reported in the table.
/5/This column shows the market value of restricted stock unit (RSU) awards on
the date of grant. The Compensation Committee of GE periodically grants
restricted stock or RSUs to executives of the Company. The restrictions on
the RSUs awarded to Ms. Schutz lapse as follows: restrictions on 25% of the
RSUs awarded lapse after 3 years from the date of the award; restrictions
on an additional 25% of the RSUs awarded lapse after 7 years from the date
of the award; and the restrictions on the remaining 50% of the RSUs awarded
lapse upon retirement. Regular quarterly dividends or dividend equivalents
are paid on restricted stock and RSUs during the period of restriction. As
of December 31, 2000, Ms. Schutz owned 36,000 RSUs with a value of
$1,725,750 and Mr. Roday owned 15,000 RSUs with a value of $719,063. Other
than Ms. Schutz and Mr. Roday, none of the Named Executives or other
employees of the Company owned restricted stock or RSUs.
/6/Options allow the holder to purchase shares of GE common stock at an
exercise price equal to the fair market value of GE common stock on the
date of grant. Options typically have a ten-year term and vest according to
the following schedule: 50% of the options vest after three years from the
date of grant; the remaining 50% of the options vest after five years from
the date of grant.
/7/Includes amounts contributed to employee benefit plans by the registrant on
behalf of the Named Executive as follows: Ms. Schutz, $4,046; Mr. Flournoy,
$2,720; Mr. Stiff, $2,678; Ms. Roberts, $2,261; and Ms. King, $3,332. Also
includes above-market interest calculated with respect to compensation
deferred at the election of the Named Executives as follows: Ms. Schutz,
$2,627; Mr. Flournoy, $1,170; and Mr. Stiff, $4,531. The remaining amounts
represent premiums paid by us under insurance policies covering the
relevant Named Executive.
146
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding the stock options granted
to Named Executives during 2000. We do not grant any stock appreciation rights.
Potential
Realizable Value at
Assumed Annual
Rates of Stock
Price Appreciation
for
Individual Grants Option Term
- ------------------------------------------------------------------------ -------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees in or Base
Granted/1/ Fiscal Price Expiration
Name (#) Year/2/ ($/Shares) Date/3/ 5%($) 10%($)
- --------------------------------------------------------------------------------------------
Pamela S. Schutz 14,280 0.0311% $57.3125 9/22/10 $514,679 $1,304,298
Selwyn L. Flournoy, Jr. 0 -- -- -- -- --
Geoffrey S. Stiff 0 -- -- -- -- --
Bethann C. Roberts 1,710 0.0037% $42.3333 3/14/10 $ 45,526 $ 115,371
Donita M. King 840 -- $42.3333 3/14/10 $ 22,361 $ 56,673
- --------------------------------------------------------------------------------------------
/1/The options listed above represent the right to acquire common stock of GE.
The options listed above for Ms. Schutz were awarded on September 22, 2000.
The options listed above for Ms. Roberts and Ms. King were awarded on March
14, 2000. In each case, the number of options shown has been pro-rated
according to the amount of the Named Executive's time allocable to
performing services for the Company.
/2/GE granted options and SARs representing 45,876,175 shares to employees in
fiscal year 2000.
/3/Options typically have a ten-year term and vest according to the following
schedule: 50% of the options vest after three years from the date of grant;
the remaining 50% of the options vest after five years from the date of
grant.
147
AGGREGATED OPTION/SAR EXERCISES IN 2000 AND YEAR-END OPTION/SAR VALUES
As noted above, none of the Named Executives own any stock appreciation rights.
In addition, during 2000, none of the Named Executives exercised stock options.
The following table sets forth the value of the stock options held by the Named
Executives based upon the value of GE's common stock as of December 31, 2000.
Number of
Unexercised Value of Unexercised
Options Held at In-the-Money Options
December 31, Held at
2000 December 31, 2000/1/
---------------- ---------------------
Shares
Acquired Value Exercis- Unexer- Exercis- Unexer-
Name on Exercise Realized ($) able cisable able cisable
- ----------------------------------------------------------------------------------------
Pamela S. Schutz -- -- 60,000 58,500 $2,295,502 $ 534,471
Selwyn L. Flournoy, Jr. -- -- 1,500 0 $ 51,688 $ 0
Geoffrey S. Stiff -- -- 190,500 46,500 $7,341,479 $1,048,784
Bethann C. Roberts -- -- 2,250 18,000 $ 61,625 $ 291,126
Donita M. King -- -- 300 1,200 $ 1,681 $ 6,725
- ----------------------------------------------------------------------------------------
/1/Based on the closing price on the New York Stock Exchange Composite
Transactions ("NYSE") of GE's Common Stock on December 31, 2000 ($47.9375).
The options and potential realizable value of those options have not been
adjusted to account for the percentage of the relevant Named Executive's
time allocable to performing services for the Company.
LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
None of the Named Executives received any payment during 2000 under any long-
term incentive plan maintained by us or our affiliates with respect to a
performance period longer than one year.
OTHER PLANS AND ARRANGEMENTS
Retirement Benefits. The table below illustrates the annual pension benefits
payable to executive officers under the GE Pension Plan. The table also
reflects the Excess Benefit Plan that we have established to provide retirement
benefits over the Code limitations and the GE Supplementary Pension Plan that
provides supplementary benefits to longer-service, higher level employees.
Benefits in the table are not reduced by social security or other offset
amounts. Since the benefits shown in the table reflect a straight life form of
annuity benefit, if the payment is made in the form of a joint and survivor
annuity, the annual amounts of benefit could be substantially below those
illustrated.
148
Employees are generally eligible to retire with unreduced benefits under
Company retirement plans at age 60 or later, and with social security benefits
at age 62 or later. The approximate annual retirement benefits provided under
Company retirement plans for GE employees retiring directly from the Company at
age 60 or later are shown in the table below.
PENSION PLAN TABLE
Estimated Annual Retirement Benefit for Credited
Years of Service/1/
------------------------------------------------------------
Final Average Salary 20 Years 25 Years 30 Years 35 Years 40 Years
- ------------------------------------------------------------------------------------
$ 100,000 30,000 38,750 47,500 56,250 65,000
$ 200,000 65,000 82,500 100,000 117,500 135,000
$ 300,000 100,000 126,250 152,500 178,750 205,000
$ 400,000 135,000 170,000 205,000 240,000 275,000
$ 500,000 170,000 213,750 257,500 301,250 345,000
$ 600,000 205,000 257,500 310,000 362,500 415,000
$ 700,000 240,000 301,250 362,500 423,750 485,000
$ 800,000 275,000 345,000 415,000 485,000 555,000
$ 900,000 310,000 388,750 467,500 546,250 625,000
$1,000,000 345,000 432,500 520,000 607,500 695,000
- ------------------------------------------------------------------------------------
/1/Retirement benefits under the GE Pension Plan are determined based on the
greater of a formula recognizing career earnings or a formula recognizing
length of service and final average earnings. GE Supplementary Pension Plan
benefits are calculated as the excess of the amount determined under a
formula recognizing length of service and final average earnings over the
GE Pension Plan benefit.
Compensation covered by the GE Pension Plan (for purposes of pension benefits)
excludes commissions and performance share awards and generally corresponds to
that shown in the "Salary" and Bonus" columns in the Summary Compensation
Table. Compensation is calculated based on the average of the highest level of
compensation paid during a period of 36 consecutive whole months. Only three
Annual Incentive Plan bonuses (whether paid or deferred) may be included in
obtaining the average compensation.
The Named Executives and their credited years of service as of November 1, 2001
are provided in the following table.
Named Executive Years of Credited Service
---------------------------------------------------
Pamela S. Schutz 23 years
Selwyn L. Flournoy, Jr. 33 years
Geoffrey S. Stiff 21 years
Bethann C. Roberts 8 years
Donita M. King 2 years
---------------------------------------------------
149
Legal Matters
We, like other life insurance companies, are involved in lawsuits, including
class action lawsuits. In some class action and other lawsuits involving
insurance companies, substantial damages have been sought and/or material
settlement payments have been made. Although we cannot predict the outcome of
any litigation with certainty, we believe that at the present time there are no
pending or threatened lawsuits that are reasonably likely to have a material
adverse impact on our Consolidated Financial Statements.
150
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 29, 2001
(UNAUDITED)
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Table of Contents
September 29, 2001
Page
----
Financial Statements:
Consolidated Balance Sheets.............................................. I-1
Consolidated Statements of Income........................................ I-2
Consolidated Statements of Shareholders' Interest........................ I-3
Consolidated Statements of Cash Flows.................................... I-4
Notes to Consolidated Financial Statements (Unaudited)................... I-5
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Consolidated Balance Sheets
(Dollar amounts in millions)
(Unaudited)
September 29, December 31,
2001 2000
------------- ------------
ASSETS
Investments:
Fixed maturities available-for-sale, at fair
value............................................ $ 9,705.3 $ 9,260.5
Equity securities available-for-sale, at fair
value:
Common stocks.................................... 22.7 15.3
Preferred stocks, non-redeemable................. 23.5 20.8
Investment in affiliate........................... 2.6 2.6
Mortgage loans, net of valuation allowance of
$17.6 and $14.3 at September 29, 2001 and
December 31, 2000, respectively.................. 941.0 1,130.0
Policy loans...................................... 103.3 89.0
Real estate owned................................. 3.5 2.5
Other invested assets............................. 115.7 134.7
--------- ---------
Total investments............................... 10,917.6 10,655.4
--------- ---------
Cash & cash equivalents............................. 191.1 71.4
Accrued investment income........................... 211.5 215.9
Deferred acquisition costs.......................... 803.7 715.7
Intangible assets................................... 348.7 400.4
Reinsurance recoverable............................. 146.9 90.6
Other assets........................................ 200.3 69.9
Separate account assets............................. 8,169.1 10,393.2
--------- ---------
Total assets.................................... $20,988.9 $22,612.5
========= =========
LIABILITIES AND SHAREHOLDERS' INTEREST
Liabilities:
Future annuity and contract benefits.............. $10,180.8 $ 9,934.3
Liability for policy and contract claims.......... 188.0 140.4
Other policyholder liabilities.................... 194.0 164.0
Accounts payable and accrued expenses............. 569.5 473.9
Deferred income tax liability..................... 85.2 32.0
Separate account liabilities...................... 8,169.1 10,393.2
--------- ---------
Total liabilities............................... 19,386.6 21,137.8
--------- ---------
Shareholders' interest:
Net unrealized investment gains/(losses).......... 33.7 (18.7)
Derivatives qualifying as hedges.................. (7.6) --
--------- ---------
Accumulated non-owner changes in equity........... 26.1 (18.7)
Preferred stock, Series A ($1,000 par value,
$1,000 redemption and liquidation value, 200,000
shares authorized, 120,000 shares issued and
outstanding)..................................... 120.0 120.0
Common stock ($1,000 par value, 50,000 authorized,
25,651 shares issued and outstanding)............ 25.6 25.6
Additional paid-in capital........................ 1,050.7 1,050.7
Retained earnings................................. 379.9 297.1
--------- ---------
Total shareholders' interest.................... 1,602.3 1,474.7
--------- ---------
Total liabilities and shareholders' interest.... $20,988.9 $22,612.5
========= =========
See accompanying notes to consolidated financial statements.
I-1
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Consolidated Statements of Income
(Dollar amounts in millions)
(Unaudited)
Nine Months Ended
---------------------------
September 29, September 30,
2001 2000
------------- -------------
Revenues:
Net investment income............................ $531.5 $ 513.4
Net realized investment gains.................... 14.1 6.5
Premiums......................................... 81.5 88.9
Cost of insurance................................ 97.6 94.7
Variable product fees............................ 100.3 109.8
Other income..................................... 31.5 42.4
------ -------
Total revenues................................. 856.5 855.7
------ -------
Benefits and expenses:
Interest credited................................ 408.9 387.4
Benefits and other changes in policy reserves.... 140.5 171.5
Commissions...................................... 126.9 182.7
General expenses................................. 95.9 89.5
Amortization of intangibles, net................. 36.2 35.9
Change in deferred acquisition costs, net........ (99.1) (188.4)
Interest expense................................. 2.2 0.6
------ -------
Total benefits and expenses.................... 711.5 679.2
------ -------
Income before income taxes and cumulative
effect of change in accounting principle...... 145.0 176.5
Provision for income taxes......................... 51.7 61.8
------ -------
Income before cumulative effect of change in
accounting principle.......................... 93.3 114.7
------ -------
Cumulative effect of change in accounting
principle, net of tax............................. (5.7) --
------ -------
Net income..................................... $ 87.6 $ 114.7
====== =======
See accompanying notes to consolidated financial statements.
I-2
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Consolidated Statements of Shareholders' Interest
(Dollar amount in millions)
(Unaudited)
Preferred Accumulated
Stock Common Stock Additional Non-owner Total
-------------- ------------- Paid In Changes Retained Shareholders'
Shares Amount Shares Amount Capital in Equity Earnings Interest
------- ------ ------ ------ ---------- ----------- -------- -------------
Balances at December 31,
1999................... 120,000 $120.0 25,651 $25.6 $1,050.7 $(134.2) $143.6 $1,205.7
Changes other than
transactions with
shareholders:
Net income............. -- -- -- -- -- -- $163.1 163.1
Net unrealized
gains/(losses) on
investment securities
(a)................... -- -- -- -- -- $ 115.5 -- 115.5
--------
Total changes other
than transactions with
shareholders.......... 278.6
------
Cash dividend declared
and paid............... -- -- -- -- -- -- $ (9.6) (9.6)
------- ------ ------ ----- -------- ------- ------ --------
Balances at December 31,
2000................... 120,000 $120.0 25,651 $25.6 $1,050.7 $ (18.7) $297.1 $1,474.7
Changes other than
transactions with
shareholders:
Net income............. -- -- -- -- -- -- $ 87.6 87.6
Derivatives qualifying
as hedges............. -- -- -- -- -- $ (7.6) -- (7.6)
Net unrealized gains
(losses) on investment
securities (a)........ -- -- -- -- -- $ 52.4 -- 52.4
--------
Total changes other
than transactions with
shareholders.......... 132.4
Cash dividend declared
and paid............... -- -- -- -- -- -- $ (4.8) (4.8)
------- ------ ------ ----- -------- ------- ------ --------
Balances at September
29, 2001............... 120,000 $120.0 25,651 $25.6 $1,050.7 $ 26.1 $379.9 $1,602.3
======= ====== ====== ===== ======== ======= ====== ========
- -------
(a) Presented net of deferred taxes of $(16.5) at September 29, 2001 and
$(61.8) at December 31, 2000.
See accompanying notes to consolidated financial statements.
I-3
GE Life and Annuity Assurance Company and Subsidiary
Consolidated Statements of Cash Flows
(Dollar amounts in millions)
(Unaudited)
Nine Months Ended
---------------------------
September 29, September 30,
2001 2000
------------- -------------
Cash flows from operating activities:
Net income........................................ $ 87.6 $ 114.7
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting
principle, net of tax........................... 5.7
Cost of insurance and surrender fees............. (125.3) (125.7)
Decrease in future policy benefits............... 444.3 511.9
Net realized investment gains.................... (14.1) (6.5)
Amortization of investment premiums and
discounts....................................... 5.4 2.1
Amortization of intangibles...................... 36.2 35.9
Deferred income tax expense...................... 33.6 69.4
Changes in certain assets and liabilities:
Decrease (increase) in:
Accrued investment income...................... 4.4 --
Deferred acquisition costs..................... (99.1) (188.4)
Other assets, net.............................. (129.1) 127.9
Increase (decrease) in:
Policy and contract claims..................... 41.1 1.7
Other policyholder liabilities................. 31.1 13.0
Accounts payable and accrued expenses.......... 85.2 60.2
--------- ---------
Total adjustments............................ 319.4 501.5
--------- ---------
Net cash provided by operating activities.... 407.0 616.2
--------- ---------
Cash flows from investing activities:
Short-term investment activity, net.............. 10.1 --
Proceeds from sales and maturities of investment
securities and other invested assets............ 2,512.8 1,169.1
Principal collected on mortgage and policy
loans........................................... 304.2 85.3
Purchases of investment securities and other
invested assets................................. (2,850.4) (1,375.4)
Mortgage loan originations and increase policy
loans........................................... (134.6) (407.4)
--------- ---------
Net cash used in investing activities........ (157.9) (528.4)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of investment contracts... 2,618.8 4,025.8
Redemption and benefit payments on investment
contracts....................................... (2,743.4) (3,943.3)
Cash dividends to shareholders................... (4.8) (4.8)
--------- ---------
Net cash (used in) provided by financing
activities.................................. (129.4) 77.7
--------- ---------
Net increase (decrease) in cash and cash
equivalents................................. 119.7 165.5
Cash and cash equivalents at beginning of
period.......................................... 71.4 70.0
--------- ---------
Cash and cash equivalents at end of period....... $ 191.1 $ 235.5
========= =========
See accompanying notes to consolidated financial statements.
I-4
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in millions)
(Unaudited)
1. The accompanying consolidated September 29, 2001 financial statements
represent GE Life and Annuity Assurance Company and its consolidated
subsidiary, Assigned Settlements Inc. (collectively "the Company"). All
significant intercompany transactions have been eliminated.
2. These financial statements have been prepared on the basis of accounting
principals generally accepted in the United States of America ("U.S. GAAP").
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts
and related disclosures. Actual results could differ from these estimates.
Certain prior year amounts have been reclassified to conform to the current
year presentation. The consolidated year-to-date financial statements are
unaudited. These statements include all adjustments (consisting of normal
recurring accruals) considered necessary by management to present a fair
statement of income and cash flows. The results reported in these consolidated
financial statements should not be regarded as balance sheet necessarily
indicative of results that may be expected for the entire year.
3. Certificates, money market funds and other time deposits with original
maturities of less than 90 days if any, are considered cash equivalents in the
Consolidated Balance Sheets and Consolidated Statements of Cash Flows.
4. The Financial Accounting Standards Board ("FASB") issued, then
subsequently amended, Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
became effective for the Company on January 1, 2001. Under SFAS No. 133, as
amended, all derivative instruments (including certain derivative instruments
embedded in other contracts) are recognized in the balance sheet at their fair
values and changes in fair value are recognized immediately in earnings,
unless derivatives qualify as hedges of future cash flows. For derivatives
qualifying as hedges of future cash flows, the effective portion of changes in
fair value is recorded temporarily in equity, then recognized in earnings
along with the related effects of the hedged items. Any ineffective portion of
a hedge is reported in earnings as it occurs.
The nature of the Company's business activities necessarily involves the
management of various financial and market risks, including those related to
changes in interest rates and equity prices. As discussed more fully in Notes
1 and 10 of the 2000 audited financial statements, the Company uses derivative
financial instruments to mitigate or eliminate certain of those risks. The
January 1, 2001 accounting change described above affected only the pattern
and timing of non-cash accounting recognition.
At January 1, 2001 the Company's financial statements were adjusted to
record a cumulative effect of adopting this accounting change, as follows:
Shareholders'
Earnings Interest
-------- -------------
Adjustment to fair value of derivatives (a).............. $(8.7) $(12.2)
Income tax effects....................................... 3.0 4.4
----- ------
Total.................................................... $(5.7) $ (7.8)
===== ======
- -------
(a) For earnings effect, amount shown is net of adjustment to hedged items.
A reconciliation of current period changes for the first nine months of
2001, net of applicable income taxes in the separate component of
shareholders' interest labeled "derivatives qualifying as hedges", follows:
Transition adjustment as of January 1, 2001........................ $(7.8)
Current period increases in fair value -- net...................... 0.2
-----
Balance at September 29, 2001...................................... $(7.6)
=====
I-5
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
(Dollar amounts in millions)
Unaudited
The cumulative effect on shareholders' interest was primarily attributable
to marking to market swap contracts used to hedge interest rate risk on
variable-rate borrowings. Increases in the fair value of these instruments are
attributable to decreases in short-term interest rates. Additional disclosures
required by SFAS No. 133, as amended, are provided in the following
paragraphs.
Hedges of Future Cash Flows
There was no ineffectiveness reported in the nine months ended September
29, 2001 in fair values of hedge positions. There were no amounts excluded
from the measure of effectiveness in the nine months ended September 29, 2001
related to the hedge of future cash flows.
Of the $(7.8) million transition adjustment recorded in shareholders'
interest at January 1, 2001, less than $(0.1) million, net of income taxes,
was reclassified to income during the nine month period ended September 29,
2001. The $(7.6) million, net of taxes, recorded in shareholders' interest at
September 29, 2001 is expected to be reclassified to future income,
contemporaneously with and primarily offsetting changes in interest expense
and interest income on floating-rate instruments. Of this amount $(0.1)
million, net of income taxes, are expected to be reclassified to earnings over
the twelve-month period ended September 30, 2002. The actual amounts that will
be reclassified to income over the next twelve months will vary from this
amount as a result of market conditions. No amounts were reclassified to
income during the first nine months ended September 29, 2001 in connection
with forecasted transactions that were no longer considered probable of
occurring.
At September 29, 2001, there were no derivative instruments hedging
forecasted transactions, except those related to payment of variable interest
on existing financial instruments.
Hedges of Recognized Assets, Liabilities and Firm Commitments
The ineffective portion of changes in fair values of hedge positions,
reported in the nine month period ended September 29, 2001 operations,
amounted to $0.1 million, before income taxes. These amounts were included in
net realized investment gains. There were no amounts excluded from the measure
of effectiveness.
Derivatives Not Designated as Hedges
At September 29, 2001, there were no derivatives that do not qualify for
hedge accounting under SFAS No. 133, as amended.
5. Included in our investment portfolio are certain debt securities issued
by Enron Corporation ("Enron") with a book value of approximately $20 million.
On December 2, 2001, Enron filed a voluntary petition for reorganization under
Chapter 11 of the United States Bankruptcy Code. During the fourth quarter of
2001, management believed it was no longer probable that the Company would
receive all contractual payments when due on these securities. Accordingly,
the debt securities were written down by $15 million subsequent to September
29, 2001.
I-6
GE LIFE AND ANNUITY ASSURANCE COMPANY
Consolidated Financial Statements
Year ended December 31, 2000
(With Independent Auditors' Report Thereon)
GE LIFE AND ANNUITY ASSURANCE COMPANY
Table of Contents
Year ended December 31, 2000
Page
----
Independent Auditors' Report............................................... F-1
Consolidated Balance Sheets................................................ F-2
Consolidated Statements of Income.......................................... F-3
Consolidated Statements of Shareholders' Interest.......................... F-4
Consolidated Statements of Cash Flows...................................... F-5
Notes to Consolidated Financial Statements................................. F-6
Independent Auditors' Report
The Board of Directors
GE Life and Annuity Assurance Company:
We have audited the accompanying consolidated balance sheets of GE Life and
Annuity Assurance Company and subsidiary as of December 31, 2000 and 1999, and
the related consolidated statements of income, shareholders' interest, and
cash flows for each of the years in the three-year period ended December 31,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GE Life
and Annuity Assurance Company and subsidiary as of December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in note 15 to the consolidated financial statements, the
Company changed its method of accounting for insurance-related assessments in
1999.
/s/ KPMG LLP
Richmond, Virginia
January 22, 2001
F-1
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Consolidated Balance Sheets
(Dollar amounts in millions, except per share amounts)
December 31,
--------------------
2000 1999
--------- ---------
Assets
Investments:
Fixed maturities available-for-sale, at fair value...... $ 9,260.5 $ 8,033.7
Equity securities available-for-sale, at fair value:
Common stocks.......................................... 15.3 9.2
Preferred stocks, non-redeemable....................... 20.8 23.9
Investment in affiliate................................. 2.6 2.6
Mortgage loans, net of valuation allowance of $14.3 and
$23.3 at December 31, 2000 and 1999, respectively...... 1,130.0 810.5
Policy loans............................................ 89.0 58.5
Real estate owned....................................... 2.5 2.5
Other invested assets................................... 135.8 141.5
--------- ---------
Total investments...................................... 10,656.5 9,082.4
--------- ---------
Cash..................................................... 70.3 21.2
Accrued investment income................................ 215.9 190.2
Deferred acquisition costs............................... 715.7 482.5
Intangible assets........................................ 400.4 472.8
Reinsurance recoverable.................................. 90.6 72.4
Deferred income tax asset................................ -- 120.3
Other assets............................................. 69.9 269.7
Separate account assets.................................. 10,393.2 9,245.8
--------- ---------
Total assets........................................... $22,612.5 $19,957.3
========= =========
Liabilities and Shareholders' Interest
Liabilities:
Future annuity and contract benefits.................... $ 9,934.3 $ 9,063.0
Liability for policy and contract claims................ 140.4 110.7
Other policyholder liabilities.......................... 164.0 138.8
Accounts payable and accrued expenses................... 473.9 193.3
Deferred income tax liability........................... 32.0 --
Separate account liabilities............................ 10,393.2 9,245.8
--------- ---------
Total liabilities...................................... 21,137.8 18,751.6
--------- ---------
Shareholders' interest:
Net unrealized investment gains......................... (18.7) (134.2)
--------- ---------
Accumulated non-owner changes in equity................. (18.7) (134.2)
Preferred stock, Series A ($1,000 par value, $1,000
redemption and liquidation value, 200,000 shares
authorized, 120,000 shares issued and outstanding)..... 120.0 120.0
Common stock ($1,000 par value, 50,000 authorized,
25,651 shares issued and outstanding).................. 25.6 25.6
Additional paid-in capital.............................. 1,050.7 1,050.7
Retained earnings....................................... 297.1 143.6
--------- ---------
Total shareholders' interest........................... 1,474.7 1,205.7
--------- ---------
Total liabilities and shareholders' interest........... $22,612.5 $19,957.3
========= =========
See accompanying notes to consolidated financial statements.
F-2
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Consolidated Statements of Income
(Dollar amounts in millions)
Years Ended December 31,
--------------------------
2000 1999 1998
-------- -------- ------
Revenues:
Net investment income............................. $ 708.9 $ 638.2 $574.7
Net realized investment gains..................... 4.3 12.0 29.6
Premiums.......................................... 116.3 123.9 123.1
Cost of insurance................................. 126.0 129.0 128.5
Variable product fees............................. 148.7 90.2 60.8
Other income...................................... 49.2 24.6 22.3
-------- -------- ------
Total revenues................................... 1,153.4 1,017.9 939.0
-------- -------- ------
Benefits and expenses:
Interest credited................................. 532.6 440.8 378.4
Benefits and other changes in policy reserves..... 223.6 214.7 178.4
Commissions....................................... 229.3 192.1 112.8
General expenses.................................. 124.8 124.7 111.0
Amortization of intangibles, net.................. 43.7 58.3 64.8
Change in deferred acquisition costs, net......... (237.7) (179.1) (74.7)
Interest expense.................................. 1.1 1.9 2.2
-------- -------- ------
Total benefits and expenses...................... 917.4 853.4 772.9
-------- -------- ------
Income before income taxes and cumulative effect
of accounting change............................ 236.0 164.5 166.1
Provision for income taxes......................... 72.9 56.6 60.3
-------- -------- ------
Income before cumulative effect of accounting
change.......................................... 163.1 107.9 105.8
-------- -------- ------
Cumulative effect of accounting change, net of
tax............................................... -- 5.0 --
-------- -------- ------
Net income....................................... $ 163.1 $ 112.9 $105.8
======== ======== ======
See accompanying notes to consolidated financial statements.
F-3
GE LIFE AND ANNUITY ASSURANCE COMPANY
Consolidated Statements of Shareholders' Interest
(Dollar amounts in millions)
Common Stock
Preferred Declared Accumulated
Stock Common Stock but not Issued Additional Non-owner Total
-------------- ------------- --------------- Paid-In Changes Retained Shareholders'
Shares Amount Shares Amount Shares Amount Capital in Equity Earnings Interest
------- ------ ------ ------ ------- ------ ---------- ----------- -------- -------------
Balances at December 31,
1997................... -- $ -- 7,010 $ 7.0 -- $ -- $1,058.4 $ 87.7 $ 193.1 $1,346.2
Changes other than
transactions with
shareholders:
Net income............. -- -- -- -- -- -- -- -- 105.8 105.8
Net unrealized losses
on investment
securities (a)........ -- -- -- -- -- -- -- (29.9) -- (29.9)
--------
Total changes other
than transactions with
shareholders.......... 75.9
Cash dividend declared
and paid............... -- -- -- -- -- -- -- -- (120.0) (120.0)
Preferred stock
dividend............... 120,000 120.0 -- -- -- -- -- -- (120.0) --
Common stock dividend
declared but not
issued................. -- -- -- -- 18,641 18.6 -- -- (18.6) --
Adjustment to reflect
purchase method........ -- -- -- -- -- -- (8.3) -- -- (8.3)
------- ------ ------ ----- ------- ------ -------- ------- ------- --------
Balances at December 31,
1998................... 120,000 120.0 7,010 7.0 18,641 18.6 1,050.1 57.8 40.3 1,293.8
Changes other than
transactions with
shareholders:
Net income............. -- -- -- -- -- -- -- -- 112.9 112.9
Net unrealized losses
on investment
securities (a)........ -- -- -- -- -- -- -- (192.0) -- (192.0)
--------
Total changes other
than transactions with
shareholders.......... (79.1)
Cash dividend declared
and paid............... -- -- -- -- -- -- -- -- (9.6) (9.6)
Common stock issued..... -- -- 18,641 18.6 (18,641) (18.6) -- -- -- --
Adjustment to reflect
purchase method........ -- -- -- -- -- -- 0.6 -- -- 0.6
------- ------ ------ ----- ------- ------ -------- ------- ------- --------
Balances at December 31,
1999................... 120,000 120.0 25,651 25.6 -- -- 1,050.7 (134.2) 143.6 1,205.7
Changes other than
transactions with
shareholders:
Net income............. -- -- -- -- -- -- -- -- 163.1 163.1
Net unrealized losses
on investment
securities (a)........ -- -- -- -- -- -- -- 115.5 -- 115.5
--------
Total changes other
than transactions with
shareholders.......... 278.6
Cash dividend declared
and paid............... -- -- -- -- -- -- -- -- (9.6) (9.6)
------- ------ ------ ----- ------- ------ -------- ------- ------- --------
Balances at December 31,
2000................... 120,000 $120.0 25,651 $25.6 -- $ -- $1,050.7 $ (18.7) $ 297.1 $1,474.7
======= ====== ====== ===== ======= ====== ======== ======= ======= ========
- -------
(a) Presented net of deferred taxes of $(61.8), $103.3 and $16.1 in 2000, 1999
and 1998, respectively.
See accompanying notes to consolidated financial statements.
F-4
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollar amounts in millions)
Years Ended December 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities:
Net income................................... $ 163.1 $ 112.9 $ 105.8
--------- --------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Cost of insurance and surrender fees........ (149.3) (169.5) (171.6)
Increase in future policy benefits.......... 688.9 565.5 440.6
Net realized investment gains............... (4.3) (12.0) (29.6)
Amortization of investment premiums and
discounts.................................. (3.4) (1.3) (1.3)
Amortization of intangibles................. 43.7 58.3 64.8
Deferred income tax expense (benefit)....... 94.5 25.0 29.5
Change in certain assets and liabilities:
Decrease (increase) in:
Accrued investment income................. (25.7) (48.6) 1.5
Deferred acquisition costs................ (237.7) (179.1) (74.7)
Other assets, net......................... 188.2 (200.1) (30.3)
Increase (decrease) in:
Policy and contract claims................ 25.5 (43.4) 18.0
Other policyholder liabilities............ 26.8 20.0 2.5
Accounts payable and accrued expenses..... 276.2 73.8 19.6
--------- --------- ---------
Total adjustments....................... 923.4 88.6 269.0
--------- --------- ---------
Net cash provided by operating
activities............................. 1,086.5 201.5 374.8
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales and maturities of
investment securities and other invested
assets...................................... 1,997.0 1,702.2 2,238.0
Principal collected on mortgage loans........ 102.1 103.3 138.3
Proceeds collected from policy loan
securitization.............................. -- 145.1 --
Purchase of investment securities and other
invested assets............................. (3,017.1) (3,086.2) (2,685.4)
Mortgage loan originations and increase in
policy loans................................ (437.4) (170.4) (212.3)
--------- --------- ---------
Net cash used in investing activities... (1,355.4) (1,306.0) (521.4)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issue of investment contracts.. 5,274.4 4,717.6 2,280.0
Redemption and benefit payments on investment
contracts................................... (4,946.8) (3,593.4) (2,016.2)
Cash dividend to shareholders................ (9.6) (9.6) (120.0)
--------- --------- ---------
Net cash provided by financing
activities............................. 318.0 1,114.6 143.8
--------- --------- ---------
Net increase (decrease) in cash and
equivalents............................ 49.1 10.1 (2.8)
Cash and cash equivalents at beginning of
year......................................... 21.2 11.1 13.9
--------- --------- ---------
Cash and cash equivalents at end of year...... $ 70.3 $ 21.2 $ 11.1
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include the historical
operations and accounts of GE Life and Annuity Assurance Company and its
subsidiary, Assigned Settlements Inc. (collectively the "Company" or
"GELAAC"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Effective January 1, 1999, an affiliated company, The Harvest Life Insurance
Company ("Harvest") merged into The Life Insurance Company of Virginia ("LOV")
with the merged Company renamed GE Life and Annuity Assurance Company
("GELAAC"). Harvest's former parent, Federal Home Life Insurance Company
("FHLIC"), received common stock of GELAAC in exchange for its interest in
Harvest. FHLIC is an indirect wholly-owned subsidiary of GE Financial
Assurance Holdings, Inc. ("GEFAHI"). As the merged entities were under common
control, the transaction has been accounted for similar to a pooling of
interest. Accordingly, the financial statements have been restated for GELAAC
for the year ended December 31, 1998 as if Harvest had been a part of LOV as
of January 1, 1998.
The majority of GELAAC's outstanding common stock is owned by General
Electric Capital Assurance Company ("GECA"). GECA is an indirect wholly-owned
subsidiary of GEFAHI, which is an indirect wholly-owned subsidiary of GE
Capital Corporation ("GECC"). GECC is an indirect wholly-owned subsidiary of
General Electric Company.
(b) Basis of Presentation
The accompanying consolidated financial statements have been prepared on the
basis of accounting principles generally accepted in the United States of
America ("GAAP") for insurance companies. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts and related disclosures. Actual
results could differ from those estimates.
(c) Products
The Company's product offerings are divided along two major segments of
consumer needs: (i) Wealth Accumulation and Transfer and (ii) Lifestyle
Protection and Enhancement.
The Company's principal product lines under the Wealth Accumulation and
Transfer segment are (i) annuities (deferred and immediate; either fixed or
variable); (ii) life insurance (universal, variable, ordinary and group),
(iii) guaranteed investment contracts ("GICs") including funding agreements
and (iv) mutual funds. Wealth Accumulation and Transfer products are used by
customers as vehicles for accumulating wealth, often on a tax-deferred basis,
transferring wealth to beneficiaries, or providing a means to replace the
insured's income in the event of premature death. The Company's distribution
of Wealth Accumulation and Transfer products is accomplished through two
distribution methods: (i) intermediaries and (ii) career or dedicated sales
forces.
The Company's principal product lines under the Lifestyle Protection and
Enhancement segment are (i) long-term care insurance and (ii) supplemental
accident and health insurance. Lifestyle Protection and Enhancement products
are used by customers as vehicles to protect their income and assets from the
adverse economic impacts of significant health care costs or other
unanticipated events that cause temporary or permanent loss of earnings
capabilities (including the ability to repay certain indebtedness). The
Company's distribution of Lifestyle Protection and Enhancement products is
accomplished through two distribution methods: (i) intermediaries and (ii)
career or dedicated sales forces.
F-6
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
Approximately 18%, 17% and 20% of premium and annuity consideration
collected, in 2000, 1999, and 1998, respectively, came from customers residing
in the South Atlantic region of the United States, and approximately 24%, 17%
and 27% of premium and annuity consideration collected, in 2000, 1999, and
1998, respectively, came from customers residing in the Mid-Atlantic region of
the United States.
Although the Company markets its products through numerous distributors,
approximately 25%, 28% and 20% of the Company's sales of variable products in
2000, 1999, and 1998, respectively, have been through two specific national
stockbrokerage firms (part of the Wealth Accumulation and Transfer segment.)
Loss of all or a substantial portion of the business provided by these
stockbrokerage firms could have a material adverse effect on the business and
operations of the Company. The Company does not believe, however, that the
loss of such business would have a long-term adverse effect because of the
Company's competitive position in the marketplace, the availability of
business from other distributors, and the Company's mix of other products.
(d) Revenues
Investment income is recorded when earned. Realized investment gains and
losses are calculated on the basis of specific identification. Premiums on
long-duration insurance products are recognized as earned when due or, in the
case of life contingent immediate annuities, when the contracts are issued.
Premiums received under annuity contracts without significant mortality risk
and premiums received on universal life products are not reported as revenues
but as liabilities for future annuity and contract benefits. Cost of insurance
is charged to universal life policyholders based upon at risk amounts, and is
recognized as revenue when due. Variable product fees are charged to variable
annuity and variable life policyholders based upon the daily net assets of the
policyholders' account values, and are recognized as revenue when charged.
Other income consists primarily of surrender charges on certain policies.
Surrender charges are recognized as income when the policy is surrendered.
(e) Investments
The Company has designated its fixed maturities (bonds, notes, mortgage-
backed securities, asset-backed securities and redeemable preferred stock) and
equity securities (common and non-redeemable preferred stock) as available-
for-sale. The fair value for regularly traded fixed maturities and equity
securities is based on individual quoted market prices. For fixed maturities
not regularly traded, fair values are estimated using values obtained from
independent pricing services or, are estimated by discounting expected future
cash flows using a current market rate applicable to the credit quality,
industry sector, call features and maturity of the investments, as applicable.
Changes in the fair values of investments available-for-sale, net of the
effect on deferred policy acquisition costs, present value of future profits
and deferred federal income taxes are reflected as unrealized investment gains
or losses and, accordingly, have no effect on net income, but are shown as a
component of accumulated non-owner changes in equity in the Consolidated
Statements of Shareholders' Interest. Unrealized losses that are considered
other than temporary are recognized in earnings through an adjustment to the
amortized cost basis of the underlying securities. The allowance for losses is
determined primarily on the basis of management's best estimate of probable
losses, including specific allowances for known troubled credits, if any.
Writedowns and the change in reserves are included in net realized investment
gains and losses in the Consolidated Statements of Income. In general, the
Company ceases to accrue investment income when interest or dividend payments
are 90 days in arrears.
Investment income on mortgage-backed and asset-backed securities is
initially based upon yield, cash flow and prepayment assumptions at the date
of purchase. Subsequent revisions in those assumptions are recorded using the
retrospective method, whereby the amortized cost of the securities is adjusted
to the amount that would have existed had the revised assumptions been in
place at the date of purchase. The adjustments to amortized cost are recorded
as a charge or credit to investment income.
F-7
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
Mortgage loans and policy loans are carried at their unpaid principal
balance, net of allowances for estimated uncollectible amounts. Short-term
investments, if any, are carried at amortized cost which approximates fair
value. Equity securities are carried at fair value. Investments in limited
partnerships are generally accounted for under the equity method of
accounting. Real estate is carried, generally, at cost less accumulated
depreciation. Other long-term investments are carried generally at amortized
cost.
Under certain securities lending transactions, the Company requires the
borrower provide collateral, consisting primarily of cash and government
securities, on a daily basis, in amounts equal to or exceeding 102% of the
market value of the applicable securities loaned.
(f) Deferred Acquisition Costs
Acquisition costs include costs and expenses which vary with and are
primarily related to the acquisition of insurance and investment contracts.
Deferred acquisition costs include first-year commissions in excess of
recurring renewal commissions, as well as other qualified non-commission
policy acquisition costs. For investment and universal life type contracts,
amortization is based on the present value of anticipated gross profits from
investments, interest credited, surrender and other policy charges, and
mortality and maintenance expenses. Amortization is adjusted retroactively
when current estimates of future gross profits to be realized are revised. For
other long-duration insurance contracts, the acquisition costs are amortized
in relation to the estimated benefit payments or the present value of expected
future premiums.
Deferred acquisition costs are reviewed to determine if they are recoverable
from future income, including investment income, and, if not considered
recoverable, are charged to expense.
(g) Intangible Assets
Present Value of Future Profits -- In conjunction with the acquisition of
the Company, a portion of the purchase price was assigned to the right to
receive future gross profits arising from existing insurance and investment
contracts. This intangible asset, called present value of future profits
(PVFP), represents the actuarially determined present value of the projected
future cash flows from the acquired policies.
Goodwill -- Goodwill is amortized over a period of 20 years on the straight-
line method. Goodwill in excess of associated expected operating cash flows is
considered to be impaired and is written down to fair value. No such write-
downs have occurred.
(h) Federal Income Taxes
Deferred income taxes have been provided for the effects of temporary
differences between financial reporting and tax bases of assets and
liabilities and have been measured using the enacted marginal tax rates and
laws that are currently in effect.
(i) Reinsurance
Premium revenue, benefits, underwriting, acquisition and insurance expenses
are reported net of the amounts relating to reinsurance ceded to other
companies. Amounts due from reinsurers for incurred future claims are
reflected in the reinsurance recoverable asset. The cost of reinsurance is
accounted for over the terms of the related treaties using assumptions
consistent with those used to account for the underlying reinsured policies.
(j) Future Annuity and Contract Benefits
Future annuity and contract benefits consist of the liability for investment
contracts, insurance contracts and accident and health contracts. Investment
contract liabilities are generally equal to the policyholder's current account
value. The
F-8
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
liability for insurance and accident and health contracts is calculated based
upon actuarial assumptions as to mortality, morbidity, interest, expense and
withdrawals, with experience adjustments for adverse deviation where
appropriate.
(k) Liability for Policy and Contract Claims
The liability for policy and contract claims represents the amount needed to
provide for the estimated ultimate cost of settling claims relating to insured
events that have occurred on or before the end of the respective reporting
period. The estimated liability includes requirements for future payments of
(a) claims that have been reported to the insurer, and (b) claims related to
insured events that have occurred but that have not been reported to the
insurer as of the date the liability is estimated.
(l) Separate Account Assets and Liabilities
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity and variable life contract owners.
The Company receives mortality risk fees and administration charges from the
variable mutual fund portfolios. The separate account assets are carried at
fair value and are equivalent to the liabilities that represent the
policyholders' equity in those assets.
The Company has periodically transferred capital to the separate accounts to
provide for the initial purchase of investments in new mutual fund portfolios.
As of December 31, 2000, approximately $67.9 of the Company's other invested
assets related to its capital investments in the separate accounts.
(m) Interest Rate Risk Management
As a matter of policy, the Company does not engage in derivatives trading,
market-making or other speculative activities.
The Company uses interest rate floors primarily to minimize the risk on
investment contracts with minimum guaranteed interest rates. The Company
requires all interest rate floors to be designated and accounted for as hedges
of specific assets, liabilities or committed transactions; resulting payments
and receipts are recognized contemporaneously with effects of hedged
transactions. A payment or receipt arising from early termination of an
effective hedge is accounted for as an adjustment to the basis of the hedged
transaction.
Instruments used as hedges must be effective at reducing the risk associated
with the exposure being hedged and must be designated as a hedge at the
inception of the contract. Accordingly, changes in market values of hedged
instruments must be highly correlated with changes in market values of
underlying hedged items both at inception of the hedge and over the life of
the hedge contract. Any instrument designated but ineffective as a hedge is
marked to market and recognized in operations immediately.
F-9
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
(2) Investments
(a) General
The sources of investment income of the Company as of December 31, were as
follows:
2000 1999 1998
------ ------ ------
Fixed maturities..................................... $624.9 $560.1 $489.8
Equity securities.................................... -- -- 4.9
Mortgage loans....................................... 80.0 66.9 64.2
Policy loans......................................... 4.6 14.0 14.4
Other investments.................................... 6.7 2.5 6.7
------ ------ ------
Gross investment income.............................. 716.2 643.5 580.0
Investment expenses.................................. (7.3) (5.3) (5.3)
------ ------ ------
Net investment income................................ $708.9 $638.2 $574.7
====== ====== ======
For the years ended December 31, sales proceeds and gross realized
investment gains and losses from the sales of investment securities available-
for-sale were as follows:
2000 1999 1998
------ ------ --------
Sales proceeds..................................... $874.2 $590.3 $1,330.0
====== ====== ========
Gross realized investment:
Gains............................................. 29.3 28.6 43.8
Losses............................................ (25.0) (16.6) (14.2)
------ ------ --------
Net realized investment gains...................... $ 4.3 $ 12.0 $ 29.6
====== ====== ========
The additional proceeds from the investments presented in the Consolidated
Statements of Cash Flows result from principal collected on mortgage-backed
securities, asset-backed securities, maturities, calls and sinking fund
payments.
Net unrealized gains and losses on investment securities and other invested
assets classified as available-for-sale are reduced by deferred income taxes
and adjustments to the present value of future profits and deferred policy
acquisition costs that would have resulted had such gains and losses been
realized. Net unrealized gains and losses on available-for-sale investment
securities and other invested assets reflected as a separate component of
shareholders' interest as of December 31, are summarized as follows:
2000 1999 1998
------ ------- ------
Net unrealized gains/(losses) on available-for-
sale investment securities and other invested
assets before adjustments:
Fixed maturities................................ $(34.4) $(245.0) $138.2
Equity securities............................... (1.6) (0.4) 5.5
Other invested assets........................... (3.2) (4.1) 2.3
------ ------- ------
Subtotal....................................... (39.2) (249.5) 146.0
====== ======= ======
Adjustments to the present value of future
profits and deferred acquisition costs.......... 10.1 43.1 (57.1)
Deferred income taxes............................ 10.4 72.2 (31.1)
------ ------- ------
Net unrealized gains/(losses).................. $(18.7) $(134.2) $ 57.8
====== ======= ======
F-10
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
The change in the net unrealized gains (losses) on investment securities
reported in accumulated non-owner changes in equity is as follows:
2000 1999 1998
------- ------ ------
Net unrealized gains (losses) on investment
securities -- beginning of year................... $(134.2) $ 57.8 $ 87.7
Unrealized gains (losses) on investment
securities -- net of deferred taxes of ($63.3),
$99.1 and $5.7.................................... 118.3 (184.2) (10.7)
Reclassification adjustments - net of deferred
taxes of $1.5, $4.5 and $10.4..................... (2.8) (7.8) (19.2)
------- ------ ------
Net unrealized gain (losses) on investment
securities - end of year.......................... (18.7) (134.2) 57.8
======= ====== ======
At December 31, the amortized cost, gross unrealized gains and losses, and
fair values of the Company's fixed maturities and equity securities available-
for-sale were as follows:
Gross Gross
Amortized unrealized unrealized Fair
2000 cost gains losses value
---- --------- ---------- ---------- --------
Fixed maturities:
U.S. government and agency....... $ 10.3 $ 0.3 $ -- $ 10.6
State and municipal.............. 1.3 -- -- 1.3
Non-U.S. government.............. 3.0 -- -- 3.0
U.S. corporate................... 5,705.5 24.2 (148.8) 5,580.9
Non-U.S. corporate............... 851.2 35.3 (2.2) 884.3
Mortgage-backed.................. 1,762.2 44.0 -- 1,806.2
Asset-backed..................... 961.4 12.8 -- 974.2
-------- ------ ------- --------
Total fixed maturities.......... 9,294.9 116.6 (151.0) 9,260.5
Common stocks and non-redeemable
preferred stocks................. 37.7 0.9 (2.5) 36.1
-------- ------ ------- --------
Total available-for-sale
securities....................... $9,332.6 $117.5 $(153.5) $9,296.6
======== ====== ======= ========
Gross Gross
Amortized unrealized unrealized Fair
1999 cost gains losses value
---- --------- ---------- ---------- --------
Fixed maturities:
U.S. government and agency....... $ 9.8 $ 0.1 $ (0.2) $ 9.7
State and municipal.............. 1.5 -- -- 1.5
Non-U.S. government.............. 3.0 -- (0.2) 2.8
U.S. corporate................... 4,936.3 21.4 (227.6) 4,730.1
Non-U.S. corporate............... 624.6 8.1 (17.8) 614.9
Mortgage-backed.................. 1,696.5 16.9 (27.4) 1,686.0
Asset-backed..................... 1,007.0 1.5 (19.8) 988.7
-------- ------ ------- --------
Total fixed maturities.......... 8,278.7 48.0 (293.0) 8,033.7
Common stocks and non-redeemable
preferred stocks................. 33.5 1.3 (1.7) 33.1
-------- ------ ------- --------
Total available-for-sale
securities....................... $8,312.2 $ 49.3 $(294.7) $8,066.8
======== ====== ======= ========
F-11
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
The scheduled maturity distribution of the fixed maturity portfolio at
December 31, 2000 follows. Expected maturities may differ from scheduled
contractual maturities because issuers of securities may have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
--------- --------
Due in one year or less.................................. $ 329.1 $ 330.8
Due one year through five years.......................... 3,009.6 2,984.2
Due five years through ten years......................... 1,855.7 1,830.2
Due after ten years...................................... 1,376.9 1,334.9
-------- --------
Subtotals.............................................. 6,571.3 6,480.1
Mortgage-backed securities............................... 1,762.2 1,806.2
Asset-backed securities.................................. 961.4 974.2
-------- --------
Totals................................................. $9,294.9 $9,260.5
======== ========
As required by law, the Company has investments on deposit with governmental
authorities and banks for the protection of policyholders of $5.6 and $5.9 as
of December 31, 2000 and 1999, respectively.
As of December 31, 2000, approximately 28.0% and 18.2% of the Company's
investment portfolio is comprised of securities issued by the manufacturing
and financial industries, respectively, the vast majority of which are rated
investment grade, and which are senior secured bonds. No other industry group
comprises more than 10% of the Company's investment portfolio. This portfolio
is widely diversified among various geographic regions in the United States,
and is not dependent on the economic stability of one particular region.
As of December 31, 2000 the Company did not hold any fixed maturity
securities which exceeded 10% of shareholders' interest.
The credit quality of the fixed maturity portfolio at December 31, follows.
The categories are based on the higher of the ratings published by Standard &
Poors or Moody's.
2000 1999
---------------- ----------------
Fair Fair
value Percent value Percent
-------- ------- -------- -------
Agencies and treasuries................... $ 226.8 2.5% $ 284.7 3.5%
AAA/Aaa................................... 2,406.5 26.0 2,080.7 25.9
AA/Aa..................................... 645.7 7.0 461.7 5.7
A/A....................................... 2,161.3 23.3 1,807.5 22.5
BBB/Baa................................... 2,259.4 24.4 2,078.2 25.9
BB/Ba..................................... 365.9 4.0 368.2 4.6
B/B....................................... 168.0 1.8 191.6 2.4
CCC/Ca.................................... 10.1 0.1 0.7 0.0
CC/Ca..................................... 2.9 0.0 0.1 0.0
C......................................... -- 0.0 -- 0.0
D......................................... 4.4 0.0 -- 0.0
Not rated................................. 1,009.5 10.9 760.3 9.5
-------- ----- -------- -----
Totals.................................. $9,260.5 100.0% $8,033.7 100.0%
======== ===== ======== =====
F-12
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
Bonds with ratings ranging from AAA/Aaa to BBB-/Baa are generally regarded
as investment grade securities. Some agencies and treasuries (that is, those
securities issued by the United States government or an agency thereof) are
not rated, but all are considered to be investment grade securities. Finally,
some securities, such as private placements, have not been assigned a rating
by any rating service and are therefore categorized as "not rated." This has
neither positive nor negative implications regarding the value of the
security.
At December 31, 2000 and 1999, there were fixed maturities in default with a
fair value of $6.4 and $1.0, respectively.
(b) Mortgage and Real Estate Portfolio
The Company's mortgage and real estate portfolio is distributed by
geographic location and type. However, the Company has concentration exposures
in certain regions and in certain types as shown in the following two tables.
Geographic distribution as of December 31, 2000:
Mortgage Real Estate
-------- -----------
South Atlantic.......................................... 30.5% 100.0%
Pacific................................................. 26.8 --
East North Central...................................... 10.5 --
West South Central...................................... 6.8 --
Mountain................................................ 9.9 --
Other................................................... 15.5 --
----- -----
Totals................................................ 100.0% 100.0%
===== =====
Type distribution as of December 31, 2000:
Mortgage Real Estate
-------- -----------
Office Building......................................... 26.6% -- %
Retail.................................................. 26.5 100.0
Industrial.............................................. 34.6 --
Apartments.............................................. 8.8 --
Other................................................... 3.5 --
----- -----
Totals................................................ 100.0% 100.0%
===== =====
"Impaired" loans are defined under GAAP as loans for which it is probable
that the lender will be unable to collect all amounts due according to the
original contractual terms of the loan agreement. That definition excludes,
among other things, leases or large groups of smaller-balance homogenous
loans, and therefore applies principally to the Company's commercial loans.
Under these principles, the Company has two types of "impaired" loans as of
December 31, 2000 and 1999: loans requiring allowances for losses and loans
expected to be fully recoverable because the carrying amount has been reduced
previously through charge-offs or deferral of income recognition ($0.0 and
$6.3, respectively). There was no allowance for losses on these loans as of
December 31, 2000, 1999 and 1998. Average investment in impaired loans during
2000, 1999 and 1998 was $11.5, $15.0 and $20.0 and interest income earned on
these loans while they were considered impaired was $.8, $2.6 and $1.8 for the
years ended 2000, 1999 and 1998, respectively.
F-13
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
The following table shows the activity in the allowance for losses during
the years ended December 31:
2000 1999 1998
------ ----- -----
Balance on January 1.................................... $ 23.3 $20.9 $17.7
Provision (benefit) charged (credited) to operations.... (11.1) 1.6 1.5
Amounts written off, net of recoveries.................. 2.1 0.8 1.7
------ ----- -----
Balance -- at December 31............................... $ 14.3 $23.3 $20.9
====== ===== =====
During 2000, as part of its on-going analysis of exposure to losses arising
from mortgage loans, the Company recognized a $12.7 reduction in its allowance
for losses.
The allowance for losses on mortgage loans at December 31, 2000, 1999 and
1998 represented 1.3%, 2.8% and 2.7% of gross mortgage loans, respectively.
The Company had $5.0, $4.5 and $5.6 of non-income producing mortgage loan
investments as of December 31, 2000, 1999 and December 31, 1998, respectively.
(3) Deferred Acquisition Costs
Activity impacting deferred policy acquisition costs for the years ended
December 31, was as follows:
2000 1999 1998
------ ------ ------
Unamortized balance -- at January 1................ $475.2 $296.1 $221.4
Costs deferred..................................... 304.4 218.9 107.0
Amortization, net.................................. (66.7) (39.8) (32.3)
------ ------ ------
Unamortized balance -- at December 31.............. 712.9 475.2 296.1
Cumulative effect of net unrealized investment
(gains) losses.................................... 2.8 7.3 (13.3)
------ ------ ------
Balance at December 31............................. $715.7 $482.5 $282.8
====== ====== ======
(4) Intangibles
(a) Present Value of Future Profits (PVFP)
PVFP reflects the estimated fair value of the Company's life insurance
business in-force and represents the portion of the cost to acquire the
Company that is allocated to the value of the right to receive future cash
flows from investment and insurance contracts existing at the date of
acquisition. Such value is the present value of the actuarially determined
projected cash flows for the acquired policies discounted at an appropriate
rate.
PVFP is amortized, net of accreted interest, in a manner similar to the
amortization of deferred acquisition costs. Interest accretes at rates
credited to policyholders on underlying contracts. Recoverability of PVFP is
evaluated periodically by comparing the current estimate of expected future
gross profits to the unamortized asset balance. If such a comparison indicates
that the expected gross profits will not be sufficient to recover PVFP, the
difference is charged to expense.
PVFP is further adjusted to reflect the impact of unrealized gains or losses
on fixed maturities classified as available for sale in the investment
portfolios. Such adjustments are not recorded in the Company's net income but
rather as a credit or charge to shareholders' interest, net of applicable
income tax.
F-14
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
The components of PVFP are as follows:
2000 1999 1998
------ ------ ------
Unamortized balance -- at January 1................ $314.8 $367.0 $426.9
Interest accrued at 6.40%, 7.19% and 6.25% for
2000, 1999, and 1998, respectively................ 17.1 21.9 24.0
Amortization....................................... (53.8) (74.1) (83.9)
------ ------ ------
Unamortized balance -- at December 31.............. 278.1 314.8 367.0
Cumulative effect of net unrealized investment
(gains) losses.................................... 7.3 35.8 (43.8)
------ ------ ------
Balance -- at December 31.......................... $285.4 $350.6 $323.2
====== ====== ======
The estimated percentage of the December 31, 2000 balance, before the effect
of unrealized investment gains or losses, to be amortized over each of the
next five years is as follows:
2001........................................ 13.5%
2002........................................ 11.2
2003........................................ 9.5
2004........................................ 8.1
2005........................................ 6.9
(b) Goodwill
At December 31, 2000 and 1999, total unamortized goodwill was $114.4 and
$121.4, respectively, which is shown net of accumulated amortization and
adjustments of $36.3 and $29.3 for the years ended December 31, 2000 and 1999,
respectively. Goodwill amortization was $7.0, $6.0, and $4.9 for the years
ending December 31, 2000, 1999 and 1998, respectively. Cumulative adjustments
to goodwill totaled ($6.8) and ($27.6) for the years ending December 31, 1999
and 1998, respectively.
(5) Reinsurance and Claim Reserves
GELAAC is involved in both the cession and assumption of reinsurance with
other companies. GELAAC's reinsurance consists primarily of long-duration
contracts that are entered into with financial institutions and related party
reinsurance. Although these reinsurance agreements contractually obligate the
reinsurers to reimburse the Company, they do not discharge the Company from
its primary liabilities and the Company remains liable to the extent that the
reinsuring companies are unable to meet their obligations.
In order to limit the amount of loss retention, certain policy risks are
reinsured with other insurance companies. The maximum of individual ordinary
life insurance normally retained by the Company on any one life policy is $1.
The Company does not have significant reinsurance contracts with any one
reinsurer that could have a material impact on its results of operations.
The effects of reinsurance on premiums written and earned for the years
ended December 31 were as follows:
2000 1999 1998
------ ------ ------
Direct............................................... $345.9 $348.0 $427.5
Assumed.............................................. 18.4 17.9 19.2
Ceded................................................ (122.0) (113.0) (195.1)
------ ------ ------
Net premiums earned.................................. $242.3 $252.9 $251.6
------ ------ ------
Percentage of amount assumed to net.................. 8% 7% 8%
====== ====== ======
Due to the nature of the Company's insurance contracts, premiums earned
approximate premiums written. The above premium amounts include cost of
insurance charges on universal life policies.
F-15
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
During 1998, a significant portion of GELAAC's ceded premiums related to
group life and health premiums. During 1998, GELAAC was the primary carrier
for the State of Virginia employees group life and health plan. By statute,
GELAAC had to reinsure these risks with other Virginia domiciled companies who
wished to participate.
Incurred losses and loss adjustment expenses are net of reinsurance of
$54.3, $68.2 and $112.4 for the years ended December 31, 2000, 1999 and 1998,
respectively.
(6) Future Annuity and Contract Benefits
(a) Investment Contracts
Investment contracts are broadly defined to include contracts without
significant mortality or morbidity risk. Payments received from sales of
investment contracts are recognized by providing a liability equal to the
current account value of the policyholder's contracts. Interest rates credited
to investment contracts are guaranteed for the initial policy term with
renewal rates determined as necessary by management.
(b) Insurance Contracts
Insurance contracts are broadly defined to include contracts with
significant mortality and/or morbidity risk. The liability for future benefits
of insurance contracts is the present value of such benefits based on
mortality, morbidity, and other assumptions which were appropriate at the time
the policies were issued or acquired. These assumptions are periodically
evaluated for potential premium deficiencies. Reserves for cancelable accident
and health insurance are based upon unearned premiums, claims incurred but not
reported, and claims in the process of settlement. This estimate is based on
the experience of the insurance industry and the Company, adjusted for current
trends. Any changes in the estimated liability are reflected in income as the
estimates are revised.
The following chart summarizes the major assumptions underlying the
Company's recorded liabilities for future annuity and contract benefits:
Mortality/ December 31,
Withdrawal Morbidity Interest Rate -----------------
Assumption Assumption Assumption 2000 1999
------------------ ---------- -------------------- -------- --------
Investment Contracts.... N/A N/A N/A $7,759.7 $6,891.1
Limited-payment
Contracts.............. None (a) 4.0-9.3% 17.4 16.3
Traditional life
insurance contracts.... Company Experience (b) 7.0% 362.3 380.8
Universal life-type
contracts.............. N/A N/A N/A 1,747.5 1,730.2
Accident & Health....... Company Experience (c) 7.5% grading to 5.5% 47.4 44.6
-------- --------
Total future annuity and
contract benefits...... $9,934.3 $9,063.0
======== ========
- -------
(a) Either the United States Population Table, 1983 Group Annuitant Mortality
Table or 1983 Individual Annuitant Mortality Table.
(b) Principally modifications of the 1965-70 or 1975-80 Select and Ultimate
Tables.
(c) The 1958 Commissioner's Standard Ordinary Table, 1964 modified and 1987
Commissioner's Disability Tables, and Company experience.
(7) Income Taxes
GELAAC and its subsidiary have been included in the life insurance company
consolidated federal income tax return of GECA and are also subject to a
separate tax-sharing agreement, as approved by state insurance regulators, the
provisions of which are substantially the same as the tax-sharing agreement
with GE Capital.
F-16
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
The total provision for income taxes for the years ended December 31,
consisted of the following components:
2000 1999 1998
------ ----- -----
Current federal income tax provision (benefit).......... $(20.8) $29.3 $29.2
Deferred federal income tax provision................... 90.5 24.9 28.7
------ ----- -----
Subtotal-federal provision............................ 69.7 54.2 57.9
Current state income tax provision (benefit)............ (0.8) 2.3 1.6
Deferred state income tax provision..................... 4.0 0.1 0.8
------ ----- -----
Subtotal-state provision.............................. 3.2 2.4 2.4
------ ----- -----
Total income tax provision............................ $ 72.9 $56.6 $60.3
====== ===== =====
The reconciliation of the federal statutory rate to the effective income tax
rate at December 31, is as follows:
2000 1999 1998
---- ---- ----
Statutory U.S. federal income tax rate..................... 35.0% 35.0% 35.0%
State income tax........................................... 0.5 0.5 0.5
Non-deductible goodwill amortization....................... 1.0 1.2 1.0
Dividends-received deduction............................... (1.7) (1.6) 0.0
Other, net................................................. (3.9) (0.7) (0.2)
---- ---- ----
Effective rate........................................... 30.9% 34.4% 36.3%
==== ==== ====
The components of the net deferred income tax asset (liability) at December
31 are as follows:
2000 1999
------ ------
Assets:
Insurance reserve amounts................................... $165.6 $149.0
Investments................................................. -- 10.7
Net unrealized investment losses on investment securities... 10.4 72.2
Other....................................................... -- 22.2
------ ------
Total deferred tax assets.................................. 176.0 254.1
------ ------
Liabilities:
Investments................................................. 5.3 --
Present value of future profits............................. 50.3 59.6
Deferred acquisition costs.................................. 149.6 74.2
Other....................................................... 2.8 --
------ ------
Total deferred tax liabilities............................. 208.0 133.8
------ ------
Net deferred income tax asset (liability).................. $(32.0) $120.3
====== ======
Based on an analysis of the Company's tax position, management believes it
is more likely than not that the results of future operations and
implementation of tax planning strategies will generate sufficient taxable
income enabling the Company to realize remaining deferred tax assets.
Accordingly, no valuation allowance for deferred tax assets is deemed
necessary.
The Company paid $41.1, $41.8 and $25.6, for federal and state income taxes
for the years ended December 31, 2000, 1999 and 1998, respectively.
F-17
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
(8) Related Party Transactions
GELAAC pays investment advisory fees and other fees to affiliates. Amounts
incurred for these items aggregated $11.1, $14.8 and $11.5 for the years ended
December 31, 2000, 1999 and 1998, respectively. GELAAC charges affiliates for
certain services and for the use of facilities and equipment which aggregated
$55.2, $45.1 and $19.1, for the years ended December 31, 2000, 1999 and 1998,
respectively.
GELAAC pays interest on outstanding amounts under a credit funding agreement
with GNA Corporation, the parent company of GECA. Interest expense under this
agreement was $1.1, $1.9 and $2.2 for the years ended December 31, 2000, 1999
and 1998, respectively. There were no outstanding borrowings at December 31,
1999, while balances outstanding were $85.7 and $64.3 at December 31, 2000 and
1998, respectively.
During 1998, GELAAC sold $18.5 of third-party preferred stock investments to
an affiliate. This resulted in a gain on sale of $3.9, which is included in
net realized investment gains.
(9) Commitments and Contingencies
(a) Mortgage Loan Commitments
GELAAC has certain investment commitments to provide fixed-rate loans. The
investment commitments, which would be collateralized by related properties of
the underlying investments, involve varying elements of credit and market
risk. Investment commitments outstanding as of December 31, 2000 and 1999,
totaled $3.6 and $30.8, respectively.
(b) Guaranty Association Assessments
The Company is required by state law to participate in the guaranty
associations of the various states in which they do business. The state
guaranty associations ensure payment of guaranteed benefits, with certain
restrictions, to policyholders of impaired or insolvent insurance companies by
assessing all other companies involved in similar lines of business.
There are currently several unrelated insurance companies which had
substantial amounts of annuity business in the process of liquidation or
rehabilitation. The Company paid assessments of $.5, $.1, and $3.1 to various
state guaranty associations during 2000, 1999 and 1998, respectively. At
December 31, 2000 and 1999, accounts payable and accrued expenses include $4.6
and $4.1, respectively, related to estimated future payments. Also, see note
15.
(c) Litigation
The Company and its subsidiary are defendants in various cases of litigation
considered to be in the normal course of business. The Company believes that
the outcome of such litigation will not have a material effect on its
financial position or results of operations.
(10) Fair Value of Financial Instruments
The Company has no derivative financial instruments as of December 31, 2000
and 1999 other than mortgage loan commitments of $9.6 and $53.0 and interest
rate floors of $10.5 and $13.9, respectively. The notional value of the
interest rate floors at December 31, 2000 and 1999, was $1,800 and the floors
expire from September 2003 to October 2003. During the year ended December 31,
2000, the Company purchased a total notional value of $6.0 in swaptions and
$370.0 in interest rate swaps. The swaptions expire in December, 2023. The
interest rate swaps mature from February, 2004 to December, 2048.
F-18
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
Fair value estimates are made at a specific point in time based on relevant
market information and valuation methodologies considered appropriate by
management. These estimates may be subjective in nature and involve
uncertainties and significant judgment in the interpretation of current market
data. Therefore, the fair values presented are not necessarily indicative of
amounts the Company could realize or settle currently. Changes in the
assumptions could significantly affect the estimates. As such, the derived
fair value estimates cannot necessarily be substantiated by comparison to
independent markets and may differ from the amounts that might be involved in
an immediate settlement of the instrument. The Company does not necessarily
intend to dispose of or liquidate such instruments prior to maturity. Fair
value estimates are made at a specific point in time based on relevant market
information and valuation methodologies considered appropriate by management.
These estimates may be subjective in nature and involve uncertainties and
significant judgment in the interpretation of current market data. Therefore,
the fair values presented are not necessarily indicative of amounts the
Company could realize or settle currently. Changes in the assumptions could
significantly affect the estimates. As such, the derived fair value estimates
cannot necessarily be substantiated by comparison to independent markets and
may differ from the amounts that might be involved in an immediate settlement
of the instrument. The Company does not necessarily intend to dispose of or
liquidate such instruments prior to maturity.
Financial instruments that, as a matter of accounting policy, are reflected
in the accompanying consolidated financial statements at fair value are not
included in the following disclosures. Such items include fixed maturities,
equity securities and certain other invested assets. The carrying value of
policy loans and short-term investments approximate fair value at both
December 31, 2000 and 1999.
At December 31, the carrying amounts and fair value of the Company's
financial instruments were as follows:
2000 1999
----------------- -----------------
Carrying Fair Carrying Fair
amount value amount value
-------- -------- -------- --------
Mortgage loans......................... $1,130.0 $1,174.0 $ 810.5 $ 819.4
Investment type insurance contracts.... 7,759.7 7,339.5 6,891.1 6,849.8
Interest rate floors................... 10.5 1.8 13.9 1.2
Swaptions.............................. 0.5 0.4 -- --
Interest rate swaps.................... -- (12.2) -- --
The fair value of mortgage loans is estimated by discounting the estimated
future cash flows using interest rates applicable to current loan origination,
adjusted for credit risk.
The estimated fair value of investment contracts is the amount payable on
demand (cash surrender value) for deferred annuities and the net present value
based on interest rates currently offered on similar contracts for non-life
contingent immediate annuities. Fair value disclosures are not required for
insurance contracts.
(11) Restrictions on Dividends
Insurance companies are restricted by states as to the aggregate amount of
dividends they may pay to their parent in any consecutive twelve-month period
without regulatory approval. Generally, dividends may be paid out of earned
surplus without approval with thirty days prior written notice within certain
limits. The limits are generally based on 10% of the prior year surplus (net
of adjustments in some cases) and prior year statutory income (net gain from
operations, net income adjusted for realized capital gains, or net investment
income). Dividends in excess of the prescribed limits or the Company's earned
surplus require formal state insurance commission approval. Based on statutory
results as of December 31, 2000, the Company is able to payout $59.4 in
dividends in 2001 without obtaining regulatory approval.
F-19
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
On December 3, 1998, the Company received approval from the Commonwealth of
Virginia for, and declared, a dividend payable in cash, preferred stock and/or
common stock at the election of each shareholder. GEFAHI elected to receive
cash and preferred stock and GECA elected to receive common stock. A cash
dividend of $120 was paid and a Series A preferred stock dividend of $120 was
issued to GEFAHI on December 15, 1998. The Series A preferred stock has a par
value of $1,000 per share, is redeemable at par at the Company's election, and
is not subject to call penalties. Dividends on the preferred stock are
cumulative and payable semi-annually at the annual rate of 8.0% of the par
value. The Series A preferred stock is not convertible into any other security
of the Company, and the holders thereof have no voting rights except with
respect to any proposed changes in the preferences and special rights of such
stock. GECA received its dividend in the form of 18,641 shares of newly issued
common stock in 1999.
(12) Supplementary Financial Data
The Company files financial statements with state insurance regulatory
authorities and the National Association of Insurance Commissioners ("NAIC")
that are prepared on an accounting basis prescribed by such authorities
(statutory basis). Statutory accounting practices differ from GAAP in several
respects, causing differences in reported net income and shareholders'
interest. Permitted statutory accounting practices encompass all accounting
practices not so prescribed but that have been specifically allowed by state
insurance authorities. The Company has no significant permitted accounting
practices.
At December 31, statutory net income and statutory capital and surplus is
summarized below:
2000 1999 1998
------ ------ ------
Statutory net income................................... $ 68.0 $ 70.8 $ 70.1
Statutory capital and surplus.......................... $593.5 $542.5 $577.5
The NAIC adopted Risk Based Capital ("RBC") requirements to evaluate the
adequacy of statutory capital and surplus in relation to risks associated with
(i) asset quality, (ii) insurance risk, (iii) interest rate risk, and (iv)
other business factors. The RBC formula is designated as an early warning tool
for the states to identify possible under-capitalized companies for the
purpose of initiating regulatory action. In the course of operations, the
Company periodically monitors its RBC level. At December 31, 2000, the Company
exceeded the minimum required RBC levels.
(13) Operating Segment Information
The Company conducts its operations through two business segments: (1)
Wealth Accumulation and Transfer, comprised of products intended to increase
the policyholder's wealth, transfer wealth to beneficiaries or provide a means
for replacing the income of the insured in the event of premature death, and
(2) Lifestyle Protection and Enhancement, comprised of products intended to
protect accumulated wealth and income from the financial drain of unforeseen
events. See Note (1)(c) for further discussion of the Company's principal
product lines within these two segments.
F-20
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
The following is a summary of industry segment activity for 2000, 1999 and
1998:
Wealth Lifestyle
Accumulation & Protection &
2000 -- Segment Data Transfer Enhancement Consolidated
- -------------------- -------------- ------------ ------------
Net investment income................ $ 703.5 $ 5.4 $ 708.9
Net realized investment gains........ 4.3 -- 4.3
Premiums............................. 55.3 61.0 116.3
Other revenues....................... 316.2 7.7 323.9
--------- ------ ---------
Total revenues..................... 1,079.3 74.1 1153.4
--------- ------ ---------
Interest credited, benefits, and
other changes in policy reserves.... 715.3 40.9 756.2
Commissions.......................... 212.8 16.5 229.3
Amortization of intangibles.......... 41.5 2.2 43.7
Other operating costs and expenses... (119.7) 7.9 (111.8)
--------- ------ ---------
Total benefits and expenses........ 849.9 67.5 917.4
--------- ------ ---------
Income before income taxes......... $ 229.4 $ 6.6 $ 236.0
========= ====== =========
Total Assets......................... $22,440.7 $171.8 $22,612.5
========= ====== =========
Wealth Lifestyle
Accumulation & Protection &
1999 -- Segment Data Transfer Enhancement Consolidated
- -------------------- -------------- ------------ ------------
Net investment income................ $ 634.2 $ 4.0 $ 638.2
Net realized investment gains........ 12.0 -- 12.0
Premiums............................. 67.8 56.1 123.9
Other revenues....................... 243.6 0.2 243.8
--------- ------ ---------
Total revenues..................... 957.6 60.3 1017.9
--------- ------ ---------
Interest credited, benefits, and
other changes in policy reserves.... 617.0 38.5 655.5
Commissions.......................... 179.7 12.4 192.1
Amortization of intangibles.......... 56.2 2.1 58.3
Other operating costs and expenses... (55.1) 2.6 (52.5)
--------- ------ ---------
Total benefits and expenses........ 797.8 55.6 853.4
--------- ------ ---------
Income before income taxes......... $ 159.8 $ 4.7 $ 164.5
========= ====== =========
Total Assets......................... $19,774.2 $183.1 $19,957.3
========= ====== =========
F-21
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
December 31, 2000, 1999 and 1998
(Dollar amounts in millions)
Lifestyle
Wealth Protection
Accumulation & &
1998 -- Segment Data Transfer Enhancement Consolidated
- -------------------- -------------- ----------- ------------
Net investment income................. $ 569.4 $ 5.3 $ 574.7
Net realized investment gains......... 29.6 -- 29.6
Premiums.............................. 101.4 21.7 123.1
Other revenues........................ 211.1 0.5 211.6
--------- ----- ---------
Total revenues...................... 911.5 27.5 939.0
--------- ----- ---------
Interest credited, benefits, and other
changes in policy reserves........... 560.7 (3.9) 556.8
Commissions........................... 106.2 6.6 112.8
Amortization of intangibles........... 55.1 9.7 64.8
Other operating costs and expenses.... 26.0 12.5 38.5
--------- ----- ---------
Total benefits and expenses......... 748.0 24.9 772.9
--------- ----- ---------
Income before income taxes.......... $ 163.5 $ 2.6 $ 166.1
========= ===== =========
Total Assets.......................... $14,661.1 $99.8 $14,760.9
========= ===== =========
(14) New Accounting Standards
The Financial Accounting Standards Board ("FASB") has issued, then
subsequently amended, Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities, effective
for GELAAC on January 1, 2001. Upon adoption, all derivative instruments
(including certain derivative instruments embedded in other contracts) will be
recognized in the balance sheets at fair value; changes in such fair values
must be recognized immediately in earnings unless specific hedging criteria
are met. Effects of qualifying changes in fair value will be recorded in
equity pending recognition in earnings as offsets to the related earnings
effects of the hedged items. Management estimates that, at January 1, 2001,
the effects on its consolidated financial statements of adopting SFAS No. 133,
as amended, will be a one-time reduction of net earnings of less than $6, and
a one-time reduction of equity, excluding the net earnings effect, of less
than $8. The precise transition effect is uncertain because the accounting for
certain derivatives and hedging relationships in accordance with SFAS No. 133
is subject to further interpretation by the FASB.
(15) Cumulative Effect of Accounting Change
In 1997, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments. This SOP provided guidance on
accounting by insurance and other enterprises for guaranty-fund and certain
other insurance-related assessments. The SOP requires enterprises to recognize
(1) a liability for assessments when (a) an assessment has been asserted or
information available prior to issuance of the financial statements indicates
it is probable that an assessment will be asserted, (b) the underlying cause
of the asserted or probable assessment has occurred on or before the date of
the financial statements, and (c) the amount of the loss can be reasonably
estimated and (2) an asset for an amount when it is probable that a paid or
accrued assessment will result in an amount that is recoverable from premium
tax offsets or policy surcharges from in-force policies.
Effective January 1, 1999, the Company adopted SOP 97-3 and has reported the
favorable impact of this adoption as a cumulative effect of a change in
accounting principle amounting to $5 (net of tax of $2.8).
F-22
Appendix
1STANDARDIZED PERFORMANCE DATA
We may advertise the historical total returns for the Subaccount according to
standards established by the Securities and Exchange Commission. These
standards are discussed in further detail in the Statement of Additional
Information, which may be obtained free of charge. The total return for the
Subaccount assumes that an investment has been held in the Subaccount for
various periods of time including a period measured from the date on which the
Total Return Fund for GE Investments Fund, Inc. was first available in the
Variable Account. When available, we will provide the total return for the
periods of one, five and ten years, adjusted to reflect current Contract
charges, as well as charges for the Total Return Fund of GE Investments Funds,
Inc. The charges for the Total Return Fund of GE Investments Funds, Inc. was
provided by the fund.
The total return quotations represent the average annual compounded rates of
return that an initial investment of $1,000 in the Subaccount would equal as of
the last day of each period.
The table below demonstrates the standardized average annual total returns of
the Subaccount for periods from the date on which the Total Return Fund of the
GE Investments Funds, Inc. was first available in the Variable Account to
December 31, 2000. Although the Contract did not exist during all of the
periods shown in the table, the returns have been adjusted to reflect current
charges imposed under the Contract. The total returns shown reflect the
deduction of applicable fees and charges assessed under the Contract, including
fees for the Total Return Fund of GE Investments Funds, Inc. Expenses include:
(1) A Mortality and Expense Risk charge of 1.35%; and
(2) An Administrative Expense charge of 0.15%.
In addition, we assume that you make a complete surrender of the Contract at
the end of the period; therefore, we deduct the surrender charge.
Premium taxes, charges for the Optional Riders and the $10 monthly billing fee
are not reflected in the calculations. PAST PERFORMANCE IS NOT A GUARANTEE OF
FUTURE RESULTS.
Table 1
Standardized Total Returns
For the For the For the From the
1-year 5-year 10-year inception Date of
period period period in Separate Inception
ended ended ended Account to in Separate
12/31/00 12/31/00 12/31/00 12/31/00 Account*
- ----------------------------------------------------------------------------
Total Return Fund of GE
Investments Funds, Inc. -12.96% 7.39% 9.26% 9.71% 05/02/88
- ----------------------------------------------------------------------------
* Date on which the Total Return Fund of GE Investments Funds, Inc. was first
available in the Variable Account. As the Variable Account is also used for
other variable annuities offered by GE Life & Annuity, this date may be
different from the date the Total Return Fund of GE Investments Funds, Inc.
was first available in this product.
A-1
NON-STANDARDIZED PERFORMANCE DATA
In addition to the standardized data, we may also show similar performance data
for other periods.
We may from time to time also advertise or disclose average annual total return
or other performance data in non-standardized formats for the Subaccount. The
non-standardized performance data may make different assumptions regarding the
amount invested, the time periods shown, or the effect of partial withdrawals
or income payments, not including repayments on amounts withdrawn.
All non-standardized performance data will be advertised only if we also
disclose the standardized performance data as described in the previous
section.
We may disclose historic performance data for the Total Return Fund of GE
Investments Funds, Inc. since its inception, reduced by some or all of the fees
and charges under the Contract. Such non-standard performance includes data
that precedes the data on which the Total Return Fund of GE Investments Funds,
Inc. was available in the Variable Account. This data is designed to show the
performance that would have resulted if the Contract had been in existence
during that time, based on the Total Return Fund of GE Investments Funds,
Inc.'s performance. This data assumes that the Subaccount available in the
Contract was in existence for the same time period as the Total Return Fund of
GE Investments Funds, Inc., with the charges equal to those currently assessed
in the Contract, including charges for the Total Return Fund of GE Investments
Funds, Inc. This data is not intended to indicate future performance.
The tables below reflect the non-standard average annual total returns for the
Total Return Fund of GE Investments Funds, Inc. for the time it was declared
effective by the Securities and Exchange Commission until December 31, 2000 for
one, five and ten year periods. The method of calculation used is described in
the Statement of Additional Information, which may be obtained free of charge.
The total returns of the Total Return Fund of GE Investments Funds, Inc. have
been reduced by the Variable Account charges, as if the Contract had been in
existence since the inception of the Total Return Fund of GE Investments Funds,
Inc. Expenses include:
(1) A Mortality and Expense Risk charge of 1.35%; and
(2) An Administrative Expense charge of 0.15%.
The total returns in the following table do not reflect surrender charges, the
$10 monthly billing fee or charges for the Optional Riders. Premium taxes are
not reflected in the calculations. PAST PERFORMANCE IS NOT A GUARANTEE OF
FUTURE RESULTS.
A-2
Table 2
Non-Standardized Performance Data
For the For the For the
1-year 5-year 10-year
period period period Portfolio
ended ended ended Inception
12/31/00 12/31/00 12/31/00 Date*
- -------------------------------------------------------------------------
Total Return Fund of GE Investments
Funds, Inc. -0.50% 4.60% 9.26% 17/01/85
- -------------------------------------------------------------------------
* Date on which the Total Return Fund of GE Investments Funds, Inc. was
declared effective by the SEC; this date may be different from the date the
Total Return Fund of GE Investments Funds, Inc. was first available in the
Variable Account.
A-3
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The expenses in connection with the issuance and distribution of the
Contract, other than any underwriting discounts and commissions, are as
follows:
Securities and Exchange Commission
Registration Fees (approximate
amount we wired with the initial
filing)............................ $ 2,910 (based on a total of 10,000,000
Proposed Maximum Aggregate Offering)
Printing and engraving.............. 20,000
Accounting fees and expenses........ 15,000
Legal fees and expenses............. 22,000
Miscellaneous....................... 15,000
---------
Total expenses (approximate)...... $74,910
=========
Item 14. Indemnification of Directors and Officers.
Section 13.1-698 and 13.1-702 of the Code of Virginia, in brief, allow a
corporation to indemnify any person made party to a proceeding because such
person is or was a director, officer, employee, or agent of the corporation,
against liability incurred in the proceeding if: (1) he conducted himself in
good faith; and (2) he believed that (a) in the case of conduct in his official
capacity with the corporation, his conduct was in its best interests; and (b)
in all other cases, his conduct was at least not opposed to the corporation's
best interests and (3) in the case of any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful. The termination of a
proceeding by judgment, order, settlement or conviction is not, of itself,
determinative that the director, officer, employee, or agent of the corporation
did not meet the standard of conduct described. A corporation may not indemnify
a director, officer, employee, or agent of the corporation in connection with a
proceeding by or in the right of the corporation, in which such person was
adjudged liable to the corporation, or in connection with any other proceeding
charging improper personal benefit to such person, whether or not involving
action in his official capacity, in which such person was adjudged liable on
the basis that personal benefit was improperly received by him. Indemnification
permitted under these sections of the Code of Virginia in connection with a
proceeding by or in the right of the corporation is limited to reasonable
expenses incurred in connection with the proceeding.
Section 5 of the By-Laws of GE Life and Annuity Assurance Company further
provides that:
(a) The Corporation shall indemnify each director, officer and
employee of this Company who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, arbitrative, or investigative
(other than an action by or in the right of the Corporation) by reason of
the fact that he is or was a director, officer or employee of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer or employee of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys;
fees), judgements [sic ], fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed
to be in the best interests of the Corporation, and with respect to any
criminal action, had no cause to believe his conduct unlawful. The
termination of any action, suit or proceeding by judgement [sic ], order,
settlement, conviction, or upon a plea of nolo contendere, shall not of
itself create a presumption that the person did not act in good faith, or
in a manner opposed to the best interests of the Corporation, and, with
respect to any criminal action or proceeding, believed his conduct
unlawful.
(b) The Corporation shall indemnify each director, officer or employee
of the Corporation who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit
1
by or in the right of the Corporation to procure a judgement [sic] in its
favor by reason of the fact that he is or was a director, officer or
employee of the Corporation, or is or was serving at the request of the
Corporation as a director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable for negligence
or misconduct in the performance of his duty to the Corporation unless and
only to the extent that the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such
court shall deem proper.
(c) Any indemnification under subsections (a) and (b) (unless ordered
by a court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer or employee is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b). Such
determination shall be made (1) by the Board of Directors of the
Corporation by a majority vote of a quorum consisting of the directors who
were not parties to such action, suit or proceeding, or (2) if such a
quorum is not obtainable, or even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or
(3) by the stockholders of the Corporation.
(d) Expenses (including attorneys' fees) incurred in defending an
action, suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative, may be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding as authorized in
the manner provided in subsection (c) upon receipt of an undertaking by or
on behalf of the director, officer or employee to repay such amount to the
Corporation unless it shall ultimately be determined that he is entitled to
be indemnified by the Corporation as authorized in this Article.
(e) The Corporation shall have the power to make any other or further
indemnity to any person referred to in this section except an indemnity
against gross negligence or willful misconduct.
(f) Every reference herein to director, officer or employee shall
include every director, officer or employee, or former director, officer or
employee of the Corporation and its subsidiaries and shall enure to the
benefit of the heirs, executors and administrators of such person.
(g) The foregoing rights and indemnification shall not be exclusive of
any other rights and indemnification to which the directors, officers and
employees of the Corporation may be entitled according to law.
* * *
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
depositor pursuant to the foregoing provisions, or otherwise, the depositor has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the depositor of expenses incurred
or paid by a director, officer or controlling person of the depositor in
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the depositor will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
Item 15. Recent Sales of Unregistered Securities.
Not applicable.
2
Item 16. Exhibits.
(1)(a) Underwriting Agreement dated December 1, 2001 between GE Life and
Annuity Assurance Company and Capital Brokerage Corporation.(12)
(1)(b) Dealer Sales Agreement.(12)
(2) Not applicable.
(3)(a)(i) Certificate of Incorporation of The Life Insurance Company of
Virginia.(2)
(3)(a)(ii) Amended and Restated Articles of Incorporation of GE Life and
Annuity Assurance Company.(9)
(3)(b)(i) Bylaws of The Life Insurance Company of Virginia.(2)
(3)(b)(ii) Amended and Restated By-Laws of GE Life and Annuity Assurance
Company dated May 1, 2000.(9)
(4)(a) Form of Contract.
(4)(a) (i) Contract Form P1161 3/01.(12)
(4)(b) Endorsements.
(4)(b)(i) Waiver of Scheduled Purchase Payments Upon Disability Rider P5163
3/01.(12)
(4)(b)(ii) Waiver of Scheduled Purchase Payments Upon Unemployment Rider
P5164 3/01.(12)
(4)(b)(iii) Waiver of Scheduled Purchase Payments Joint Annuitant Life Rider
P5165 3/01.(12)
(4)(b)(iv) Guaranteed Minimum Income Payment Endorsement P5168 3/01.(12)
(4)(c) Form of Application.(14)
(4)(d) Form of Additional Payment Allocation Request.(14)
(4)(e) Variable Annuity Application--Additional Riders Form.(14)
(5) Opinion and Consent of Counsel.(12)
(6) Not applicable.
(7) Not applicable.
(8) Not applicable.
(9) Not applicable.
(10)(a)(i) Participation Agreement between GE Investments Funds, Inc. and
The Life Insurance Company
of Virginia.(4)
(10)(a)(ii) Amendment to Participation Agreement between GE Investments
Funds, Inc. and GE Life and Annuity Assurance Company.(5)
(10)(a)(iii) Amendment to Participation Agreement between GE Investments
Funds, Inc. and GE Life and Annuity Assurance Company.(8)
(11) Not applicable.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) Not applicable.
(16) Not applicable.
3
(17) Not applicable.
(18) Not applicable.
(19) Not applicable.
(20) Not applicable.
(21) Subsidiaries of the Registrant.(11)
(22) Not applicable.
(23)(a) Opinion and Consent of Counsel.(15)
(23)(b) Consent of Independent Auditors.(15)
(23)(c) Consent of Sutherland Asbill & Brennan LLP.(15)
(24)(a) Power of Attorney dated April 16, 1997.(1)
(24)(b) Power of Attorney dated April 15, 1999.(5)
(24)(c) Power of Attorney dated December 17, 1999.(6)
(24)(d) Power of Attorney dated April 4, 2000.(7)
(24)(e) Power of Attorney dated June 30, 2000.(8)
(24)(f) Power of Attorney dated July 21, 2000.(8)
(24)(g) Power of Attorney dated December 1, 2001.(13)
(25) Not applicable.
(26) Not applicable.
(27) Not applicable.
(99) Resolution of Board of Directors of The Life Insurance Company of
Virginia authorizing
the establishment of the Immediate Installment Account.
- --------
(1) Incorporated herein by reference to Post-Effective Amendment No. 7 to the
GE Life & Annuity Separate Account 4's Registration Statement on Form N-4,
File No. 33-76334, filed with the Securities and Exchange Commission on
May 1, 1997.
(2) Incorporated herein by reference to Post-Effective Amendment No. 9 to the
GE Life & Annuity Separate Account 4's Registration Statement on Form N-4,
File No. 33-76334, filed with the Securities and Exchange Commission on
May 1, 1998.
(3) Incorporated herein by reference to Post-Effective Amendment No. 11 to the
GE Life & Annuity Separate Account 4's Registration Statement on Form N-4,
File No. 33-76334, filed with the Securities and Exchange Commission on
July 17, 1998.
(4) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
GE Life & Annuity Separate Account 4's Registration Statement on Form N-4,
File No. 333-62695, filed with the Securities and Exchange Commission on
December 18, 1998.
(5) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
GE Life & Annuity Separate Account 4's Registration Statement on Form N-4,
File No. 33-76334, filed with the Securities and Exchange Commission on
April 30, 1999.
(6) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
GE Life & Annuity Separate Account 4's Registration Statement on Form N-4,
File No. 333-96513, filed with the Securities and Exchange Commission on
December 22, 1999.
(7) Incorporated herein by reference to Post-Effective Amendment No. 19 to the
GE Life & Annuity Separate Account 4's Registration Statement on Form N-4,
File No. 33-76334, filed with the Securities and Exchange Commission on
April 28, 2000.
(8) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
GE Life & Annuity Separate Account 4's Registration Statement on Form N-4,
File No. 333-31172, filed with the Securities and Exchange Commission on
June 2, 2000.
4
(9) Incorporated herein by reference to Post-Effective Amendment No. 1 to the
GE Life & Annuity Separate Account 4's Registration Statement on Form N-4,
File No. 332-31172, filed with the Securities and Exchange Commission on
September 1, 2000.
(10) Incorporated herein by reference to the initial filing to the GE Life &
Annuity Separate Account 4's Registration Statement on Form N-4, File No.
811-05343, filed with the Securities and Exchange Commission on the same
date as the date of filing of this registration statement.
(11) Incorporated herein by reference to Part C of the initial filing to the
GE Life & Annuity Separate Account 4's Registration Statement on Form N-
4, File No. 811-05343, filed with the Securities and Exchange Commission
on the same date as the date of filing of this registration statement.
(12) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1, pre-effective Amendment No. 1, File No. 333-69620,
filed with Securities and Exchange Commission on December 13, 2001.
(13) Incorporated herein by reference to the GE Life & Annuity Separate
Account II's Registration Statement on Form S-6, pre-effective Amendment
No. 1, File No. 333-72572, filed with Securities and Exchange Commission
on January , 2001.
(14) Incorporated herein by reference to GE Life & Annuity Separate Account
Registration Statement on Form N-4, pre-effective Amendment 1, File No.
333-67902, filed with Securities and Exchange Commission on January ,
2001.
(15) Filed herein.
Item 17. Undertakings.
(A) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(B) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers,
and controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable: In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officers or, controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such-
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
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SIGNATURES
As required by the Securities Act of 1933, the Registrant has duly caused
Pre-Effective Amendment 1 to this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned thereunto duly authorized, and its seal
to be hereunto affixed and attested, in the County of Henrico in the
Commonwealth of Virginia, on the 15th day of January, 2002.
GE Life and Annuity Assurance
Company
(Registrant)
/s/ Heather C. Harker
By: _________________________________
Heather C. Harker
Assistant Vice President and
Associate General Counsel
As required by the Securities Act of 1933, this Registration Statement on
Form S-1 has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
* President and Chief 01/15/02
______________________________________ Executive Officer and
Pamela S. Schutz Director
* Director, Senior Vice 01/15/02
______________________________________ President
Thomas M. Stinson
* Senior Vice President, 01/15/02
______________________________________ Chief Financial Officer
Kelly L. Groh
* Vice President and 01/15/02
______________________________________ Controller
Susan Mann
* Director 01/15/02
______________________________________
Donita M. King
* Director 01/15/02
______________________________________
Geoffrey S. Stiff
/s/ Heather C. Harker Assistant Vice President 01/15/02
______________________________________ and Associate General
Heather C. Harker Counsel
*By Heather C. Harker Pursuant To Power of Attorney Executed On December 1,
2001.
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EXHIBIT LIST
(23)(a) Opinion and Consent of Counsel
(23)(b) Consent of Independent Auditors
(23)(c) Consent of Sutherland Asbill & Brennan LLP
7