As Filed Pursuant to Rule 424(b)(3)
Registration No. 333-69786
Prospectus For Single Purchase Payment
Modified Guaranteed Annuity Contract
Issued by:
GE Life and Annuity Assurance Company
6610 West Broad Street
Richmond, Virginia 23230
Telephone: (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 single purchase payment modified guaranteed annuity
contract (the "contract") for individuals offered by GE Life and Annuity
Assurance Company (the "Company," "we," "us," or "our"). You may purchase the
contract on a non-qualified basis ("Non-Qualified Contracts") or for use with
certain qualified retirement plans ("Qualified Contracts").
The contract provides a means for you to allocate a single purchase payment of
$5,000 or more ($2,000 or more for Individual Retirement Accounts ("IRAs")) to
our Guarantee Account for a specified investment period, known as a Guarantee
Term. You select a Guarantee Term from a number of Guaranteed Terms we offer at
the time of your purchase payment. We typically offer Guarantee Terms ranging
from 1 to 10 years, although we may not offer each of these Guarantee Terms in
the future. Not all the Guarantee Terms are available in all states or in all
markets. Your purchase payment will earn interest for the initial Guarantee
Term you select based on the interest rates we offer at the time of your
purchase payment. For any Guarantee Term, we will credit a Guaranteed Interest
Rate. We may credit a different Guaranteed Interest Rate for each year of a
Guarantee Term.
If you surrender your contract or withdraw any portion of your Contract Value
before the end of a Guarantee Term, we may assess a surrender charge on the
amount you withdraw. We may apply a Market Value Adjustment to the proceeds
paid in connection with any withdrawal or transfer. We may also apply a Market
Value Adjustment in determining your Annuity Commencement Value. Under certain
conditions, you may withdraw earned interest without a surrender charge or
Market Value Adjustment. Withdrawals of interest will be subject to income tax
and may be subject to a 10% tax penalty if taken before age 59 1/2.
On the Annuity Date, we will apply your Annuity Commencement Value, modified by
any Market Value Adjustment, to a monthly Income Payment, to an Optional
Payment Plan you have selected, or you may take that amount in one lump sum
payment. The Optional Payment Plans include:
. life income with payments guaranteed for 10, 15 or 20 years;
. payments for a fixed period from 1 to 30 years;
. payments of a fixed amount until the amount we hold is exhausted;
. annual payments of interest earned from proceeds left with us; or
. life income based on the lives of two payees with payments guaranteed for
10 years.
1
The Securities and Exchange Commission ("SEC") has not approved or disapproved
these securities or 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 lawfully be made.
The date of this prospectus is April 29, 2005.
This contract:
. Is Not a bank deposit
. Is Not FDIC insured
. Is Not insured or endorsed by a bank or any federal government agency
. Is Not available in every state
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Table of Contents
Definitions................................................. 5
Summary..................................................... 7
Other Contracts............................................. 10
Financial Statements........................................ 10
The Contract................................................ 11
Purchasing a Contract.................................... 11
Ownership................................................ 11
Assignment............................................... 12
The Company................................................. 13
The Guarantee Account.................................... 13
Guarantee Terms.......................................... 14
Guaranteed Interest Rates................................ 16
Free Withdrawal Amount................................... 16
Contract Value and Surrender Value....................... 17
Market Value Adjustment.................................. 17
Transfers Before the End of a Guarantee Term............. 18
Surrenders and Partial Withdrawals.......................... 19
Systematic Withdrawals of Interest....................... 19
Charges and Other Deductions................................ 22
Surrender Charge......................................... 22
Deductions for Premium Taxes............................. 23
Commission Payments...................................... 24
The Death Benefit........................................... 25
Death Benefit Upon Death Before the Annuity Date......... 25
Death Benefit Amount..................................... 25
Required Distributions................................... 25
Death Benefit After the Annuity Date..................... 27
The Annuity Commencement Date and Benefits at Annuity Date.. 28
The Annuity Commencement Date............................ 28
The Annuity Date......................................... 28
Optional Payment Plans...................................... 29
Federal Tax Matters......................................... 31
Introduction............................................. 31
Taxation of Non-Qualified Contracts...................... 31
Section 1035 Exchanges................................... 35
Qualified Retirement Plans............................... 35
Moving Money From One Qualified Contract or Qualified
Plan to Another........................................ 39
Federal Income Tax Withholding........................... 39
State Income Tax Withholding............................. 39
Changes in the Law....................................... 39
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Requesting Payments......................................... 40
Sales of the Contract....................................... 41
Additional Information...................................... 44
Owner Questions.......................................... 44
Return Privilege......................................... 44
State Regulation......................................... 44
Records and Reports...................................... 44
Other Information........................................ 44
GE Life and Annuity Assurance Company....................... 45
Business................................................. 45
Strategy................................................. 46
Operating Segments....................................... 46
Properties.................................................. 47
Legal Proceedings........................................... 48
Submission of Matters to a Vote of Security Holders......... 52
Market for the Registrant's Common Equity and Related
Shareholder Matters......................................... 53
Selected Financial Data..................................... 54
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 55
Cautionary Note Regarding Forward-Looking Statements..... 55
Operating Results........................................ 55
Capital Resources and Liquidity............................. 58
Consolidated Balance Sheet............................... 58
Statement of Changes in Stockholder's Interest........... 61
Interest Rate Management................................. 61
Equity Markets........................................... 62
Liquidity................................................ 63
Off-Balance Sheet Transactions........................... 65
Critical Accounting Policies................................ 66
New Accounting Standards................................. 68
Quantitative and Qualitative Disclosures About Market Risk
and Interest Rate Management................................ 69
Experts..................................................... 70
GE Life and Annuity Assurance Company Financial Statements.. F-1
Appendix.................................................... A-1
Market Value Adjustment Examples......................... A-1
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Definitions
The following terms are used throughout this prospectus:
Annuitant/Joint Annuitant -- The person(s) named in the
contract whose age and, where appropriate, gender,
determine Income Payments.
Annuity Commencement Date -- The date stated on your
contract's data pages as the date on which Income
Payments are scheduled to commence, provided the
Annuitant(s) is living on that date. The Annuity
Commencement Date may be changed during the 30-day period
immediately prior to the end of a Guarantee Term.
Annuity Commencement Value -- Your Surrender Value on the
business day immediately preceding the Annuity Date
modified by any Market Value Adjustment. We use the
Annuity Commencement Value to determine the amount of
each Income Payment or lump sum payment.
Annuity Date -- The date on which Income Payments start.
Code -- The Internal Revenue Code of 1986, as amended.
Contract Date -- The date we issue your contract and your
contract becomes effective. Your Contract Date is shown
on your contract's data pages. We use the Contract Date
to determine Contract Years and contract anniversaries.
Contract Value -- Your purchase payment and interest
earnings under the contract, minus any prior withdrawals
including surrender charges and any premium tax, modified
by any prior Market Value Adjustment.
General Account -- Assets of the Company other than those
allocated to any of our separate investment accounts.
Guarantee Account -- GE Life & Annuity Separate Account
6; a legally insulated, non-unitized separate account
established to hold amounts for this class of contracts,
and other similar market value adjustment contracts.
Guaranteed Interest Rate -- A stated interest rate or
rates we credit to the Contract Value during a Guarantee
Term.
Guarantee Term -- The period of time we guarantee a
specified credited rate(s) of interest under the contract.
Home Office -- Our offices at 6610 West Broad Street,
Richmond, Virginia 23230.
Income Payment -- One of a series of payments made under
either the monthly income benefit or one of the Optional
Payment Plans.
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Market Value Adjustment -- A positive or negative
adjustment we may apply to the amount payable upon
surrender, withdrawal or transfer. We may also apply a
Market Value Adjustment in determining your Annuity
Commencement Value.
Optional Payment Plan -- A plan whereby any part of the
death benefit, Surrender Value or Annuity Commencement
Value can be left with us to provide Income Payments to a
payee.
Owner -- The person or persons (in the case of Joint
Owners) entitled to exercise all ownership rights stated
in the contract (e.g., name beneficiaries, make
withdrawals). The Owners are shown on the contract's data
pages and on any application. "You" or "your" refers to
the Owner or Joint Owners.
Surrender Value -- The Contract Value on the date we
receive your written request for surrender at our Home
Office, less any applicable premium tax and surrender
charge.
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Summary
How is a contract issued? We will issue the contract
when we receive and accept your completed application and
your purchase payment. See the provision entitled
"Issuing a Contract."
How does this contract work? The contract permits you to
allocate a single purchase payment to our Guarantee
Account for the Guarantee Term you select. On the Annuity
Date, we apply your Annuity Commencement Value to
purchase a series of monthly Income Payments (sometimes
known as annuity payments). You may also elect Income
Payments under an Optional Payment Plan or a lump sum
payment.
Certain features described in this prospectus may vary
from your contract. See the provision entitled "The
Contract" of this prospectus for more information. Please
refer to your contract for these provisions that apply
specifically to you.
How does my purchase payment earn interest? You allocate
your purchase payment (less any applicable premium taxes)
to the Guarantee Account for a Guarantee Term you select.
Your allocation will earn interest at the Guaranteed
Interest Rate(s) we credit for that Guarantee Term. We
may credit a different rate of interest for any Guarantee
Term from one year to the next. See the provision
entitled "Guarantee Terms."
What happens at the end of a Guarantee Term? At the end
of any Guarantee Term, a subsequent Guarantee Term will
begin. Unless you instruct us otherwise, the subsequent
Guarantee Term will generally be the same duration as the
expiring Guarantee Term. If we are not offering a
Guarantee Term of the same duration, the subsequent
Guarantee Term will be the next shortest Guarantee Term,
which does not extend beyond the Annuity Commencement
Date. If we do not offer a Guarantee Term that expires on
or before the Annuity Commencement Date, the subsequent
Guarantee Term will be the Guarantee Term that first
expires after the Annuity Commencement Date. We will pay
interest on your Contract Value in a subsequent Guarantee
Term at our declared Guaranteed Interest Rate applicable
to that Guarantee Term on the day the subsequent
Guarantee Term begins. See the provision entitled
"Guarantee Terms" in this prospectus.
Is the contract available to Qualified Plans? Yes. We
may issue the contract in connection with retirement
plans that qualify for preferential income tax treatment
as defined under the Code. We may also issue the contract
on a non-qualified basis.
May I surrender the contract or take a partial
withdrawal? Yes. You may surrender the contract for its
Surrender Value modified by any applicable Market Value
Adjustment at any time before the Annuity Date. You may
also take partial withdrawals from the Contract Value. A
partial withdrawal will reduce your death benefit.
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For more information on surrenders and partial
withdrawals, see the "Surrenders and Partial Withdrawals"
provision in the prospectus.
What surrender charges are associated with the
contract? We may assess a surrender charge if you
surrender your contract or take a partial withdrawal from
the Contract Value.
The surrender charge will be anywhere from 6% to 1% of
the amount withdrawn, depending on the contract year of
your surrender or partial withdrawal. We may also apply a
Market Value Adjustment to partial withdrawals and
surrenders from the Guarantee Account.
You may withdraw an amount up to the free withdrawal
amount without a surrender charge or Market Value
Adjustment. The free withdrawal amount equals the
interest credited under the contract for the twelve-month
period prior to the date of the partial withdrawal. We
will reduce the available free withdrawal amount by the
amount of any prior free withdrawal during that
twelve-month period. We will also waive the surrender
charge if you apply your Contract Value upon surrender to
certain Optional Payment Plans. See the "Charges and
Other Deductions" provision of this prospectus.
Are there any other charges? Yes. If your state assesses
a premium tax with respect to your contract, then at the
time your contract incurs such tax (or at such other time
as we may choose), we will deduct the premium tax from
your purchase payment or from proceeds at surrender,
partial withdrawal, death or annuitization, as
applicable. See the "Charges and Other Deductions"
provision of this prospectus.
For a complete discussion of all charges associated with
the contract, see the "Charges and Other Deductions"
provision of 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 of this prospectus.
What is a Market Value Adjustment? The Market Value
Adjustment is an amount we deduct from or add to the
amount payable upon surrender, partial withdrawal, or
transfer if such event occurs outside the 30-day period
immediately prior to the end of a Guarantee Term (the
"30-day window"). We may also apply the Market Value
Adjustment in determining your Annuity Commencement Value
if the Annuity Date falls outside the 30-day window. The
Market Value Adjustment formula in the contract reflects
the relationship between the Guaranteed Interest Rate
associated with the Guarantee Term from which the
surrender, partial withdrawal, transfer or Income
Payments are taken, and the Guaranteed Interest Rate for
a Guarantee Term with a
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duration equal to the number of years remaining in the
Guarantee Term from which the surrender, partial
withdrawal, transfer or Income Payments are taken. See
the "Market Value Adjustment" provision of this
prospectus.
What happens if an Owner dies before the Annuity
Date? Before the Annuity Date, if any Owner (or any
Annuitant, if the Owner is a non-natural person) dies
while the contract is in force, the death benefit becomes
payable to the designated beneficiary. The Code imposes
certain distribution rules on designated beneficiaries.
We may pay a death benefit to the designated beneficiary.
The death benefit will be the greater of:
(1) the Contract Value; or
(2) the Surrender Value modified by any applicable
Market Value Adjustment.
The death benefit is calculated as of the date we receive
the paperwork necessary to process the death claim ("due
proof of death") but there are other requirements and
conditions. See "The Death Benefit" provision of this
prospectus.
What annuity benefit does the contract provide? On the
Annuity Date, we will apply your Annuity Commencement
Value to a monthly income payment, an Optional Payment
Plan you select, or pay that amount in one lump sum
payment. The Optional Payment Plans are:
(1) life income with payments, guaranteed for 10, 15 or
20 years;
(2) payments for a fixed period from 1 to 30 years;
(3) payments of a fixed amount until the amount we hold
is exhausted;
(4) annual payments of interest earned from proceeds
left with us; or
(5) life income based on the lives of two payees with
payments guaranteed for 10 years.
Do I have a return privilege? Yes. You have the right to
return the contract to us at our Home Office and have us
cancel the contract within a certain number of days
(usually 20 days from the date you receive the contract,
but some states have longer periods).
If you exercise this right, we will cancel the contract
as of the day we receive your request and send you a
refund equal to your purchase payment adjusted by any
Market Value Adjustment or any another amount as required
by state law. See the "Additional Information -- Return
Privilege" provision of this prospectus.
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Other Contracts
We offer other single purchase payment modified
guaranteed annuity contracts, which also offer Guarantee
Terms. These contracts have different charges that could
affect the interest we may credit.
Financial Statements
The consolidated financial statements for the Company are
set forth herein.
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The Contract
The contract is a single purchase payment modified
guaranteed 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 what specifically
applies to you.
PURCHASING A If you wish to purchase a contract, you must apply for it
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 may send the
contract directly to you or to you through your sales
representative. See the "Sales of the Contract" provision
of the prospectus.
To apply for a contract, the Owner(s) and Annuitant(s)
must be age 85 or younger. 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, so there should be another reason for you to
purchase the contract other than tax deferral. Please
consult a tax adviser to determine whether the 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 one or more annuity contracts to make your purchase
payment for this contract. Before making an exchange to
acquire this contract, you should carefully compare this
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 charge, which would apply to you. The benefits
under this contract 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 trying to sell you the contract will generally
earn a commission.
OWNERSHIP As Owner(s), you have all the rights under the contract,
subject to the rights of any irrevocable beneficiary. Two
persons may apply for a contract as Joint Owners. Joint
Owners who are spouses have equal undivided interests in
the contract. This means
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that each may exercise any ownership rights on behalf of
the other except for ownership changes. Non-Spouse Joint
Owners must exercise ownership rights jointly.
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. During the Annuitant(s)'s life, you can change
the Owner(s) to another Owner(s) and the beneficiary(s)
to another beneficiary(s), except when an irrevocable
beneficiary has been named. You may change an irrevocable
beneficiary only with the written consent of that
beneficiary.
An Owner (other than a non-natural person) may name a
Joint Annuitant.
Purchase payment. You may purchase the contract with a
single purchase payment of $5,000 or more ($2,000 or more
for IRAs). You must obtain our prior approval before
purchase payments for any contract issued by the Company
exceed $1,000,000.
ASSIGNMENT An Owner of a Non-Qualified Contract may assign some or
all of his or her rights under the contract. An
assignment must occur before the Annuity Date and while
the Annuitant is still living. Once proper notice of the
assignment is recorded by our Home Office, the assignment
will become effective as of the date the written request
was signed.
Qualified Contracts, IRAs and Tax Sheltered Annuities may
not be assigned, pledged or otherwise transferred except
where allowed by law.
We are not responsible for the validity or tax
consequences of any assignment. We are not liable for any
payment or settlement made before the assignment is
recorded. Assignments will not be recorded until our Home
Office receives sufficient direction from the Owner and
the assignee regarding the proper allocation of contract
rights.
Amounts pledged or assigned will be treated as
distributions and will be included in your gross income
to the extent that the Contract Value exceeds the
investment in the contract for the taxable year in which
it was pledged or assigned. Amounts assigned may be
subject to a tax penalty equal to 10% of the amount
included in gross income.
Assignment of the entire Contract Value may cause the
portion of the contract exceeding the total investment in
the contract and previously taxed amounts to be included
in your gross income for federal income tax purposes each
year that the assignment is in effect.
12
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. We are obligated to pay
all amounts promised under the contract.
Capital Brokerage Corporation serves as principal
underwriter for the contracts and is a broker/dealer
registered with the SEC. GNA corporation directly owns
the stock of Capital Brokerage Corporation. GNA
Corporation, Capital Brokerage Corporation and GE
Financial Assurance Holding, Inc. are affiliates of the
Company. Capital Brokerage Corporation's principal
offices are located at 3001 Summer Street, 2nd Floor,
Stamford, Connecticut 06905.
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 GE Life and Annuity Assurance
Company, see the provision entitled "GE Life and Annuity
Assurance Company."
THE GUARANTEE We established the Guarantee Account as a non-unitized
ACCOUNT separate account under Virginia law. Assets of the
Guarantee Account will at all times equal at least the
reserves and other contract liabilities supported by the
Guarantee Account. The assets of the Guarantee Account
are available to cover the liabilities of our General
Account to the extent that the assets of the Guarantee
Account exceed the contract liabilities. Income and both
realized and unrealized gains or losses from the assets
of the Guarantee Account are credited to or charged
against the Guarantee Account without regard to the
income, gains, or losses arising out of any other
business we may conduct. Subject to statutory authority,
we have sole discretion over the investment of assets of
the Guarantee Account.
Amounts in the Guarantee Account do not reflect the
investment performance of our General Account, or any
portion thereof.
Due to certain exclusionary provisions of the Investment
Company Act of 1940 (the "1940 Act"), 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 subject to regulation under the 1940
Act. As such, you do not have the protections afforded by
that statute that, for
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example, requires investment companies to have a majority
of disinterested directors. We have, however, registered
the contracts under the Securities Act of 1933.
Therefore, the contracts are subject to regulation under
the federal securities laws, including provisions of the
federal securities laws relating to the accuracy of
statements made in a registration statement.
GUARANTEE A Guarantee Term is the number of years we will credit a
TERMS Guaranteed Interest Rate(s) to your Contract Value.
Typically, we offer Guarantee Terms ranging from 1 to
10 years though all Guarantee Terms may not be available
in all states or in all markets. We may at any time
decrease or increase the number of Guarantee Terms we
offer. However, any decision made to decrease or increase
the number of Guarantee Terms will not affect the
Guarantee Terms already in effect.
Initial Guarantee Term. Your purchase payment (less any
applicable premium tax) will earn interest for the
initial Guarantee Term you select at a Guaranteed
Interest Rate we offer. For any initial Guarantee Term,
we may credit a different Guaranteed Interest Rate for
each year of the Guarantee Term. Your purchase payment
earns interest at the Guaranteed Interest Rate in effect
from the date your purchase payment is credited to the
Guarantee Account through the first Contract Year or
until you take a partial withdrawal or surrender the
contract. For an initial Guarantee Term with a duration
of more than one year, after the first Contract Year,
your Contract Value will earn interest at the Guaranteed
Interest Rate we credit for the remainder of the initial
Guarantee Term or until you transfer to another Guarantee
Term, take a partial withdrawal or surrender the contract.
Subsequent Guarantee Terms. During the 30-day window,
prior to the end of a Guarantee Term, you may select from
the following options:
(1) Surrender or take a partial withdrawal of your
Contract Value without a Market Value Adjustment
(we will, however, assess a surrender charge if the
surrender or partial withdrawal occurs prior to the
end of your third contract year);
(2) Instruct us to apply the ending Contract Value to
another Guarantee Term that you select from the
Guarantee Terms we are then offering at the time
your Guarantee Term expires; or
(3) Do nothing and allow a subsequent Guarantee Term to
begin automatically. The interest rate declared for
the new term may be different than the interest
rate credited during the prior term.
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Option 1 -- Surrenders at the end of a Guarantee
Term. To surrender your contract, we must receive your
written request, in a form acceptable to us, at our Home
Office no later than the end of the 30-day window prior
to the end of a Guarantee Term. Upon surrender, we will
pay the Surrender Value of the contract.
Any surrendered amount may be subject to income taxes,
and a 10% tax penalty may apply if you are younger than
age 59 1/2 at the time of the withdrawal. See the
"Federal Tax Matters" provision of this prospectus.
If you surrender your contract before or after the 30-day
window prior to the end of a Guarantee Term, a Market
Value Adjustment will apply. In addition, you may be
assessed a surrender charge.
Option 2 -- Selecting a subsequent Guarantee Term. To
apply your ending Contract Value to a subsequent
Guarantee Term, we must receive your written request, on
a form acceptable to us, at our Home Office no later than
the end of the 30-day window prior to the end of a
Guarantee Term. At least 45 days prior to the expiration
of your current Guarantee Term, we will send you written
notice of the expiration of the Guarantee Term and a list
of the subsequent Guarantee Terms we offer. You may
select a subsequent Guarantee Term only from the
Guarantee Terms we are offering at the time your current
Guarantee Term expires. Any subsequent Guarantee Term may
not extend past the Annuity Commencement Date for your
contract.
Option 3 -- Automatic subsequent Guarantee Terms. A
subsequent Guarantee Term automatically begins when the
prior Guarantee Term ends if you do not instruct us
otherwise under the first or second options described in
the "Subsequent Guarantee Terms" provision of this
prospectus. Your ending Contract Value becomes the
beginning Contract Value for the subsequent Guarantee
Term. The subsequent Guarantee Term will be the Guarantee
Term with the same duration as the expiring Guarantee
Term if the subsequent Guarantee Term does not extend
past the Annuity Commencement Date. If a Guarantee Term
of the same duration as the expiring Guarantee Term is
not available or is a term that would extend beyond the
Annuity Commencement Date, we will transfer your Contract
Value to the next shortest Guarantee Term that does not
go beyond the Annuity Commencement Date. If we do not
offer a Guarantee Term that expires on or before the
Annuity Commencement Date, we will transfer your Contract
Value to the Guarantee Term that first expires after the
Annuity Commencement Date. You must allocate your entire
Contract Value to the subsequent Guarantee Term.
Guaranteed Interest Rates in subsequent Guarantee
Terms. Your beginning Contract Value for any subsequent
Guarantee Term earns interest at the rate we declare and
is
15
in effect for the first year of the subsequent Guarantee
Term. We may credit a different Guaranteed Interest Rate
for each year of the subsequent Guarantee Term. Our
Guaranteed Interest Rates for subsequent Guarantee Terms
may differ from our Guaranteed Interest Rates for prior
Guarantee Terms of the same duration.
GUARANTEED From time to time and at our sole discretion we set
INTEREST RATES Guaranteed Interest Rates for each available Guarantee
Term. In determining these Guaranteed Interest Rates we
consider the interest rates available on the types of
instruments in which we intend to invest the proceeds
attributable to the contracts. We will invest proceeds
attributable to the contracts primarily in
investment-grade fixed income securities (i.e.,
securities rated by Standard and Poor's rating system to
be suitable for prudent investors). We are not obligated
to invest according to any particular strategy, except as
may be required by applicable law. You will have no
direct or indirect interest in these investments. We
consider other factors in determining Guaranteed Interest
Rates, including:
. regulatory and tax requirements;
. sales commissions and administrative expenses we
incur;
. general economic trends; and
. competitive factors.
We make the final determination as to the Guaranteed
Interest Rates we declare. We cannot predict or guarantee
what future interest rates we will declare.
To find out the current Guaranteed Interest Rate for a
Guarantee Term, please contact our Home Office at the
telephone number listed on page 1 of this prospectus or
your sales representative.
FREE You may instruct us to send you all or a portion of the
WITHDRAWAL interest credited to your Contract Value during the prior
AMOUNT twelve months. This amount is known as the free
withdrawal amount. The free withdrawal amount will be
reduced by any prior free withdrawal during that
twelve-month period. Interest withdrawals remove money
from a Guarantee Term that would otherwise compound even
more interest on a daily basis. Because of this
interruption of interest compounding, the more interest
you withdraw, the less interest your contract will earn
over time. Larger withdrawals reduce the compounding of
interest more than smaller withdrawals; frequent
withdrawals hinder the compounding process more than
infrequent withdrawals; and earlier withdrawals reduce
your interest more than later withdrawals.
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We will not impose a surrender charge or Market Value
Adjustment if you withdraw the free withdrawal amount,
but your withdrawal may be subject to federal and state
income tax and may include a 10% federal income tax
penalty if the withdrawal is taken prior to age 59 1/2.
See the "Federal Tax Matters" provision of this
prospectus.
CONTRACT Your Contract Value at any time is equal to your purchase
VALUE AND payment plus any interest credited to it, minus any prior
SURRENDER withdrawals including any surrender charges and premium
VALUE tax, modified by any prior Market Value Adjustment.
The Surrender Value is equal to the Contract Value, minus
any surrender charges and premium tax that would apply in
the case of a full surrender. Your Surrender Value
modified by any applicable Market Value Adjustment is the
amount you would be entitled to receive if you surrender
your contract.
MARKET VALUE We will apply a Market Value Adjustment to amounts in
ADJUSTMENT excess of the free withdrawal amount:
(1) whenever you take a withdrawal from the Contract
Value (unless the withdrawal is made within the
30-day window prior to the end of the current
Guarantee Term);
(2) on the Annuity Date if the Annuity Date does not
fall within the 30-day window prior to the end of
the current Guarantee Term; and
(3) when you transfer to a different Guarantee Term
(unless the amount is transferred within the 30-day
window prior to the end of the current Guarantee
Term).
We determine the Market Value Adjustment by multiplying
the amount you withdraw, transfer or apply to the monthly
income benefit option or an Optional Payment Plan by the
factor set forth below.
((1 + i) / (1 + j))/n/365/
n = the number of days from the date of surrender, partial withdrawal, transfer to
another Guarantee Term or from the Annuity Date to the end of your current
Guarantee Term.
i = the Guaranteed Interest Rate in effect for the current Guarantee Term.
j = the Guaranteed Interest Rate, determined at the time of surrender, partial
withdrawal, transfer to another Guarantee Term or upon the Annuity Date, for a
Guarantee Term with a duration equal to "n." If we do not offer a Guarantee Term
with a duration equal to "n," "j" will be a linear interpolation of the Guaranteed
17
Interest Rates for Guarantee Terms with durations that
immediately precede and follow "n." If we offer only
Guarantee Terms with longer durations than "n," "j"
will be the Guaranteed Interest Rate for the Guarantee
Term with the shortest duration we offer. If we offer
only Guarantee Terms with shorter durations than "n,"
"j" will be the Guaranteed Interest Rate for the
Guarantee Term with the longest duration we offer.
A Market Value Adjustment may be positive, negative or
result in no change. In general, if interest rates are
rising, you bear the risk that any Market Value
Adjustment will likely be negative and reduce the amount
available for the partial withdrawal, surrender or
transfer. On the other hand, if interest rates are
falling, it is more likely that you will receive a
positive Market Value Adjustment that increases the
amount available for partial withdrawal, surrender or
transfer. In the event of surrender or payment under the
monthly income benefit option or an Optional Payment
Plan, we will add or subtract any Market Value Adjustment
from your Surrender Value to determine your Annuity
Commencement Value. In the event of a partial withdrawal
or transfer, we will add or subtract any Market Value
Adjustment from the total amount withdrawn or transferred.
Illustrations of how the Market Value Adjustment works
are included in Appendix A.
TRANSFERS Once each contract year after the first contract year,
BEFORE THE END you may transfer your entire Contract Value before the
OF A GUARANTEE 30-day window prior to the end of your current Guarantee
TERM Term to another Guarantee Term with a duration of five or
more years. The transfer will be effective as of the date
we receive your request at our Home Office in a form
acceptable to us. Your transfer will be subject to any
applicable Market Value Adjustment. See the "Charges and
Other Deductions" provision of this prospectus.
18
Surrenders And Partial Withdrawals
You may take a partial withdrawal and/or surrender at any
time before the Annuity Date. We will not process any
partial withdrawal request that would reduce your
Contract Value to less than $2,000. You may surrender
your contract at any time. A partial withdrawal or
surrender is effective as of the date we receive your
request at our Home Office in a form acceptable to us.
Partial withdrawals and surrenders may be subject to a
surrender charge and a Market Value Adjustment. See the
"Charges and Other Deductions" provision of this
prospectus. A partial withdrawal will also reduce your
death benefit. See the "The Death Benefit" provision of
this prospectus. Withdrawals of the free withdrawal
amount are not subject to a surrender charge or a Market
Value Adjustment.
In addition, you may be subject to 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 of
this prospectus.
We reserve the right to defer payments from the Guarantee
Account or our General Account for a partial withdrawal
or surrender for up to six months from the date we
receive your request for payment.
SYSTEMATIC You may elect systematic withdrawals of interest credited
WITHDRAWALS under the contract (in amounts of at least $100) on a
OF INTEREST monthly, quarterly, semi-annual or annual basis.
Depending upon the frequency of the systematic
withdrawals you elect, the monthly, quarterly,
semi-annual or annual period immediately preceding a
systematic withdrawal will be known as the systematic
withdrawal period. The maximum amount available for any
systematic withdrawal is the interest we credit under the
contract during the prior systematic withdrawal period.
You may elect payments to begin at any time after the
first systematic withdrawal period under the contract.
However, payments can begin no sooner than one systematic
withdrawal period after the last withdrawal.
After payments begin, you may change the frequency and/or
amount of your payments once per calendar quarter. To
participate in a systematic withdrawal program, you must
complete our authorization form. You can obtain the form
from an authorized sales representative or by calling the
telephone number or writing to the address listed on page
1 of this prospectus.
Your systematic withdrawals may not exceed the maximum
amount. If at any time the systematic withdrawal amount
would exceed the maximum, we will lower the systematic
withdrawal amount otherwise payable to equal the
available maximum amount.
19
A systematic withdrawal program will terminate
automatically when a systematic withdrawal would cause
the remaining Contract Value to be less than $2,000. If a
systematic withdrawal would cause the Contract Value to
be less than $2,000, then we will not process that
systematic withdrawal transaction. If any amount
withdrawn pursuant to systematic withdrawals would be or
becomes less than $100, we reserve the right to reduce
the frequency of payments to an interval that would
result in each payment being at least $100. You may
discontinue systematic withdrawals at any time by
notifying us in writing or by calling our Home Office at
the address and telephone number listed on page 1 of the
prospectus.
When you consider systematic withdrawals, please remember
that each systematic withdrawal is subject to Federal
income taxes on any portion considered gain for tax
purposes. In addition, you may be assessed a 10% Federal
penalty tax on systematic withdrawals if you are younger
than age 59 1/2 at the time of the withdrawal. See the
"Federal Tax Matters" provision of this prospectus.
Both partial withdrawals at your specific request and
withdrawals under a systematic withdrawal program will
reduce the free withdrawal amount.
Telephone withdrawals. You may take partial withdrawals
from your contract by calling us, provided that we
received your prior written authorization allowing us to
process such telephone requests at our Home Office.
However, you only can surrender your contract by writing
our Home Office at the address listed on page 1 of this
prospectus.
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.
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
partial withdrawal requests made by telephone.
To request a partial withdrawal by telephone, please call
us at 1-800-352-9910.
20
Special note on reliability. Please note that the
telephone system may not always be available. 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 to our Home
Office at the address listed on page 1 of this prospectus.
Surrender Value. The amount payable on surrender of your
contract is the Surrender Value as of the date we receive
your surrender request in a form acceptable to us
modified by any Market Value Adjustment. The Surrender
Value equals the Contract Value on the date we receive
your request, less any applicable surrender charge and
premium tax charge. We will pay the Surrender Value
modified by any Market Value Adjustment in a lump sum,
unless you elect one of the Optional Payment Plans. See
the "Optional Payment Plans" provision of this
prospectus. We may waive surrender charges upon surrender
if you elect certain Optional Payment Plans. See the
"Charges and Other Deductions" provision of this
prospectus.
21
Charges and Other Deductions
We will deduct the charges described below to cover our
costs and expenses, services provided, and 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. The
amount of a charge may not necessarily correspond to the
costs associated with providing the services or benefits
indicated by the designation of the charge. 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 a charge.
SURRENDER Surrenders and partial withdrawals may be subject to a
CHARGE surrender charge. Generally, we will assess a surrender
charge as a percentage of Contract Value withdrawn or
surrendered in excess of the free withdrawal amount.
After the third Contract Year, we will not assess a
surrender charge on a surrender or withdrawal you request
during the 30-day window prior to the end of your
Guarantee Term.
The surrender charge percentage is as follows:
Surrender Charge as a
Contract Year in Which Percentage of Amount
Surrender or Withdrawal Made Withdrawn
--------------------------------------------------
1 6%
2 6%
3 5%
4 4%
5 3%
6 and after 2%
Contract year prior to 1%
Annuity Commencement Date
--------------------------------------------------
There is no surrender charge on the Annuity Commencement
Date.
Waiver of Surrender Charge. We will waive the surrender
charge if you surrender your contract and apply your
Contract Value to one of the following Optional Payment
Plans:
(1) Optional Payment Plan 1 (Life Income with Period
Certain);
(2) Optional Payment Plan 2 (Income for a Fixed Period
of 5 or more years); or
(3) Optional Payment Plan 5 (Joint Life and Survivor
Income).
If you elect one of the above Optional Payment Plans,
then the amount applied to the Optional Payment Plan will
be the Contract Value, minus any premium tax, and
modified by any Market Value Adjustment, if applicable.
22
You may also select Optional Payment Plan 3 or Optional
Plan 4 upon surrender, although we will assess surrender
charges and any applicable premium tax against your
Contract Value. We will apply the Surrender Value
modified by any applicable Market Value Adjustment to the
selected plan. See the "Optional Payment Plans" provision
of this prospectus.
We will also waive the surrender charge arising from a
surrender or partial withdrawal before Income Payments
begin if, at the time we receive the request, we have
received due proof that the Owner has a qualifying
confinement to a state licensed or legally operated
hospital or nursing facility for a minimum period as set
forth in the contract (provided the confinement began at
least 90 days after the Contract Date). A Market Value
Adjustment is, however, assessed in accordance with the
section below.
We will not impose the surrender charge upon your
withdrawal of the free withdrawal amount.
Market Value Adjustment. Surrenders, partial withdrawals
and transfers from one Guaranteed Term to another may be
subject to a Market Value Adjustment. We assess the
Market Value Adjustment on the proceeds payable or
transferred. We will also apply a Market Value Adjustment
in determining your Annuity Commencement Value. We
calculate the Market Value Adjustment separately for each
transaction.
We will not apply a Market Value Adjustment to the
proceeds payable or transferred in the following cases:
. A surrender or partial withdrawal from a Guarantee
Term made during the 30-day window prior to the end
of a Guarantee Term;
. If you elect a transfer of Contract Value from a
Guarantee Term to a new Guarantee Term during the
30-day window prior to the end of a Guarantee Term;
. Annuity commencement during the 30-day window prior
to the end of a Guarantee Term; or
. Payment of the free withdrawal amount.
DEDUCTIONS FOR We will deduct charges for any premium tax or other tax
PREMIUM TAXES levied by any governmental entity either from your
purchase payment or Contract Value when incurred or when
we pay proceeds under the contract (proceeds include
amounts received due to surrender, partial withdrawal,
annuitization, and/or death).
23
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.
These premium taxes depend upon the law of your state.
The tax generally ranges from 0.0% to 3.5%.
COMMISSION We sell the contracts through registered representatives
PAYMENTS 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
of this prospectus for more information.
24
The Death Benefit
DEATH BENEFIT If any Owner (or Annuitant if the Owner is a non-natural
UPON DEATH person) dies before the Annuity Date, the amount of
BEFORE THE proceeds available is the death benefit.
ANNUITY DATE
The death benefit is calculated as of the date that we
receive due proof of death and all required forms. Until
we receive complete written settlement instructions from
the designated beneficiary, values will remain in the
Guarantee 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 treat the
death benefit in accordance with your instructions,
subject to distribution rules and termination of contract
provisions described elsewhere.
Unless otherwise distributed pursuant to the distribution
rules stated below, we will pay death benefit proceeds in
one lump sum unless the beneficiary elects an Optional
Payment Plan. See the "Optional Payment Plans" provision
of this prospectus.
DEATH BENEFIT The death benefit equals the greater of:
AMOUNT
(1) the Contract Value; and
(2) the Surrender Value modified by any applicable
Market Value Adjustment.
The death benefit is calculated as of the date of receipt
of due proof of death and all required forms.
REQUIRED General: In certain circumstances, federal tax law
DISTRIBUTIONS 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.
Designated Beneficiary: At the death of any Owner or any
Annuitant, (if any Owner is a non-natural person), the
person or entity first listed below who is alive or in
existence on the date of death will become the designated
beneficiary:
(1) Owner or Joint Owner(s);
25
(2) Primary beneficiary;
(3) Contingent beneficiary; or
(4) Owner's estate.
The designated beneficiary may choose one of the payment
choices listed below, subject to the distribution rules
stated below. If there is more than one designated
beneficiary, we will treat each one separately in
applying the tax law's rules described below.
Distribution Rules: 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 any Owner is a non-natural person). Upon
receipt of due proof of death and all required forms, 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 person, the
contract may be continued with the surviving spouse
as the new Owner, or the surviving spouse may
receive any death benefit payable. The surviving
spouse will become the Annuitant or he or she may
designate a new Annuitant. At the death of the
surviving spouse, this provision may not be used
again, even if the surviving spouse remarries. In
such case, 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 person)
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 in a 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 through withdrawals or surrendering the
contract. At the end of the five-year period,
we will pay any remaining value in a lump sum.
The remaining value will be modified for any
Market Value Adjustment unless payment is made
within the 30-day window prior to the end of
the Guarantee Term. See the "Requesting
Payments" provision in this prospectus.
26
(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. In addition,
if Optional Payment Plan 1 is chosen, the
period certain cannot exceed the designated
beneficiary's life expectancy, and if Optional
Payment Plan 2 is chosen, the fixed period
cannot exceed the designated beneficiary's life
expectancy.
If the designated beneficiary makes no choice within 30
days following receipt of due proof of death and all
required forms, we will pay the death benefit as a lump
sum within the earlier of 5 years following the date of
death or 60 days following receipt of due proof of death
and all required forms. If the designated beneficiary
dies before we have distributed the entire death benefit,
we will pay any value still remaining in a lump sum 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 upon payment of all available proceeds. Under
payment choice 3, this contract will terminate when we
apply the death benefit to provide Income Payments.
DEATH BENEFIT If any Owner, Annuitant or payee dies after the Annuity
AFTER THE Date, Income Payments will be made as stated in the
ANNUITY DATE section discussing income benefits. See the "The Annuity
Commencement Date and Benefits at Annuity Date" provision
of this prospectus.
27
The Annuity Commencement Date and Benefits at Annuity Date
THE ANNUITY If any Annuitant is age 80 or younger when the contract
COMMENCEMENT is issued, the Annuity Commencement Date cannot be
DATE earlier than the 10th Contract Anniversary and cannot be
later than the Contract Anniversary following the
Annuitant's 90th birthday (or the younger Annuitant's
90th birthday if there is a Joint Annuitant), unless we
approve a different age. If all Annuitants are 81 or
older when the contract is issued, the Annuity
Commencement Date will be the 10th Contract Anniversary
unless we approve a different date.
You may change the Annuity Commencement Date during any
30-day window prior to the end of your current Guarantee
Term. The new Annuity Commencement date selected must
meet the requirements stated in the paragraph above. To
make a change, send written notice to our Home Office at
the address located on page 1 of this prospectus before
the end of your Guarantee Term. If you change the Annuity
Commencement Date, the Annuity Commencement Date will
then mean the new Annuity Commencement Date you select.
An Annuity Commencement Date that occurs or is scheduled
to occur at an advanced age (e.g., past age 85), may in
certain circumstances have adverse income tax
consequences. See the "Federal Tax Matters" provision of
this prospectus.
THE ANNUITY If the Annuitant is still living on the Annuity Date, we
DATE will pay you or your designated payee the monthly Income
Payments described below beginning on that date. 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 years, 15 years,
or 20 years. If you do not select a period certain, we
will use a life annuity payment plan with a 10-year
period certain. The guaranteed amount payable will earn
interest at 3% compounded yearly. We may decide at our
sole discretion to pay a higher rate of interest. We will
make Income Payments monthly unless you elect in writing
quarterly, semi-annual or annual installments. Instead,
you may choose to receive the Contract Value in one lump
sum in which case we will terminate the contract. You may
also choose to receive Income Payments under the Optional
Payment Plans described below. Once Income Payments
commence the amount and period of Income Payments cannot
be changed.
28
Optional Payment Plans
You may apply your Surrender Value adjusted for any
applicable Market Value Adjustment, death benefit
proceeds or your Annuity Commencement Value to an
Optional Payment Plan. If you surrender the contract and
select Plan 1, Plan 2 (with a fixed period of 5 or more
years), or Plan 5, then the amount applied to the Plan is
the Contract Value, minus any premium tax modified by any
applicable Market Value Adjustment. If the Annuity Date
falls within the 30-day window prior to the end of the
current Guarantee Term, we will not apply a Market Value
Adjustment.
During the Annuitant's life, you (or your designated
beneficiary at your death) can choose an Optional Payment
Plan. If you change a designated beneficiary, your Plan
selection will not remain in effect unless you request
otherwise. Any election or change in a 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 Owner (or Annuitant, if the Owner is a non-natural
person), your designated beneficiary can choose a Plan
when we pay the death benefit.
We will make Income Payments monthly unless you request
otherwise. 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
any Annuitant, if any Owner is a non-natural person),
must conform to the rules as outlined in the "Death
Benefit" provision.
We may make an age adjustment to determine the amount of
your 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.
Optional Payment Plans. The contract provides five
Optional Payment Plans, each of which is payable on a
fixed basis. If any payee is not a natural person, our
consent must be obtained before selecting an Optional
Payment Plan. Following are explanations of the Optional
Payment Plans available.
Plan 1 -- Life Income with Period Certain. This option
guarantees monthly 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 period can be 10, 15,
or 20 years. Payments are determined according to the
table in the Monthly Income Benefit section of the
contract. Guaranteed amounts payable are
29
determined assuming an interest rate of 3% compounded
annually. We may increase this rate and the amount of any
payment. The payee selects the designated period. If the
payee dies during the minimum period, we will discount
the amount of the remaining guaranteed payments at the
same rate used in calculating Income Payments. We will
pay the discounted amount in one sum to the payee's
estate unless otherwise provided.
Plan 2 -- Income for a Fixed Period. This option
guarantees periodic payments (monthly, quarterly,
semi-annually or annually) for a fixed period not longer
than 30 years. Payments will be made according to the
table in the contract. Guaranteed amounts payable are
determined assuming an interest rate of 3% compounded
annually. We may increase this rate and the amount of any
payment. If the payee dies, we will discount the amount
of the remaining guaranteed payments to the date of the
payee's death at the same rate used in calculating Income
Payments. We will pay the discounted amount in one sum to
the Payee's estate unless otherwise provided.
Plan 3 -- Income of a Definite Amount. This option
provides periodic payments (monthly, quarterly,
semi-annually or annually) 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. Unpaid proceeds will earn
interest at 3% compounded annually. We may increase this
rate. If we do, the payment period will be extended. If
the payee dies, we will pay the amount of the remaining
proceeds with earned interest in one sum to the payee's
estate unless otherwise provided.
Plan 4 -- Interest Income. This option provides for
periodic payments (monthly, quarterly, semi-annually or
annually) of interest earned from the proceeds left with
us. Payments will begin at the end of the first period
chosen. Proceeds left under this plan will earn interest
at 3% compounded annually. We may increase this rate and
the amount of any payment. If the payee dies, we will pay
the amount of remaining proceeds and any earned but
unpaid interest in one sum to the payee's estate unless
otherwise provided.
Plan 5 -- Joint Life and Survivor Income. This option
provides for us to make monthly payments to two payees
for a guaranteed minimum of 10 years. The settlement age
of each payee must be at least 35 when payments begin.
The amounts payable under this plan are determined
assuming an interest rate of 3% compounded annually. We
may increase this rate and the amount of any payment.
Payments will continue as long as either payee is living.
If both payees die before the end of the minimum period,
we will discount the amount of the remaining payments for
the 10-year period at the same rate used in calculating
Income Payments. We will pay the discounted amount in one
sum to the last surviving payee's estate unless otherwise
provided.
30
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 This part of the discussion describes some of the federal
NON-QUALIFIED income tax rules applicable to non-qualified contracts. A
CONTRACTS non-qualified contract is a contract not issued in
connection with a qualified 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, including:
. An individual must own the contract (or the tax law
must treat the contract as owned by an individual);
and
. The contract's Annuity Commencement Date must not
occur near the end of the Annuitant's life
expectancy.
This part of the prospectus discusses each of these
requirements.
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 currently on the excess of the Contract
Value over the purchase payments paid for the contract.
Contracts issued to a corporation or a trust are examples
of contracts where the Owner pays current tax 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
31
deduction for a portion of its otherwise deductible
interest expenses. This disallowance does not apply if
the Owner pays tax on the annual increase in the Contract
Value. 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.
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 or are scheduled to begin on 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 the 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.
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 the case of systematic withdrawals, the amount of each
withdrawal should be considered a distribution and each
taxed in the same manner as a withdrawal from the
contract.
There is some uncertainty regarding the tax treatment of
the Market Value Adjustment when the Market Value
Adjustment is applied. The IRS has authority to address
this uncertainty. However, as of the date of this
prospectus, the IRS has not issued any clarifying
regulations. In the event of a withdrawal, or other
transaction, such as an
32
assignment or a gift, that is treated as a withdrawal for
tax purposes to determine the extent to which your
Contract Value exceeds your "investment in the contract,"
we will disregard the amount of the Market Value
Adjustment. The IRS could determine that the Market Value
Adjustment should not be disregarded and this could
increase or decrease the tax you pay, depending on the
circumstances.
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 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.
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 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
Optional Payment Plan 3 depending on the relationship of
the amount of the periodic payments to the period over
which they are paid.
Taxation of death benefits. We may distribute amounts
from your contract because of the death of an Owner, a
Joint Owner, or 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
Date.
Before the contract's Annuity Date. If received under an
annuity payout option, death benefits are taxed in the
same manner as annuity payouts.
33
If not received under an annuity payout option, death
benefits are taxed in the same manner as a withdrawal.
After the contract's Annuity Date. The death benefit is
includible in income to the extent that it exceeds the
unrecovered "investment in the contract" at that time.
Penalty taxes payable on partial withdrawals, surrenders,
or annuity payments. 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 payments 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 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 may have to 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 partial 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 for
certain purposes.
The effects of such aggregation are not clear. However,
it could affect:
. the amount of a surrender, a partial withdrawal or
an annuity payment that you must include in income;
and
. the amount that might be subject to the penalty tax
described above.
34
SECTION 1035 Under Section 1035 of the Code, the exchange of one
EXCHANGES annuity contract for another annuity contract generally
is not taxed (unless cash is distributed). 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 the 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 will not qualify as a tax-free exchange
under Section 1035.
QUALIFIED We also designed the contracts for use in connection with
RETIREMENT certain types of retirement plans that receive favorable
PLANS treatment under the Code. Contracts issued to or in
connection with a qualified retirement plan are called
"qualified contracts." In considering the appropriateness
of the contract for use as a qualified contract, you
should take into account that this contract must be
purchased with a single purchase payment. Generally, this
requirement will limit use of the contract to situations
involving a rollover or transfer from another qualified
retirement plan. 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. 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 ("SEPs");
. Savings Incentive Matched Plan for Employees
("SIMPLE plans" including "SIMPLE IRAs");
35
. Public school system and tax-exempt organization
annuity plans ("403(b) plans");
. Qualified corporate employee pension and
profit-sharing plans ("401(a) plans") and qualified
annuity plans ("403(a) plans"); and
. Self-employed individual plans ("H.R. 10 plans" or
"Keogh 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 the 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.
Employer qualified plans. Qualified plans sponsored by
an employer or employee organization are governed by the
provisions of the Code and the Employee Retirement Income
Security Act, as amended ("ERISA"). ERISA is administered
primarily by the U.S. Department of Labor. The Code and
ERISA include requirements that various features be
contained in an employer qualified plan such as:
participation; vesting and funding; nondiscrimination;
limits on contributions and benefits; distributions;
penalties; duties of fiduciaries; prohibited
transactions; and withholding, reporting and disclosure.
In the case of certain qualified plans, if a participant
is married at the time benefits become payable, unless
the participant elects otherwise with written consent of
the spouse, the benefits must be paid in the form of a
qualified joint and survivor annuity. A qualified joint
and survivor annuity is an annuity payable for the life
of the participant with a survivor annuity for the life
of the spouse in an amount that is not less than one-half
of the amount payable to the participant during his or
her lifetime. In addition, a married participant's
beneficiary must be the spouse, unless the spouse
consents in writing to the designation of a different
beneficiary.
If this contract is purchased as an investment of a
qualified retirement plan, the Owner will be either an
employee benefit trust or the plan sponsor. Plan
participants and beneficiaries will have no ownership
rights in the contract. Only the Owner, acting through
its authorized representative(s) may exercise contract
rights. Participants and beneficiaries must look to the
plan fiduciaries for satisfaction of their rights to
benefits under the terms of the qualified plan.
36
Where a contract is purchased by an employer-qualified
plan, we assume no responsibility regarding whether the
contract's terms and benefits are consistent with the
requirements of the Code and ERISA. It is the
responsibility of the employer, plan trustee and plan
administrator to satisfy the requirements of the Code and
ERISA applicable to the qualified plan. This prospectus
does not provide detailed tax or ERISA information.
Various tax disadvantages, including penalties, may
result from actions that conflict with requirements of
the Code or ERISA, and the regulations pertaining to
those laws. Federal tax laws and ERISA are continually
under review by Congress. Any changes in the laws or in
the regulations pertaining to the laws may affect the tax
treatment of amounts contributed to employer qualified
plans and the fiduciary actions required by ERISA.
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 received.
. 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 such 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 qualified plans, the Owner must begin
receiving payments from the contract in certain
minimum amounts by a certain date (generally, April
1 of the calendar year following the later of age
70 1/2 or retirement). Under an IRA, the Owner must
begin receiving payments from the contract in
certain minimum amounts by April 1 of the calendar
year following the attainment of age 70 1/2. Due to
the presence of the Market Value Adjustment feature,
there may be, in some circumstances,
37
uncertainty as to the amounts of required minimum
distributions. However, these "minimum distribution
rules" do not apply to a Roth IRA before the Owner's
death.
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 include the total
amount you receive in your income. There are exceptions.
For example, you do not include amounts received from a
Roth IRA 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 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 over 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.
38
MOVING MONEY Rollovers and transfers. In many circumstances you may
FROM ONE move money between qualified contracts and qualified
QUALIFIED plans by means of a rollover or a transfer. Special rules
CONTRACT OR apply to such rollovers and transfers. If you do not
QUALIFIED PLAN follow the applicable rules, you may suffer adverse
TO ANOTHER 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.
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
certain 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 how you can avoid 20% withholding by
electing a direct rollover.
FEDERAL We will withhold and remit to the IRS a part of the
INCOME TAX taxable portion of each distribution made under a
WITHHOLDING 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 If required by the law of your state, we will also
WITHHOLDING 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.
CHANGES IN THE This discussion is based on the Code, IRS regulations,
LAW and interpretations existing on the date of this
prospectus. Congress, the IRS, and the courts may modify
these authorities, however, sometimes retroactively.
39
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 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 within seven days from the receipt of due proof
of death, and receipt of all required forms. We will
determine payment amounts as of the date on which our
Home Office receives the payment request or due proof of
death, and receipt of all required forms. We reserve the
right to defer payments from the Guarantee Account or our
General Account for a withdrawal and surrender for up to
six months from the date we receive your payment request.
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 seven 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 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.
If mandated under applicable law, we may be required to
reject a premium payment and/or block an owner's account
and thereby refuse request for surrenders, partial
surrenders, loans or death benefits, until instructions
are received from the appropriate regulators. We may also
be required to provide additional information about you
or your account to government regulators.
40
Sales of the Contract
We have entered into an underwriting agreement with
Capital Brokerage Corporation (doing business in Indiana,
Minnesota, New Mexico, and Texas as GE Capital Brokerage
Corporation) (collectively, "Capital Brokerage
Corporation") for the distribution and sale of the
contracts. Pursuant to this agreement, Capital Brokerage
Corporation serves as principal underwriter for the
contracts, offering them on a continuous basis. Capital
Brokerage Corporation is located at 3001 Summer Street,
2nd Floor, Stamford, Connecticut 06905. Although the
Company and Capital Brokerage Corporation do not
anticipate discontinuing the offering of the contracts,
we do reserve the right to discontinue offering the
contracts at any time.
Capital Brokerage Corporation was organized as a
corporation under the laws of the state of Washington in
1981 and is an affiliate of ours. Capital Brokerage
Corporation is registered as a broker-dealer with the SEC
under the Securities Exchange Act of 1934, as well as
with the securities commissions in the states in which it
operates, and is a member of the NASD.
Capital Brokerage Corporation offers the contracts
through registered representatives who are registered
with the NASD and with the states in which they do
business. More information about Capital Brokerage
Corporation and the registered representatives is
available at http://www.nasdr.com or by calling
1-800-289-9999. You can also obtain an investor brochure
from NASD Regulation describing its Public Disclosure
Program. Registered representatives with Capital
Brokerage Corporation are also licensed as insurance
agents in the states in which they do business and are
appointed with the Company.
Capital Brokerage Corporation also enters into selling
agreements with an affiliated broker-dealer and
unaffiliated broker-dealers to sell the Contracts. The
registered representatives of these selling firms are
registered with the NASD and with the states in which
they do business, are licensed as insurance agents in the
states in which they do business and are appointed with
us.
We pay compensation to Capital Brokerage Corporation for
promotion and sales of the contracts by its registered
representatives as well as by affiliated and unaffiliated
selling firms. This compensation consists of sales
commissions and other cash and non-cash compensation. The
maximum commission we may pay is 3.0% of your purchase
payment.
41
The maximum commission consists of three parts --
commissions paid to internal and external wholesalers of
Capital Brokerage Corporation ("wholesalers" are
individuals employed by the Company and registered with
Capital Brokerage Corporation that promote the offer and
sale of the contracts), commissions paid to the
affiliated and unaffiliated brokerage firm for whom the
registered representative that sold your contract is
employed ("selling firms") and an amount paid to the
selling firm for marketing allowances and other payments
related to the sale of the contract. Wholesalers with
Capital Brokerage Corporation receive a maximum
commission of 0.25% of your purchase payment.
After commission is paid to the wholesalers of Capital
Brokerage Corporation, a commission is then paid to the
selling firm. A maximum commission of 1.75% of your
purchase payment is paid to the selling firm. The exact
amount of commission paid to the registered
representative who sold you your contract is determined
by the brokerage firm for whom the representative is
employed.
All selling firms receive commissions as described above
based on the sale and receipt of premium on the contract.
Unaffiliated selling firms receive additional
compensation, including marketing allowances and other
payments. The maximum marketing allowance paid on the
sale of a contract is 1.0 % of purchase payments
received. At times, Capital Brokerage Corporation may
make other cash and non-cash payments to selling firms,
as well as receive payments from selling firms, for
expenses relating to the recruitment and training of
personnel, periodic sales meetings, the production of
promotional sales literature and similar expenses. These
expenses may also relate to the synchronization of
technology between the Company, Capital Brokerage
Corporation and the selling firm in order to coordinate
data for the sale and maintenance of the contract. In
addition, registered representatives may be eligible for
non-cash compensation programs offered by Capital
Brokerage Corporation or an affiliated company, such as
conferences, trips, prizes and awards. The amount of
other cash and non-cash compensation paid by Capital
Brokerage Corporation or its affiliated companies ranges
significantly among the selling firms. Likewise, the
amount received by Capital Brokerage Corporation from the
selling firms ranges significantly.
The commissions listed above are maximum commissions
paid, and therefore such commissions stated above reflect
situations where we pay a higher commission for a short
period of time for a special promotion.
Commissions paid on the contracts, including other
incentives and payments, are not charged directly to you
or to your Contract Value, but indirectly through fees
and charges imposed under the contracts.
42
All commissions, special marketing allowances and other
payments made or received by Capital Brokerage
Corporation to or from selling firms come from or are
allocated to the general assets of Capital Brokerage
Corporation or one of its affiliated companies.
Therefore, regardless of the amount paid or received by
Capital Brokerage Corporation or one of its affiliated
companies, the amount of expenses you pay under the
contract do not vary because of such payments to or from
such selling firms.
Even though your contract costs are not determined based
on amounts paid to or received from Capital Brokerage
Corporation or the selling firm, the prospect of
receiving, or the receipt of, additional compensation as
described above may create an incentive for selling firms
and/or their registered representative to sell you this
product versus a product with respect to which a selling
firm does not receive additional compensation, or a lower
level of additional compensation. You may wish to take
such compensation arrangements into account when
considering and evaluating any recommendation relating to
the contracts.
43
Additional Information
OWNER The obligations to Owners under the contracts are ours.
QUESTIONS Please direct your questions and concerns to us at our
Home Office at the address and telephone number listed on
page 1 of this prospectus.
RETURN Within the 20-day free-look period after you receive the
PRIVILEGE 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 payment, the amount of the refund you receive
will equal your purchase payment adjusted for any Market
Value Adjustment.
STATE As a life insurance company organized and operated under
REGULATION 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. The Commission
conducts a full examination of our operations at least
every five years.
RECORDS AND At least once each year, we will send you a report
REPORTS showing information about your contract for the period
covered by the report. The report will show your purchase
payment, Contract Value, Surrender Value, interest
credited, partial withdrawals and charges made during the
statement period. In addition, when you make your
purchase payment and partial withdrawals, you will
receive a written confirmation of these transactions.
OTHER We have filed a Registration Statement with the SEC,
INFORMATION under the Securities Act of 1933, 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 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 SEC and available on the SEC's website at
http://www.sec.gov.
44
GE Life and Annuity Assurance Company
BUSINESS GE Life and Annuity Assurance Company (the "Company",
"we", "us", or "our" unless context otherwise requires)
is a stock life insurance company operating under a
charter granted by the Commonwealth of Virginia on March
21, 1871 as 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 us to its wholly owned
subsidiary, GE Financial Assurance Holdings, Inc.,
("GEFAHI") and ultimately the majority of the outstanding
common stock to General Electric Capital Assurance
Company ("GECA" or "GE Capital Assurance"). As part of an
internal reorganization of GE Financial Assurance's
insurance subsidiaries, the Harvest Life Insurance
Company ("Harvest") merged into us 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 our common stock
in exchange for its interest in Harvest.
On May 24, 2004, GEFAHI transferred substantially all of
its assets to Genworth Financial, Inc. ("Genworth"),
including all of the outstanding capital stock of GNA
Corporation ("GNA"), our indirect parent and 800 shares
of our common stock that GEFAHI had held directly. As a
result, we became an indirect, wholly-owned subsidiary of
Genworth. On May 25, 2004, Genworth's Class A common
stock began trading on The New York Stock Exchange.
Approximately 30% of Genworth's common stock is now owned
by public shareholders. GEFAHI continues to own
approximately 70% of Genworth's common stock.
On May 31, 2004, (1) Genworth contributed to GNA and GNA
in turn contributed to GECA 800 shares of our common
stock and (2) Federal paid a dividend to GECA consisting
of 2,378 shares of our common stock. As a result of the
foregoing contribution and dividend, we became a direct,
wholly-owned subsidiary of GECA while remaining an
indirect, wholly-owned subsidiary of Genworth.
We principally offer annuity contracts, guaranteed
investment contracts, funding agreements, Medicare
supplement insurance and life insurance policies. We do
business in all states, except New York, and in the
District of Columbia. Our principal offices are located
at 6610 West Broad Street, Richmond, Virginia 23230.
We are one of a number of subsidiaries of Genworth, a
company that, through its subsidiaries, provides
consumers financial security solutions by selling a wide
variety of insurance, investment and retirement products,
primarily in North America. Our product offerings are
divided along two segments of consumer needs: (1)
Retirement Income and Investments and (2) Protection. We
also have a Corporate and Other segment, which consists
primarily of net realized investment gains (losses),
interest and other financing expenses and unallocated
corporate income, expenses and income taxes.
45
Our financial information, including the information
contained in this report filed on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and any
amendments to the above mentioned reports, will be made
available upon request. Alternatively, reports filed with
the United States Securities and Exchange Commission
("SEC") may be viewed or obtained at the SEC Public
Reference Room in Washington, D.C., or at the SEC's
Internet site at www.sec.gov.
STRATEGY We believe that changes in demographics such as the
increased number of baby boomers entering middle and late
middle age, longer life expectancies due to healthy
lifestyles and medical advances and the reduction in
government and employer-sponsored benefit programs have
increased and will continue to increase, the demand for
innovative products and services to solve financial needs
and challenges. Our strategy is designed to take
advantage of these trends by offering a broad array of
insurance and investment products and services to meet
key consumer financial needs at each stage of life.
OPERATING SEGMENTS During 2003, we redefined our operating segments.
Management realigned the business on a product line and
market basis to intensify its focus on return on equity,
optimum deployment of capital and distribution
effectiveness. As a result of this change, our operations
are conducted under two reporting segments corresponding
to customer needs: 1) Retirement Income and Investments
and 2) Protection.
We also have a Corporate and Other segment, which
consists primarily of net realized investment gains
(losses), interest and other financing expenses and
unallocated corporate income, expenses and income taxes.
Retirement Income and Investments Segment. We offer
deferred annuities (variable and fixed) and variable life
insurance to a broad range of individual consumers who
want to accumulate tax-deferred assets for retirement,
desire a tax-efficient source of income and seek to
protect against outliving their assets. We also offer
guaranteed investment contracts ("GICs") and funding
agreements as investment products to qualified
institutional buyers.
Protection Segment. Our Protection segment includes
universal life insurance, interest-sensitive whole life
insurance and Medicare supplement insurance. Life
insurance products provide protection against financial
hardship after the death of an insured by providing cash
payment to the beneficiaries of the policyholder.
Medicare supplement insurance provides coverage for
Medicare-qualified expenses that are not covered by
Medicare because of applicable deductibles or maximum
limits.
46
Properties
We conduct our business from various facilities, all of
which are leased except for one building in Richmond,
Virginia, which we own.
47
Legal Proceedings
We face a significant risk of litigation and regulatory
investigations and actions in the ordinary course of
operating our businesses, including the risk of class
action lawsuits. Our pending legal and regulatory actions
include proceedings specific to us and others generally
applicable to business practices in the industries in
which we operate. In our insurance operations, we are or
may become subject to class actions and individual suits
alleging, among other things, issues relating to sales or
underwriting practices, payment of contingent or other
sales commissions, claims payments and procedures,
product design, disclosure, administration, additional
premium charges for premiums paid on a periodic basis,
denial or delay of benefits and breaches of fiduciary or
other duties to customers. Plaintiffs in class action and
other lawsuits against us may seek very large or
indeterminate amounts, including punitive and treble
damages, which may remain unknown for substantial periods
of time. We are also subject to various regulatory
inquiries, such as information requests, subpoenas and
books and record examinations, from state and federal
regulators and other authorities. A substantial legal
liability or a significant regulatory action against us
could have an adverse effect on our business, financial
condition and results of operations. Moreover, even if we
ultimately prevail in the litigation, regulatory action
or investigation, we could suffer significant
reputational harm, which could have an adverse effect on
our business, financial condition and results of
operations.
Recently, the insurance industry has become the focus of
increased scrutiny by regulatory and law enforcement
authorities concerning certain practices within the
insurance industry. This scrutiny includes the
commencement of investigations and other proceedings by
the New York State Attorney General and other
governmental authorities relating to allegations of
improper conduct in connection with the payment of, and
the failure to disclose, contingent commissions by
insurance companies to insurance brokers and agents, the
solicitation and provision of fictitious or inflated
quotes and the use of inducements to brokers or companies
in the sale of insurance products. We have not received a
subpoena or inquiry from the State of New York with
respect to these matters. As part of industry-wide
inquiries in this regard, we have received inquiries and
informational requests from federal and state regulatory
authorities. We are cooperating with these regulatory
authorities in connection with their inquiries.
Recent industry-wide inquiries also include those
regarding market timing and late trading in variable
annuity contracts, variable annuity sales
practices/exchanges and electronic communication document
retention practices. In this regard, we responded in late
2003 to a New York State Attorney General subpoena
regarding market timing and late trading in variable
products and mutual funds. We have not received any
further inquiries from the New York State Attorney
General regarding this matter.
48
Although we do not believe that the current
investigations and proceedings will have a material
adverse effect on our business, financial condition or
results of operations, we cannot assure you that this
will be the case. In addition, it is possible that
related investigations and proceedings may be commenced
in the future, and we could become subject to further
investigations and have lawsuits filed against us. In any
event, increased regulatory scrutiny and any resulting
investigations or proceedings could result in new legal
precedents and industry-wide regulations or practices
that could adversely affect our business, financial
condition and results of operation.
In our investment-related operations, we are subject to,
and may become subject to further litigation involving
commercial disputes with counterparties or others and
class action and other litigation alleging, among other
things, that we made improper or inadequate disclosures
in connection with the sale of assets and annuity and
investment products or charged excessive or impermissible
fees on these products, recommended unsuitable products
to customers or breached fiduciary or other duties to
customers. We are also subject to litigation arising out
of our general business activities such as our
contractual and employment relationships.
We were named as a defendant in a lawsuit, McBride v.
Life Insurance Co. of Virginia dba GE Life and Annuity
Assurance Co., related to the sale of universal life
insurance policies. The complaint was filed on November
1, 2000, in Georgia state court, as a class action on
behalf of all persons who purchased certain universal
life insurance policies and alleges improper practices in
connection with the sale and administration of universal
life policies. The plaintiffs sought unspecified
compensatory and punitive damages. On December 1, 2000,
we removed the case to the U.S. District Court for the
Middle District of Georgia. We have vigorously denied
liability with respect to the plaintiff's allegations.
Nevertheless, to avoid the risks and costs associated
with protracted litigation and to resolve our differences
with policyholders, we agreed in principle on October 8,
2003 to settle the case on a nationwide class basis. The
settlement provides benefits to the class, and allows us
to continue to serve our customers' needs undistracted by
disruptions caused by litigation. The court gave final
approval to the settlement on August 12, 2004. In the
third quarter of 2003, we accrued $50 million in reserves
relating to this litigation, which represents our best
estimate of bringing this matter to conclusion. The
precise amount of payments in this matter cannot be
estimated because they are dependent upon the number of
individuals who ultimately will seek relief in the claim
form process of the class settlement, the identity of
such claimants and whether they are entitled to relief
under the settlement terms and the nature of the relief
to which they are entitled. That process is currently
underway. In addition, approximately 650 class members
elected to exclude themselves from the class action
settlement. In the fourth quarter of 2004,
49
we reached an agreement in principle to settle the
threatened claims of policyholders who had excluded
approximately 512 policies from the class action
settlement. At that time, we accrued a reserve for the
settlement in principle. We have also been named as a
defendant in six lawsuits brought by 67 class members who
elected to exclude themselves from the class action
settlement. We cannot determine at this point whether or
how many other class members who have excluded themselves
from the class action will initiate individual actions
against us, or the effect of such suits or claims,
including the six pending lawsuits, on our financial
condition, results of operations or business reputation.
In addition, we were named as a defendant in five
lawsuits brought by individuals claiming that William
Maynard, one of our former dedicated sales specialists,
and Anthony Allen, one of our former independent
producers, converted customer monies and engaged in
various fraudulent acts. The five cases are, Monger v.
Allen, Maynard, and GE Life and Annuity Assurance Company
("GELAAC") (filed October 24, 2003), Warfel v. Allen,
Maynard, adVenture Publishing, and GELAAC (filed February
6, 2004), Hanrick v. Allen, Maynard and GELAAC (filed
March 10, 2004), Modlin v. Allen, et al. (filed June 17,
2004), and Clark v. Allen, 66 et al. (filed June 25,
2004). The Monger and Hanrick cases have been settled.
The remaining three cases are in their preliminary stages
and are pending in the state court of Cumberland County,
North Carolina. The suits allege that GELAAC failed to
properly supervise Allen and Maynard and that GELAAC is
responsible for Allen's and Maynard's conduct.
Specifically, Monger alleged conversion, negligence,
fraudulent misrepresentation, constructive fraud, unfair
and deceptive trade practices, violations of the
Investment Company Act of 1940 and negligent supervision.
Warfel alleged breach of contract, conversion, breach of
fiduciary duty, fraud, constructive fraud, negligent
misrepresentation, negligent supervision and unfair and
deceptive trade practices. Hanrick alleged conversion,
negligence, fraudulent misrepresentation, constructive
fraud, unfair and deceptive trade practices and negligent
supervision. Modlin and Clark make similar allegations.
The total amount allegedly invested by the plaintiffs in
the three unresolved actions is approximately $883,000.
The plaintiff in Warfel seeks damages of $1.4 million and
the plaintiffs in Modlin and Clark seek unspecified
compensatory damages. In addition, each plaintiff seeks
treble damages, as well as punitive damages of an
unspecified amount. Additionally, in the fourth quarter
of 2004, we reached an agreement in principle to settle
the threatened claims of a putative class of individuals
who had dealings with Allen and Maynard. At that time we
accrued a reserve for the settlement in principle. In
October 2003, Allen and Maynard were arrested and charged
with conversion in Cumberland County, North Carolina for
allegedly failing to remit $30,000 in premiums that they
received from a client to GELAAC. Allen has also been
indicted in Cumberland County, North Carolina for
converting the funds of numerous other individuals. We
50
cannot determine the ultimate outcome of these suits or
whether any related or similar suits or claims will be
asserted against us in the future, or the effect of such
suits or claims on our financial condition, results of
operations or reputation.
Although it is not anticipated that these developments
will have an adverse impact on the Guarantee Account or
on the ability of Capital Brokerage Corporation to
perform under its principal underwriting agreement, there
can be no assurance at this time.
51
Submission of Matters to a Vote of Security Holders
Information omitted in accordance with General
Instruction I (2)(c).
52
Market For the Registrant's Common Equity and Related Shareholder Matters
At December 31, 2004, all of our common stock, our sole
class of common equity on the date hereof, is owned by GE
Capital Assurance. 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.
53
Selected Financial Data
Information omitted in accordance with General
Instruction I (2)(a).
54
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following analysis of the consolidated financial
condition and results of our operations should be read in
conjunction with our Consolidated Financial Statements
and the notes thereto included herein.
CAUTIONARY NOTE This report contains certain "forward-looking statements"
REGARDING within the meaning of the Private Securities Litigation
FORWARD-LOOKING Reform Act of 1995. Forward-looking statements may be
STATEMENTS identified by words such as "expects," "intends,"
"anticipates," "plans," "believes," "seeks," "estimates,"
"will," or words of similar meaning and include, but are
not limited to, statements regarding the outlook for our
future business and financial performance.
Forward-looking statements are based on management's
current expectations and assumptions, which are subject
to inherent uncertainties, risks and changes in
circumstances that are difficult to predict. Actual
outcomes and results may differ materially due to global
political, economic, business, competitive, market,
regulatory and other factors, including the following:
Risks relating to our businesses, including interest rate
fluctuations, downturns and volatility in equity markets,
defaults in portfolio securities, downgrades in our
financial strength and credit ratings, unexpected changes
in mortality and morbidity rates, accelerated
amortization of deferred acquisition costs and present
value of future profits, impairment of the value of
goodwill, insufficiency of reserves, legal constraints on
dividend distributions by subsidiaries, illiquidity of
investments, competition, inability to attract or retain
independent sales intermediaries and dedicated sales
specialists, defaults by counterparties, regulatory
restrictions on our operations and changes in applicable
laws and regulations, legal or regulatory actions or
investigations, political or economic instability and the
threat of terrorism, terrorist acts, unexpected changes
in mortality, morbidity and unemployment rates,
accelerated amortization of deferred acquisition costs
and present value of future profits, goodwill
impairments, medical advances such as genetic mapping
research, unexpected changes in persistency rates,
increases in statutory reserve requirements and changes
in tax and securities laws.
We undertake no obligation to publicly update any
forward-looking statement, whether as a result of new
information, future developments or otherwise.
OPERATING Year Ended December 31, 2004 Compared to Year Ended
RESULTS December 31, 2003
Overview. Net income in 2004 was $199.4 million, a
$179.7 million increase from 2003. The increase is
primarily due to a tax benefit increase of $140.2 million
resulting primarily from reinsurance transactions entered
into in 2004, in which we ceded to Union Fidelity Life
Insurance Company ("UFLIC"), an affiliate, substantially
all of our in-force blocks of variable annuities and
structured settlements. The reinsurance
55
transactions with UFLIC were completed and accounted for
at book value and will be reported on our tax returns at
fair value as determined for tax purposes, giving rise to
a net reduction in current and deferred income tax
liabilities and resulting in a net tax benefit for the
year ended December 31, 2004. Also contributing to the
increase was a $50.0 million litigation reserve in 2003
and an increase in investment income of $42.0 million in
our corporate and other segment associated with an
increase in invested assets not allocated to the
operating segments. These amounts were partially offset
by a goodwill impairment charge of $59.8 million in 2004
resulting from the reinsurance transactions with UFLIC.
Net investment income. Net investment income decreased
$117.0 million, or 21.7%, to $421.0 million in 2004 from
$538.0 million in 2003. The decrease was primarily a
result of a $2,554.9 million, or 21.7%, decline in
average invested assets. The decline in average invested
assets was due primarily to the reinsurance transactions
with UFLIC. Also contributing to the decrease in average
invested assets was a decline in outstanding
institutional stable value liabilities.
Net realized investment gains. Net realized investment
gains (losses) consist of gross realized investment gains
and gross realized investment (losses), including charges
related to impairments. Net realized investment gains
(losses) increased $1.8 million to $5.7 million in 2004
from $3.9 million in 2003. For 2004, gross realized gains
and (losses) were $10.7 million and $(5.0) million,
respectively. Realized losses for 2004 included $0.9
million of impairments that were primarily attributable
to fixed-maturity and equity securities. For 2003, gross
realized gains and (losses) were $80.2 million and
$(76.3) million, respectively. Realized losses for 2003
included $26.4 million of impairments, primarily
attributable to fixed-maturity and equity securities.
Premiums. Premiums decreased $7.2 million, or 6.9% to
$96.8 million in 2004 from $104.0 million in 2003. The
decrease was primarily due to our Medicare supplement
product. Medicare supplement premiums were down $8.3
million in 2004 driven by a reduction in due premiums
offset by growth in new business and in-force premium
rate actions.
Cost of Insurance. Cost of insurance decreased $10.9
million, or 7.1% to $142.2 million in 2004 from $153.1
million in 2003. The decrease was due primarily to a
decline of universal life policies in-force.
Variable product fees. Variable product fees decreased
$96.9 million to $9.4 million in 2004 from $106.3 million
in 2003. The decrease in variable product fees was
primarily due to the reinsurance transactions with UFLIC
in which we ceded, effective January 1, 2004, the
majority of our in-force variable annuities.
56
Other income. Other income decreased $10.7 million, or
30.1%, to $24.8 million in 2004 from $35.5 million in
2003. The decrease was due primarily to lower surrender
fees attributable to the reinsurance transactions with
UFLIC.
Interest credited. Interest credited represents interest
credited on behalf of policyholder and contractholder
general account balances. Interest credited decreased
$119.4 million, or 29.1%, to $291.2 million for 2004 from
$410.6 million for 2003. This decrease was primarily the
result of an $84.5 million decrease attributable to the
reinsurance transactions with UFLIC and a $33.2 million
decrease attributable to institutional stable value
products. This decrease was due to a combination of a
decrease in liabilities and reduced crediting rates on
book with the maturity of higher cost liabilities and the
addition of new business with lower crediting rates.
Benefits and other changes in policy reserves. Benefits
and other changes in policy reserves decreased $62.9
million, or 25.6%, to $182.8 million in 2004 from $245.7
million in 2003. The decrease was primarily a result of a
$46.7 million decrease attributable to the reinsurance
transactions with UFLIC and a $16.3 million reserve
strengthening in 2003 related to whole life products.
Underwriting, Acquisition and Insurance Expenses, net of
deferrals. Underwriting, acquisition and insurance
expenses, net of deferrals, decreased $85.8 million, or
57.6%, to $63.2 million in 2004 from $149.0 million in
the prior year. This decrease was primarily the result of
a $50.0 million reserve accrual in 2003 associated with a
class action lawsuit settlement agreed to in principle
and a $30.0 million decrease attributable to the
reinsurance transactions with UFLIC.
Amortization of deferred acquisition costs and
intangibles. Amortization of deferred acquisition costs
and intangibles decreased $11.6 million, or 9.8%, to
$107.3 million in 2004 from $118.9 million in 2003. The
decrease is primarily the result of a $74.0 million
decrease attributable to the reinsurance transactions
with UFLIC, which was partially offset by a $59.8 million
goodwill impairment charge, also as a result of the
reinsurance transactions with UFLIC.
Provision (benefit) for income taxes. Benefit for income
taxes increased $140.2 million to a benefit of $(143.3)
million for the year ended December 31, 2004 from a
benefit of $(3.1) million for the year ended December 31,
2003. The increase in tax benefit was primarily
attributable to the tax benefit associated with the
reinsurance transactions with UFLIC. The reinsurance
transactions with UFLIC were completed and accounted for
at book value. These transactions will be reported on our
tax returns at fair value as determined for tax purposes,
giving rise to a net reduction in current and deferred
income tax liabilities and resulting in a net tax benefit
for the year ended December 31, 2004. The tax benefit
relates primarily to the reinsurance transaction with
UFLIC.
57
Capital Resources and Liquidity
CONSOLIDATED BALANCE Total Investments. Total investments decreased $2,478.6
SHEET million, or 21.9%, to $8,850.6 million at December 31,
2004 from $11,329.2 million at December 31, 2003. The
decrease was primarily a result of the transfer of
invested assets associated with the reinsurance
transactions with UFLIC and lower invested assets due to
a decline in outstanding institutional stable value
liabilities, which was partially offset by an increase in
invested assets in our Corporate and Other segment. The
change in investments due to the reinsurance transactions
with UFLIC, institutional stable value liabilities and
corporate segment was $(2,728.5) million, $(354.4)
million and $635.5 million, respectively. The increase in
investments in our corporate segment was due primarily to
an increase in the securities lending program.
Investment securities comprise mainly investment grade
debt securities. Fixed maturities and equity securities
were $7,028.0 million, including gross unrealized gains
and losses of $192.6 million and $(41.2) million,
respectively at December 31, 2004 ($9,666.7 million,
including gross unrealized gains and losses of $278.7
million and $(71.1) million, respectively, as of December
31, 2003). Market value for these purposes is defined by
relevant accounting standards and should not be viewed as
a forecast of future gains or losses.
Impairment of Investment Securities. We regularly review
each investment security for impairment in accordance
with our impairment policy, which includes both
quantitative and qualitative criteria. Quantitative
criteria include length of time and amount that each
security position is in an unrealized loss position and
for fixed maturity securities, whether the issuer is in
compliance with terms and covenants of the security. Our
qualitative criteria include the financial strength and
specific prospects for the issuer as well as our intent
to hold the security until recovery. Our impairment
reviews involve our finance, risk and management teams as
well as the portfolio management and research
capabilities of GE Asset Management, Inc.("GEAM") as well
as other third party asset managers, as appropriate. Our
qualitative review attempts to identify those issuers
with a greater than 50% chance of default in the coming
twelve months. These securities are characterized as
"at-risk" of impairment. As of December 31, 2004,
securities "at risk" of impairment had aggregate
unrealized losses of approximately $10.0 million.
For fixed maturity securities, we recognize an impairment
charge to earnings in the period in which we determine
that we do not expect to either collect principal and
interest in accordance with the contractual terms of the
instruments or to recover based on underlying collateral
values and considering events such as payment default,
bankruptcy or disclosure of fraud. For equity securities,
we recognize an impairment charge in the period in which
we determine that the security will not recover to book
within a reasonable period. We determine what constitutes
a reasonable period on a
58
security-by-security basis based upon consideration of
all the evidence available to us, including the magnitude
of an unrealized loss and its duration. In any event,
this period does not exceed 18 months for common equity
securities. We measure impairment charges based on the
difference between the book value of the security and its
fair value. Fair value is based on quoted market price,
except for certain infrequently traded securities where
we estimate values using internally developed pricing
models. These models are based upon common valuation
techniques and require us to make assumptions regarding
credit quality, liquidity and other factors that affect
estimated values.
During 2004, 2003 and 2002, we recognized impairment
losses of $0.9 million, $26.4 million and $77.4 million,
respectively. We generally intend to hold securities in
unrealized loss positions until they recover. However,
from time to time, we sell securities in the normal
course of managing our portfolio to meet diversification,
credit quality, yield and liquidity requirements.
The following table presents the gross unrealized losses
and estimated fair values of our investment securities,
aggregated by investment type and length of time that
individual investment securities have been in a
continuous unrealized loss position, at December 31,
Less than 12 Months
---------------------------------------------------
2004 Amortized Fair Unrealized % Below # of
(Dollar amounts in millions) cost or cost value losses cost securities
- ---------------------------- ------------ -------- ---------- ------- ----------
Description of Securities
Fixed maturities:
U.S. government and agency $ 7.2 $ 7.2 $ -- -- 4
Non - U.S. government 2.9 2.9 -- -- 3
U.S. corporate 505.2 494.5 (10.7) 2.1% 104
Non-U.S. corporate 131.2 129.0 (2.2) 1.7% 30
Asset Backed 222.8 221.6 (1.2) 0.5% 38
Mortgage Backed 477.2 470.9 (6.3) 1.3% 76
-------- -------- ------ ---- ---
Total temporarily impaired securities $1,346.5 $1,326.1 $(20.4) 1.5% 255
======== ======== ====== ==== ===
% Underwater - Fixed maturities
(less than) 20% Underwater $1,344.7 $1,324.8 $(19.9) 1.5% 253
20-50% Underwater 1.8 1.3 (0.5) 27.8% 2
(greater than) 50% Underwater -- -- -- -- --
-------- -------- ------ ---- ---
Total fixed maturities $1,346.5 $1,326.1 $(20.4) 1.5% 255
======== ======== ====== ==== ===
Investment Grade $1,220.4 $1,203.8 $(16.6) 1.4% 223
Below Investment Grade 106.5 103.0 (3.5) 3.3% 26
Not rated 19.6 19.3 (0.3) 1.5% 6
-------- -------- ------ ---- ---
Total $1,346.5 $1,326.1 $(20.4) 1.5% 255
======== ======== ====== ==== ===
59
12 Months or More
-----------------------------------------------------
2004 Amortized Unrealized % Below # of
(Dollar amounts in millions) cost or cost Fair value losses cost securities
- ---------------------------- ------------ ---------- ---------- ------- ----------
Description of Securities
Fixed maturities:
U.S. corporate $285.6 $267.0 $(18.6) 6.5% 29
State and municipal 0.3 0.3 -- -- 1
Non-U.S. corporate 18.0 17.3 (0.7) 3.9% 4
Asset Backed 1.6 1.6 -- -- 1
Mortgage Backed 57.6 56.1 (1.5) 2.6% 20
------ ------ ------ ---- --
Total temporarily impaired securities $363.1 $342.3 $(20.8) 5.7% 55
====== ====== ====== ==== ==
% Underwater - Fixed maturities
(less than) 20% Underwater $338.2 $323.5 $(14.7) 4.3% 51
20-50% Underwater 24.9 18.8 (6.1) 24.5% 4
(greater than) 50% Underwater -- -- -- -- --
------ ------ ------ ---- --
Total fixed maturities $363.1 $342.3 $(20.8) 5.7% 55
====== ====== ====== ==== ==
Investment Grade $220.0 $208.2 $(11.8) 5.4% 40
Below Investment Grade 143.1 134.1 (9.0) 6.3% 15
Not rated equities -- -- -- -- --
------ ------ ------ ---- --
Total $363.1 $342.3 $(20.8) 5.7% 55
====== ====== ====== ==== ==
The investment securities at December 31, 2004 in an
unrealized loss position for less than twelve months,
account for $20.4 million or 49% of the total unrealized
losses. Of the securities in this category, there was no
security with an unrealized loss in excess of $5.0
million.
The investment securities in an unrealized loss position
for twelve months or more account for $20.8 million or
51% of the total unrealized losses. There are 35 fixed
maturity securities in three industry groups that account
for $14.0 million or 67% of the unrealized losses in this
category.
Twenty-two of these 35 securities are in the finance and
insurance sector. Within this sector, no single issuer
has unrealized losses greater than $5 million. The
unrealized losses of the securities are due to a higher
interest rate environment for the quarter ended December
31, 2004.
Six of these 35 securities are in the transportation
sector and are related to the airline industry. For those
airline securities, which we have previously impaired, we
expect to recover our carrying amount based upon
underlying aircraft collateral values.
The remaining 7 of these 35 securities are in the
consumer non-cyclical sector. There is one issuer,
comprising of one security, which represents $7 million.
No other single issuer of fixed maturities in this sector
has an unrealized loss greater than $5 million.
60
Separate Account Assets and Liabilities. Separate
account assets and liabilities represent funds held for
the exclusive benefit of variable annuity and variable
life contract holders. As of December 31, 2004, we held
$8,636.7 million of separate account assets. The increase
of $601.8 million, or 7.5%, from $8,034.9 million at
December 31, 2003 was related primarily to the favorable
market performance of the underlying securities, which
was partially offset by death, surrender and other
benefits outpacing new deposits.
Future Annuity and Contract Benefits. Future annuity and
contract benefits decreased $636.6 million, to $9,604.6
million at December 31, 2004 from $10,241.2 million at
December 31, 2003. The decrease is primarily attributable
to a decline in the institutional stable value product
liability, which resulted from maturities outpacing
sales. Also contributing to the decline in future annuity
and contract benefits was the recapture of previously
assumed structured settlement liabilities resulting from
the reinsurance transactions with UFLIC.
STATEMENT OF CHANGES Stockholder's interest decreased $232.0 million to
IN STOCKHOLDER'S $1,590.0 million at December 31, 2004 from $1,822.0
INTEREST million at December 31, 2003. The decrease was primarily
attributable to dividends paid in the amount of $419.1
million and a decline in net unrealized gains on invested
securities of $15.7 million, which was partially offset
by current year net income of $199.4 million.
INTEREST RATE Fluctuations in market interest rates may have a
MANAGEMENT significant effect on our sales of insurance and
investment products and our margins on these products.
Interest rates are highly sensitive to many factors,
including governmental monetary policies, domestic and
international economic and political conditions and other
factors beyond our control. In our Retirement Income and
Investments and Protection segments, low market interest
rates may reduce the spreads between the amounts we
credit to policyholders and contractholders and the yield
we earn on the investments that support these
obligations. In response to the unusually low interest
rates that have prevailed during the last several years,
we have reduced the guaranteed minimum crediting rates on
newly issued fixed annuity contracts and have reduced
crediting rates on in-force contracts where permitted to
do so. These actions have helped mitigate the adverse
impact of low interest rates on our spreads and
profitability on these products. A gradual increase in
interest rates generally would have a favorable effect on
the profitability of these products. However, rapidly
rising interest rates also could result in reduced
persistency in our spread-based retail products as
contractholders shift assets into higher yielding
investments.
61
We use derivative financial instruments to mitigate or
eliminate certain financial and market risks, including
those related to changes in interest rates. As a matter
of policy, we do not engage in derivative market-making,
speculative derivative trading, or other speculative
derivative activities. More detailed information
regarding these financial instruments, as well as the
strategies and policies for their use, is contained in
Notes 1 and 10 to the Consolidated Financial Statements.
We have managed our exposure to changes in interest
rates, in part, by monitoring and managing the duration
of our investment portfolio assets with the duration of
our liabilities. Established practices require that
derivative financial instruments relate to specific asset
or liability transactions or to currency exposure, if
any. Market fluctuations could negatively affect the
business. Significant changes in equity market
performance expose insurance companies to the risk of not
earning anticipated policy fees from variable products,
accelerating amortization of deferred acquisition costs,
or requiring additional liabilities for death benefits
exceeding the policyholder account balance. If the equity
markets fail to improve, we may recognize additional
amortization of deferred acquisition costs. Market
fluctuations may also increase trade volumes that could
expose insurers to gains or We are exposed to prepayment
risk in certain of our business activities, such as in
our investment portfolio and annuities activities. We use
swaptions to mitigate prepayment risk. These swaptions
are governed by the credit risk policies described below
and are transacted in either exchange-traded or
over-the-counter markets.
Counterparty credit risk is managed on an individual
counterparty basis, which means that gains and losses are
netted for each counterparty to determine the amount at
risk. When a counterparty exceeds credit exposure limits
in terms of amounts owed to us, typically as a result of
changes in market conditions, no additional transactions
are executed until the exposure with that counterparty is
reduced to an amount that is within the established
limit. All swaps are executed under master swap
agreements containing mutual credit downgrade provisions
that provide the ability to require assignment or
termination in the event either party is downgraded below
A3 or A-.
EQUITY MARKETS Equity market volatility may discourage purchases of
separate account products, such as variable annuities and
variable life, that have returns linked to the
performance of the equity markets and may cause some
existing customers to withdraw cash values or reduce
investments in those products. Equity market volatility
also affects the value of the assets in our separate
accounts, which, in turn, affects our earnings from
fee-based products. After several years of declines,
equity markets increased in 2003 and 2004, and we expect
that increases or relative stability in equity markets
could have a favorable impact on our sales of variable
products and our earnings from those
62
products. The potential impact of volatile equity markets
on our results has been significantly reduced as a result
of our reinsurance arrangements with UFLIC, pursuant to
which we reinsured, effective as of January 1, 2004,
substantially all of our in-force blocks of variable
annuities. We retain variable annuities sold after
January 1, 2004 for our own account, subject to
third-party reinsurance transactions in the ordinary
course of business, and therefore we bear the risk of any
adverse impact of future equity market fluctuations on
those annuities.
LIQUIDITY The principal liquidity requirements for our insurance
operations are our contractual obligations to contract
holders and annuitants. Contractual obligations include
payments of claims under outstanding insurance policies
and annuities, contract withdrawals and surrender
benefits. The primary sources for meeting these
contractual obligations are investment activities and
cash generated from operating activities. We maintain a
committed credit line with an indirect parent, GNA, of
$500 million to provide liquidity to meet normal
variation in cash requirements.
For the years ended December 31, 2004, 2003 and 2002 cash
flows from operating activities were $447.7 million,
$527.6 million and $375.3 million, respectively, and cash
flows from financing activities were $(767.1) million,
$(959.2) million and $(659.5) million, respectively.
These amounts include net cash from financing activities
relating to investment contract issuances and redemptions
of $(731.6) million, $(937.8) million and $(617.5)
million for the years ended December 31, 2004, 2003 and
2002, respectively.
As an insurance business, cash flows from operating and
financing activities, as premiums and deposits collected
from our insurance and investment products net of
redemptions and benefits paid, are invested if positive
and investments are redeemed if negative. Net cash from
investing activities was $333.4 million, $444.0 million
and $284.2 million for the year ended December 31, 2004,
2003 and 2002, respectively. The decrease in cash from
investing activities for the year ended December 31, 2004
was primarily the result of a decrease of cash used in
financing activities.
As of December 31, 2004, we had approximately $1,108.0
million of renewable floating rate funding agreements,
which are deposit-type products that generally credit
interest on deposits at a floating rate tied to an
external market index. Purchasers of renewable funding
agreements include money market funds, bank common trust
funds and other short-term investors. Some of our funding
agreements contain "put" provisions, through which the
contractholder has an option to terminate the funding
agreement for any reason after giving notice within the
contract's specified notice period, which is generally 90
days. Of the $1,108.0 million aggregate amount
63
outstanding as of December 31, 2004, $458.0 million had
put option features, none of which were less than 90
days. GE Capital has guaranteed certain obligations under
floating-rate funding agreements with a final maturity on
or before June 30, 2005. This guarantee covers our
obligations to contractholders and requires us to
reimburse GE Capital for any payments made to
contractholders under the guarantee. As of December 31,
2004, GE Capital's guarantee covered $858.0 million of
outstanding floating-rate funding agreements.
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. Following is a breakdown of the credit
quality of our fixed maturity portfolio at December 31,
2004.
BBB/Baa or above 91.2%
BB/Ba and below 8.6%
Not Rated 0.2%
-----
Total portfolio 100.0%
=====
-----------------------
Certain of our products contain provisions for charges
for surrender of, or withdrawals from, the policy. At
December 31, 2004 and December 31, 2003, approximately
64.8% and 67.2%, respectively, of our annuity contracts
were subject to surrender charges or contained
non-surrender provisions.
As of December 31, 2004, we had approximately $2,109.7
million of guaranteed investment contracts ("GICs").
Substantially all of these contracts allow for the
payment of benefits at contract value to ERISA plan
participants prior to contract maturity in the event of
death, disability, retirement or change in investment
election. We carefully underwrite these risks before
issuing a GIC to a plan and historically have been able
to effectively manage our exposure to these benefit
payments. Our GICs typically credit interest at a fixed
interest rate and have a fixed-maturity generally ranging
from two to six years. Contracts provide for early
termination by the contractholder but subject to an
adjustment to the contract value for changes in the level
of interest rates from the time the GIC was issued plus
an early withdrawal penalty.
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. Dividends in excess of the
prescribed limits or the earned surplus are deemed
extraordinary and require formal state insurance
department approval. We are able to pay $67.2 million in
dividends in 2005 without obtaining regulatory approval.
64
OFF-BALANCE SHEET We have used off-balance sheet securitization
TRANSACTIONS transactions to mitigate and diversify our asset risk
position and to adjust the asset class mix in our
portfolio by reinvesting securitization proceeds in
accordance with our approved investment guidelines. We
have not used securitization transactions to provide us
with additional liquidity and we do not anticipate using
securitization transactions for that purpose in the
future. The transactions involved securitizations of some
of our receivables and investments that were secured by
commercial mortgage loans, fixed maturities or other
receivables, consisting primarily of policy loans. Total
securitized assets remaining as of December 31, 2004 and
2003, were $297.9 million and $349.8 million respectively.
There were no securitization transactions in 2004 and
2003. Securitization transactions resulted in net gains,
before taxes, of approximately $5.8 million for the year
ended December 31, 2002.
We have arranged for the assets that we have transferred
in securitization transactions to be serviced by us
directly, or pursuant to arrangements with GEAM and with
General Motors Acceptance Corporation. Servicing
activities include ongoing review, credit monitoring,
reporting and collection activities.
Support. Financial support is provided under credit
support agreements, in which our direct parent, Genworth
Financial, provides limited recourse for a maximum of
$119 million of credit losses in such entities. We do not
provide any such recourse. Assets with credit support are
funded by demand notes that are further enhanced with
support provided by GE Capital.
Under FIN 46, Consolidation of Variable Interest
Entities, new consolidation criteria is applied to
certain SPE's, which are defined as "Variable Interest
Entities". Additional information about entities that
fall within the scope of FIN 46 is provided in Note 11.
65
Critical Accounting Policies
The accounting policies discussed in this section are
those that we consider to be particularly critical to an
understanding of our financial statements because their
application places the most significant demands on our
ability to judge the effect of inherently uncertain
matters on our financial results. For all of these
policies, we caution that future events rarely develop
exactly as forecast, and our management's best estimates
may require adjustment.
Insurance liabilities and reserves. We calculate and
maintain reserves for the estimated future payment of
claims to our policyholders and contractholders based on
actuarial assumptions and in accordance with industry
practice and U.S. GAAP. Many factors can affect these
reserves, including economic and social conditions,
inflation, healthcare costs, changes in doctrines of
legal liability and damage awards in litigation.
Therefore, the reserves we establish are necessarily
based on extensive estimates, assumptions and our
analysis of historical experience. Our results depend
significantly upon the extent to which our actual claims
experience is consistent with the assumptions we used in
determining our reserves and pricing our products. Our
reserve assumptions and estimates require significant
judgment and, therefore, are inherently uncertain. We
cannot determine with precision that the ultimate amounts
that we will pay for actual claims or the timing of those
payments will be consistent with our reserve assumptions.
Insurance reserves differ for long- and short-duration
insurance policies and annuity contracts. Measurement of
long-duration insurance reserves (such as guaranteed
renewable term life, whole life and long-term care
insurance policies) is based on approved actuarial
methods, but necessarily includes assumptions about
expenses, mortality, morbidity, lapse rates and future
yield on related investments. Short-duration contracts
are accounted for based on actuarial estimates of the
amount of loss inherent in that period's claims,
including losses incurred for which claims have not been
reported. Short-duration contract loss estimates rely on
actuarial observations of ultimate loss experience for
similar historical events.
Deferred acquisition costs. Deferred acquisition costs
("DAC") represents costs which vary with and are
primarily related to the sale and issuance of our
insurance policies and investment contracts that are
deferred and amortized over the estimated life of the
related insurance policies. These costs include
commissions in excess of ultimate renewal commissions,
solicitation and printing costs, sales material and some
support costs, such as underwriting and contract and
policy issuance expenses. DAC is subsequently amortized
to income, over the lives of the underlying contracts, in
relation to the anticipated recognition of premiums or
gross profits.
66
The amortization of DAC for traditional long-duration
insurance products, including guaranteed renewable term
life, is determined as a level proportion of premium
based on commonly accepted actuarial methods and
reasonable assumptions established when the contract or
policy is issued about mortality, morbidity, lapse rates,
expenses, and future yield on related investments.
Amortization for annuity contracts without significant
mortality risk and investment and universal life products
is based on estimated gross profits and is adjusted as
those estimates are revised. The DAC amortization
methodology for our variable products (variable annuities
and variable universal life insurance) includes a
long-term equity market average appreciation assumption
of 8.5%. When actual returns vary from the expected 8.5%,
we assume a reversion to this mean over a 3- to 7-year
period, subject to the imposition of ceilings and floors.
The assumed returns over this reversion period are
limited to the 85th percentile of historical market
performance.
We regularly review all of these assumptions and
periodically test DAC for recoverability. For deposit
products, if the current present value of estimated
future gross profits is less than the unamortized DAC for
a line of business, a charge to income is recorded for
additional DAC amortization. For other products, if the
benefit reserves plus anticipated future premiums and
interest earnings for a line of business are less than
the current estimate of future benefits and expenses
(including any unamortized DAC), a charge to income is
recorded for additional DAC amortization or for increased
benefit reserves.
Unfavorable experience with regard to expected expenses,
investment returns, mortality, morbidity, withdrawals or
lapses, may cause us to increase the amortization of DAC
or to record a charge to increase benefit reserves. In
recent years, the portion of estimated product margins
required to amortize DAC and has increased in most lines
of our business, with the most significant impact on
investment products, primarily as the result of lower
investment returns.
Present value of future profits. In conjunction with the
acquisition of a block of life insurance policies or
investment contracts, a portion of the purchase price is
assigned to the right to receive future gross profits
arising from existing insurance and investment contracts.
This intangible asset, called the present value of future
profits ("PVFP") represents the actuarially estimated
present value of future cash flows from the acquired
policies. PVFP is amortized, net of accreted interest, in
a manner similar to the amortization of DAC. We regularly
review our assumptions and periodically test PVFP for
recoverability in a manner similar to our treatment of
DAC.
Goodwill impairment. Goodwill resulting from
acquisitions is tested for impairment at least annually
using a fair value approach, which requires the use of
estimates and
67
judgment. To the extent the carrying amount of goodwill
exceeds its fair value, an impairment charge to income
would be recorded.
Valuation of investment securities. We obtain values for
actively traded securities from external pricing
services. For infrequently traded securities, we obtain
quotes from brokers or we estimate values using
internally developed pricing models. These models are
based upon common valuation techniques and require us to
make assumptions regarding credit quality, liquidity and
other factors that affect estimated values.
Impairment of investment securities. We regularly review
investment securities for impairment in accordance with
our impairment policy, which includes both quantitative
and qualitative criteria. Our quantitative criteria
include length of time and amount that each security
position is in an unrealized loss position, and for fixed
maturities, whether the issuer is in compliance with
terms and covenants of the security. Our qualitative
criteria include the financial strength and specific
prospects for the issuer as well as our intent to hold
the security until recovery. We actively perform
comprehensive market research, monitor market conditions
and segment our investments by credit risk in order to
minimize impairment risks.
Other significant accounting policies, not involving the
same level of measurement uncertainties as those
discussed above, are nevertheless important to an
understanding of the financial statements. Policies
related to revenue recognition, financial instruments and
consolidation policy require difficult judgments on
complex matters that are often subject to multiple
sources of authoritative guidance. Certain of these
matters are among topics currently under reexamination by
accounting standard setters and regulators. Although no
specific conclusion reached by these standard setters
appear likely to cause a material change in our
accounting policies, outcomes cannot be predicted with
confidence. Also see Note 1, Summary of Significant
Accounting Policies, which discusses accounting policies
that we must select when there are acceptable
alternatives.
NEW ACCOUNTING See Note 1 (t) to the Consolidated Financial Statements
STANDARDS for a discussion of recently issued accounting
pronouncements.
68
Quantitative and Qualitative Disclosures About Market Risk and Interest Rate
Management
Information about potential effects of market risk and
changes in interest rates on us are discussed in the
Interest Rate Management section of Item 7.
69
Experts
The consolidated financial statements and schedule of GE
Life and Annuity Assurance Company and subsidiary (the
Company) as of December 31, 2004 and 2003, and for each
of the years in the three-year period ended December 31,
2004, have been included herein in reliance upon the
reports of KPMG LLP, independent registered public
accounting firm, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and
auditing.
The reports of KPMG LLP dated February 12, 2005 with
respect to the consolidated financial statements and
schedule of GE Life and Annuity Assurance Company and
subsidiary refer to a change in accounting for certain
nontraditional long-duration contracts and for separate
accounts in 2004 and its method of accounting for
goodwill and other intangible assets in 2002.
70
GE LIFE AND ANNUITY ASSURANCE COMPANY
Consolidated Financial Statements
Year ended December 31, 2004
(With Report of Independent Registered Public Accounting Firm Thereon)
GE Life and Annuity Assurance Company
Consolidated Financial Statements
Table of Contents
Page
----
Report of Independent Registered Public Accounting Firm................................. F-1
Consolidated Statements of Income....................................................... F-2
Consolidated Balance Sheets............................................................. F-3
Consolidated Statements of Stockholder's Interest....................................... F-4
Consolidated Statements of Cash Flows................................................... F-5
Notes to Consolidated Financial Statements.............................................. F-6
Report of Independent Registered Public Accounting Firm on Financial Statement Schedules F-33
Schedule III, Supplemental Insurance Information........................................ F-34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 (the Company) as of December 31, 2004
and 2003, and the related consolidated statements of income, stockholder's
interest, and cash flows for each of the years in the three-year period ended
December 31, 2004. 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. 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, 2004 and 2003, and
the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for certain nontraditional long-duration
contracts and for separate accounts in 2004 and its method of accounting for
goodwill and other intangible assets in 2002.
/s/ KPMG LLP
Richmond, Virginia
February 12, 2005
F-1
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Consolidated Statements of Income
(Dollar amounts in millions)
Years Ended December 31,
-------------------------
2004 2003 2002
------- ------ --------
Revenues:
Net investment income..... $ 421.0 $538.0 $ 600.2
Net realized
investment gains........ 5.7 3.9 55.3
Premiums.................. 96.8 104.0 105.3
Cost of insurance......... 142.2 153.1 125.8
Variable product fees..... 9.4 106.3 113.9
Other income.............. 24.8 35.5 44.9
------- ------ --------
Total revenues........ 699.9 940.8 1,045.4
------- ------ --------
Benefits and expenses:
Interest credited......... 291.2 410.6 462.1
Benefits and other
changes in policy
reserves................ 182.8 245.7 178.2
Underwriting,
acquisition and
insurance expenses,
net of deferrals........ 63.2 149.0 99.3
Amortization of
deferred
acquisition costs
and intangibles......... 107.3 118.9 147.1
------- ------ --------
Total benefits
and expenses........ 644.5 924.2 886.7
------- ------ --------
Income before income
taxes and cumulative
effect of change in
accounting principle....... 55.4 16.6 158.7
Provision (benefit) for
income taxes............... (143.3) (3.1) 42.9
------- ------ --------
Income before cumulative
effect of change in
accounting principle....... 198.7 19.7 115.8
Cumulative effect of
change in accounting
principle, net of tax
of $0.4 million............ 0.7 -- --
------- ------ --------
Net income................... $ 199.4 $ 19.7 $ 115.8
======= ====== ========
See Notes to Consolidated Financial Statements.
F-2
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Consolidated Balance Sheets
(Dollar amounts in millions, except share amounts)
December 31,
-------------------
2004 2003
--------- ---------
Assets
Investments:
Fixed maturities
available-for-sale,
at fair value.......... $ 7,001.2 $ 9,640.7
Equity securities
available-for-sale,
at fair value..........
Common stock........... 26.8 24.7
Preferred stock,
non-redeemable........ -- 1.3
Mortgage loans, net
of valuation
allowance of $10.4
at December 31, 2004
and 2003............... 1,207.7 1,262.3
Policy loans............ 148.4 138.5
Short-term investments.. -- 99.6
Other invested assets... 466.5 162.1
--------- ---------
Total investments...... 8,850.6 11,329.2
Cash and cash
equivalents............. 26.4 12.4
Accrued investment
income.................. 81.5 127.8
Deferred acquisition
costs................... 248.1 897.0
Goodwill.................. 57.5 117.3
Intangible assets......... 120.6 144.6
Reinsurance recoverable... 2,753.8 160.7
Deferred income tax
asset................... 5.9 --
Other assets.............. 51.5 38.7
Separate account assets... 8,636.7 8,034.9
--------- ---------
Total assets........... $20,832.6 $20,862.6
========= =========
Liabilities and
Stockholder's Interest
Liabilities:
Future annuity and
contract benefits...... $ 9,604.6 $10,241.2
Liability for policy
and contract claims.... 89.4 42.6
Other policyholder
liabilities............ 235.9 147.8
Other liabilities....... 676.0 399.4
Deferred income tax
liability.............. -- 174.7
Separate account
liabilities............ 8,636.7 8,034.9
--------- ---------
Total liabilities...... 19,242.6 19,040.6
--------- ---------
Stockholder's interest:
Net unrealized
investment gains....... 72.0 87.7
Derivatives
qualifying as hedges... 3.3 0.4
--------- ---------
Accumulated non-owner
changes in
stockholder's
interest............... 75.3 88.1
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
shares authorized,
25,651 shares issued
and outstanding)....... 25.6 25.6
Additional paid-in
capital................ 1,061.1 1,060.6
Retained earnings....... 308.0 527.7
--------- ---------
Total stockholder's
interest.............. 1,590.0 1,822.0
--------- ---------
Total liabilities
and stockholder's
interest.............. $20,832.6 $20,862.6
========= =========
See Notes to Consolidated Financial Statements.
F-3
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Consolidated Statements of Stockholder's Interest
(Dollar amounts in millions, except share amounts)
Accumulated
Preferred Stock Common Stock Additional Non-owner
-------------- ------------- Paid-In Changes In Retained
Share Amount Share Amount Capital Equity Earnings
------- ------ ------ ------ ---------- ----------- --------
Balances at January 1, 2002........................................ 120,000 $120.0 25,651 $25.6 $1,050.7 $(25.5) $ 411.4
Changes other than transactions with stockholders:
Net income...................................................... -- -- -- -- -- -- 115.8
Net unrealized gains on investment securities (a)............... -- -- -- -- -- 5.4 --
Derivatives qualifying as hedges (b)............................ -- -- -- -- -- 10.4 --
Total changes other than transactions with stockholders.....
Cash dividends declared and paid................................... -- -- -- -- -- -- (9.6)
------- ------ ------ ----- -------- ------ -------
Balances at December 31, 2002...................................... 120,000 $120.0 25,651 $25.6 $1,050.7 $ (9.7) $ 517.6
Changes other than transactions with stockholders:
Net income...................................................... -- -- -- -- -- -- 19.7
Net unrealized gains on investment securities (a)............... -- -- -- -- -- 99.7 --
Derivatives qualifying as hedges (b)............................ -- -- -- -- -- (1.9) --
Total changes other than transactions with stockholders.....
Contributed capital................................................ -- -- -- -- 9.9 -- --
Cash dividends declared and paid................................... -- -- -- -- -- -- (9.6)
------- ------ ------ ----- -------- ------ -------
Balances at December 31, 2003...................................... 120,000 $120.0 25,651 $25.6 $1,060.6 $ 88.1 $ 527.7
Changes other than transactions with stockholder:
Net income...................................................... -- -- -- -- -- -- 199.4
Net unrealized gains on investment securities (a)............... -- -- -- -- -- (15.7) --
Derivatives qualifying as hedges (b)............................ -- -- -- -- -- 2.9 --
Total changes other than transactions with stockholders.....
Contributed capital................................................ -- -- -- -- 0.5 -- --
Cash dividends declared and paid................................... -- -- -- -- -- -- (40.0)
Non-cash dividend declared and paid................................ -- -- -- -- -- -- (379.1)
------- ------ ------ ----- -------- ------ -------
Balances at December 31, 2004...................................... 120,000 $120.0 25,651 $25.6 $1,061.1 $ 75.3 $ 308.0
======= ====== ====== ===== ======== ====== =======
Total
Stockholder's
Interest
-------------
Balances at January 1, 2002........................................ $1,582.2
Changes other than transactions with stockholders:
Net income...................................................... 115.8
Net unrealized gains on investment securities (a)............... 5.4
Derivatives qualifying as hedges (b)............................ 10.4
--------
Total changes other than transactions with stockholders..... 131.6
--------
Cash dividends declared and paid................................... (9.6)
--------
Balances at December 31, 2002...................................... $1,704.2
Changes other than transactions with stockholders:
Net income...................................................... 19.7
Net unrealized gains on investment securities (a)............... 99.7
Derivatives qualifying as hedges (b)............................ (1.9)
--------
Total changes other than transactions with stockholders..... 117.5
--------
Contributed capital................................................ 9.9
Cash dividends declared and paid................................... (9.6)
--------
Balances at December 31, 2003...................................... $1,822.0
--------
Changes other than transactions with stockholder:
Net income...................................................... 199.4
Net unrealized gains on investment securities (a)............... (15.7)
Derivatives qualifying as hedges (b)............................ 2.9
--------
Total changes other than transactions with stockholders..... 186.6
Contributed capital................................................ 0.5
Cash dividends declared and paid................................... (40.0)
Non-cash dividend declared and paid................................ (379.1)
--------
Balances at December 31, 2004...................................... $1,590.0
========
- --------
(a)Presented net of deferred taxes of $8.6, $(55.9) and $(1.8) in 2004, 2003
and 2002, respectively.
(b)Presented net of deferred taxes of $(1.6), $1.0 and $(5.9) in 2004, 2003 and
2002, respectively.
See 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,
-------------------------------
2004 2003 2002
--------- --------- ---------
Cash flows from
operating activities:
Net income................ $ 199.4 $ 19.7 $ 115.8
--------- --------- ---------
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Cumulative effect of
change in accounting
principle, net of tax.. (0.7) -- --
Change in future
policy benefits........ 341.1 407.5 413.2
Net realized
investments gains...... (5.7) (3.9) (55.3)
Amortization of
investment premiums
and discounts.......... 28.3 46.5 29.9
Acquisition costs
deferred............... (89.1) (167.7) (116.3)
Amortization of
deferred acquisition
costs and intangibles.. 107.3 118.9 147.1
Deferred income taxes... (174.0) 18.3 21.8
Change in certain
assets:
Decrease (increase)
in:
Accrued investment
income................ 26.6 32.6 48.0
Other, net............. (21.1) (39.8) 6.6
Change in certain
liabilities:
Increase (decrease)
in:
Policy and contract
claims................ 64.2 (183.9) 27.9
Other policyholder
liabilities........... 88.6 (59.6) 117.0
Other liabilities...... (117.2) 339.0 (380.4)
--------- --------- ---------
Net cash from
operating activities... 447.7 527.6 375.3
--------- --------- ---------
Cash flows from
investing activities:
Short-term investment
activity, net........... 99.6 178.4 (237.5)
Proceeds from sales and
maturities of
investment securities
and other invested
assets.................. 1,741.2 4,328.8 6,087.4
Principal collected on
mortgage and policy
loans................... 217.5 268.6 151.2
Purchases of investment
securities and other
invested assets......... (1,498.4) (3,819.5) (5,464.1)
Mortgage loan
originations and
increase in policy
loans................... (226.5) (512.3) (252.8)
--------- --------- ---------
Net cash from
investing
activities.......... 333.4 444.0 284.2
--------- --------- ---------
Cash flows from
financing activities:
Proceeds from issuance
of investment
contracts............... 1,293.0 3,107.0 3,495.1
Redemption and benefit
payments on
investment contracts.... (2,024.6) (4,044.8) (4,112.6)
Proceeds from
short-term borrowings... 251.4 346.5 388.4
Payments on short-term
borrowings.............. (246.9) (358.3) (420.8)
Cash dividends to
stockholders............ (40.0) (9.6) (9.6)
--------- --------- ---------
Net cash from
financing
activities.......... (767.1) (959.2) (659.5)
--------- --------- ---------
Net change in cash
and cash
equivalents......... 14.0 12.4 --
Cash and cash
equivalents at
beginning of year......... 12.4 -- --
--------- --------- ---------
Cash and cash
equivalents at end of
year...................... $ 26.4 $ 12.4 $ --
========= ========= =========
See Notes to Consolidated Financial Statements.
F-5
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2004, 2003 and 2002
(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 ("GELAAC") and
its subsidiary, Assigned Settlement, Inc. All significant intercompany accounts
and transactions have been eliminated in consolidation.
GE Life and Annuity Assurance Company (the "Company", "we", "us", or "our"
unless context otherwise requires) is a stock life insurance company operating
under a charter granted by the Commonwealth of Virginia on March 21, 1871 as
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 us to its wholly owned subsidiary, GE Financial
Assurance Holdings, Inc., ("GEFAHI") and ultimately the majority of the
outstanding common stock to General Electric Capital Assurance Company
("GECA"). As part of an internal reorganization of GE Financial Assurance's
insurance subsidiaries, the Harvest Life Insurance Company ("Harvest") merged
into us 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 our common stock in exchange for its interest in Harvest.
On May 24, 2004, GEFAHI transferred substantially all of its assets to
Genworth Financial, Inc. ("Genworth"), including all of the outstanding capital
stock of GNA Corporation ("GNA"), our indirect parent and 800 shares of our
common stock that GEFAHI had held directly. As a result, we became an indirect,
wholly-owned subsidiary of Genworth. On May 25, 2004, Genworth's Class A common
stock began trading on The New York Stock Exchange. Approximately 30% of
Genworth's common stock is now owned by public stockholders. GEFAHI continues
to own approximately 70% of Genworth's common stock.
On May 31, 2004, (1) Genworth contributed to GNA and GNA in turn contributed
to GECA 800 shares of our common stock and (2) Federal paid a dividend to GECA
consisting of 2,378 shares of our common stock. As a result of the foregoing
contribution and dividend, we became a direct, wholly-owned subsidiary of GECA
while remaining an indirect, wholly-owned subsidiary of Genworth.
(b) Basis of Presentation
These consolidated financial statements have been prepared on the basis of
accounting principles generally accepted in the United States of America ("U.S.
GAAP"). Preparing financial statements in conformity with U.S. GAAP requires us
to make estimates and assumptions that affect reported amounts and related
disclosures. Actual results could differ from those estimates. Certain prior
year amounts have been reclassified to conform to the current year presentation.
(c) Products
Our product offerings are divided along two major segments of consumer
needs: (i) Retirement Income and Investments and (ii) Protection.
Retirement Income and Investments deferred annuities (variable and fixed)
and variable life insurance products are investment vehicles and insurance
contracts intended for contractholders who want to accumulate tax-deferred
assets for retirement, desire a tax-efficient source of income and seek to
protect against outliving their assets. Our guaranteed investment contracts
("GICs") and funding agreements are investment contracts sold to qualified
institutional buyers.
Protection products are intended to provide protection against financial
hardship primarily after the death of an insured and to protect income and
assets from other adverse economic impacts of significant health care costs.
Our principal product lines under the Protection segment are universal life
insurance, interest-sensitive whole life) and Medicare supplement insurance.
F-6
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
We distribute our products through three primary channels: financial
intermediaries (banks, securities brokerage firms and independent
broker/dealers), independent producers (brokerage general agencies, affluent
market producer groups and specialized brokers) and dedicated sales specialists
(affiliated networks of both accountants and personal financial advisors).
(d) Premiums
For traditional long-duration insurance contracts, we report premiums as
earned when due.
For short-duration insurance contracts, we report premiums as revenue over
the terms of the related insurance policies on a pro-rata basis or in
proportion to expected claims.
Premiums received under annuity contracts without significant mortality risk
and premiums received on investment and universal life products are not
reported as revenues but rather as deposits and are included in liabilities for
future annuity and contract benefits.
(e) Net Investment Income and Net Realized Investment Gains and Losses
Investment income is recorded when earned. Realized investment gains and
losses are calculated on the basis of specific identification.
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 or prospective method. Under the retrospective method, used for
mortgage-backed and asset-backed securities of high credit quality (ratings
equal to or greater than AA or that are U.S. Agency backed) which cannot be
contractually prepaid, amortized cost of the security 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 net investment income. Under the prospective method, which is used
for all other mortgage-backed and asset-backed securities, future cash flows
are estimated and interest income is recognized going forward using the new
internal rate of return. As of December 31, 2004, all our mortgage-backed and
asset-backed securities that have had subsequent revisions in yield, cash flow
or prepayment assumptions were accounted for under the retrospective method.
(f) Policy Fees and Other Income
Policy fees and other income consists primarily of insurance charges
assessed on universal life contracts, fees assessed against policyholder
account values and surrender fee income. Charges to policyholder accounts for
universal life cost of insurance 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 policyholder's account values and are
recognized as revenue when charged. Policy surrender fees are recognized as
income when the policy is surrendered.
(g) Cash and Cash Equivalents
Certificates, money market funds and other time deposits with original
maturities of less than 90 days are considered cash equivalents in the
Consolidated Balance Sheets and Consolidated Statements of Cash Flows. Items
with maturities greater than 90 days but less than a year are included in
short-term investments.
(h) Investment Securities
We have designated all of our investment securities as available-for-sale
and report them in our Consolidated Balance Sheets at fair value. We obtain
values for actively traded securities from external pricing services. For
infrequently traded securities, we obtain quotes from brokers, or we estimate
values using internally developed pricing models. These models are
F-7
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
based upon common valuation techniques and require us to make assumptions
regarding credit quality, liquidity and other factors that affect estimated
values. Changes in the fair value of available-for-sale investments, net of the
effect on deferred acquisition costs ("DAC"), present value of future profits
("PVFP") and deferred income taxes, are reflected as unrealized investment
gains or losses in a separate component of accumulated nonowner changes in
stockholder's interest and accordingly, have no effect on net income.
We regularly review investment securities for impairment in accordance with
our policy, which includes both quantitative and qualitative criteria.
Quantitative criteria include length of time and amount that each security
position is in an unrealized loss position, and for fixed maturities, whether
the issuer is in compliance with terms and covenants of the security. Our
qualitative criteria include the financial strength and specific prospects for
the issuer as well as our intent to hold the security until recovery. Our
impairment reviews involve our finance, risk and asset management teams as well
as the portfolio management and research capabilities of GE Asset Management,
Inc. ("GEAM") and other third party asset managers, as appropriate. We actively
perform comprehensive market research, monitor market conditions and segment
our investments by credit risk in order to minimize impairment risks. The risks
inherent in reviewing the impairment of any investment security include the
risk that market results may differ from expectations; facts and circumstances
may change in the future and differ from estimates and assumptions; or we may
later decide to sell an investment security before it recovers in value as a
result of changed circumstances. If we change our estimate to conclude that a
decline in the value of an investment security is other than temporary, we will
reflect a charge for the impairment in the period our estimate changes.
(i) Securities Lending Activity
We engage in certain securities lending transactions, which require the
borrower to provide collateral, primarily consisting of cash and government
securities, on a daily basis, in amounts equal to or exceeding 102% of the fair
value of the applicable securities loaned. We maintain effective control over
all loaned securities and therefore, continue to report such securities as
fixed maturities in the Consolidated Balance Sheets.
Cash collateral received on securities lending transactions is reflected in
other invested assets with an offsetting liability recognized in other
liabilities for the obligation to return the collateral. Non-cash collateral,
such as a security received by us, is not reflected in our assets in the
Consolidated Balance Sheets, as we have not or repledged or sold the
collateral. The fair value of collateral held and included in other invested
assets was $406.9 million and $102.7 million at December 31, 2004 and 2003,
respectively. We had non-cash collateral of $23.8 million and $0 at December
31, 2004 and 2003, respectively.
(j) Mortgage and Policy Loans
Mortgage and policy loans are stated at their unpaid principal balance.
Mortgage loans are stated net of an allowance for estimated uncollectible
amounts. The allowance for losses is determined primarily on the basis of
management's best estimate of probable losses, including specific allowances
for known troubled loans, if any.
(k) Short-term Investments
Short-term investments are stated at amortized cost, which approximates fair
value. Equity securities (including seed money for new mutual fund portfolios)
are stated at fair value. Investments in limited partnerships are generally
accounted for under the equity method of accounting. Real estate is included in
other invested assets and is stated, generally, at cost less accumulated
depreciation. Other long-term investments are stated generally at amortized
cost.
(l) Deferred Acquisition Costs
Acquisition costs include costs which vary with and are primarily related to
the acquisition of insurance and investment contracts. Such costs are deferred
and amortized as follows:
F-8
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
Long-Duration Contracts -- Acquisition costs include commissions in excess
of ultimate renewal commissions, solicitation and printing costs, sales
material and some support costs, such as underwriting and contract and policy
issuance expenses. Amortization for traditional long-duration insurance
products is determined as a level proportion of premium based on commonly
accepted actuarial methods and reasonable assumptions regarding mortality,
morbidity, lapse rates, expenses and future yield on related investments
established when the contract or policy is issued. Amortization for annuity
contracts without significant mortality risk and investment and universal life
products is based on estimated gross profits and is adjusted as those estimates
are revised.
Short-Duration Contracts -- Acquisition costs consist primarily of
commissions and premium taxes and are amortized ratably over the terms of the
underlying policies.
We regularly review all of these assumptions and periodically test DAC for
recoverability. For deposit products, if the current present value of estimated
future gross profits is less than the unamortized DAC for a line of business, a
charge to income is recorded for additional DAC amortization. For other
products, if the benefit reserve plus anticipated future premiums and interest
earnings for a line of business are less than the current estimate of future
benefits and expenses (including any unamortized DAC), a charge to income is
recorded for additional DAC amortization or for increased benefit reserves.
(m) Intangible Assets
Present Value of Future Profits -- In conjunction with the acquisition of a
block of insurance policies or investment contracts, a portion of the purchase
price is assigned to the right to receive future gross profits arising from
existing insurance and investment contracts. This intangible asset, called
PVFP, represents the actuarially estimated present value of future cash flows
from the acquired policies. PVFP is amortized, net of accreted interest, in a
manner similar to the amortization of DAC.
We regularly review all of these assumptions and periodically test PVFP for
recoverability. For deposit products, if the current present value of estimated
future gross profits is less than the unamortized PVFP for a line of business,
a charge to income is recorded for additional PVFP amortization. For other
products, if the benefit reserve plus anticipated future premiums and interest
earnings for a line of business are less than the current estimate of future
benefits and expenses (including any unamortized PVFP), a charge to income is
recorded for additional PVFP amortization or for increased benefit reserves.
Deferred Sales Inducements to Contractholders -- We defer sales inducements
to contractholders for features on variable annuities that entitle the
contractholder to an incremental amount to be credited to the account value
upon making a deposit. Our sales inducements to contractholders deferred prior
to the adoption of American Institute of Certified Public Accountants ("AICPA")
Statement of Position 03-1 ("SOP 03-1"), Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts, which we included in unamortized deferred acquisition costs, were
reinsured effective January 1, 2004.
Other Intangible Assets -- We amortize the costs of other intangibles over
their estimated useful lives unless such lives are deemed indefinite.
Amortizable intangible assets are tested for impairment at least annually based
on undiscounted cash flows, which requires the use of estimates and judgment,
and, if impaired, written down to fair value based on either discounted cash
flows or appraised values. Intangible assets with indefinite lives are tested
at least annually for impairment and written down to fair value as required.
Software -- Purchased software and certain application development costs
related to internally developed software are capitalized, above de minimus
thresholds. When the software is ready for its intended use, the amounts
capitalized are amortized over the expected useful life, not to exceed 5 years.
F-9
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
(n) Goodwill
Goodwill is not amortized but is tested for impairment at least annually
using a fair value approach, which requires the use of estimates and judgment,
at the "reporting unit" level. A reporting unit is the operating segment, or a
business one level below that operating segment (the "component" level) if
discrete financial information is prepared and regularly reviewed by management
at the component level. We recognize an impairment charge for any amount by
which the carrying amount of a reporting unit's goodwill exceeds its fair
value. We use discounted cash flows to establish fair values. When available
and as appropriate, we use comparative market multiples to corroborate
discounted cash flow results. When a business within a reporting unit is
disposed of, goodwill is allocated to the business using the relative fair
value methodology to measure the gain or loss on disposal.
(o) 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 and estimated 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.
(p) Separate Accounts
The separate account assets represent funds for which the investment income
and investment gains and losses accrue directly to the variable annuity
contract holders and variable life policyholders. We assess mortality risk fees
and administration charges on the assets in the separate account. The separate
account assets are carried at fair value and are at least equal to the
liabilities that represent the policyholders' equity in those assets.
(q) 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 liability for life 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.
(r) 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, (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, and (c) claim adjustment
expenses. Claim adjustment expenses include costs incurred in the claim
settlement process such as legal fees and costs to record, process, and adjust
claims.
Management considers the liability for policy and contract claims provided
to be satisfactory to cover the losses that have occurred. Management monitors
actual experience, and where circumstances warrant, will revise its
assumptions. The methods of determining such estimates and establishing the
reserves are reviewed continuously and any adjustments are reflected in
operations in the period in which they become known. Future developments may
result in losses and loss expenses greater or less than the liability for
policy and contract claims provided.
(s) Income Taxes
For periods prior to 2004, we filed a consolidated life insurance federal
income tax return with our parent, GECA, and its other life insurance
affiliates. We were subject to a tax-sharing agreement, as approved by state
insurance regulators,
F-10
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
which allocated taxes on a separate company basis but provided benefit for
current utilization of losses and credits. Intercompany balances were settled
at least annually.
For the period beginning January 1, 2004, and ending on the date of the
transfer of our outstanding capital stock from GEFAHI to Genworth, we will be
included in the consolidated federal income tax return of General Electric
Corporation ("GE"). During this period, we will be subject to a tax-sharing
arrangement that allocates tax on a separate company basis, but provides
benefit for current utilization of losses and credits. Intercompany balances
will be settled at least annually.
Subsequent to the transfer of our outstanding capital stock from GEFAHI to
Genworth, we will file a consolidated life insurance federal income tax return
with our parent, GECA, and its other life insurance affiliates. We will be
subject to a separate tax-sharing agreement, as approved by state insurance
regulators, which will allocate taxes on a separate company basis but will
provide benefit for current utilization of losses and credits. Intercompany
balances will be settled at least annually.
Deferred federal taxes are provided for temporary differences between the
carrying amounts of assets and liabilities and their tax bases and are stated
at the enacted tax rates expected to be in effect when taxes are actually paid
or recovered.
(t) Accounting Changes
On January 1, 2004 we adopted AICPA Statement of Position 03-1, Accounting
and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts. SOP 03-1 provides guidance on separate
account presentation and valuation, accounting for sales inducements to
contractholders and classification and valuation of long-duration contract
liabilities. The cumulative effect of change in accounting principle related to
adopting SOP 03-1 was a $0.7 million benefit, net of taxes, for the change in
reserves, less additional amortization of deferred acquisition costs, on
variable annuity contracts with guaranteed minimum death benefits.
As described in Note 5, on April 15, 2004 we reinsured our in-force variable
annuity contracts, excluding the GE Retirement Answer product ("GERA(TM)"), to
Union Fidelity Life Insurance Company ("UFLIC"), effective as of January 1,
2004. We have continued to sell variable annuities and are retaining that
business for our own account. This reinsurance transaction for the separate
account of the variable annuity is structured as modified coinsurance. As such,
the separate account assets remain with us, and essentially all separate
account assets and liabilities relate to variable annuity contracts. Excluding
this reinsurance block, the separate account liabilities include both variable
annuity and variable life insurance contracts. Investment income and investment
gains and losses accrue directly to, and investment risk is borne by, the
contractholder for assets allocated to the separate account option. Our
variable contracts also include fixed accounts, which are accounted for and
recognized as general account assets and liabilities. Essentially all of our
separate account guarantees are death benefits.
Our variable annuity contracts provide for a guaranteed minimum death
benefit ("GMDB"), which provides a minimum account value to be paid on the
annuitant's death. Our contractholders have the option to purchase, at an
additional charge, a GMDB rider that provides for enhanced death benefits. The
minimum death benefit that we contractually guarantee to be paid on receipt of
proof of the annuitant's death is either one of the following specified amounts
or, in some cases, the greater of one or more of these amounts: (a) current
account value, (b) return of premium, which is no less than net deposits made
to the contract reduced by any amounts withdrawn from the policy, (c) the
highest contract value on a specified anniversary date ("ratchet"), adjusted
for subsequent premiums and withdrawals, if any, or (d) premium accumulated at
a stated interest rate ("roll-up"), adjusted for any amounts withdrawn from the
policy. In addition, we offer an Earnings Protection Rider (EPR), which pays a
death benefit up to 40% of the gain in the contract. GERA, a variable deferred
annuity and two variable annuity riders, the Guaranteed Income Advantage and
Principal Protection Advantage, also provide for a GMDB. Essentially all of our
separate account guarantees are death benefits.
The total account value (excluding the block of business reinsured through
the transaction mentioned above) of our variable annuities with GMDBs,
including both separate account and fixed account assets, is approximately
$203.3 million
F-11
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
and $992.7 million at January 1 and December 31, 2004, respectively, with
related death benefit exposure (or net amount at risk) of approximately $0 and
$0.9 million at January 1 and December 31, 2004, respectively. The death
benefit exposure for the EPR was $0 and $2.5 million at January 1, and December
31, 2004, respectively.
The following table presents our variable annuity exposure, net of
reinsurance, by GMDB type at December 31, 2004:
Net
Account Amount
(Dollar amounts in millions) Value at Risk /(a)/
- ---------------------------- ------- ------------
Return of premium....... $551.5 $0.2
Ratchet................. 149.5 0.2
Roll-up................. 174.3 0.3
Ratchet and roll-up..... 117.4 0.2
------ ----
Total................... $992.7 $0.9
====== ====
- --------
(a)Net amount at risk represents the guaranteed minimum death benefit exposure,
in excess of the current account value, if all contractholders died on
December 31, 2004.
The average attained age of our variable annuity contractholders with GMDBs,
weighted by net amount at risk, is 63.4 years of age as of December 31, 2004.
The liability for our GMDBs and EPR on variable annuity contracts net of
reinsurance is $0.5 million at December 31, 2004. Benefits paid for GMDB and
EPR were $0.1 million, net of reinsurance, for the year ended December 31,
2004. Incurred GMDB and EPR, net of reinsurance, is $0.6 million for the year
ended December 31, 2004.
The GMDB and EPR liability is determined by estimating the expected value of
death benefits in excess of the projected account value (or death benefit up to
the 40% of the gain in the contract for EPR) and recognizing the excess ratably
over the accumulation period based on total expected assessments. We regularly
evaluate estimates used and adjust the additional liability balance, with a
related charge or credit to benefits and other changes in policy reserves, if
actual experience or other evidence suggests that earlier assumptions should be
revised.
The following assumptions were used to determine the variable annuity GMDB
and EPR liability at December 31, 2004: data used was 1,000 stochastically
generated investment performance scenarios; geometric mean equity growth
assumed to be 8.9% and volatility assumed to be 20% for the portion of account
value invested in equity securities; mortality assumed to be 95% of the 1983
Basic Table mortality; lapse rates, which vary by contract type and duration,
assumed to range from 1% to 25% and correspond closely to lapse rates used for
deferred acquisition cost amortization; and discount rate assumed to be 8%.
The assets supporting the separate accounts of the variable contracts are
primarily mutual fund equity securities and are reflected in our Consolidated
Balance Sheet at fair value and reported as summary total separate account
assets with an equivalent summary total reported for liabilities. Amounts
assessed against the contactholders for mortality, administrative, and other
services are included in revenues. Changes in liabilities for minimum
guarantees are included in benefits and other changes in policy reserves.
Separate account net investment income, net investment gains and losses, and
the related liability changes are offset within the same line item in the
Consolidated Statement of Income. There were no gains or losses on transfers of
assets from the general account to the separate account.
We defer sales inducements to contractholders for features on variable
annuities that entitle the contractholder to an incremental amount to be
credited to the account value upon making a deposit, and for fixed annuities
with crediting rates
F-12
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
higher than the contract's expected ongoing crediting rates for periods after
the inducement. Our sales inducements to contractholders deferred prior to the
adoption of SOP 03-1, which we included in unamortized deferred acquisition
costs, were reinsured effective January 1, 2004. At December 31, 2004 the
unamortized sales inducements to contractholders balance was $5.3 million.
Deferred sales inducements to contractholders are reported as a separate
intangible asset and amortized in benefits and other changes in policy reserves
using the same methodology and assumptions used to amortize deferred
acquisition costs. For the year ended December 31, 2004, we deferred new sales
inducements to contractholders of $5.5 million, and we amortized sales
inducements to contractholders of $0.2 million.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities, which we adopted on July 1, 2003. No special purpose entities
("SPEs"), or assets previously sold to qualifying SPEs ("QSPEs"), were required
to be consolidated on our books.
(2)Investment Securities
(a) General
For the years ended December 31, 2004, 2003 and 2002 the sources of our
investment income were as follows:
(Dollar amounts in millions) 2004 2003 2002
- ---------------------------- ------ ------ ------
Fixed maturities.......... $360.9 $467.2 $528.8
Equity securities......... 0.1 (0.1) 0.8
Mortgage loans............ 77.1 81.8 73.2
Policy loans.............. 7.5 10.8 6.3
Other investments......... (16.8) (10.4) 0.6
------ ------ ------
Gross investment income... 428.8 549.3 609.7
Investment expenses..... (7.8) (11.3) (9.5)
------ ------ ------
Net investment income..... $421.0 $538.0 $600.2
====== ====== ======
For the years ended December 31, 2004, 2003 and 2002, gross realized
investment gains and losses from the sales of investment securities
available-for-sale were as follows:
(Dollar amounts in millions) 2004 2003 2002
- ---------------------------- ----- ------ -------
Gross realized investments:
Gains............................. $10.7 $ 80.2 $ 181.1
Losses, including impairments (a). (5.0) (76.3) (125.8)
----- ------ -------
Net realized investments gains....... $ 5.7 $ 3.9 $ 55.3
===== ====== =======
- --------
(a)Impairments were $(0.9) million, $(26.4) million and $(77.4) million in
2004, 2003 and 2002 respectively.
F-13
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
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 PVFP and deferred 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 stockholder's interest as of December 31, 2004, 2003
and 2002 are summarized as follows:
(Dollar amounts in millions) 2004 2003 2002
- ---------------------------- ------ ------ ------
Net unrealized gains (losses) on available-for-sale investment securities and other invested assets
before adjustments:
Fixed maturities................................................................................ $145.4 $204.6 $ 18.6
Equity securities............................................................................... 6.0 3.0 (9.7)
------ ------ ------
Subtotal.................................................................................... 151.4 207.6 8.9
------ ------ ------
Adjustments to the present value of future profits and Deferred acquisitions costs................. (40.7) (72.6) (29.5)
Deferred income taxes.............................................................................. (38.7) (47.3) 8.6
------ ------ ------
Net unrealized gains (losses) on available-for-sale investment securities................... $ 72.0 $ 87.7 $(12.0)
====== ====== ======
The change in the net unrealized gains (losses) on investment securities
reported in accumulated non-owner changes in equity is as follows:
2004 2003 2002
------ ------ ------
(Dollar amounts in millions)
- ----------------------------
Net unrealized gains (losses) on investment securities as of January 1......................... $ 87.7 $(12.0) $(17.4)
------ ------ ------
Unrealized gains on investment arising during the period:
Unrealized gain on investment securities.................................................... (52.5) 201.2 99.2
Adjustment to deferred acquisition costs.................................................... 19.7 (10.7) (31.8)
Adjustment to present value of future profits............................................... 12.2 (32.4) (23.1)
Provision for deferred income taxes......................................................... 8.6 (55.9) (3.0)
------ ------ ------
Unrealized gains (losses) on investment securities...................................... (12.0) 102.2 41.3
Reclassification adjustments to net realized investment gains (losses) net of deferred taxes of
$2.0, $1.4 and $19.4......................................................................... (3.7) (2.5) (35.9)
------ ------ ------
Net unrealized gains (losses) on investment securities as of December 31....................... $ 72.0 $ 87.7 $(12.0)
====== ====== ======
At December 31, 2004 and 2003, the amortized cost, gross unrealized gains
and losses and fair values of our fixed maturities and equity securities
available-for-sale were as follows:
Gross Gross
2004 Amortized Unrealized Unrealized
(Dollar amounts in millions) Cost Gains Losses Fair Value
- ---------------------------- --------- ---------- ---------- ----------
Fixed maturities:
U.S. government and agency....................... $ 51.5 $ 0.9 $ -- $ 52.4
State and municipal.............................. 0.7 -- -- 0.7
Non-U.S. government.............................. 97.9 7.5 -- 105.4
U.S. corporate................................... 3,935.8 134.1 (29.3) 4,040.6
Non-U.S. corporate............................... 782.7 23.0 (2.9) 802.8
Mortgage-backed.................................. 1,311.1 16.4 (7.8) 1,319.7
Asset-backed..................................... 676.1 4.7 (1.2) 679.6
-------- ------ ------ --------
Total fixed maturities........................ 6,855.8 186.6 (41.2) 7,001.2
Common stocks and non-redeemable preferred stocks 20.8 6.0 -- 26.8
-------- ------ ------ --------
Total available-for-sale securities.............. $6,876.6 $192.6 $(41.2) $7,028.0
======== ====== ====== ========
F-14
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
Gross Gross
2003 Amortized Unrealized Unrealized
(Dollar amounts in millions) Cost Gains Losses Fair Value
- ---------------------------- --------- ---------- ---------- ----------
Fixed maturities:
U.S. government and agency....................... $ 17.5 $ 0.6 $ (0.1) $ 18.0
State and municipal.............................. 0.9 -- -- 0.9
Non-U.S. government.............................. 67.8 4.9 (0.1) 72.6
U.S. corporate................................... 5,437.3 194.9 (48.9) 5,583.3
Non-U.S. corporate............................... 874.5 27.2 (8.2) 893.5
Mortgage-backed.................................. 1,819.1 33.6 (9.5) 1,843.2
Asset-backed..................................... 1,219.0 14.5 (4.3) 1,229.2
-------- ------ ------ --------
Total fixed maturities........................ 9,436.1 275.7 (71.1) 9,640.7
Common stocks and non-redeemable preferred stocks 23.0 3.0 -- 26.0
-------- ------ ------ --------
Total available-for-sale securities.............. $9,459.1 $278.7 $(71.1) $9,666.7
======== ====== ====== ========
We regularly review each investment security for impairment in accordance
with our impairment policy, which includes both quantitative and qualitative
criteria. Quantitative measures include length of time and amount that each
security position is in an unrealized loss position and for fixed maturity
securities, whether the issuer is in compliance with terms and covenants of the
security. Our qualitative criteria include the financial strength and specific
prospects for the issuer as well as our intent to hold the security until
recovery. Our impairment reviews involve our finance, risk, and asset
management teams as well as the portfolio management and research capabilities
of GEAM and other third party asset managers, as appropriate. Our qualitative
review attempts to identify those issuers with a greater than 50% chance of
default in the coming twelve months. These securities are characterized as
"at-risk" of impairment. As of December 31, 2004, securities "at risk" of
impairment had aggregate unrealized losses of approximately $10.0 million.
For fixed maturity securities, we recognize an impairment charge to earnings
in the period in which we determine that we do not expect to either collect
principal and interest in accordance with the contractual terms of the
instruments or to recover based on underlying collateral values and considering
events such as payment default, bankruptcy or disclosure of fraud. For equity
securities, we recognize an impairment charge in the period in which we
determine that the security will not recover to book value within a reasonable
period. We determine what constitutes a reasonable period on a
security-by-security basis based upon consideration of all the evidence
available to us, including the magnitude of an unrealized loss and its
duration. In any event, this period does not exceed 18 months for common equity
securities. We measure impairment charges based on the difference between the
book value of the security and its fair value. Fair value is based on quoted
market price, except for certain infrequently traded securities where we
estimate values using internally developed pricing models. These models are
based upon common valuation techniques and require us to make assumptions
regarding credit quality, liquidity and other factors that affect estimated
values.
During 2004, 2003 and 2002, we recognized impairment losses of $0.9 million,
$26.4 million and $77.4 million, respectively. We generally intend to hold
securities in unrealized loss positions until they recover. However, from time
to time, we sell securities in the normal course of managing our portfolio to
meet diversification, credit quality, yield and liquidity requirements.
F-15
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
The following table presents the gross unrealized losses and estimated fair
values of our investment securities, on a historical basis, aggregated by
investment type and length of time that individual investment securities have
been in a continuous unrealized loss position, at December 31,
Less than 12 Months
- - -----------------------------------------------------
2004 Amortized Unrealized % Below # of
(Dollar amounts in millions) cost or cost Fair value losses cost securities
- ---------------------------- ------------ ---------- ---------- ------- ----------
Description of Securities
Fixed maturities:
U.S. government and agency........ $ 7.2 $ 7.2 $ -- -- 4
Non-U.S. government............... 2.9 2.9 -- -- 3
U.S. corporate.................... 505.2 494.5 (10.7) 2.1% 104
Non-U.S. corporate................ 131.2 129.0 (2.2) 1.7% 30
Asset Backed...................... 222.8 221.6 (1.2) 0.5% 38
Mortgage Backed................... 477.2 470.9 (6.3) 1.3% 76
-------- -------- ------ ---- ---
Total temporarily impaired securities $1,346.5 $1,326.1 $(20.4) 1.5% 255
======== ======== ====== ==== ===
% Underwater -- Fixed maturities
(less than) 20% Underwater........ $1,344.7 $1,324.8 $(19.9) 1.5% 253
20-50% Underwater................. 1.8 1.3 (0.5) 27.8% 2
(greater than) 50% Underwater..... -- -- -- -- --
-------- -------- ------ ---- ---
Total fixed maturities............... $1,346.5 $1,326.1 $(20.4) 1.5% 255
======== ======== ====== ==== ===
Investment Grade..................... $1,220.4 $1,203.8 $(16.6) 1.4% 223
Below Investment Grade............... 106.5 103.0 (3.5) 3.3% 26
Not rated............................ 19.6 19.3 (0.3) 1.5% 6
-------- -------- ------ ---- ---
Total................................ $1,346.5 $1,326.1 $(20.4) 1.5% 255
======== ======== ====== ==== ===
12 Months or More
- - -------------------------------------------------
2004 Amortized Fair Unrealized % Below # of
(Dollar amounts in millions) cost or cost value losses cost securities
- ---------------------------- ------------ ------ ---------- ------- ----------
Description of Securities
Fixed maturities:
U.S. corporate.................... $285.6 $267.0 $(18.6) 6.5% 29
State and municipal............... 0.3 0.3 -- -- 1
Non-U.S. corporate................ 18.0 17.3 (0.7) 3.9% 4
Asset Backed...................... 1.6 1.6 -- -- 1
Mortgage Backed................... 57.6 56.1 (1.5) 2.6% 20
------ ------ ------ ---- --
Total temporarily impaired securities $363.1 $342.3 $(20.8) 5.7% 55
====== ====== ====== ==== ==
% Underwater -- Fixed maturities
(less than) 20% Underwater........ $338.2 $323.5 $(14.7) 4.3% 51
20-50% Underwater................. 24.9 18.8 (6.1) 24.5% 4
(greater than) 50% Underwater..... -- -- -- -- --
------ ------ ------ ---- --
Total fixed maturities............... $363.1 $342.3 $(20.8) 5.7% 55
====== ====== ====== ==== ==
Investment Grade..................... $220.0 $208.2 $(11.8) 5.4% 40
Below Investment Grade............... 143.1 134.1 (9.0) 6.3% 15
Not rated equities................... -- -- -- -- --
------ ------ ------ ---- --
Total................................ $363.1 $342.3 $(20.8) 5.7% 55
====== ====== ====== ==== ==
F-16
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
Less than 12 Months
- - ---------------------------------------------------
2003 Amortized Fair Unrealized % Below # of
(Dollar amounts in millions) cost or cost value losses cost securities
- ---------------------------- ------------ -------- ---------- ------- ----------
Description of Securities
Fixed maturities:
U.S. corporate.................... $1,039.4 $1,009.2 $(30.2) 2.9% 129
U.S. government and agencies...... 7.2 7.1 (0.1) 1.4% 2
Non-U.S. government............... 14.2 14.1 (0.1) 0.7% 4
State and municipal............... 0.9 0.9 -- -- 2
Non-U.S. corporate................ 177.3 172.4 (4.9) 2.8% 41
Asset Backed...................... 224.1 220.2 (3.9) 1.7% 22
Mortgage Backed................... 560.3 550.9 (9.4) 1.7% 79
-------- -------- ------ --- ---
Total temporarily impaired securities $2,023.4 $1,974.8 $(48.6) 2.4% 279
======== ======== ====== === ===
% Underwater -- Fixed maturities
(less than) 20% Underwater........ $2,023.3 $1,974.8 $(48.5) 2.4% 277
20-50% Underwater................. -- -- -- -- --
(greater than) 50% Underwater..... 0.1 -- (0.1) 100% 2
-------- -------- ------ --- ---
Total fixed maturities............... $2,023.4 $1,974.8 $(48.6) 2.4% 279
======== ======== ====== === ===
Investment Grade..................... $1,905.1 $1,862.7 $(42.4) 2.2% 257
Below Investment Grade............... 118.3 112.1 (6.2) 5.2% 22
Not rated equities................... -- -- -- -- --
-------- -------- ------ --- ---
Total................................ $2,023.4 $1,974.8 $(48.6) 2.4% 279
======== ======== ====== === ===
12 Months or More
- - -----------------------------------------------------
2003 Amortized Unrealized % Below # of
(Dollar amounts in millions) cost or cost Fair value losses cost securities
- ---------------------------- ------------ ---------- ---------- ------- ----------
Description of Securities
Fixed maturities:
U.S. corporate.................... $268.2 $249.5 $(18.7) 7.0% 37
Non-U.S. corporate................ 46.1 42.8 (3.3) 7.2% 4
Asset Backed...................... 75.4 75.0 (0.4) 0.5% 6
Mortgage Backed................... 3.9 3.8 (0.1) 2.6% 6
------ ------ ------ ---- --
Total temporarily impaired securities $393.6 $371.1 $(22.5) 5.7% 53
====== ====== ====== ==== ==
% Underwater -- Fixed maturities
(less than) 20% Underwater........ $370.7 $353.2 $(17.5) 4.7% 47
20-50% Underwater................. 22.9 17.9 (5.0) 21.8% 6
(greater than) 50% Underwater..... -- -- -- -- --
------ ------ ------ ---- --
Total fixed maturities............... $393.6 $371.1 $(22.5) 5.7% 53
====== ====== ====== ==== ==
Investment Grade..................... $282.9 $273.0 $ (9.9) 3.5% 29
Below Investment Grade............... 110.7 98.1 (12.6) 11.4% 24
Not rated equities................... -- -- -- -- --
------ ------ ------ ---- --
Total................................ $393.6 $371.1 $(22.5) 5.7% 53
====== ====== ====== ==== ==
The investment securities at December 31, 2004 in an unrealized loss
position for less than twelve months, account for $20.4 million or 49% of the
total unrealized losses. Of the securities in this category, there was no
security with an unrealized loss in excess of $5.0 million.
F-17
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
The investment securities in an unrealized loss position for twelve months
or more account for $20.8 million or 51% of the total unrealized losses. There
are 35 fixed maturity securities in three industry groups that account for
$14.0 million or 67% of the unrealized losses in this category.
Twenty-two of these 35 securities are in the finance and insurance sector.
Within this sector, no single issuer has unrealized losses greater than $5.0
million. The unrealized losses of the securities are due to a higher interest
rate environment for the quarter ended December 31, 2004.
Six of these 35 securities are in the transportation sector and are related
to the airline industry. For those airline securities, which we have previously
impaired, we expect to recover our carrying amount based upon underlying
aircraft collateral values.
The remaining 7 of these 35 securities are in the consumer non-cyclical
sector. There is one issuer, comprising of one security, which represents $7
million. No other single issuer of fixed maturities in this sector has an
unrealized loss greater than $5 million.
The scheduled maturity distribution of the fixed maturity portfolio at
December 31, 2004 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.
(Dollar amounts in millions) Amortized cost Fair value
- ---------------------------- -------------- ----------
Due in one year less.................. $ 411.5 $ 413.7
Due after one year through five years. 1,886.2 1,938.3
Due after five years through ten years 1,603.9 1,662.9
Due after ten years................... 967.0 987.0
-------- --------
Subtotals.......................... 4,868.6 5,001.9
Mortgage-backed securities............ 1,311.1 1,319.7
Asset-backed securities............... 676.1 679.6
-------- --------
Totals............................. $6,855.8 $7,001.2
======== ========
As of December 31, 2004, $828.2 million of our investments (excluding
mortgage and asset-backed securities) were subject to certain call provisions.
As required by law, we have amounts invested, with governmental authorities
and banks for the protection of policyholders, of $5.6 million and $5.7 million
as of December 31, 2004 and 2003, respectively.
As of December 31, 2004, securities issued by finance and insurance,
utilities and energy and consumer -- non cyclical industry groups represented
approximately 35%, 17% and 12% of our domestic and foreign corporate fixed
maturities portfolio, respectively. No other industry group comprises more than
10% of our investment portfolio. This portfolio is widely diversified among
various geographic regions in the U.S. and internationally, and is not
dependent on the economic stability of one particular region.
As of December 31, 2004, we did not hold any fixed maturity securities,
which individually exceeded 10% of stockholder's interest.
The Securities Valuation Office of the National Association of Insurance
Commissioners (NAIC) evaluates bond investments of U.S. insurers for regulatory
reporting purposes and assigns securities to one of six investment categories
called "NAIC designations." The NAIC designations parallel the credit ratings
of the Nationally Recognized Statistical Rating Organizations for marketable
bonds. NAIC designations 1 and 2 include bonds considered investment grade
(rated
F-18
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
"Baa3" or higher by Moody's, or rated "BBB-" or higher by S&P) by such rating
organizations. NAIC designations 3 through 6 include bonds considered below
investment grade (rated "Ba1" or lower by Moody's, or rated "BB+" or lower by
S&P).
The following table presents our fixed maturities by NAIC and/or equivalent
ratings of the Nationally Recognized Statistical Rating Organizations, as well
as the percentage, based upon estimated fair value, that each designation
comprises. Our non-U.S. fixed maturities generally are not rated by the NAIC
and are shown based upon the equivalent rating of the Nationally Recognized
Statistical Rating Organizations. Similarly, certain privately placed fixed
maturities that are not rated by the Nationally Recognized Statistical Rating
Organizations are shown based upon their NAIC designation. Certain fixed
maturities, primarily non-U.S. fixed maturities, are not rated by the NAIC or
the Nationally Recognized Statistical Rating Organizations and are so
designated.
As of December 31,
------------------------------------------------------
2004 2003
(Dollar amounts in millions) -------------------------- --------------------------
NAIC Rating Agency Equivalent Amortized Estimated % of Amortized Estimated % of
Rating Designation cost fair value total cost fair value total
- ------ ------------------------ --------- ---------- ----- --------- ---------- -----
(Dollar amounts in millions)
1 Aaa/Aa/A............... $3,982.0 $4,025.0 57.5% $5,719.0 $5,805.7 60.2%
2 Baa.................... 2,279.0 2,361.7 33.7% 2,951.8 3,059.4 31.7%
3 Ba..................... 408.2 430.9 6.2% 460.5 481.6 5.0%
4 B...................... 135.6 135.5 1.9% 161.7 158.2 1.6%
5 Caa and lower.......... 30.7 26.9 0.4% 101.5 91.8 1.0%
6 In or near default..... 7.1 7.8 0.1% 40.6 43.0 0.5%
Not rated Not rated.............. 13.2 13.4 0.2% 1.0 1.0 --
-------- -------- ----- -------- -------- -----
Total fixed maturities. $6,855.8 $7,001.2 100.0% $9,436.1 $9,640.7 100.0%
======== ======== ===== ======== ======== =====
We have limited partnership commitments outstanding of $0.4 million and $7.4
million at December 31, 2004 and December 31, 2003, respectively.
(b) Mortgage and Real Estate Portfolio
For the years ended December 31, 2004 and 2003, respectively, we originated
$28.0 million and $44.6 million of mortgages secured by real estate in
California, which represents 14% and 9% of our total originations for those
years.
We have certain investment commitments to provide fixed-rate loans. The
investment commitments, which would be collateralized by related properties of
the underlying investments and held for investment purposes, involve varying
elements of credit and market risk. We are committed to fund $6.1 million and
$0 as of December 31, 2004 and 2003, respectively, in U.S. mortgage loans,
which will be held for investment purposes.
"Impaired" loans are defined under U.S. 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 our commercial loans.
Under these principles, we have two types of "impaired" loans: loans
requiring allowances for losses (none as of December 31, 2004 and 2003) and
loans expected to be fully recoverable because the carrying amount has been
reduced previously through charge-offs or deferral of income recognition ($0.8
million and $1.2 million as of December 31, 2004 and 2003, respectively).
Average investment in impaired loans during December 31, 2004, 2003 and 2002
was $1.1 million, $2.8 million and $5.1 million and interest income earned on
these loans while they were considered impaired was $0, $0.1 million and $0.5
million for the years ended December 31, 2004, 2003 and 2002, respectively.
F-19
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
The following table presents the activity in the allowance for losses during
the years ended December 31, 2004, 2003 and 2002:
(Dollar amounts in millions) 2004 2003 2002
- ---------------------------- ----- ----- -----
Balance at January 1................................ $10.4 $ 8.9 $18.2
(Benefit) provision (credited) charged to operations 1.0 1.5 (9.3)
Transfers........................................... (0.6) -- --
Amounts written off, net of recoveries.............. (0.4) -- --
----- ----- -----
Balance at December 31.............................. $10.4 $10.4 $ 8.9
===== ===== =====
During 2002, as part of our on-going analysis of exposure to losses arising
from mortgage loans, we recognized $11.6 million reduction in its allowance for
losses.
The allowance for losses on mortgage loans at December 31, 2004, 2003 and
2002 represented 0.9%, 0.8% and 0.8% of gross mortgage loans, respectively.
Non-income producing mortgage loans were $0.8 million and $0 of December 31,
2004 and 2003, respectively.
(3)Deferred Acquisition Costs
Activity impacting deferred acquisition costs for the years ended December
31, 2004, 2003 and 2002 was as follows:
(Dollar amounts in millions) 2004 2003 2002
- ---------------------------- ------- ------ -------
Unamortized balance at January 1.................... $ 923.8 $843.3 $ 838.2
Cost deferred....................................... 89.1 167.7 116.3
Amortization, net................................... (23.6) (87.2) (111.2)
Transfers due to reinsurance transactions with UFLIC (734.1) -- --
------- ------ -------
Unamortized balance at December 31.................. 255.2 923.8 843.3
Cumulative effect of net unrealized investment gains (7.1) (26.8) (16.1)
------- ------ -------
Balance at December 31.............................. $ 248.1 $897.0 $ 827.2
======= ====== =======
(4)Intangible Assets and Goodwill
At December 31, 2004 and 2003 the gross carrying amount and accumulated
amortization of intangibles subject to amortization were as follows:
2004 2003
- - -------------------- --------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
(Dollar amounts in millions) Amount Amortization Amount Amortization
- ---------------------------- -------- ------------ -------- ------------
Present value of future profits ("PVFP")..... $123.7 $(27.6) $508.8 $(380.7)
Capitalized software......................... 31.1 (11.9) 26.2 (10.1)
Deferred sales inducements to contractholders 5.7 (0.4) -- --
All other.................................... 1.0 (1.0) 1.0 (0.6)
------ ------ ------ -------
Total........................................ $161.5 $(40.9) $536.0 $(391.4)
====== ====== ====== =======
(a) Present Value of Future Profits
The method used by us to value PVFP in connection with acquisitions of life
insurance entities is summarized as follows: (1) identify the future gross
profits attributable to certain lines of business, (2) identify the risks
inherent in realizing those gross profits and (3) discount those gross profits
at the rate of return that we must earn in order to accept the inherent risks.
F-20
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
The following table presents the activity in PVFP for the years ended
December 31, 2004, 2003 and 2002:
(Dollar amounts in millions) 2004 2003 2002
- ---------------------------- ------ ------ ------
Unamortized balance at January 1.............................................. $173.9 $202.2 $235.1
Interest accreted as 5.2%, 5.4% and 6.0% for December 31, 2004, 2003 and 2002,
respectively................................................................ 7.1 10.2 13.2
Amortization.................................................................. (27.6) (38.5) (46.1)
Amounts transferred in connection with reinsurance transactions with UFLIC.... (23.7) -- --
------ ------ ------
Unamortized balance December 31............................................... 129.7 173.9 202.2
Cumulative effect of net unrealized investment gains.......................... (33.6) (45.8) (13.4)
------ ------ ------
Balance at December 31........................................................ $ 96.1 $128.1 $188.8
====== ====== ======
The estimated percentage of the December 31, 2004 balance, before the effect
of unrealized investment gains or losses, to be amortized over each of the next
five years is as follows:
2005 11.2%
2006 9.7%
2007 8.7%
2008 7.4%
2009 6.8%
(b) Goodwill
As of December 31, 2004 goodwill was comprised of the following:
Retirement
Income &
(Dollar amounts in millions) Investments Protection Total
- ---------------------------- ----------- ---------- ------
Balance at December 31, 2002 $54.8 $52.6 $107.4
Additions................... 5.0 4.9 9.9
----- ----- ------
Balance at December 31, 2003 59.8 57.5 117.3
Impairment.................. 59.8 -- 59.8
----- ----- ------
Balance at December 31, 2004 $ -- $57.5 $ 57.5
===== ===== ======
As a result of the reinsurance transactions with UFLIC described in Note 5,
we were not able to transfer any goodwill, as the reinsurance transactions with
UFLIC did not constitute the disposition of a business. However, as the
reinsurance transactions with UFLIC represented a significant portion of our
operations, we were required to test goodwill for impairment and recognized an
impairment charge of $59.8 million in the Retirement Income and Investments
reporting unit for the year ended December 31, 2004. The fair value of that
reporting unit was estimated using the expected present value of future cash
flows.
(5)Reinsurance
On April 15, 2004, we entered into reinsurance transactions in which we
ceded to Union Fidelity Life Insurance Company, an affiliate, substantially all
of our in-force blocks of variable annuities and structured settlements. Our
in-force variable annuity contracts, excluding the GERA(TM) product that was
not reinsured, had aggregate general account reserves of $2.5 billion as of
January 1, 2004. Our in-force structured settlements reinsured had aggregate
policyholder reserves of $0.3 billion as of January 1, 2004. At December 31,
2004, the in-force blocks of variable annuities and structured settlements
F-21
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
ceded to UFLIC had aggregate policyholder reserves of $2.4 billion and $0.2
billion, respectively. The reinsurance transactions with UFLIC were completed
and accounted for at book value. We transferred investment assets to UFLIC in
exchange for the reinsurance recoverable asset from UFLIC in the amount of $2.1
billion at January 1, 2004. UFLIC also assumed any benefit or expense resulting
from third party reinsurance that we have on this block of business. We have
$7.6 billion in retained assets that are attributable to the separate account
portion of the variable annuity business and will make any payments with
respect to that separate account portion directly from these assets. The
reinsurance transactions with UFLIC will be reported on our tax returns at fair
value as determined for tax purposes, giving rise to a net reduction in current
and deferred income tax liabilities and resulting in a net tax benefit. Under
these reinsurance agreements, we continue to perform various management,
administration and support services and receive an expense allowance from UFLIC
to reimburse us for costs we incur to service the reinsured blocks. Actual
costs and expense allowance amounts will be determined by expense studies to be
conducted periodically.
Although we are not relieved of our primary obligations to the
contractholders, the reinsurance transactions with UFLIC transfer the future
financial results of the reinsured blocks to UFLIC. To secure the payment of
its obligations to us under these reinsurance agreements, UFLIC has established
trust accounts to maintain an aggregate amount of assets with a statutory book
value at least equal to the statutory general account reserves attributable to
the reinsured business less an amount required to be held in certain claims
paying accounts. A trustee will administer the trust accounts and we will be
permitted to withdraw from the trust accounts amounts due to us pursuant to the
terms of the reinsurance agreements that are not otherwise paid by UFLIC.
Concurrently with the consummation of the reinsurance transactions with
UFLIC, we paid a dividend to our stockholders consisting of cash and
securities. A portion of this dividend, together with amounts paid by certain
of our affiliates, was used by GE Financial Assurance Holdings, Inc. to make a
capital contribution to UFLIC. The aggregate value of the dividend was $409.5
million, consisting of cash in the amount of $30.4 million and securities in
the amount of $379.1 million.
We are involved in both the cession and assumption of reinsurance with other
companies. Our 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 us, they do not discharge us from our primary liabilities and we
remain 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 any one insured with an issue age up to and
including 75 is $1.0 million and for issue ages over 75 is $0.1 million.
Certain Medicare supplement insurance policies are reinsured on either a quota
share or excess of loss basis. We also use reinsurance for guaranteed minimum
death benefit ("GMDB") options on most of our variable annuity products. We
monitor both the financial condition of individual reinsurers and risk
concentrations arising from similar geographic regions, activities and economic
characteristics of reinsurers to lessen the risk of default by such reinsurers.
Other than with UFLIC, at December 31, 2004, we had no significant
concentrations of variable annuity net at risk reinsurance with any one
reinsurer that could have a material impact on our results of operations. At
December 31, 2004, 28.5% of our reinsured life insurance net at risk exposure
was with one company.
Net life insurance in force as of December 31 is summarized as follows:
(Dollar amounts in millions) 2004 2003 2002
- ---------------------------- --------- --------- ---------
Direct life insurance in force...... $24,723.4 $26,889.2 $28,964.5
Amounts ceded to other companies.... (4,045.2) (4,129.4) (4,575.9)
Amounts assumed from other companies 1,863.3 1,970.2 2,092.9
--------- --------- ---------
Net in force........................ $22,541.5 $24,730.0 $26,481.5
========= ========= =========
Percentage of amount assumed to net. 8.3% 8.0% 7.9%
========= ========= =========
F-22
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
The effects of reinsurance on premiums earned for the years ended December
31, 2004, 2003 and 2002 were as follows:
(Dollar amounts in millions) 2004 2003 2002
- ---------------------------- ------ ------ ------
Direct............................. $110.8 $122.9 $117.9
Assumed............................ 2.5 2.5 4.8
Ceded.............................. (16.5) (21.4) (17.4)
------ ------ ------
Net premiums earned................ $ 96.8 $104.0 $105.3
====== ====== ======
Percentage of amount assumed to net 2.6% 2.4% 4.6%
====== ====== ======
Due to the nature of our insurance contracts, premiums earned approximate
premiums written.
Reinsurance recoveries recognized as a reduction of benefits amounted to
$1,038.7 million, $77.7 million and $87.6 million for the years ended December
31, 2004, 2003 and 2002, 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 less the present
value of future net premiums, 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 reserve
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 our experience and the
experience of the insurance industry, 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 our recorded
liabilities for future annuity and contract benefits:
Mortality/ December 31,
Withdraw Morbidity Interest Rate ------------------
(Dollar amounts in millions) Assumption Assumption Assumption 2003 2004
- ---------------------------- ---------- ---------- ------------- -------- ---------
Investment contracts....................... N/A N/A N/A $7,419.5 $ 7,920.2
Limited payment contracts.................. None (a) 4.0% -7.6% 51.9 162.4
Traditional life insurance contracts....... Company
Experience (b) 6.0% - 7.5% 309.2 324.6
Universal life type contracts.............. N/A N/A N/A 1,769.1 1,780.2
Accident and health........................ Company
Experience (c) 4.5% - 7.0% 54.9 53.8
-------- ---------
Total future annuity and contracts benefits $9,604.6 $10,241.2
======== =========
- --------
(a)Either the United States Population Table, 1983 Group Annuitant Mortality
Table or 1983 Individual Annuity Mortality Table and Company experience.
F-23
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
(b)Principally modifications of the 1965-70 or 1975-80 Select and Ultimate
Tables and Company experience.
(c)The 1958 Commissioner's Standard Ordinary Table, 1964 modified and 1987
Commissioner's Disability Tables and Company experience.
(7)Income Taxes
The total provision (benefit) for income taxes attributable to continuing
operations for the years ended December 31, 2004, 2003 and 2002 consisted of
the following components:
(Dollar amounts in millions) 2004 2003 2002
- ---------------------------- ------- ------ -----
Current federal income tax..... $ 34.2 $(21.4) $19.8
Deferred federal income tax.... (166.6) 18.3 20.8
------- ------ -----
Subtotal-federal income tax. (132.4) (3.1) 40.6
------- ------ -----
Current state income tax....... (3.5) -- 1.3
Deferred state income tax...... (7.4) -- 1.0
------- ------ -----
Subtotal-state income tax... (10.9) -- 2.3
------- ------ -----
Total income tax........ $(143.3) $ (3.1) $42.9
======= ====== =====
The reconciliation of the federal statutory rate to the effective income tax
rate on income from continuing operations for the years ended December 31,
2004, 2003 and 2002 is as follows:
(Dollar amounts in millions) 2004 2003 2002
- ---------------------------- ------ ----- ----
Statutory U.S. federal income tax rate............. 35.0% 35.0% 35.0%
State income tax, net of federal income tax benefit (4.2) (0.1) 0.5
Non-deductible goodwill amortization............... 37.8 -- --
Dividends-received deduction....................... (11.9) (53.1) (9.1)
Reinsurance transactions with UFLIC................ (315.9) -- --
Other, net......................................... 0.4 (0.8) 0.6
------ ----- ----
Effective rate.................................. (258.8)% (19.0)% 27.0%
====== ===== ====
The components of the net deferred income tax asset (liability) at December
31, 2004 and 2003 are as follows:
(Dollar amounts in millions) 2004 2003
- ---------------------------- ------ -------
Assets:
Insurance reserves amounts........................ $ 65.7 $ 118.9
Investments....................................... -- 11.1
Net unrealized losses on investment securities.... -- --
Net unrealized losses on derivatives.............. -- --
Accruals.......................................... 17.5 21.9
Deferred tax losses............................... 11.0 --
Other............................................. 28.8 0.6
------ -------
Total deferred income tax asset............... 123.0 152.5
------ -------
Liabilities:
Net unrealized gains on investment securities..... 38.7 47.3
Net unrealized gains on derivatives............... 1.9 0.3
Investments....................................... 10.4 --
Present value of future profits................... 22.4 39.7
Deferred acquisition costs........................ 4.5 234.6
Other............................................. 39.2 5.3
------ -------
Total deferred income tax liability........... 117.1 327.2
------ -------
Net deferred income tax asset (liability)..... $ 5.9 $(174.7)
====== =======
F-24
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
The significant changes in our deferred tax components related to insurance
reserves, deferred acquisition costs, present value of future profits and
investments are directly attributable to the reinsurance transactions with
UFLIC.
Based on our analysis, 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 to enable us to realize remaining
deferred tax assets. Accordingly, no valuation allowance for deferred tax
assets is deemed necessary.
We paid federal and state taxes of $38.1 million for the year ended December
31, 2004. We paid federal and state taxes of $7.3 million for the year ended
December 31, 2003. For the year ended December 31, 2002, we received refunds of
$16.4 million.
At December 31, 2004 and 2003, the deferred income tax asset was $5.9
million and the deferred income tax liability was $174.7 million, respectively.
At December 31, 2004 and 2003, the current income tax receivable was $2.6
million and the current income tax liability was $4.8 million, respectively.
(8)Related Party Transactions
We pay investment advisory fees and other fees to affiliates. Amounts
incurred for these items aggregated $19.3 million, $60.7 million and $36.8
million for the years ended December 31, 2004, 2003 and 2002, respectively. We
charge affiliates for certain services and for the use of facilities and
equipment, which aggregated $14.3 million, $55.6 million and $58.4 million, for
the years ended December 31, 2004, 2003 and 2002, respectively.
In May 2002, we entered into an investment management agreement with GEAM
under which we paid $6.9 million in 2004 and $10.5 million in 2003 to GEAM as
compensation for the investment services.
During 2002, we sold certain assets to an affiliate at a fair value
established as if it were an arms-length, third party transaction, which
resulted in a gain of $17.6 million.
GE Capital has guaranteed certain obligations under floating-rate funding
agreements with a final maturity on or before June 30, 2005. This guarantee
covers our obligations to contractholders and requires us to reimburse GE
Capital for any payments made to contractholders under the guarantee. As of
December 31, 2004, GE Capital's guarantee covered $858.0 million of outstanding
floating-rate funding agreements.
We pay interest on outstanding amounts under a credit funding agreement with
GNA Corporation, the parent company of GECA. We have a credit line of $500
million with GNA. Interest expense under this agreement was $0.1 million, $0.1
million and $0.1 million for the years ended December 31, 2004, 2003 and 2002
respectively. We pay interest at the cost of funds of GNA Corporation, which
were 2.2%, 1.3% and 2.0%, as of December 31, 2004, 2003 and 2002, respectively.
The amounts outstanding as of December 31, 2004 and 2003 were $10.7 million and
$6.3 million, respectively and are included with other liabilities in the
Consolidated Balance Sheets.
(9)Litigation
We face a significant risk of litigation and regulatory investigations and
actions in the ordinary course of operating our businesses, including class
action lawsuits. Our pending legal and regulatory actions include proceedings
specific to us and others generally applicable to business practices in the
industries in which we operate. Plaintiffs in class action and other lawsuits
against us may seek very large or indeterminate amounts, including punitive and
treble damages, which may remain unknown for substantial periods of time. A
substantial legal liability or a significant regulatory action against us could
have an adverse effect on our financial condition and results of operations.
Moreover, even if we ultimately prevail in the litigation, regulatory action or
investigation, we could suffer significant reputational harm, which could have
an adverse effect on our business, financial condition or results of operations.
F-25
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
We were named as a defendant in a lawsuit, McBride v. Life Insurance Co. of
Virginia dba GE Life and Annuity Assurance Co., related to the sale of
universal life insurance policies. The complaint was filed on November 1, 2000,
in Georgia state court, as a class action on behalf of all persons who
purchased certain universal life insurance policies and alleges improper
practices in connection with the sale and administration of universal life
policies. The plaintiffs sought unspecified compensatory and punitive damages.
On December 1, 2000, we removed the case to the U.S. District Court for the
Middle District of Georgia. We have vigorously denied liability with respect to
the plaintiff's allegations. Nevertheless, to avoid the risks and costs
associated with protracted litigation and to resolve our differences with
policyholders, we agreed in principle on October 8, 2003 to settle the case on
a nationwide class basis. The settlement provides benefits to the class, and
allows us to continue to serve our customers' needs undistracted by disruptions
caused by litigation. The court gave final approval to the settlement on August
12, 2004. In the third quarter of 2003, we accrued $50 million in reserves
relating to this litigation, which represents our best estimate of bringing
this matter to conclusion. The precise amount of payments in this matter cannot
be estimated because they are dependent upon the number of individuals who
ultimately will seek relief in the claim form process of the class settlement,
the identity of such claimants and whether they are entitled to relief under
the settlement terms and the nature of the relief to which they are entitled.
That process is currently underway. In addition, approximately 650 class
members elected to exclude themselves from the class action settlement. In the
fourth quarter of 2004, we reached an agreement in principle to settle the
threatened claims of policyholders who had excluded approximately 512 policies
from the class action settlement. At that time, we accrued a reserve for the
settlement in principle. We have also been named as a defendant in six lawsuits
brought by 67 class members who elected to exclude themselves from the class
action settlement. We cannot determine at this point whether or how many other
class members who have excluded themselves from the class action will initiate
individual actions against us, or the effect of such suits or claims, including
the six pending lawsuits, on our financial condition, results of operations or
business reputation.
In addition, we were named as a defendant in five lawsuits brought by
individuals claiming that William Maynard, one of our former dedicated sales
specialists, and Anthony Allen, one of our former independent producers,
converted customer monies and engaged in various fraudulent acts. The five
cases are, Monger v. Allen, Maynard, and GE Life and Annuity Assurance Company
("GELAAC") (filed October 24, 2003), Warfel v. Allen, Maynard, adVenture
Publishing, and GELAAC (filed February 6, 2004), Hanrick v. Allen, Maynard and
GELAAC (filed March 10, 2004), Modlin v. Allen, et al. (filed June 17, 2004),
and Clark v. Allen, 66 et al. (filed June 25, 2004). The Monger and Hanrick
cases have been settled. The remaining three cases are in their preliminary
stages and are pending in the state court of Cumberland County, North Carolina.
The suits allege that GELAAC failed to properly supervise Allen and Maynard and
that GELAAC is responsible for Allen's and Maynard's conduct. Specifically,
Monger alleged conversion, negligence, fraudulent misrepresentation,
constructive fraud, unfair and deceptive trade practices, violations of the
Investment Company Act of 1940 and negligent supervision. Warfel alleged breach
of contract, coversion, breach of fiduciary duty, fraud, constructive fraud,
negligent misrepresentation, negligent supervision and unfair and deceptive
trade practices. Hanrick alleged conversion, negligence, fraudulent
misrepresentation, constructive fraud, unfair and deceptive trade practices and
negligent supervision. Modlin and Clark make similar allegations. The total
amount allegedly invested by the plaintiffs in the three unresolved actions is
approximately $883,000. The plaintiff in Warfel seeks damages of $1.4 million
and the plaintiffs in Modlin and Clark seek unspecified compensatory damages.
In addition, each plaintiff seeks treble damages, as well as punitive damages
of an unspecified amount. Additionally, in the fourth quarter of 2004, we
reached an agreement in principle to settle the threatened claims of a putative
class of individuals who had dealings with Allen and Maynard. At that time we
accrued a reserve for the settlement in principle. In October 2003, Allen and
Maynard were arrested and charged with conversion in Cumberland County, North
Carolina for allegedly failing to remit $30,000 in premiums that they received
from a client to GELAAC. Allen has also been indicted in Cumberland County,
North Carolina for converting the funds of numerous other individuals. We
cannot determine the ultimate outcome of these suits or any related or similar
suits or claims will be asserted against us in the future, or the effect of
such suits or claims on our financial condition, results of operations or
reputation.
(10)Fair Value of Financial Instruments
Assets and liabilities that are reflected in the Consolidated Financial
Statements at fair value are not included in the following disclosure of fair
value; such items include cash and cash equivalents, investment securities,
separate accounts and
F-26
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
derivative financial instruments. Other financial assets and
liabilities -- those not carried at fair value -- are discussed below. Apart
from certain of our borrowings and certain marketable securities, few of the
instruments discussed below are actively traded and their fair values must
often be determined using models. The fair value estimates are made at a
specific point in time, based upon available market information and judgments
about the financial instruments, including estimates of the timing and amount
of expected future cash flows and the credit standing of counterparties. Such
estimates do not reflect any premium or discount that could result from
offering for sale at one time our entire holdings of a particular financial
instrument, nor do they consider the tax impact of the realization of
unrealized gains or losses. In many cases, the fair value estimates cannot be
substantiated by comparison to independent markets, nor can the disclosed value
be realized in immediate settlement of the financial instrument.
The bases on which we estimate fair values are as follows:
Mortgage loans. Based on quoted market prices, recent transactions
and/or discounted future cash flows, using rates at which similar loans
would have been made to similar borrowers.
Other financial instruments. Based on comparable market transactions,
discounted future cash flows, quoted market prices and/or estimates of the
cost to terminate or otherwise settle obligations.
Borrowings. Based on market quotes or comparables.
Investment contract benefits. Based on expected future cash flows,
discounted at currently offered discount rates for immediate annuity
contracts or cash surrender value for single premium deferred annuities.
Policy Loans. Carrying value approximates estimated fair value.
All other instruments. Based on comparable market transactions,
discounted future cash flows, quoted market prices and /or estimates of the
cost to terminate or otherwise settle obligations.
The following represents the fair value of financial assets and liabilities
at December 31,
2004 2003
----------------------------- -----------------------------
Assets (Liabilities) Assets (Liabilities)
----------------------------- -----------------------------
(Dollar amounts in Notional Carrying Estimated Notional Carrying Estimated
millions) Amount Amount Fair Value Amount Amount Fair Value
- --------- -------- --------- ---------- -------- --------- ----------
Assets:
Mortgage loans........ (a) $ 1,207.7 $ 1,252.4 (a) $ 1,262.3 $ 1,309.7
Policy Loans.......... (a) 148.4 148.4 (a) 138.5 138.5
Other financial
instruments......... (a) 23.1 23.1 (a) 0.9 0.9
Liabilities:
Borrowings and
related instruments:
Borrowings............ (a) (10.7) (10.7) (a) (6.3) (6.3)
Investment
contract
benefits............ (a) (7,419.5) (7,492.6) (a) (7,920.2) (7,969.9)
Other firm
commitments:
Ordinary course
of business
lending
commitments......... $31.5 -- -- -- -- --
Commitments to fund
limited partnerships.... $ 0.4 -- -- $7.4 -- --
- --------
(a)These financial instruments do not have notional amounts.
F-27
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
A reconciliation of current period changes for the years ended December 31,
2004 and 2003, net of applicable income taxes in the separate component of
stockholder's interest labeled "derivatives qualifying as hedges", follows:
(Dollar amounts in millions) 2004 2003
- ---------------------------- ---- -----
Net Other Comprehensive Income Balances as of January 1.. $0.4 $ 2.3
Current period decreases (increases) in fair value -- net 2.1 (0.3)
Reclassification to earnings, net........................ 0.8 (1.6)
---- -----
Balance at December 31................................... $3.3 $ 0.4
==== =====
Hedges of Future Cash Flows
There was $0 of ineffectiveness reported in the twelve months ended December
31, 2004 and 2003 in the fair values of hedge positions. There were no amounts
excluded from the measure of effectiveness in the twelve months ended
December 31, 2004 and 2003 related to the hedge of future cash flows.
The $3.3 million, net of taxes, recorded in stockholder's interest at
December 31, 2004 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 $0.8 million, net
of income taxes, is expected to be reclassified to earnings in the year ending
December 31, 2005. Actual amounts may vary from this amount as a result of
market conditions. The amount of $0.8 million, net of income taxes, was
reclassified to earnings in the year ended December 31, 2004. The amount of
$(1.6) million, net of income taxes, was reclassified to earnings in the year
ended December 31, 2003. No amounts were reclassified to earnings during the
year ended December 31, 2004 and 2003 in connection with forecasted
transactions that were no longer considered probable of occurring.
Derivatives Not Designated as Hedges
We use derivatives to hedge exposures when it makes economic sense to do so,
including circumstances in which the hedging relationship does not qualify for
hedge accounting as described in the following paragraph. We will also
occasionally receive derivatives in the ordinary course of business. Under SFAS
133, derivatives that do not qualify for hedge accounting are marked to market
through earnings.
For certain liabilities, we engage both OTC and exchange traded financial
derivatives to hedge the economic risk associated with changes in interest
rates, equity prices and equity implied volatility. Although these instruments
are considered to be derivatives under SFAS 133, our economic risk is similar
to, and managed on the same basis as other equity instruments we hold.
(11)Non-controlled Entities
One of the most common forms of off-balance sheet arrangements is asset
securitization. We use GE Capital sponsored and third party entities to
facilitate asset securitizations. As part of this strategy, management
considers the relative risks and returns of our alternatives and predominately
uses GE Capital sponsored entities. Management believes these transactions
could be readily executed through third party entities at insignificant
incremental cost.
The following table summarizes the current balance of assets sold to Special
Purpose Entities ("SPEs") at December 31:
(Dollar amounts in millions) 2004 2003
- ---------------------------- ------ ------
Assets secured by:
Commercial mortgage loans. $112.7 $137.1
Fixed maturities.......... 86.4 105.4
Other receivables......... 98.8 107.3
------ ------
Total assets.......... $297.9 $349.8
====== ======
F-28
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
Each of the categories of assets shown in the table above represents
portfolios of assets that are highly rated. Examples of each category include:
commercial mortgage loans -- loans on diversified commercial property; fixed
maturities- domestic and foreign, corporate and government securities; other
receivables -- primarily policy loans.
We evaluate the economic, liquidity and credit risk related to the above
SPEs and believe that the likelihood is remote that any such arrangements could
have a significant adverse effect on our operations, cash flows, or financial
position. Financial support for certain SPE's is provided under credit support
agreements, in which Genworth Financial provides limited recourse for a maximum
of $119 million of credit losses in such entities. Assets with credit support
are funded by demand notes that are further enhanced with support provided by
GE Capital. We may record liabilities, for such guarantees based on our best
estimate of probable losses. To date, no SPE has incurred a loss.
Sales of securitized assets to SPEs result in a gain or loss amounting to
the net of sales proceeds, the carrying amount of net assets sold, the fair
value of servicing rights and retained interests and an allowance for losses.
There were no securitization transactions in 2004 and 2003. Sales resulted in
net gains on securitizations of approximately $5.8 million in 2002. The net
realized gains and losses are included in net realized gains within our
Consolidated Statements of Income
Retained interests and recourse obligations related to such sales that are
recognized in our consolidated financial statements are as follows:
December 31,
----------------------
2004 2003
---------- -----------
Fair Fair
(Dollar amounts in millions) Cost Value Cost Value
- ---------------------------- ---- ----- ----- -----
Retained interests -- assets $9.7 $11.5 $14.5 $15.6
Servicing assets............ -- -- -- --
Recourse liability.......... -- -- -- --
---- ----- ----- -----
Total....................... $9.7 $11.5 $14.5 $15.6
==== ===== ===== =====
Retained interest. When we securitize receivables, we determine fair value
based on discounted cash flow models that incorporate, among other things,
assumptions including credit losses, prepayment speeds and discount rates.
These assumptions are based on our experience, market trends and anticipated
performance related to the particular assets securitized. Subsequent to
recording retained interests, we review recorded values quarterly in the same
manner and using current assumptions.
Servicing assets. Following a securitization transaction, we retain the
responsibility for servicing the receivables, and as such, are entitled to
receive an ongoing fee based on the outstanding principal balances of the
receivables. There are no servicing assets nor liabilities recorded as the
benefits of servicing the assets are adequate to compensate an independent
servicer for its servicing responsibilities.
Recourse liability. As described previously, under credit support
agreements we provide recourse for credit losses in special purpose entities.
We provide for expected credit losses under these agreements and such amounts
approximate fair value.
(12)Restrictions on Dividends
Insurance companies are restricted by state regulations departments 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
the lesser of 10% of the prior year surplus or prior year net gain from
operations. Dividends in excess of the prescribed limits or our earned surplus
require formal approval from the Commonwealth of Virginia State Corporation
F-29
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
Commission, Bureau of Insurance. Based on statutory results as of December 31,
2004, we are able to distribute $67.2 million in dividends in 2005 without
obtaining regulatory approval.
Concurrently with the consummation of the reinsurance transactions with
UFLIC, we paid a dividend to our stockholders consisting of cash and
securities. A portion of this dividend, together with amounts paid by certain
of our affiliates, was used by GE Financial Assurance Holdings, Inc. to make a
capital contribution to UFLIC. The aggregate value of the dividend was $409.5
million, consisting of cash in the amount of $30.4 million and securities in
the amount of $379.1 million.
In addition to the dividend in connection with the reinsurance transaction
with UFLIC, we declared and paid dividends of $9.6 million for each of the
years ended December 31, 2004, 2003 and 2002.
(13)Supplementary Financial Data
We file 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 U.S. GAAP in several respects,
causing differences in reported net income and stockholder's interest.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed but that have been specifically allowed by state insurance
authorities. We have no permitted accounting practices.
For the years ended December 31, 2004, 2003 and 2002, statutory net (loss)
income and statutory capital and surplus is summarized below:
(Dollar amounts in millions) 2004 2003 2002
- ---------------------------- ------ ------ ------
Statutory net income (loss).. $105.8 $(28.0) $(48.8)
Statutory capital and surplus $817.2 $562.4 $550.7
The NAIC has adopted Risk Based Capital ("RBC") requirements to evaluate the
adequacy of statutory capital and surplus in relation to risks associated with
(i) asset risk, (ii) insurance risk, (iii) interest rate risk and (iv) business
risks. 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, we periodically monitor our RBC
level. At December 31, 2004 and 2003 we exceeded the minimum required RBC
levels.
(14)Operating Segment Information
During the fourth quarter 2003, we redefined our operating segments.
Management realigned the business on a product line and market basis to
intensify its focus on return on equity, optimum deployment of capital and
distribution effectiveness. As a result of this change, our operations are
conducted under two reporting segments corresponding to customer needs:
Retirement Income and Investments and Protection.
Retirement Income and Investments is comprised of products offered to
individuals who want to accumulate tax-deferred assets for retirement, desire a
tax-efficient source of income and seek to protect against outliving their
assets and to institutions seeking investment products.
Protection is comprised of products offered to consumers to provide
protection against financial hardship after the death of an insured and to
protect income and assets from the adverse economic impacts of significant
health care costs. See Note (1)(c) for further discussion of our principal
product lines within these two segments.
F-30
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
The following is a summary of industry segment activity for December 31,
2004, 2003 and 2002:
Retirement
(Dollar amounts in millions) Income and Corporate
December 31, 2004 -- Segment Data Investments Protection and Other Consolidated
- --------------------------------- ----------- ---------- --------- ------------
Net investment income................................................... $ 238.5 $ 140.3 $ 42.2 $ 421.0
Net realized investment gains........................................... -- -- 5.7 5.7
Premiums................................................................ 0.4 96.4 -- 96.8
Other revenues.......................................................... 40.0 136.4 -- 176.4
--------- -------- -------- ---------
Total revenues....................................................... 278.9 373.1 47.9 699.9
--------- -------- -------- ---------
Interest credited, benefits and other changes in policy reserves........ 202.4 271.6 -- 474.0
Underwriting, acquisition and insurance expenses, net of deferrals...... 17.1 31.1 15.0 63.2
Amortization of deferred acquisition costs and intangibles.............. 78.6 28.7 -- 107.3
--------- -------- -------- ---------
Total benefits and expenses.......................................... 298.1 331.4 15.0 644.5
--------- -------- -------- ---------
Income before income taxes and cumulative effect of change in accounting
principle............................................................. (19.2) 41.7 32.9 55.4
Provision (benefit) for income taxes................................. 8.2 14.8 (166.3) (143.3)
--------- -------- -------- ---------
Income (loss) before cumulative effect of change in accounting
principle.......................................................... (27.4) 26.9 199.2 198.7
Cumulative effect of change in accounting principle, net of tax...... 0.7 -- -- 0.7
========= ======== ======== =========
Net income (loss).................................................... $ (26.7) $ 26.9 $ 199.2 $ 199.4
========= ======== ======== =========
Total assets............................................................ $16,742.4 $2,745.7 $1,344.5 $20,832.6
========= ======== ======== =========
Retirement
(Dollar amounts in millions) Income and Corporate
December 31, 2003 -- Segment Data Investments Protection and Other Consolidated
- --------------------------------- ----------- ---------- --------- ------------
Net investment income (loss)...................................... $ 402.7 $ 152.5 $(17.2) $ 538.0
Net realized investment gains..................................... -- -- 3.9 3.9
Premiums.......................................................... (1.7) 105.7 -- 104.0
Other revenues.................................................... 150.8 143.8 0.3 294.9
--------- -------- ------ ---------
Total revenues................................................. 551.8 402.0 (13.0) 940.8
--------- -------- ------ ---------
Interest credited, benefits and other changes in policy reserves.. 362.0 294.3 -- 656.3
Underwriting, acquisition and insurance expenses, net of deferrals 46.4 55.3 47.3 149.0
Amortization of deferred acquisition costs and intangibles........ 84.9 34.0 -- 118.9
--------- -------- ------ ---------
Total benefits and expenses.................................... 493.3 383.6 47.3 924.2
--------- -------- ------ ---------
Income (loss) before income taxes.............................. 58.5 18.4 (60.3) 16.6
Provision (benefit) for income taxes........................... 14.7 6.5 (24.3) (3.1)
--------- -------- ------ ---------
Net income (loss).............................................. $ 43.8 $ 11.9 $(36.0) $ 19.7
========= ======== ====== =========
Total assets...................................................... $17,412.4 $2,758.1 $692.1 $20,862.6
========= ======== ====== =========
F-31
GE LIFE AND ANNUITY ASSURANCE COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements -- Continued
Years Ended December 31, 2004, 2003 and 2002
Retirement
(Dollar amounts in millions) Income and Corporate
December 31, 2002 -- Segment Data Investments Protection and Other Consolidated
- --------------------------------- ----------- ---------- --------- ------------
Net investment income............................................. $ 457.1 $ 160.5 $(17.4) $ 600.2
Net realized investment gains..................................... -- -- 55.3 55.3
Premiums.......................................................... 1.0 102.3 2.0 105.3
Other revenues.................................................... 157.3 123.7 3.6 284.6
--------- -------- ------ ---------
Total revenues................................................. 615.4 386.5 43.5 1,045.4
--------- -------- ------ ---------
Interest credited, benefits and other changes in policy reserves.. 392.6 247.1 0.6 640.3
Underwriting, acquisition and insurance expenses, net of deferrals 37.1 57.8 4.4 99.3
Amortization of deferred acquisition costs and intangibles........ 113.6 30.6 2.9 147.1
--------- -------- ------ ---------
Total benefits and expenses.................................... 543.3 335.5 7.9 886.7
--------- -------- ------ ---------
Income before income taxes..................................... 72.1 51.0 35.6 158.7
Provision (benefit) for income taxes........................... 26.0 18.1 (1.2) 42.9
--------- -------- ------ ---------
Net income..................................................... $ 46.1 $ 32.9 $ 36.8 $ 115.8
========= ======== ====== =========
Total assets...................................................... $17,116.4 $2,777.5 $387.1 $20,281.0
========= ======== ====== =========
(15)Quarterly Financial Data (unaudited)
Summarized quarterly financial data for the years ended December 31, 2004
and 2003 were as follows:
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- ------------- ------------- -------------
(Dollar amounts in millions) 2004 2003 2004 2003 2004 2003 2004 2003
- ---------------------------- ------ ------ ------ ------ ------ ------ ------ ------
Net investment income............................. $129.1 $137.9 $ 84.4 $137.1 $100.0 $137.9 $107.5 $125.1
====== ====== ====== ====== ====== ====== ====== ======
Total revenues.................................... $232.2 $250.9 $119.0 $227.7 $174.5 $227.1 $174.2 $235.1
====== ====== ====== ====== ====== ====== ====== ======
Earnings (loss) before cumulative effect of change
in accounting principle (1)..................... $ 6.5 $ 24.9 $150.4 $ 9.7 $ 19.0 $(21.9) $ 22.8 $ 7.0
====== ====== ====== ====== ====== ====== ====== ======
Net income (loss)................................. $ 7.2 $ 24.9 $150.4 $ 9.7 $ 19.0 $(21.9) $ 22.8 $ 7.0
====== ====== ====== ====== ====== ====== ====== ======
- --------
(1)See note 1 (t) of the Consolidated Financial Statements.
F-32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
GE Life and Annuity Assurance Company:
Under the date of February 12, 2005, we reported on the consolidated balance
sheets of GE Life and Annuity Assurance Company and subsidiary (the Company) as
of December 31, 2004 and 2003, and the related consolidated statements of
income, stockholder's interest, and cash flows for each of the years in the
three-year period ended December 31, 2004, which are included herein. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule included herein. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for certain nontraditional long-duration
contracts and for separate accounts in 2004 and its method of accounting for
goodwill and other intangible assets in 2002.
/s/ KPMG LLP
Richmond, Virginia
February 12, 2005
F-33
Schedule III
GE LIFE AND ANNUITY ASSURANCE COMPANY
Supplemental Insurance Information
(Dollar amounts in millions)
Future Annuity
And Contract
Benefits &
Liability
Deferred For Policy and Other
Acquisition Contract Unearned Policyholder Premium
Segment Costs Claims Premiums Liabilities Revenue
- ------- ----------- --------------- ------------- ------------ --------
December 31, 2004:
Retirement Income and Investments. $171.0 $ 7,474.6 $ -- $210.7 $ 0.4
Protection........................ 77.1 2,219.4 24.0 1.2 96.4
Corporate and Other............... -- -- -- -- --
------ --------- ------ ------ ------
Total......................... $248.1 $ 9,694.0 $ 24.0 $211.9 $ 96.8
====== ========= ====== ====== ======
December 31, 2003:
Retirement Income and Investments. $817.0 $ 8,032.8 $ -- $120.2 $ (1.7)
Protection........................ 80.0 2,251.0 24.8 2.8 105.7
Corporate and Other............... -- -- -- -- --
------ --------- ------ ------ ------
Total......................... $897.0 $10,283.8 $ 24.8 $123.0 $104.0
====== ========= ====== ====== ======
December 31, 2002:
Retirement Income and Investments. $ 1.0
Protection........................ 102.3
Corporate and Other............... 2.0
------
Total......................... $105.3
======
Interest Underwriting, Amortization
Credited & Acquisition of Deferred
Net Benefits and and Insurance Acquisition
Investment Other Changes Expenses, net Costs and Premiums
Segment Income Policy Reserves of deferrals Intangibles Written
- ------- ----------- --------------- ------------- ------------ --------
December 31, 2004:
Retirement Income and Investments. $238.5 $ 202.4 $ 17.1 $ 78.6 $ 0.3
Protection........................ 140.3 271.6 31.1 28.7 97.1
Corporate & Other................. 42.2 -- 15.0 -- --
------ --------- ------ ------ ------
Total......................... $421.0 $ 474.0 $ 63.2 $107.3 $ 97.4
====== ========= ====== ====== ======
December 31, 2003:
Retirement Income and Investments. $402.7 $ 362.0 $ 46.4 $ 84.9 $ (1.7)
Protection........................ 152.5 294.3 55.3 34.0 105.4
Corporate & Other................. (17.2) -- 47.3 -- --
------ --------- ------ ------ ------
Total......................... $538.0 $ 656.3 $149.0 $118.9 $103.7
====== ========= ====== ====== ======
December 31, 2002:
Retirement Income and Investments. $457.1 $ 392.6 $ 37.1 $113.6 $ 1.0
Protection........................ 160.5 247.1 57.8 30.6 102.1
Corporate & Other................. (17.4) 0.6 4.4 2.9 2.0
------ --------- ------ ------ ------
Total......................... $600.2 $ 640.3 $ 99.3 $147.1 $105.1
====== ========= ====== ====== ======
F-34
Appendix
MARKET VALUE The formula used to determine the Market Value Adjustment
ADJUSTMENT factor is:
EXAMPLES ((1+i)/(1+j))/n/365/, where
n = the number of days to the end of your current
Guarantee Term
i = the Guaranteed Interest Rate in effect for your
current Guarantee Term
j =the currently offered Guaranteed Interest Rate for a
Guarantee Term with a duration of "n"
Examples of Market Value Adjustment at the end of the
third Contract Year based on a single purchase payment of
$100,000.00, a Guarantee Term of 10 years and a
Guaranteed Interest Rate of 4.00%
Contract Value at the end of the third Contract Year =
$100,000.00 x (1.04)/3/ = $112,486.40
Free Withdrawal Amount = Interest Credited to Contract
Value during the prior twelve months = $4,326.40
Surrender Charge = ($112,486.40 - $4,326.40) x .05 =
$5,408
Example #1: Full Surrender -- Negative Market Value
Adjustment
n = 2,555 (365 x 7)
i = 4.00%
j = 5.00%
MVA factor = (1.04/1.05)/7/ = .935208147
Amount Payable Upon Surrender = [(Contract Value - Free
Withdrawal Amount - Surrender Charge) x MVA factor] +
Free Withdrawal Amount
= [($112,486.40 - $4,326.40 - $5,408) x .935208147] +
$4,326.40
= $100,420.91
Example #2: Full Surrender -- Positive Market Value
Adjustment
n = 2,555 (365 x 7)
i = 4.00%
j = 3.00%
MVA factor = (1.04/1.03)/7/ = 1.069972959
Amount Payable Upon Surrender = [(Contract Value - Free
Withdrawal Amount - Surrender Charge) x MVA factor] +
Free Withdrawal Amount
= [($112,486.40 - $4,326.40 - $5,408) x 1.069972959] +
$4,326.40
= $114,268.26
A-1