As filed with the Securities and Exchange Commission on March 17, 2006.
Registration No. 333-69620
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
AMENDMENT NO. 5 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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GENWORTH LIFE AND ANNUITY INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Virginia 63 54-0283385
-------- -- ----------
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code) Identification Number)
6610 W. Broad Street
Richmond, Virginia 23230
(804) 281-6000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
-----------------
Heather Harker
Vice President and Associate General Counsel
Genworth Life and Annuity Insurance Company
6610 W. Broad Street
Richmond, Virginia 23230
(804) 281-6910
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------------
Approximate date of commencement of proposed sale to the public: Continuously
on and after May 1, 2006.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
-----------------
CALCULATION OF REGISTRATION FEE
==========================================================================
Title of each
Class Amount Proposed Maximum Proposed Maximum Amount of
of Securities to be Offering Price Aggregate Registration
to be Registered Registered Per Unit Offering Price Fee**
--------------------------------------------------------------------------
Guaranteed
Fixed Annuity
Contracts * * $50,000,000 N/A
==========================================================================
*The proposed maximum aggregate offering price is estimated solely for the
purposes of determining the registration fee. The amount to be registered and
the proposed maximum offering price per unit are not applicable since these
securities are not issued in predetermined amounts or units.
**Fees for registration were paid with Pre-Effective Amendment No. 1 to the
Registration Statement filed on December 13, 2001.
-----------------
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
As Filed Pursuant to Rule 424(b)(3)
Registration No. 333-69620
Prospectus For Single Purchase Payment
Modified Guaranteed Annuity Contract
Issued by:
Genworth Life and Annuity Insurance Company
(formerly, GE Life and Annuity Assurance Company)
6610 West Broad Street
Richmond, Virginia 23230
Telephone: (800) 352-9910
- --------------------------------------------------------------------------------
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 Genworth Life and Annuity
Insurance 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 Guarantee 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 May 1, 2006.
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
2
Table of Contents
Definitions.................................................
Summary.....................................................
Other Contracts.............................................
Financial Statements........................................
The Contract................................................
Purchasing a Contract....................................
Ownership................................................
Assignment...............................................
The Company.................................................
The Guarantee Account....................................
Guarantee Terms..........................................
Guaranteed Interest Rates................................
Free Withdrawal Amount...................................
Contract Value and Surrender Value.......................
Market Value Adjustment..................................
Transfers Before the End of a Guarantee Term.............
Surrenders and Partial Withdrawals..........................
Systematic Withdrawals of Interest.......................
Charges and Other Deductions................................
Surrender Charge.........................................
Deductions for Premium Taxes.............................
Commission Payments......................................
The Death Benefit...........................................
Death Benefit Upon Death Before the Annuity Date.........
Death Benefit Amount.....................................
Required Distributions...................................
Death Benefit After the Annuity Date.....................
The Annuity Commencement Date and Benefits at Annuity Date..
The Annuity Commencement Date............................
The Annuity Date.........................................
Optional Payment Plans......................................
Federal Tax Matters.........................................
Introduction.............................................
Taxation of Non-Qualified Contracts......................
Section 1035 Exchanges...................................
Qualified Retirement Plans...............................
Moving Money From One Qualified Contract or Qualified
Plan to Another........................................
Federal Income Tax Withholding...........................
State Income Tax Withholding.............................
Changes in the Law.......................................
3
Requesting Payments.........................................
Sales of the Contract.......................................
Additional Information......................................
Owner Questions..........................................
Return Privilege.........................................
State Regulation.........................................
Records and Reports......................................
Other Information........................................
Genworth Life and Annuity Insurance Company.................
Overview.................................................
Market Environment and Opportunities.....................
Competitive Strengths....................................
Growth Strategies........................................
Retirement Income and Investments...........................
Overview.................................................
Products.................................................
Underwriting and Pricing.................................
Competition..............................................
Protection..................................................
Overview.................................................
Products.................................................
Competition..............................................
Corporate and Other......................................
Distribution.............................................
Marketing...................................................
Risk Management.............................................
Overview.................................................
New Product Introductions................................
Product Performance Reviews..............................
Asset-Liability Management...............................
Portfolio Diversification................................
Actuarial Database and Information Systems...............
Operations and Technology................................
Reserves.................................................
Reinsurance..............................................
Financial Strength Ratings...............................
Investments..............................................
Regulation..................................................
General..................................................
Insurance Regulation.....................................
Other Laws and Regulations...............................
4
Risk Factors................................................
Risks Relating To Our Businesses.........................
Unresolved Staff Comments...................................
Properties..................................................
Legal Proceedings...........................................
Submission of Matters to a Vote of Security Holders.........
Market for the Registrant's Common Equity, Related
Shareholder Matters and Issuer Purchases of Equity
Securities..................................................
Selected Financial Data.....................................
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................
Cautionary Note Regarding Forward-Looking Statements.....
Overview.................................................
Results of Operations....................................
Investments..............................................
Capital Resources........................................
Liquidity................................................
Off-Balance Sheet Transactions...........................
New Accounting Standards.................................
Quantitative and Qualitative Disclosures About Market Risk
and Interest Rate Management................................
Sensitivity Analysis.....................................
Derivative Counterparty Credit Risk......................
Experts.....................................................
GE Life and Annuity Assurance Company Financial Statements..
Appendix....................................................
Market Value Adjustment Examples.........................
5
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 -- Genworth Life & Annuity MVA Separate
Account; a legally insulated, non-unitized separate
account established to hold amounts for this class of
contracts, and other similar market value adjustment
contracts.
Guarantee Term -- The period of time we guarantee a
specified credited rate(s) of interest under the contract.
Guaranteed Interest Rate -- A stated interest rate or
rates we credit to the Contract Value during a Guarantee
Term.
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.
6
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.
7
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.
8
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 within the first seven Contract Years.
The surrender charge will be anywhere from 7% 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
9
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.
10
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.
11
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
CONTRACT
If you wish to purchase a contract, you must apply for it
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
12
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.
13
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 provided 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 is directly owned by Genworth Financial,
Inc., a public company.
We are a charter member of the Insurance Marketplace
Standards Association ("IMSA"). We may use the IMSA
membership logo and language in our advertisements, as
outlined in IMSA's Marketing and Graphics Guidelines.
Companies that belong to IMSA subscribe to a set of
ethical standards covering the various aspects of sales
and service for individually sold life insurance and
annuities.
For more information about Genworth Life and Annuity
Insurance Company, see the provision entitled "Genworth
Life and Annuity Insurance Company."
THE GUARANTEE
ACCOUNT
We established the Guarantee Account as a non-unitized
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
14
Act. As such, you do not have the protections afforded by
that statute that, for example, requires investment
companies to have a majority to have 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
TERMS
A Guarantee Term is the number of years we will credit a
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 before the
30-day window at 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.
15
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 during the
30-day window, we will pay the Contract Value of the
contract.
Any surrendered amount may be subject to income taxes,
and a 10% federal income 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
16
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
INTEREST RATES
From time to time and at our sole discretion we set
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
WITHDRAWAL
AMOUNT
You may instruct us to send you all or a portion of the
interest credited to your Contract Value during the prior
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.
17
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% tax penalty if the
withdrawal is taken prior to age 59 1/2. See the "Federal
Tax Matters" provision of this prospectus.
CONTRACT
VALUE AND
SURRENDER
VALUE
Your Contract Value at any time is equal to your purchase
payment plus any interest credited to it, minus any prior
withdrawals including any surrender charges and premium
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
ADJUSTMENT
We will apply a Market Value Adjustment to amounts taken
in 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
18
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 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
BEFORE THE END
OF A GUARANTEE
TERM
Once each contract year after the first contract year,
you may transfer your entire Contract Value before the
30-day window prior to the end of your current Guarantee
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.
19
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
WITHDRAWALS
OF INTEREST
You may elect systematic withdrawals of interest credited
under the contract (in amounts of at least $100) on a
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.
20
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.
21
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.
22
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
CHARGE
Surrenders and partial withdrawals may be subject to a
surrender charge. Generally, we will assess a surrender
charge as a percentage of Contract Value withdrawn or
surrendered during the first 7 Contract Years in excess
of the free withdrawal amount. Beginning in the third
Contract Year, we will not assess a surrender charge on a
surrender or partial 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 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
8 and after 0%
--------------------------------------------------
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 1 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.
23
You may also select Optional Payment Plan 3 or Optional
Payment 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.
Beginning in the third contract year, we will not apply a
Market Value Adjustment to payments of the free
withdrawal amount or to 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;
or
. Annuity commencement during the 30-day window prior
to the end of a Guarantee Term.
DEDUCTIONS
FOR PREMIUM
TAXES
We will deduct charges for any premium tax or other tax
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).
24
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
PAYMENTS
We sell the contracts through registered representatives
of broker-dealers. These registered representatives are
also appointed and licensed as insurance agents of the
Company. We pay commissions to broker-dealers for selling
the contracts. You do not directly pay these commissions,
we do. We intend to recover the commissions, marketing,
administrative and other expenses and the cost of
contract benefits through fees and charges imposed under
the contract. See the "Sales of the Contract" provision
of this prospectus for more information.
25
The Death Benefit
DEATH BENEFIT
UPON DEATH
BEFORE THE
ANNUITY DATE
If any Owner (or Annuitant if the Owner is a non-natural
person) dies before the Annuity Date, the amount of
proceeds available is the death benefit.
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
AMOUNT
The death benefit equals the greater of:
(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
DISTRIBUTIONS
General: In certain circumstances, federal tax law
requires that distributions be made under the contract
upon the first death of:
. an Owner or Joint Owner; or
. the Annuitant or Joint Annuitant, if any Owner is a
non-natural person (an entity, such as a trust or
corporation).
The discussion below describes the methods available for
distributing the value of the contract upon death.
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);
26
(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.
27
(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
AFTER THE
ANNUITY DATE
If any Owner, Annuitant or payee dies after the Annuity
Date, Income Payments will be made as stated in the
section discussing income benefits. See "The Annuity
Commencement Date and Benefits at Annuity Date" provision
of this prospectus.
28
The Annuity Commencement Date and Benefits at Annuity Date
THE ANNUITY
COMMENCEMENT
DATE
If any Annuitant is age 80 or younger when the contract
is issued, the Annuity Commencement Date cannot be
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 age 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
DATE
If the Annuitant is still living on the Annuity Date, we
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.
29
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 1 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
30
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. 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
31
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.
32
Federal Tax Matters
INTRODUCTION
This part of the prospectus discusses the federal income
tax treatment of the contract. The federal income tax
treatment of the contract is complex and sometimes
uncertain. The federal income tax rules may vary with
your particular circumstances. This discussion does not
address all of the federal income tax rules that may
affect you and your contract. This discussion also does
not address other federal tax consequences, or state or
local tax consequences, associated with a contract. As a
result, you should always consult a tax advisor about the
application of tax rules to your individual situation.
TAXATION OF
NON-QUALIFIED
CONTRACTS
This part of the discussion describes some of the federal
income tax rules applicable to non-qualified contracts. A
non-qualified contract is a contract not issued in
connection with a 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
33
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
34
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.
35
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.
36
SECTION 1035
EXCHANGES
Under Section 1035 of the Code, the exchange of one
annuity contract for another annuity contract generally
is not taxed (unless cash is distributed). 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
RETIREMENT
PLANS
We also designed the contracts for use in connection with
certain types of retirement plans that receive favorable
treatment under the Code. Contracts issued to or in
connection with 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");
37
. 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.
38
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 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
39
some circumstances 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.
40
MOVING MONEY
FROM ONE
QUALIFIED
CONTRACT OR
QUALIFIED PLAN
TO ANOTHER
Rollovers and transfers. In many circumstances you may
move money between qualified contracts and qualified
plans by means of a rollover or a transfer. Special rules
apply to such rollovers and transfers. If you do not
follow the applicable rules, you may suffer adverse
federal income tax consequences, including paying taxes
which you might not otherwise have had to pay. You should
always consult a qualified advisor before you move or
attempt to move funds between any qualified contract or
plan and another qualified contract or plan.
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
INCOME TAX
WITHHOLDING
We will withhold and remit to the IRS a part of the
taxable portion of each distribution made under a
contract unless the distributee notifies us at or before
the time of the distribution that he or she elects not to
have any amounts withheld. In certain circumstances,
federal income tax rules may require us to withhold tax.
At the time you request a withdrawal, surrender, or
annuity payout, we will send you forms that explain the
withholding requirements.
STATE INCOME TAX
WITHHOLDING
If required by the law of your state, we will also
withhold state income tax from the taxable portion of
each distribution made under the contract, unless you
make an available election to avoid withholding. If
permitted under state law, we will honor your request for
voluntary state withholding.
CHANGES IN THE
LAW
This discussion is based on the Code, IRS regulations,
and interpretations existing on the date of this
prospectus. Congress, the IRS, and the courts may modify
these authorities, however, sometimes retroactively.
41
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 "Secure Access Account," for the designated
beneficiary, in the amount of the death benefit
proceeds payable.
When establishing the 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 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 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 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 purchase payment and/or block an owner's account
and thereby refuse request for surrenders, partial
withdrawals, 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.
42
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 Genworth Financial
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 5.0% of your purchase
payment.
43
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 3.75% 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.
44
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.
45
Additional Information
OWNER
QUESTIONS
The obligations to Owners under the contracts are ours.
Please direct your questions and concerns to us at our
Home Office at the address and telephone number listed on
page 1 of this prospectus.
RETURN
PRIVILEGE
Within the 20-day free-look period after you receive the
contract, you may cancel it for any reason by delivering
or mailing it postage prepaid, to our Home Office,
Annuity New Business, 6610 W. Broad Street, Richmond,
Virginia 23230. If you cancel your contract, it will be
void. Unless state law requires that we return your
purchase payment, the amount of the refund you receive
will equal your purchase payment adjusted for any Market
Value Adjustment.
STATE
REGULATION
As a life insurance company organized and operated under
the laws of the Commonwealth of Virginia, we are subject
to provisions governing life insurers and to regulation
by the Virginia Commissioner of Insurance.
Our books and accounts are subject to review and
examination by the State Corporation Commission of the
Commonwealth of Virginia at all times. The Commission
conducts a full examination of our operations at least
every five years.
RECORDS AND
REPORTS
At least once each year, we will send you a report
showing information about your contract for the period
covered by the report. The report will show 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
INFORMATION
We have filed a Registration Statement with the SEC,
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.
46
Genworth Life and Annuity Insurance Company
OVERVIEW
We are 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.
An affiliate of the General Electric Company ("GE")
acquired us on April 1, 1996 and ultimately contributed
the majority of the outstanding common stock to Genworth
Life Insurance Company ("GLIC"), formerly known as
General Electric Capital Assurance Company.
On May 24, 2004, we became an indirect, wholly-owned
subsidiary of Genworth Financial, Inc. ("Genworth"). On
May 25, 2004, Genworth's Class A common stock began
trading on The New York Stock Exchange.
On May 31, 2004, we became a direct, wholly-owned
subsidiary of GLIC while remaining an indirect,
wholly-owned subsidiary of Genworth.
As of December 31, 2005, GE beneficially owned
approximately 18% of Genworth's outstanding stock. On
March 8, 2006, a subsidiary of GE completed a secondary
offering to sell its remaining interest in Genworth. Our
preferred shares are owned by an affiliate, Brookfield
Life Assurance Company Limited.
We principally offer annuity contracts, guaranteed
investment contracts ("GICs") and funding agreements,
Medicare supplement insurance and life insurance
policies. We do business in the District of Columbia and
all states, except New York. 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, serves the life
and lifestyle protection, retirement income, investment
and mortgage insurance needs of more than 15 million
customers. Our product offerings are divided along two
segments of consumer needs: (1) Retirement Income and
Investments and (2) Protection.
. Retirement Income and Investments. 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 GICs and funding agreements as
investment products to institutional buyers.
. Protection. 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.
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We also have a Corporate and Other segment, which
consists primarily of net realized investment gains
(losses), unallocated corporate income, expenses and
income taxes.
MARKET
ENVIRONMENT AND
OPPORTUNITIES
We believe we are well positioned to benefit from a
number of significant demographic, governmental and
market trends, including the following:
. Aging U.S. population with growing retirement income
needs. According to a 2005 report issued by the
U.S. Social Security Administration, from 1945 to
2003, U.S. life expectancy at birth increased from
62.9 years to 74.6 years for men and from 68.4 years
to 79.6 years for women, respectively, and life
expectancy is expected to increase further. In
addition, increasing numbers of baby boomers are
approaching retirement age. Based on the 2000
census, the U.S. Census Bureau projects that the
percentage of the U.S. population aged 55 or older
will increase from approximately 22% (65 million) in
2004 to more than 29% (97 million) in 2020. These
increases in life expectancy heighten the risk that
individuals will outlive their retirement savings.
In addition, approximately $4.2 trillion of invested
financial assets are held by people within 10 years
of retirement and approximately $2.4 trillion of
invested financial assets are held by individuals
who are under age 70 and consider themselves
retired, in each case according to a survey
conducted by SRI Consulting Business Intelligence in
2004. We believe these trends will lead to growing
demand for products, such as our income annuities
and other investment products that help consumers
accumulate assets and provide reliable retirement
income.
COMPETITIVE
STRENGTHS
We believe the following competitive strengths will
enable us to capitalize on opportunities in our targeted
markets:
. Product innovation. We are selective in the
products we offer and strive to maintain appropriate
return and risk thresholds when we expand the scope
of our product offerings.
. Extensive, multi-channel distribution network. We
have extensive distribution reach and offer
consumers access to our products through a broad
network of financial intermediaries, independent
producers and dedicated sales specialists. In
addition, we maintain strong relationships with
leading distributors by providing a high level of
specialized and differentiated distribution support
through technology solutions that support the
distributors' sales efforts.
. Technology-enhanced, scalable, low-cost operating
platform. We have pursued an aggressive approach to
cost-management and continuous customer service
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improvement. We also have developed sophisticated
technology tools that enhance performance by
automating key processes and reducing response times
and process variations. Our teams of trained
associates focus on delivering high touch customer
service. In addition, we have centralized our
operations and have established scalable, low-cost
operating centers in Virginia. Through an
outsourcing provider, we also have a substantial
team of professionals in India who provide us with a
variety of back office support services.
. Disciplined risk management with strong compliance
practices. Risk management and regulatory
compliance are critical parts of our business, and
we believe we are recognized in the insurance
industry for our excellence in these areas. We
employ comprehensive risk management processes in
virtually every aspect of our operations, including
product development, underwriting, investment
management, asset-liability management and
technology development programs. We have an
experienced group of professionals dedicated
exclusively to our risk management processes.
. Strong balance sheet and high-quality investment
portfolio. As part of Genworth, we believe our
ratings and capital strength provide us with a
significant competitive advantage. We have a
diversified, high-quality investment portfolio with
$6,890.9 million of invested assets as of
December 31, 2005. Approximately 92.8% of our fixed
maturities had ratings equivalent to
investment-grade, and less than 1.0% of our total
investment portfolio consisted of equity securities,
as of December 31, 2005. We also actively manage the
relationship between our investment assets and our
insurance liabilities.
GROWTH
STRATEGIES
Our objective is to increase operating earnings and
enhance returns on equity. We intend to pursue this
objective by focusing on the following strategies:
. Capitalize on attractive growth prospects in our key
markets. We have positioned our product portfolio
and distribution relationships to capitalize on the
attractive growth prospects in our key markets:
Retirement income, where we believe growth will be
driven by a variety of favorable demographic trends
and the approximately $4.2 trillion of invested
financial assets in the U.S. that are held by
people within 10 years of retirement and
approximately $2.4 trillion of invested assets that
are held by individuals who are under age 70 and
consider themselves retired, in each case according
to a survey conducted by SRI Consulting Business
Intelligence in 2004. Our Income Distribution
Series of products are designed to enable the
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growing retired population to convert their
accumulated assets into reliable income throughout
their retirement years. Our Income Distribution
Series of products are composed of our retirement
income annuity products and three variable annuity
riders that provide similar income features. It
does not include immediate annuities or fixed
annuities, which also serve income distribution
needs but are reported separately. We are also
offering a version of the guaranteed income
product, ClearCourse/SM/, in the employer sponsored
401(k) market. ClearCourse/SM/ is designed to be an
option within a 401(k) plan and offers participants
the ability to purchase guaranteed retirement
income while maintaining liquidity and the
opportunity for market upside.
ClearCourse/SM/ provides plan participants with the
ability to access defined benefit-like features
within a defined contribution environment.
Funding-Agreement Backed Notes ("FA-BNs"),
where the total FA-BN market has grown from $20.3
billion in 2000 issuance to $37.6 billion in 2004
issuance according to Standard and Poor's Rating
Services ("S&P"). S&P reports 2005 issuance to be
down to $32.1 billion, this in part is due to
reduced issuance levels from a previously frequent
issuer as well as the overall tight spread
environment. Genworth's Retirement Income and
Investments segment began issuing in the
unregistered market in 2000 through Bear Stearns'
Premium Asset Trust structure and has placed $7.4
billion through 2005, $685.0 million of which was
issued through the Company. In December 2005, we
registered with the Securities and Exchange
Commission ("SEC") a $5.0 billion proprietary
registered note platform and subsequently issued a
$300.0 million inaugural deal targeting
institutional investors. In 2006, we will explore
introducing a retail notes platform whereby retail
investors can purchase amounts in denominations
of $1,000. The demand for strong credit ratings and
diversity of issuer base should support growth for
us in this market space.
. Further strengthen and extend our distribution
channels. We intend to further strengthen and
extend our distribution channels by continuing to
differentiate ourselves in areas where we believe we
have distinct competitive advantages. These areas
include:
Product innovations, as illustrated by new product
introductions, such as the introduction of
ClearCourse/SM /for the employer sponsored 401(k)
market, our Income Distribution Series of
guaranteed income products and riders, our FA-BN
program which provides us the ability to issue
fixed or floating rate offerings with wide-ranging
maturities.
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Collaborative approach to key distributors, which
includes joint business improvement program and our
tailored approach to our sales intermediaries
addressing their unique service needs, which have
benefited our distributors and helped strengthen
our relationships with them.
. Enhance returns on capital and increase margins. We
believe we will be able to enhance our returns on
capital and increase our margins through the
following means:
Adding new business layers at targeted returns and
optimizing mix. We have introduced revised pricing
and new products, which we believe will increase
our expected returns. We have exited or placed in
run-off certain product lines in blocks of business
with low returns. As these blocks decrease, we
expect to release capital over time to deploy to
higher-return products and/or businesses.
Investment income enhancements. The yield on our
investment portfolio is affected by the practice,
prior to Genworth's separation from GE, of
realizing investment gains through the sale of
appreciated securities and other assets during a
period of historically low interest rates. This
strategy had been pursued to offset impairments in
our investment portfolio and to fund consolidations
and restructurings, and provide current income.
Since 2003, our current investment strategy has
been to optimize investment income without relying
on realized investment gains. We continue to
experience a challenging interest-rate environment
in which the yields that we can achieve on new
investments are lower than the aggregate yield on
our existing portfolio. We will seek to mitigate
declines in our investment yields by continuously
evaluating our asset class mix, pursuing additional
investment classes, utilizing active management
strategies, and accepting additional credit risk
when we believe that it is prudent to do so.
Ongoing operating cost reductions and efficiencies.
We continually focus on reducing our cost base
while maintaining strong service levels for our
customers. We expect to accomplish this goal
through a wide range of cost management
disciplines, including reducing supplier costs,
leveraging process improvement efforts, forming
focused teams to identify opportunities for cost
reductions and investing in new technology,
particularly for web-based, digital end-to-end
processes.
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Retirement Income and Investments
OVERVIEW
Through our Retirement Income and Investments segment, we
offer fixed and variable deferred annuities and income
annuities. We offer these products to a broad range of
consumers who want to accumulate tax-deferred assets for
retirement, desire a reliable source of income during
their retirement, and/or seek to protect against
outliving their assets during retirement.
We have continued to focus on our Income Distribution
Series of variable annuity products and riders in
response to customers who desire guaranteed minimum
income streams with equity market upside at the end of
the contribution and accumulation period. Our Income
Distribution Series of variable annuity products and
riders provides the contractholder with a guaranteed
minimum income stream that they cannot outlive, along
with an opportunity to participate in market
appreciation, but reduces some of the risks to insurers
that generally accompany traditional products with
guaranteed minimum income benefits. We are targeting
people who are focused on building a personal portable
retirement plan or are moving from the accumulation to
the distribution phase of their retirement planning.
During 2005, we introduced our ClearCourse/SM /product
for the employer sponsored 401(k) market. ClearCourse/SM/
is designed to be an option within a 401(k) plan and
offers participants the ability to purchase guaranteed
retirement income while maintaining liquidity and the
opportunity for equity appreciation.
ClearCourse/SM/ provides plan participants with the
ability to access defined benefit-like features within a
defined contribution environment. Genworth employees are
offered this product as an option in their 401(k) plan
and we have two other large clients in varying stages of
implementation with more than 40 potential clients in
varying stages of product assessment. In October 2005, we
also introduced a guaranteed minimum withdrawal benefit
for life product, Lifetime Income Plus, that was added to
our Income Distribution Series products. This product
filled a customer need within our Income Distribution
Series for guaranteed income payments, that the customer
cannot outlive, along with the opportunity for market
upside, similar to our RetireReady/SM/ Retirement Answer
Variable Annuity ("Retirement Answer") (formerly known as
GE Retirement Answer(R)) and added significant liquidity
features. We initiated a $5.0 billion SEC registered
notes program secured by funding agreements. This program
became effective in December 2005 and provides us with
the ability to issue fixed or floating rate offerings
with maturities ranging from 9 months to 30 years. Our
initial issuance through this program was a five-year,
$300.0 million floating rate funding agreement, which was
funded during December 2005.
According to VARDS, we were the largest provider of
variable income annuities in the U.S. for the year ended
December 31, 2005, based upon total premiums and
deposits. According to LIMRA International, sales of
individual annuities were $216.5 billion in 2005. From
June 2004 through December 2005, the Federal Reserve
increased short-term rates from 1.0% to 4.25% while
long-term interest rates remained relatively
52
stable. This "flattening" of the yield curve resulted in
a shift in demand to shorter duration instruments like
bank certificates of deposits and money market funds and
away from longer-duration products like annuities. Within
the fixed annuity market, we saw an increasing demand for
products with an equity-indexed component, such as
equity-indexed annuities. We did not have a product with
an equity-indexed component in the market in 2005, but we
have launched such a product in the first quarter of
2006. In variable annuities, we expect product demand to
primarily be driven by product features and guarantees.
Although volatility in the equity markets may cause some
potential purchasers to refrain from purchasing products
such as variable annuities and variable life insurance,
many of today's purchasers are seeking to remain invested
in the equity markets and, at that same time, have
guarantees to protect their income during their
retirement years. We believe that moderately higher
longer-term interest rates and greater public awareness
about the need for lifetime retirement income protection
will result in increased demand for annuities and other
investment products that help consumers accumulate assets
and provide reliable retirement income.
We offer variable and fixed deferred annuities, in which
assets accumulate until the contract is surrendered, the
contractholder dies, takes withdrawals or the
contractholder begins receiving benefits under an annuity
payout option. We also offer variable income annuities.
We believe our variable annuity offerings continue to
appeal to contractholders who wish to participate in
returns linked to equity and bond markets with many
desiring products with options that provide certain
minimum guarantees. We also offer variable life insurance
through our Retirement Income and Investments segment
because this product provides investment features that
are similar to our variable annuity products.
In addition to our annuity and variable life insurance
products, we offer a number of specialty products,
including GICs and funding agreements (including those
issued pursuant to the above-referenced FA-BN program).
We sell GICs to ERISA-qualified plans, such as pension
and 401(k) plans, and we sell funding agreements to money
market funds that are not ERISA qualified and to other
institutional investors.
We offer our annuities and other investment products
primarily through financial institutions and specialized
brokers, as well as independent accountants and
independent advisers associated with Genworth's captive
broker/dealer. We provide extensive training and support
to our distributors through a wholesaling sales force
that specializes in retirement income needs.
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The following table sets forth selected financial
information regarding the products we offer through our
Retirement Income and Investments segment as of the dates
or for the periods indicated:
As of or for the Years Ended
December 31,
--------------------------------
(Dollar amounts in millions) 2005 2004 2003
- ----------------------------------------------------------------------------------------
Variable annuities
Account value, net of reinsurance, beginning of period $ 1,003.9 $ 10,455.1 $ 8,891.9
Deposits 928.6 766.9 1,822.6
Market Performance 99.0 70.3 1,254.9
Surrenders, benefits and product charges (102.1) (35.4) (1,514.3)
Reinsurance transfer/1/ -- (10,253.0) --
--------- ---------- ---------
Account value, net of reinsurance, end of period $ 1,929.4 $ 1,003.9 $10,455.1
Variable life
Account value, net of reinsurance, beginning of period $ 344.0 $ 313.2 $ 255.9
Deposits 33.3 38.9 45.3
Market Performance 27.3 41.4 42.4
Surrenders, benefits and product charges (42.6) (49.5) (30.4)
--------- ---------- ---------
Account value, net of reinsurance, end of period $ 362.0 $ 344.0 $ 313.2
GICs and funding agreements
Account value, net of reinsurance, beginning of period $ 3,667.3 $ 4,051.8 $ 5,263.3
Deposits 430.4 460.1 869.2
Interest credited 131.1 144.5 177.8
Surrenders, benefits and product charges (1,506.1) (989.1) (2,258.5)
--------- ---------- ---------
Account value, net of reinsurance, end of period $ 2,722.7 $ 3,667.3 $ 4,051.8
Fixed annuities
Account value, net of reinsurance, beginning of period $ 853.4 $ 939.3 $ 1,026.6
Deposits 2.1 8.9 5.7
Interest credited 36.0 39.0 42.2
Surrenders, benefits and product charges (114.1) (133.8) (135.2)
--------- ---------- ---------
Account value, net of reinsurance, end of period $ 777.4 $ 853.4 $ 939.3
Single Premium Income Annuities
Account value, net of reinsurance, beginning of period $ 78.8 $ 78.6 $ 83.9
Deposits 14.0 10.3 8.2
Interest credited 7.4 5.7 3.8
Surrenders, benefits and product charges (20.4) (15.8) (17.3)
--------- ---------- ---------
Account value, net of reinsurance, end of period $ 79.8 $ 78.8 $ 78.6
Structured Settlements
Account value, net of reinsurance, beginning of period $ -- $ 181.3 $ 184.2
Deposits -- -- --
Interest credited -- -- 13.1
Surrenders, benefits and product charges -- 0.2 (16.0)
Reinsurance transfer/1/ -- (181.5) --
--------- ---------- ---------
Account value, net of reinsurance, end of period $ -- $ -- $ 181.3
- ----------------------------------------------------------------------------------------
/1/ We ceded to Union Fidelity Life Insurance Company
("UFLIC"), effective as of January 1, 2004, all of our
in-force structured settlement contracts and
substantially all of our in-force variable annuity
contracts.
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PRODUCTS
VARIABLE ANNUITIES We offer variable annuities that allow the contractholder
to make payments to a separate account that are divided
into subaccounts that invest in available mutual funds
and if available, the contractholder may make allocations
to a guaranteed interest-rate account which is a part of
our general account. All allocations are determined by
the contractholder. A deferred variable annuity has an
accumulation period and a payout period. Our variable
annuity products allow the contractholder to allocate all
or a portion of his account value to a separate account
that is divided into subaccounts that are distinct from
our general account. Assets allocated to the separate
account have subaccounts that track the performance of
the available mutual funds. There is no guaranteed
minimum rate of return in these subaccounts which invest
in these mutual funds, and the contractholder bears the
entire risk associated with the performance of these
subaccounts. Some of our variable annuities also permit
the contractholder to allocate a portion of his account
value to our general account, in which case we credit
interest at specified rates, subject to certain
guaranteed minimums.
Our variable annuity contracts permit the contractholder
to withdraw all or part of the premiums paid, plus the
amount credited to his account, subject to surrender
charges, if any. The cash surrender value of a variable
annuity contract depends upon the value of the assets
that have been allocated to the contract, how long those
assets have been in the contract and the investment
performance of the subaccounts that invest in the mutual
funds to which the contractholder has allocated assets.
Variable annuities provide us with fee-based revenue in
the form of expense and mortality charges. These fees
equal a percentage of the contractholder's assets in the
separate account and typically range from 0.75% to
1.70% per annum. We also receive fees charged on assets
allocated to our separate account to cover administrative
costs.
We also offer variable annuities with fixed account
options and with bonus features. Variable annuities with
fixed account options enable the contractholder to
allocate a portion of his account value to the fixed
account, which pays a fixed interest crediting rate.
Allocations to the fixed account within the variable
annuity are limited to 25% of the account value. The
portion of the account value allocated to the fixed
account option represents a general account liability for
us and functions similarly to a traditional fixed
annuity, whereas for the portion allocated to the
separate account, the contractholder bears the investment
risk. Our variable annuities with bonus features entitle
the contractholder to an additional increase to his
account value upon making a deposit. However, variable
annuities with bonus features are subject to different
55
surrender charge schedules and expense charges than
variable annuities without the bonus feature.
Our variable annuity contracts provide a basic guaranteed
minimum death benefit ("GMDB"), which provides a minimum
account value to be paid upon the annuitant's death. Our
contractholders also have the option to purchase, through
riders, at an additional charge, enhanced death benefits.
Assuming every annuitant died on December 31, 2005, as of
that date, contracts with death benefit features not
covered by reinsurance had an account value of $1.9
billion and a related death benefit exposure of $8.2
million net amount at risk. In 2003, we raised prices of,
and reduced certain benefits under, our newly issued
GMDBs. We continue to evaluate our pricing, hedging and
reinsurance of GMDB features and intend to change prices
as appropriate. In addition, in 2004, we introduced a
variable annuity product with a guaranteed minimum
withdrawal benefit ("GMWB"). This product provides a
guaranteed annual withdrawal of a fixed portion of the
initial deposit over a fixed period of time, but requires
a balanced asset allocation of the owner's separate
account deposit. In 2005, we expanded our GMWB lineup by
offering a guaranteed minimum withdrawal benefit for the
life of the owner while maintaining our requirement for a
balanced assets allocation of the owner's separate
account deposit. GMWB for life is a component of our
Income Distribution Series of variable annuity products
and riders.
With some employers moving away from traditional defined
benefit pension plans to 401(k) plans, in October 2005 we
responded by introducing ClearCourse/SM/, a group
variable annuity product. The ClearCourse/SM/ product is
designed to represent an investment option within a
company's 401(k) retirement plan. It offers participants
the ability to build guaranteed retirement income while
maintaining liquidity and growth potential.
ClearCourse/SM/ provides participants with the ability to
access defined benefit-like features within a defined
contribution environment. The product is distributed via
direct salespeople and through third-party benefits
administrators.
We continually review potential new variable annuity
products and pursue only those where we believe we can
achieve targeted returns in light of the risks involved.
Unlike several of our competitors, we have not offered
variable annuity products with traditional guaranteed
minimum income benefits ("GMIBs") or with guaranteed
minimum accumulation benefits ("GMABs"). Traditional GMIB
products guarantee an annuitization value for guaranteed
income payments equal to the premium accumulated at a
specified minimum appreciation rate for a defined period
of time, after which annuity payments commence. GMAB
products guarantee a customer's account value will be no
less than the original investment at the end of a
specified accumulation period, plus a specified interest
rate.
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Although we do not offer traditional GMIBs or GMABs, we
have been able to capitalize on the demand for products
with guarantees with our Retirement Answer which was
introduced in April 2002. Retirement Answer is a variable
deferred annuity that has a minimum ten-year scheduled
deposit period for customers who desire guaranteed
minimum income streams at the end of an accumulation
period. The income stream may exceed the guaranteed
minimum based upon the performance of the subaccount
investing in the mutual fund. As of December 31, 2005,
our sales as measured by collected scheduled periodic
deposits and future scheduled periodic deposits for this
product totaled $1.5 billion since its inception. Based
on key product design features, some of which have
patents pending which have been assigned to Genworth, we
believe Retirement Answer allows us to provide our
customers a guaranteed income annuity product that
mitigates a number of the risks that accompany
traditional guaranteed minimum income benefits offered by
many of our competitors.
Retirement Answer is a component of our Income
Distribution Series of variable annuity products and
riders. The Income Distribution Series also includes the
Guaranteed Income Advantage ("GIA"), the Principal
Protection Advantage ("PPA"), and the Lifetime Income
Plus ("LIP"). GIA is a rider to several of our variable
annuity products that provides retirement benefits
similar to Retirement Answer but requires contractholders
to allocate assets among a prescribed group of
subaccounts that invest in mutual funds ("Prescribed
Investment Strategy"). Whereas Retirement Answer and GIA
require a minimum ten-year accumulation period, PPA is
designed for purchasers nearing retirement and requires
only a three-year accumulation period before
annuitization.
In the second quarter 2004, we entered into reinsurance
transactions in which we ceded, effective January 1,
2004, all of our in-force variable annuity business,
excluding Retirement Answer, to UFLIC. We have continued
to sell variable annuities and are retaining that
business for our own account.
VARIABLE LIFE We offer variable life insurance products that provide
INSURANCE insurance coverage through a policy that gives the
policyholder flexibility in investment choices and, in
some products, in premium payments and coverage amounts.
Our variable life products allow the policyholder to
allocate all or a portion of his premiums to a separate
account that is divided into subaccounts that are
distinct from our general account. Assets allocated to
each separate account have subaccounts that track the
performance of available mutual funds. There is no
guaranteed minimum rate of return in these subaccounts,
which invest in these mutual funds, and the policyholder
bears the entire investment risk associated with the
performance of the subaccounts. Some of our variable life
insurance products also permit the policyholder to
allocate all or a portion of his account value to our
general account, in which case we credit interest at
specified
57
rates, subject to certain guaranteed minimums, which are
comparable to the minimum rates in effect for our fixed
annuities.
Similar to our variable annuity products, we collect
specified mortality and expense charges and fees charged
on assets allocated to the separate account to cover
administrative services and costs. We also collect cost
of insurance charges on our variable life insurance
products to compensate us for the mortality risk of the
guaranteed death benefit, particularly in the early years
of the policy when the death benefit is significantly
higher than the value of the policyholder's account.
Our life insurance policies provide a death benefit
payable upon death of the insured. Owners of life
insurance pay premiums that are applied to their account
value, net of any expense charges. We deduct cost of
insurance charges, which vary by age, gender, plan, and
class of insurance from the account value. We determine
our cost of insurance each year in advance, which is
subject to a maximum stated in each policy. The owner may
access their account value through policy loans, partial
withdrawals, or full surrender of the policy. Some
withdrawals and surrenders are subject to surrender
charges.
Our variable life insurance policies provide
policyholders with lifetime death benefit coverage, the
ability to accumulate assets on a flexible, tax-deferred
basis, and the option to access the cash value of the
policy through a policy loan, partial withdrawal or full
surrender. Our variable life insurance products allow
policyholders to adjust the timing and amount of premium
payments. We credit premiums paid, less certain expenses,
to the policyholder's account and from that account
deduct regular expense charges and certain risk charges,
known as cost of insurance, which generally increase from
year to year as the insured ages. Our variable life
insurance policies accumulate cash value that we pay to
the insured when the policy lapses or is surrendered.
Most of our variable life insurance policies also include
provisions for surrender charges for early termination
and partial withdrawals.
GUARANTEED We offer GICs and funding agreements, which are
INVESTMENT deposit-type products that pay a guaranteed return to the
CONTRACTS AND contractholder on specified dates. GICs are purchased by
FUNDING AGREEMENTS ERISA qualified plans, including pension and 401(k)
plans. Funding agreements are purchased by institutional
accredited investors for various kinds of funds and
accounts that are not ERISA qualified. Purchasers of
funding agreements include money market funds, bank
common trust funds and other corporate and trust accounts
and private investors including Genworth Global Funding
Trust as part of our SEC registered note program.
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Substantially all our GICs allow for the payment of
benefits at contract value (on a pro-rata basis as to
plan participants) to ERISA plans 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.
Our funding agreements generally credit interest on
deposits at a floating rate tied to an external market
index. To hedge our exposure to fluctuations in interest
rates, we invest the proceeds backing floating-rate
funding agreements in floating-rate assets. Some of our
funding agreements are purchased by money market funds,
bank common trust funds and other short-term investors.
These funding agreements typically are renewed annually,
and may 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. As of December 31,
2005, we had an aggregate of $200.0 million of
floating-rate funding agreements outstanding, excluding
those issued under the FA-BN program, compared to
$1,108.0 million as of December 31, 2004. This decline
was due to a planned reduction in these products. Of the
$200.0 million aggregate amount outstanding as of
December 31, 2005, $50.0 million had put option features
of 180 days; the remaining contracts contain no
optionality.
We also issue funding agreements to trust accounts to
back medium-term notes purchased by investors. We have
historically issued these in an unregistered format
through Bear Stearns Premium Asset Trust structure, but
in December 2005, we launched our proprietary FA-BN
program with an inaugural $300.0 million issuance. These
contracts typically are issued for terms of one to seven
years. As of December 31, 2005 and 2004, we had an
aggregate of $535.0 million and $435.0 million,
respectively, of these funding agreements backing notes.
These funding agreements do not permit early termination.
FIXED ANNUITIES We have a closed block of single premium deferred
annuities ("SPDAs"). In addition, we offer two fixed
annuity products in the form of modified guaranteed
annuity contracts. These contracts provide for a single
premium to be allocated to a guaranteed term option for
one or more guaranteed terms ranging from 1 to 10 years
in duration. During the accumulation period, the portion
of the single premium payment allocated to any guaranteed
term will earn a pre-declared guaranteed rate of interest
for that term. However, if the contractholder surrenders
or annuitizes the contract prior to the end of term, or
withdraws or transfers any portion of assets prior to the
end of the guaranteed term, we will apply a market value
adjustment to the proceeds and we may
59
assess a surrender charge. The market value adjustment
may result in a positive, negative or zero change in
value depending on interest rates in effect at the time
the market value adjustment is applied. For example, if
interest rates are rising, generally the contractholder
will bear the risk that the market value adjustment will
be negative, causing a reduction in the amount available
for surrender. However, if interest rates are falling,
generally, the contractholder will receive a positive
market value adjustment, providing an increase in value
when surrendering the contract. If there is no change in
interest rates at the time of the market value
adjustment, generally, the market value adjustment will
have no impact on contract value. Approximately $179.0
million, or 23.0% of the total account value of our fixed
annuities as of December 31, 2005, were subject to
surrender charges.
At least once each month, we set an interest crediting
rate for newly issued fixed annuities and additional
deposits. We maintain the initial crediting rate for a
minimum period of one year or the guarantee period,
whichever is longer. Thereafter, we may adjust the
crediting rate no more frequently than once per year for
any given deposit. Our modified guaranteed annuity
contracts have a minimum guaranteed crediting rate of
3.0%.
FIXED IMMEDIATE In exchange for a single premium, fixed immediate
ANNUITIES annuities provide a fixed amount of income for either a
defined number of years, the annuitant's lifetime, or the
greater of the two periods. Income can be paid monthly,
quarterly, semi-annually or annually and generally begins
within one year of receipt of the premium. Fixed
immediate annuities also include annuitizations chosen as
a settlement option for an existing deferred annuity
contract. We do not currently offer fixed immediate
annuities as a stand-alone product.
STRUCTURED In the second quarter 2004, we entered into reinsurance
SETTLEMENTS transactions in which we ceded, effective January 1,
2004, all of our in-force structured settlements business
to UFLIC. We currently are not actively marketing this
product.
UNDERWRITING
AND PRICING
We generally do not underwrite individual lives in our
annuity products. Instead, we price our products based
upon our expected investment returns and our expectations
for mortality, longevity and persistency for the group of
our contractholders as a whole, taking into account
mortality improvements in the general population and our
historical experience. We price deferred annuities by
analyzing longevity and persistency risk, volatility of
expected earnings on our assets under management, and the
expected time to retirement. We price our GICs using
customized pricing models that estimate both expected
cash flows and likely variance from those expectations
caused by reallocations of assets by plan participants.
60
Underwriting for our variable life insurance policies
involves a determination of the type and amount of risk
that we are willing to accept. Our underwriters evaluate
each policy application on the basis of the information
provided by the applicant and others. We follow detailed
and uniform underwriting practices and procedures
designed to properly assess and quantify risks before
issuing coverage to qualified applicants. The long-term
profitability of our products is affected by the degree
to which future experience deviates from these
assumptions.
COMPETITION
We face significant competition in all our Retirement
Income and Investments products. Many other companies
actively compete for sales in our markets, including
other major insurers, banks, other financial
institutions, mutual fund and money asset management
firms and specialty providers. In many of our product
lines, we face competition from competitors that have
greater market share or breadth of distribution, offer a
broader range of products, services or features, assume a
greater level of risk, have lower profitability
expectations or have higher claims paying ratings than we
do. Many competitors offer similar products and use
similar distribution channels. The substantial expansion
of banks' and insurance companies' distribution
capacities and expansion of product features in recent
years has intensified pressure on margins and production
levels and has increased the level of competition in many
of our business lines.
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Protection
OVERVIEW
Through our Protection segment, we offer accident and
health insurance, which includes Medicare supplement
insurance. We also have life insurance, which includes
universal life insurance and interest-sensitive whole
life insurance; however, these products are not currently
offered.
PRODUCTS
ACCIDENT AND HEALTH The primary product in this line is Medicare supplement
INSURANCE insurance. Our Medicare supplement insurance provides
coverage for Medicare-qualified expenses that are not
covered by Medicare because of applicable deductibles or
maximum limits. These products are sold to individuals
through dedicated sales specialists as well as selected
independent distributors. We have expanded our Medicare
supplement product in a majority of states and have seen
growth in these new states.
LIFE Our life insurance products provide protection for the
INSURANCE entire life of the insured and allow for cash value
accumulation. These products include interest-sensitive
whole life ("ISWL") and universal life insurance ("UL").
Our life insurance policies provide a death benefit
payable upon death of the insured. Owners of life
insurance pay premiums that are applied to their account
value, net of any expense charges. We deduct cost of
insurance charges, which vary by age, gender, plan, and
class of insurance from the account value. We determine
our cost of insurance each year in advance, which is
subject to a maximum stated in each policy. The owner may
access their account value through policy loans, partial
withdrawals, or full surrender of the policy. Some
withdrawals and surrenders are subject to surrender
charges.
We credit the policyholder account value for ISWL and UL
policies with interest at an interest rate we determine
in advance and generally guarantee for a policy year at a
time. Policies have a minimum credited interest rate,
which varies by policy and ranges from 4.0% to 6.0%. ISWL
and UL differ in two major ways. ISWL requires the
contractholder to pay a fixed premium we determine each
year, while UL allows a contractholder to determine the
amount of premium to be paid, subject to certain minimum
and maximum values. Also, the ISWL death benefit is fixed
at issue, while the contractholder may decrease and
(subject to evidence of good health) increase the death
benefit on a UL policy.
Our UL policies provide policyholders with lifetime death
benefit coverage, the ability to accumulate assets on a
flexible, tax-deferred basis, and the option to access
the cash value of the policy through a policy loan,
partial withdrawal or full surrender. Our UL products
allow policyholders to adjust the timing and amount of
premium payments. We credit premiums paid, less certain
expenses, to the policyholder's account and from that
account deduct regular expense charges and certain risk
charges, known as cost
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of insurance, which generally increase from year to year
as the insured ages. Our UL policies accumulate cash
value that we pay to the insured when the policy lapses
or is surrendered. Most of our UL policies also include
provisions for surrender charges for early termination
and partial withdrawals. As of December 31, 2005, 60.1%
of our in-force block of universal life insurance was
subject to surrender charges. We also sell joint,
second-to-die policies that are typically used for estate
planning purposes. These policies insure two lives rather
than one, with the policy proceeds paid after the death
of both insured individuals.
COMPETITION
We face significant competition in all our Protection
segment operations. Our competitors include other large
and highly rated insurance carriers. Some of these
competitors have greater resources than we do, and many
of them offer similar products and use similar
distribution channels.
CORPORATE AND
OTHER
We also have a Corporate and Other segment, which
consists primarily of net realized investment gains
(losses) and unallocated corporate income, expenses and
income taxes.
DISTRIBUTION
We distribute our products through an extensive and
diversified distribution network that is balanced between
independent sales intermediaries, including financial
intermediaries and independent producers, and dedicated
sales specialists. We believe this access to a variety of
distribution channels enables us to respond effectively
to changing consumer needs and distribution trends. We
compete with other financial institutions to attract and
retain commercial relationships in each of these
channels, and our success in competing for sales through
these sales intermediaries depends upon factors such as
the amount of sales commissions and fees we pay, the
strength and breadth of our product offerings, the
strength of our brand, our perceived stability and our
financial strength ratings, the marketing and services we
provide to them and the strength of the relationships we
maintain with individuals at those firms. We have
strategically positioned our multi-channel distribution
network to capture a broad share of the distributor and
consumer markets and to accommodate different consumer
preferences in how to purchase insurance and financial
services products.
Our Retirement Income and Investments and Protection
segments both distribute their products through the
following channels:
. financial intermediaries, including banks,
securities brokerage firms, and independent
broker/dealers;
63
. independent producers, including brokerage general
agencies ("BGAs"), affluent market producer groups
and specialized brokers; and
. dedicated sales specialists, including affiliated
networks of both accountants and personal financial
advisers.
The following table sets forth our annualized first-year
premiums and deposits for the products in our Retirement
Income and Investments and Protection segments,
categorized by each of our distribution channels.
(Dollar amounts in millions) Year Ended December 31, 2005 Year Ended December 31, 2004
- --------------------------------- ----------------------------------------------- -----------------------------------------------
Annualized Dedicated Dedicated
First-Year Premiums Financial Independent Sales Financial Independent Sales
and Deposits/1/ Intermediaries Producers Specialists Total Intermediaries Producers Specialists Total
- ---------------------------------------------------------------------------------------------------------------------------------
Retirement Income and Investments $941.2 $438.2 $51.5 $1,430.9 $932.3 $170.6 $43.9 $1,146.8
Protection 0.1 9.6 2.4 12.1 -- 4.4 3.2 7.6
- ---------------------------------------------------------------------------------------------------------------------------------
/1/ Annualized first-year premiums and deposits reflect the
amount of business we generated during a specified
period. We consider annualized first-year premiums and
deposits to be a measure of our operating performance
because they represent a measure of new sales of
insurance policies and additional investments by our
customers during a specified period, rather than a
measure of our revenues or profitability during that
period.
FINANCIAL We have selling agreements with various financial
INTERMEDIARIES intermediaries in the U.S., including banks, securities
brokerage firms and independent broker/dealers. We use
financial intermediaries to distribute a significant
portion of our deferred and income annuities and other
investment products. They also distribute a small portion
of our variable life insurance policies to their
individual clients. We have wholesalers who are our
employees and who work to develop sales relationships
with new financial intermediaries and to expand sales
with existing financial intermediaries. Approximately
10.2% of our variable annuity product sales in 2005 were
through one national bank. However, we do not believe
that the loss of such business would have a long-term
adverse effect on our business and operations due to our
competitive position in the marketplace and the
availability of business from other distributors.
INDEPENDENT Brokerage general agencies. We distribute certain
PRODUCERS products through independent BGAs located throughout the
U.S. BGAs market our products, and those of other
insurance companies, through a network of independent
brokers who sell our products.
Affluent market producer groups. Through strong
relationships with several industry-leading affluent
market producer groups, we have access to producers who
sell our products. These groups target high-net-worth
individuals, which we define to include households with
at least $1 million of liquid assets. We distribute
annuity products through these groups.
64
Specialized brokers. We distribute certain products
through brokers that specialize in a particular insurance
or investment product and deliver customized service and
support to their clients. We distribute GICs and funding
agreements through a group of 38 specialized brokers and
investment managers as of December 31, 2005.
Dedicated sales specialists. We have dedicated sales
specialists who sell our Medicare supplement insurance
product and other products of our affiliated insurers on
a select basis.
65
Marketing
As part of Genworth, we promote and differentiate our
products and services through a variety of offerings,
technology services, specialized support for our
distributors and innovative marketing programs tailored
to particular consumer groups.
The RetireReady/SM /series of variable annuities is the
foundation for our Income Distribution Series. Marketing
of these products is supported by internal and external
wholesalers who help distributors understand each
product's and rider's features. In addition, we also hold
"Income Summits" throughout the country, educating
distributors on the need for guaranteed income during
one's retirement years as part of a sound overall
financial plan. We believe education of our distributors
and potential contractholders is key to our success in
marketing these products as they move from accumulation
of assets to the "spend-down" or distribution of assets.
Genworth has focused its marketing approach on promoting
its brand to key constituencies, including sales
intermediaries, employees, investors and consumers. These
programs include advertising on television and in trade
and business periodicals that are likely to reach those
demographic groups. We also seek to build recognition of
the Genworth brand and maintain strong relationships with
leading distributors by providing a high level of
specialized and differentiated distribution support, such
as product training, advanced marketing and sales
solutions, financial product design for affluent
customers and technology solutions that support the
distributors' sales efforts and by pursuing joint
business improvement efforts. In addition, Genworth
sponsors various advisory councils with independent sales
intermediaries and dedicated sales specialists to gather
their feedback on industry trends, new product
suggestions and ways to enhance their relationships.
Pursuant to a transitional trademark license agreement,
GE granted us the right to use the "GE" mark and the "GE"
monogram for up to five years following Genworth's IPO in
connection with our products and services. Most of our
current products and services, however, are now primarily
using the Genworth mark and logo, and we expect to
complete our transition to the Genworth brand by the end
of 2006.
66
Risk Management
OVERVIEW
Risk management is a critical part of our business and we
have adopted rigorous risk management processes in
virtually every aspect of our operations, including
product development, underwriting, investment management,
asset-liability management and technology development
projects. The primary objective of these risk management
processes is to reduce the variations we experience from
our expected results. We have an experienced group of
professionals, including actuaries, statisticians and
other specialists, dedicated exclusively to our risk
management process. We have emphasized our adherence to
rigorous risk management techniques and leveraged the
benefits into a competitive advantage in marketing and
managing our products.
NEW PRODUCT
INTRODUCTIONS
Our risk management process begins with the development
and introduction of new products and services. We have
established a rigorous product development process that
specifies a series of required analyses, reviews and
approvals for any new product. For each proposed project,
this process includes a review of the market opportunity
and competitive landscape for each proposed product,
major pricing assumptions and methodologies, return
expectations, reinsurance strategies, underwriting
criteria and business risks and potential mitigating
factors. Before we introduce a new product in the market,
we establish a monitoring program with specific
performance targets and leading indicators, which we
monitor frequently to identify any deviations from
expected performance so that we can take prompt
corrective action when necessary. Significant product
introductions require approval by our senior management
team. We use a similarly rigorous process to introduce
variations to existing products and to introduce existing
products through new distribution channels.
PRODUCT
PERFORMANCE
REVIEWS
We have Risk Committees at the Retirement Income and
Investments and Protection segment levels. We also
utilize Genworth's Risk Committee which includes the
following executives of Genworth: Chief Executive
Officer, Chief Risk Officer, Chief Financial Officer,
Chief Investment Officer, Chief Actuary, and the
Presidents of our operating segments. This risk committee
process requires reviews of major products in all
operating segments on a regular cycle, typically twice
per year. These reviews include an analysis of the major
drivers of profitability, underwriting performance,
variations from expected results, regulatory and
competitive environment and other factors affecting
product performance. In addition, we initiate special
reviews when a product's performance fails to meet any of
the indicators we established during that product's
introductory review process. If a product does not meet
our performance criteria, we consider adjustments in
pricing, design and marketing or ultimately discontinuing
sales of that product. We review our underwriting,
pricing and risk selection strategies on a regular basis
to ensure that our products remain progressive,
competitive and consistent with our marketing and
profitability objectives. We are also
67
subject to periodic external audits by our reinsurers,
which provide us with valuable insights into other
innovative risk management practices.
ASSET-LIABILITY
MANAGEMENT
We maintain segmented investment portfolios for the
majority of our product lines. This enables us to perform
an ongoing analysis of the interest rate risks associated
with each major product line, in addition to the interest
rate risk for our overall enterprise. We analyze the
behavior of our liability cash flows across a wide
variety of future interest rate scenarios, reflecting
policy features and expected policyholder behavior. We
also analyze the behavior of our asset portfolios across
the same scenarios. We believe this analysis shows the
sensitivity of both our assets and liabilities to large
and small changes in interest rates and enables us to
manage our assets and liabilities more effectively.
PORTFOLIO
DIVERSIFICATION
We use limits to ensure a spread of risk in our business.
We have strict limitations on credit risk to avoid
concentration in our investment portfolio. Our product
portfolios have considerable diversification due to the
variety of products we have sold over a number of years.
We also manage unique product exposures in our business.
ACTUARIAL
DATABASE AND
INFORMATION
SYSTEMS
Our extensive actuarial databases and innovative
information systems technology are important tools in our
risk management programs. We also have substantial
experience in offering individual life insurance
products, and we have developed a large database of
claims experience, particularly in preferred risk
classes, which provides significant predictive experience
for mortality.
COMPLIANCE
Legal and regulatory compliance are critical parts of our
business. Throughout our Company, we instill a strong
commitment to integrity and ethics in business dealings
and compliance with applicable laws and regulations. We
have professionals dedicated to legal and regulatory
compliance matters.
OPERATIONS AND
TECHNOLOGY
SERVICE AND SUPPORT We benefit from Genworth's dedicated team of service and
support personnel including the operations through an
arrangement with an outsourcing provider in India who
assist our sales intermediaries and customers with their
service needs. We use advanced and, in some cases,
proprietary, patent-pending technology to provide product
design and underwriting, and we operate service centers
that leverage technology, integrated processes, and
process management techniques.
In our Retirement Income and Investments and Protection
segments, we interact directly and cost-effectively with
our independent sales intermediaries and dedicated
68
sales specialists through secure websites that have
enabled them to transact business with us electronically,
obtain information about our products, submit
applications, check application and account status and
view commission information. We also provide our
independent sales intermediaries and dedicated sales
specialists with account information to disseminate to
their customers through the use of industry-standard
communications.
OPERATING CENTERS We have centralized our operations and have established
scalable, low-cost operating centers in Virginia. In
addition, through an arrangement with an outsourcing
provider, we have a substantial team of professionals in
India who provide a variety of services to us, including
customer service, transaction processing, and functional
support including finance, investment research,
actuarial, risk and marketing resources to our insurance
operations.
TECHNOLOGY We rely on Genworth's proprietary processes for project
CAPABILITIES AND approval, execution, risk management and benefit
PROCESS IMPROVEMENT verification as part of our approach to technology
investment. Genworth has been issued 14 patents and has
filed more than 70 pending patent applications.
Genworth's technology team is experienced in large-scale
project delivery, including many insurance administration
system consolidations and the development of
Internet-based servicing capabilities. Genworth
continually manages technology costs by standardizing its
technology infrastructure, consolidating application
systems, reducing servers and storage devices and
managing project execution risks.
RESERVES
We calculate and maintain reserves for estimated future
benefit payments to our policyholders and contractholders
in accordance with U.S. GAAP. We release these reserves
as those future obligations are extinguished. The
reserves we establish reflect estimates and actuarial
assumptions with regard to our future experience. These
estimates and actuarial assumptions involve the exercise
of significant judgment. Our future financial results
depend significantly upon the extent to which our actual
future experience is consistent with the assumptions we
have used in pricing our products and determining our
reserves. Many factors can affect future experience,
including economic and social conditions, inflation,
healthcare costs, changes in doctrines of legal liability
and damage awards in litigation. Therefore, we cannot
determine with complete precision the ultimate amounts we
will pay for actual future benefits or the timing of
those payments.
RETIREMENT INCOME For our investment contracts, including annuities, GICs,
AND INVESTMENTS and funding agreements, contractholder liabilities are
equal to the accumulated contract account values, which
generally consist of an accumulation of deposit payments,
less withdrawals, plus investment earnings and interest
credited to the account, less expense, mortality, and
69
profit charges, if applicable. We also maintain a
separate reserve for any expected future payments in
excess of the account value due to the potential death of
the contractholder. For variable life insurance policies,
policyholder liabilities are generally based on
policyholder account values, to include premiums
collected, interest credited, deduction of policy charges
and market performance.
PROTECTION We establish reserves for life insurance policies based
upon generally recognized actuarial methods. We use
mortality tables in general use in the U.S., modified
where appropriate, to reflect relevant historical
experience and our underwriting practices. Persistency,
expense and interest rate assumptions are based upon
relevant experience and expectations for future
development. We establish reserves at amounts which,
including the receipt of assumed additional premiums and
interest assumed to be earned on the assets underlying
the reserves, we expect to be sufficient to satisfy our
policy obligations.
The liability for policy benefits for universal life
insurance policies and interest-sensitive whole life
policies is equal to the account balance that accrues to
the benefit of policyholders, including credited
interest, plus any amount needed to provide for
additional benefits. We also reflect in the reserves
amounts that we have deducted from the policyholder's
balance to compensate us for services to be performed in
future periods.
Our reserves for unpaid health insurance claims are
estimates of the ultimate net cost of both reported and
unreported losses not yet settled. Our liability is based
upon an evaluation of historical claim run-out patterns
and includes a provision for adverse claim development.
Reserves for incurred but not reported claims in our
health insurance business are based upon historic
incidence rates.
REINSURANCE
We follow the industry practice of reinsuring portions of
our insurance risks with reinsurance companies. We use
reinsurance both to diversify our risks and to manage
loss exposures and capital effectively. The use of
reinsurance permits us to write policies in amounts
larger than the risk we are willing to retain, and also
to write a larger volume of new business.
We cede insurance primarily on a treaty basis, under
which risks are ceded to a reinsurer on specific blocks
of business where the underlying risks meet certain
predetermined criteria. To a lesser extent, we cede
insurance risks on a facultative basis, under which the
reinsurer's prior approval is required on each risk
reinsured. Use of reinsurance does not discharge us, as
the insurer, from liability on the insurance ceded. We,
as the insurer, are required to pay the full amount of our
70
insurance obligations even in circumstances where we are
entitled or able to receive payments from our reinsurer.
The principal reinsurers to which we cede risks have A.M.
Best financial strength ratings ranging from "A+" to
"A-." Historically, we have not had significant
concentrations of reinsurance risk with any one
reinsurer. However, prior to the completion of the
Genworth IPO, we entered into reinsurance transactions
with UFLIC, which resulted in a significant concentration
of reinsurance risk with UFLIC whose obligations to us
are secured by trust accounts as described in Note 5 in
our financial statements under "Item 8 -- Financial
Statements and Supplementary Data."
On November 30, 2005, we entered into a reinsurance
agreement with First Colony Life Insurance Company, an
affiliate, to cede liabilities arising from the funding
agreements issued as part of our FA-BN program as
described in Note 5 in our financial statements under
"Item 8 -- Financial Statements and Supplementary Data."
The following table sets forth our exposure to our top
five reinsurers, along with the reinsurance recoverable
as of December 31, 2005, and the A.M. Best ratings of
those reinsurers as of that date:
Reinsurance
(Dollar amounts in millions) Recoverable A.M. Best Rating
-------------------------------------------------------------------
UFLIC/1/ $2,141.1 A-
Genworth Life Insurance Company 98.7 A+
Max Re Ltd 40.7 A-
Swiss Re Life & Health America Inc. 7.2 A+
American United Life Insurance Company 5.4 A
-------------------------------------------------------------------
/1/ See note 5 to the financial statements included in
Item 8 of our Annual Report.
FINANCIAL
STRENGTH RATINGS
Ratings with respect to financial strength are an
important factor in establishing the competitive position
of insurance companies. Ratings are important to
maintaining public confidence in us and our ability to
market our products. Rating organizations review the
financial performance and condition of most insurers and
provide opinions regarding financial strength, operating
performance and ability to meet obligations to
policyholders or contractholders, but these ratings are
not designed to be, and do not serve as, measures of
protection or valuation offered to our policyholders or
contractholders. Short-term financial strength
ratings are an assessment of the credit quality of an
issuer with respect to instruments considered short-term
in the relevant market, typically one year or less.
We are rated by A.M. Best, S&P, Moody's and Fitch as
follows:
A.M. Best Rating S&P Rating Moody's Rating Fitch Rating
- --------------------------------------------------------------------------------------
Long-term rating A+ (Superior) AA- (Very Strong) Aa3 (Excellent) AA- (Very Strong)
Short-term rating Not rated A-1+ P-1 Not rated
- --------------------------------------------------------------------------------------
71
A.M. Best states that its "A+" (Superior) rating is
assigned to those companies that have, in its opinion, a
superior ability to meet their ongoing obligations to
policyholders. The "A+" (Superior) rating is the
second-highest of fifteen ratings assigned by A.M. Best,
which range from "A++" to "S".
S&P states that an insurer rated "AA" (Very Strong) has
very strong financial security characteristics that
outweigh any vulnerabilities, and is highly likely to
have the ability to meet financial commitments. The "AA"
range is the second-highest of the four ratings ranges
that meet these criteria, and also is the second-highest
of nine financial strength rating ranges assigned by S&P,
which range from "AAA" to "R." A plus (+) or minus (-)
shows relative standing in a rating category.
Accordingly, the "AA-" rating is the fourth-highest of
S&P's 20 ratings categories. The short-term rating "A-1"
is the highest rating and shows the capacity to meet
financial commitments is strong. Within this category,
the designation of a plus sign (+) indicates capacity to
meet its financial commitments is extremely strong.
Moody's states that insurance companies rated "Aa"
(Excellent) offer excellent financial security. Moody's
states that companies in this group constitute what are
generally known as high-grade companies. The "Aa" range
is the second-highest of nine financial strength rating
ranges assigned by Moody's, which range from "Aaa" to
"C." Numeric modifiers are used to refer to the ranking
within the group, with 1 being the highest and 3 being
the lowest. Accordingly, the "Aa3" rating is the
fourth-highest of Moody's 21 ratings categories. The
short-term rating "P1" is the highest rating and shows
superior ability for repayment of short-term debt
obligations.
Fitch states that "AA" (Very Strong) rated insurance
companies are viewed as possessing very strong capacity
to meet policyholder and contract obligations. Risk
factors are modest, and the impact of any adverse
business and economic factors is expected to be very
small. The "AA" rating category is the second-highest of
eight financial strength rating categories, which range
from "AAA" to "D." The symbol (+) or (-) may be appended
to a rating to indicate the relative position of a credit
within a rating category. These suffixes are not added to
ratings in the "AAA" category or to ratings below the
"CCC" category. Accordingly, the "AA-" rating is the
fourth-highest of Fitch's 24 ratings categories.
A.M. Best, S&P, Moody's and Fitch review their ratings
periodically and we cannot assure you that we will
maintain our current ratings in the future. Other
agencies may also rate our Company on a solicited or an
unsolicited basis.
72
INVESTMENTS
OVERVIEW As of December 31, 2005, we had total cash, cash
equivalents and invested assets of $7,234.9 million. As
of December 31, 2005, we also had an additional $8,777.3
million held in our separate accounts, for which we do
not bear investment risk. We manage our assets to meet
diversification, credit quality, yield and liquidity
requirements of our policy and contract liabilities by
investing primarily in fixed maturities, including
government, municipal and corporate bonds,
mortgage-backed and other asset-backed securities and
mortgage loans on commercial real estate. We also invest
in other investments, including a small position in
limited partnership and equity securities. In all cases,
our investments are required to comply with restrictions
imposed by applicable laws and insurance regulatory
authorities.
The following table sets forth our cash, cash equivalents
and invested assets as of the dates indicated:
December 31,
-------------------------------
2005 2004
--------------- ---------------
Carrying % of Carrying % of
(Dollar amounts in millions) Value Total Value Total
- --------------------------------------------------------------------------------
Fixed-maturities, available-for-sale
Public $3,627.8 50.1% $4,706.7 53.0%
Private 1,649.5 22.8% 2,294.5 25.8%
Commercial mortgage loans 1,042.1 14.4% 1,207.7 13.6%
Other investments 389.9 5.4% 466.5 5.3%
Policy loans 158.3 2.2% 148.4 1.7%
Equity securities, available for sale 23.3 0.3% 26.8 0.3%
Cash and cash equivalents 344.0 4.8% 26.4 0.3%
-------- ------ -------- ------
Total cash, cash equivalents and invested assets $7,234.9 100.0% $8,877.0 100.0%
- --------------------------------------------------------------------------------
Our primary investment objective is to meet our
obligations to policyholders and contractholders while
increasing value to our stockholder by investing in a
diversified high-quality portfolio, income producing
securities and other assets. Our investment strategy
seeks to optimize investment income without relying on
realized investment gains. Our investment strategy
focuses primarily on:
. minimizing interest rate risk through management of
asset durations relative to policyholder and
contractholder obligations;
. selecting assets based on fundamental,
research-driven strategies;
. emphasizing fixed-interest, low-volatility assets;
. maintaining sufficient liquidity to meet unexpected
financial obligations;
73
. regularly evaluating our asset class mix and
pursuing additional investment classes; and
. continuously monitoring asset quality.
We are exposed to two primary sources of investment risk:
. credit risk, relating to the uncertainty associated
with the continued ability of a given issuer to make
timely payments of principal and interest; and
. interest rate risk, relating to the market price and
cash flow variability associated with changes in
market interest rates.
We manage credit risk by analyzing issuers, transaction
structures and any associated collateral. We use
sophisticated analytic techniques to monitor credit risk.
For example, we continually measure the probability of
credit default and estimated loss in the event of such a
default, which may provide us with early notification of
worsening credits. We also manage credit risk through
industry and issuer diversification and asset allocation
practices. For commercial mortgage loans, we manage
credit risk through geographic, property type and product
type diversification and asset allocation. We routinely
review different issuers and sectors and conduct more
formal quarterly portfolio reviews with our Investment
Committee.
We mitigate interest rate risk through rigorous
management of the relationship between the duration of
our assets and the duration of our liabilities, seeking
to minimize risk of loss in both rising and falling
interest rate environments. For further information on
our management of interest rate risk, see "Item 7A --
Quantitative and Qualitative Disclosures About Market
Risk."
FIXED MATURITIES Fixed maturities, which are classified as
available-for-sale, including tax-exempt bonds, consist
principally of publicly traded and privately placed debt
securities, and represented 72.9% and 78.9% of total cash
and invested assets as of December 31, 2005 and 2004,
respectively.
We invest in privately placed fixed maturities to
increase diversification and obtain higher yields than
can ordinarily be obtained with comparable public market
securities. Generally, private placements provide us with
protective covenants, call protection features and, where
applicable, a higher level of collateral. However, our
private placements are not freely transferable because of
restrictions imposed by federal and state securities
laws, the terms of the securities, and illiquid trading
markets.
The Securities Valuation Office of the National
Association of Insurance Commissioners ("NAIC") evaluates
bond investments of U.S. insurers for regulatory
reporting purposes
74
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 "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 tables present our public, private and
aggregate 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 their 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 securities,
primarily non-U.S. securities, are not rated by the NAIC
or the Nationally Recognized Statistical Rating
Organizations and are so designated.
December 31,
-------------------------------------------------------
Public Fixed Maturities 2005 2004
- ----------------------- --------------------------- ---------------------------
NAIC Rating Agency
Rating Equivalent Designation
- ------ ----------------------
Amortized Estimated % of Amortized Estimated % of
(Dollar amounts in millions) Cost Fair Value Total Cost Fair Value Total
- -------------------------------------------------------------------------------------
1 Aaa/Aa/A $2,292.3 $2,292.6 63.2% $3,008.1 $3,046.6 64.7%
2 Baa 1,003.2 1,020.5 28.1% 1,210.5 1,258.8 26.7%
3 Ba 235.8 241.2 6.6% 287.9 305.2 6.5%
4 B 62.6 63.8 1.8% 78.6 77.8 1.7%
5 Caa and lower 6.2 6.0 0.2% 16.3 13.5 0.3%
6 In or near default 3.2 3.7 0.1% 4.1 4.8 0.1%
Not rated -- -- -- -- -- --
-------- -------- ------ -------- -------- ------
Total public fixed
maturities $3,603.3 $3,627.8 100.0% $4,605.5 $4,706.7 100.0%
- -------------------------------------------------------------------------------------
75
December 31,
--------------------------------------------------------
Private Fixed Maturities 2005 2004
- ------------------------ --------------------------- ---------------------------
NAIC Rating Agency
Rating Equivalent Designation
- ------ ----------------------
Estimated
Amortized Estimated % of Amortized Fair % of
(Dollar amounts in millions) Cost Fair Value Total Cost Value Total
- --------------------------------------------------------------------------------------
1 Aaa/Aa/A $1,013.3 $1,005.3 61.0% $ 973.9 $ 978.4 42.6%
2 Baa 568.7 578.4 35.1% 1,068.5 1,102.9 48.1%
3 Ba 53.6 55.0 3.3% 120.3 125.7 5.5%
4 B 7.1 6.9 0.4% 57.0 57.7 2.5%
5 Caa and lower 3.3 3.5 0.2% 14.4 13.4 0.6%
6 In or near default 0.4 0.4 -- 3.0 3.0 0.1%
Not rated -- -- -- 13.2 13.4 0.6%
-------- -------- ------ -------- -------- ------
Total private fixed
maturities $1,646.4 $1,649.5 100.0% $2,250.3 $2,294.5 100.0%
- --------------------------------------------------------------------------------------
December 31,
--------------------------------------------------------
Total Fixed Maturities 2005 2004
- ---------------------- --------------------------- ---------------------------
NAIC Rating Agency
Rating Equivalent Designation
- ------ ----------------------
Amortized Estimated % of Amortized Estimated % of
(Dollar amounts in millions) Cost Fair Value Total Cost Fair Value Total
- --------------------------------------------------------------------------------------
1 Aaa/Aa/A $3,305.6 $3,297.9 62.5% $3,982.0 $4,025.0 57.5%
2 Baa 1,571.9 1,598.9 30.3% 2,279.0 2,361.7 33.7%
3 Ba 289.4 296.2 5.6% 408.2 430.9 6.2%
4 B 69.7 70.7 1.3% 135.6 135.5 1.9%
5 Caa and lower 9.5 9.5 0.2% 30.7 26.9 0.4%
6 In or near default 3.6 4.1 0.1% 7.1 7.8 0.1%
Not rated -- -- -- 13.2 13.4 0.2%
-------- -------- ------ -------- -------- ------
Total fixed maturities $5,249.7 $5,277.3 100.0% $6,855.8 $7,001.2 100.0%
- --------------------------------------------------------------------------------------
Based upon estimated fair value, public fixed maturities
represented 68.7% and 67.2% of total fixed maturities as
of December 31, 2005 and 2004, respectively. Private
fixed maturities represented 31.3% and 32.8% of total
fixed maturities as of December 31, 2005 and 2004,
respectively.
76
We diversify our fixed maturities by security sector. The
following table sets forth the estimated fair value of
our fixed maturities by sector as well as the percentage
of the total fixed maturities holdings that each security
sector comprised as of the dates indicated:
December 31,
-----------------------------------
2005 2004
----------------- -----------------
Estimated % of Estimated % of
(Dollar amounts in millions) Fair Value Total Fair Value Total
----------------------------------------------------------------
U.S. government and agencies $ 70.2 1.3% $ 52.4 0.7%
State and municipal -- -- 0.7 --
Government -- Non U.S. 111.4 2.1% 105.4 1.5%
U.S. corporate 2,817.0 53.4% 4,040.6 57.7%
Corporate -- Non-U.S. 460.2 8.7% 802.8 11.5%
Mortgage-backed 992.0 18.8% 1,319.7 18.9%
Asset-backed 826.5 15.7% 679.6 9.7%
-------- ------ -------- ------
Total fixed maturities $5,277.3 100.0% $7,001.2 100.0%
----------------------------------------------------------------
The following table sets forth the major industry types
that comprise our corporate bond holdings, based
primarily on industry codes established by Lehman
Brothers, as well as the percentage of the total
corporate bond holdings that each industry comprised as
of the dates indicated:
December 31,
-----------------------------------
2005 2004
----------------- -----------------
Estimated % of Estimated % of
(Dollar amounts in millions) Fair Value Total Fair Value Total
-----------------------------------------------------------------
Finance and insurance $1,001.4 30.6% $1,712.6 35.4%
Utilities and energy 567.7 17.3% 834.5 17.2%
Consumer -- non cyclical 434.7 13.3% 587.1 12.1%
Capital goods 254.3 7.8% 367.7 7.6%
Consumer -- cyclical 314.4 9.6% 363.6 7.5%
Industrial 196.1 6.0% 288.7 6.0%
Technology and communications 165.0 5.0% 222.7 4.6%
Transportation 112.7 3.4% 92.1 1.9%
Other 230.9 7.0% 374.4 7.7%
-------- ------ -------- ------
Total $3,277.2 100.0% $4,843.4 100.0%
-----------------------------------------------------------------
We diversify our corporate bond holdings by industry and
issuer. The portfolio does not have significant exposure
to any single issuer. As of December 31, 2005, our
combined corporate bond holdings in the ten issuers to
which we had the greatest exposure was $438.4 million
which was approximately 6.1% of our total cash and
invested assets as of December 31, 2005. The exposure to
the largest single issuer of corporate bonds held as of
December 31, 2005 was $63.2 million, which was less than
1.0% of our total cash and invested assets as of such
date.
77
COMMERCIAL MORTGAGE Our commercial mortgage loans are collateralized by
LOANS commercial properties, including multifamily residential
buildings. The carrying value of commercial mortgage
loans is stated at original cost net of prepayments,
amortization and allowance for loan losses.
We diversify our commercial mortgage loans by both
property type and geographic region. The following table
sets forth the distribution across property type and
geographic region for commercial mortgage loans as of the
dates indicated:
December 31,
---------------------------------------------------
Property Type 2005 2004
- ------------- ------------------------- -------------------------
(Dollar amounts in millions) Carrying Value % of Total Carrying Value % of Total
- --------------------------------------------------------------------------------
Office $ 346.8 33.3% $ 356.1 29.5%
Industrial 353.7 33.9% 386.2 32.0%
Retail 233.5 22.4% 335.9 27.8%
Apartments 91.5 8.8% 105.6 8.7%
Mixed use/other 16.6 1.6% 23.9 2.0%
-------- ------ -------- ------
Total $1,042.1 100.0% $1,207.7 100.0%
- --------------------------------------------------------------------------------
December 31,
---------------------------------------------------
Geographic Region 2005 2004
- ----------------- ------------------------- -------------------------
(Dollar amounts in millions) Carrying Value % of Total Carrying Value % of Total
- --------------------------------------------------------------------------------
Pacific $ 299.4 28.7% $ 332.8 27.6%
South Atlantic 190.1 18.2% 255.3 21.1%
Middle Atlantic 115.5 11.1% 129.3 10.7%
East North Central 204.0 19.6% 215.1 17.8%
Mountain 97.8 9.4% 101.4 8.4%
West South Central 38.6 3.7% 65.8 5.4%
West North Central 48.1 4.6% 52.0 4.3%
East South Central 17.3 1.7% 15.4 1.3%
New England 31.3 3.0% 40.6 3.4%
-------- ------ -------- ------
Total $1,042.1 100.0% $1,207.7 100.0%
- --------------------------------------------------------------------------------
The following table sets forth the distribution of our
commercial mortgage loans by loan size as of the dates
indicated:
December 31,
-------------------------------------------------------------
2005 2004
------------------------------ ------------------------------
Number of Principal Number of Principal
(Dollar amounts in millions) Loans Balance % of Total Loans Balance % of Total
- -------------------------------------------------------------------------------------------
Under $5 million 276 $ 562.1 53.8% 287 $ 585.8 48.1%
$5 million but less than $10
million 31 198.2 18.9% 40 268.8 22.1%
$10 million but less than $20
million 11 164.6 15.7% 11 157.6 13.0%
$20 million but less than $30
million 2 43.4 4.2% 2 45.1 3.7%
More than $30 million 2 77.1 7.4% 4 159.4 13.1%
--- -------- ------ --- -------- ------
Total 322 $1,045.4 100.0% 344 $1,216.7 100.0%
- -------------------------------------------------------------------------------------------
78
The following table sets forth the scheduled maturities
for our commercial mortgage loans as of the date
indicated:
December 31, 2005
-------------------------
(Dollar amounts in millions) Carrying Value % of Total
----------------------------------------------------------
Due in 1 year or less $ 8.1 0.8%
Due after 1 year through 2 years 36.8 3.5%
Due after 2 year through 3 years 8.9 0.9%
Due after 3 year through 4 years 12.9 1.2%
Due after 4 year through 5 years 47.3 4.5%
Due after 5 years 928.1 89.1%
-------- ------
Total $1,042.1 100.0%
----------------------------------------------------------
We monitor our commercial mortgage loans on a continual
basis. These reviews include an analysis of the property,
its financial statements, the relevant market and tenant
creditworthiness. Through this monitoring process, we
review loans that are restructured, delinquent or under
foreclosure and identify those that management considers
to be potentially delinquent.
The following table sets forth the changes in allowance
for losses on mortgage loans as of the dates indicated:
As of or for
the years
ended
December 31,
------------
(Dollar amounts in millions) 2005 2004
--------------------------------------------------------
Balance, beginning of period $10.4 $10.4
Provision charged (released) to operations (4.6) 1.0
Transfers -- (0.6)
Amounts written off, net of recoveries (1.5) (0.4)
----- -----
Balance, end of period $ 4.3 $10.4
--------------------------------------------------------
During 2005, we adjusted our process for estimating
credit losses in our commercial mortgage loan portfolio.
As a result of this adjustment, we released $4.6 million
of commercial mortgage loan reserves to net investment
income in the fourth quarter of 2005.
EQUITY SECURITIES Our equity securities, which are classified as
available-for-sale, primarily consist of mutual funds and
retained interests in our securitization transactions. We
had equity securities of $23.3 million and $26.8 million
as of December 31, 2005 and 2004, respectively.
79
OTHER INVESTMENTS The following table sets forth the carrying values of our
other investments as of the dates indicated:
December 31,
---------------------------------------------------
2005 2004
------------------------- -------------------------
(Dollar amounts in millions) Carrying Value % of Total Carrying Value % of Total
- ------------------------------------------------------------------------------------
Restricted other invested assets $332.0 85.2% $ -- -- %
Securities lending -- -- 406.9 87.2%
Limited partnerships 48.6 12.4% 53.0 11.4%
Other investments 9.3 2.4% 6.6 1.4%
------ ------ ------ ------
Total $389.9 100.0% $466.5 100.0%
- ------------------------------------------------------------------------------------
On August 19, 2005, we transferred approximately $344.6
million of investment securities to an affiliated special
purpose entity ("SPE"), whose sole purpose is to
securitize these investment securities and issue secured
notes (the "Secured Notes") to various affiliated
companies. The securitized investments are owned in their
entirety by the SPE and are not available to satisfy the
claims of our creditors. However, we are entitled to
principal and interest payments made on the Secured Notes
we hold. Under U.S. GAAP, the transaction is accounted
for as a secured borrowing. Accordingly, the Secured
Notes are included within our consolidated financial
statements as available-for-sale fixed maturities and the
liability equal to the proceeds received upon transfer
has been included in Other Liabilities. Additionally, the
investment securities transferred are included in Other
Invested Assets and are shown as restricted assets.
We participated in a securities lending program whereby
blocks of securities included in our portfolio were
loaned primarily to major brokerage firms. We require a
minimum of 102% of the fair value of the loaned
securities to be separately maintained as collateral for
the loans. As of December 31, 2005, we are not
participating in the securities lending program.
The limited partnerships primarily represent interests in
pooled investment funds that make private equity
investments in U.S. and non-U.S. companies. Other
investments are primarily swaps, options and strategic
equity investments.
80
Regulation
Our Businesses are Subject to Extensive Regulation and Supervision.
GENERAL
Our insurance operations are subject to a wide variety of
laws and regulations. State insurance laws regulate most
aspects of our business, and we are regulated by the
insurance department of the state in which we are
domiciled and states where we are licensed to transact
business. We and our insurance products also are affected
by U.S. federal, state and local tax laws. Insurance
products that constitute "securities," such as variable
annuities and variable life insurance policies, also are
subject to U.S. federal and state securities laws and
regulations. The SEC, the National Association of
Securities Dealers ("NASD"), as well as the insurance
departments of the states in which we are licensed,
regulate and supervise these products.
The purpose of the laws and regulations affecting our
insurance and securities businesses is primarily to
protect our customers. Many of the laws and regulations
to which we are subject are regularly re-examined, and
existing or future laws and regulations may become more
restrictive or otherwise adversely affect our operations.
In addition, insurance and securities regulatory
authorities (including state law enforcement agencies and
attorneys general) increasingly make inquiries regarding
compliance by us with insurance, securities and other
laws and regulations regarding the conduct of our
insurance business and insurance products which are also
regulated as securities products. We cooperate with such
inquiries and take corrective action when warranted.
Some of our customers and independent sales
intermediaries also operate in regulated environments.
Changes in the regulations that affect their operations
also may affect our business relationships with them and
their ability to purchase or to distribute our products.
INSURANCE
REGULATION
We are licensed and regulated in all jurisdictions in
which we conduct insurance business. The extent of this
regulation varies, but most jurisdictions have laws and
regulations governing the financial condition of
insurers, including standards of solvency, types and
concentration of investments, establishment and
maintenance of reserves, credit for reinsurance and
requirements of capital adequacy, and the business
conduct of insurers, including marketing and sales
practices and claims handling. In addition, statutes and
regulations usually require the licensing of insurers and
their agents, the approval of policy forms and related
materials and the approval of rates for certain lines of
insurance.
The types of insurance laws and regulations applicable to
us are described below.
81
INSURANCE HOLDING All jurisdictions in which we conduct insurance business
COMPANY REGULATION have enacted legislation that requires each insurance
company in a holding company system, except captive
insurance companies, to register with the insurance
regulatory authority of its jurisdiction of domicile and
to furnish that regulatory authority financial and other
information concerning the operations of, and the
interrelationships and transactions among, companies
within its holding company system that may materially
affect the operations, management or financial condition
of the insurers within that system. These laws and
regulations also regulate transactions between insurance
companies and their parents and affiliates. Generally,
these laws and regulations require that all transactions
within a holding company system between an insurer and
its affiliates be fair and reasonable and that the
insurer's statutory surplus following any transaction
with an affiliate be both reasonable in relation to its
outstanding liabilities and adequate to its financial
needs. Statutory surplus is the excess of admitted assets
over the sum of statutory liabilities and capital. For
certain types of agreements and transactions between an
insurer and its affiliates, these laws and regulations
require prior notification to, and non-disapproval or
approval by, the insurance regulatory authority of the
insurer's jurisdiction of domicile.
POLICY FORMS Our policy forms are subject to regulation in every
jurisdiction in which we are licensed to transact
insurance business. In most jurisdictions, policy forms
must be filed prior to, or concurrent with, their use. In
some jurisdictions, forms may also need to be approved or
declared effective by the appropriate regulator prior to
use.
MARKET CONDUCT The laws and regulations of jurisdictions include
REGULATION numerous provisions governing the marketplace activities
of insurers, including provisions governing the form and
content of disclosure to consumers, product
illustrations, advertising, product replacement, sales
and underwriting practices, complaint handling and claims
handling. Regulatory authorities generally enforce these
provisions through periodic market conduct examinations.
STATUTORY As part of their regulatory oversight process, insurance
EXAMINATIONS departments conduct periodic detailed examinations of the
books, records, accounts and business practices of
insurers which conduct business in their jurisdictions.
These examinations generally are conducted in cooperation
with the insurance departments of two or three other
states or jurisdictions, representing each of the NAIC
zones, under guidelines promulgated by the NAIC. In the
three-year period ended December 31, 2005, we have not
received any material adverse findings resulting from any
insurance department examinations.
Most of the jurisdictions in which we are licensed to
GUARANTY ASSOCIATIONS transact business require life insurers doing business
AND SIMILAR within the jurisdiction to participate in guaranty
ARRANGEMENTS associations, which are organized to pay contractual
benefits owed pursuant to insurance policies of
82
insurers who become impaired or insolvent. These
associations levy assessments, up to prescribed limits,
on all member insurers in a particular jurisdiction on
the basis of the proportionate share of the premiums
written by member insurers in the lines of business in
which the impaired, insolvent or failed insurer is
engaged. Some jurisdictions permit member insurers to
recover assessments paid through full or partial premium
tax offsets. Aggregate assessments levied against us were
not material to our financial statements.
POLICY AND CONTRACT Under the laws and regulations of the Commonwealth of
RESERVE SUFFICIENCY Virginia, we are required to conduct annual analyses of
ANALYSIS the sufficiency of our life and health insurance and
annuity statutory reserves. In addition, other
jurisdictions in which we are licensed may have certain
reserve requirements that differ from those of our
domiciliary jurisdiction. In each case, a qualified
actuary must submit an opinion that states that the
aggregate statutory reserves, when considered in light of
the assets held with respect to such reserves, make good
and sufficient provision for the associated contractual
obligations and related expenses of the insurer. If such
an opinion cannot be provided, the affected insurer must
set up additional reserves by moving funds from surplus.
We submit these opinions annually to applicable insurance
regulatory authorities.
SURPLUS AND CAPITAL Insurance regulators have the discretionary authority, in
REQUIREMENTS connection with the ongoing licensing of our Company, to
limit or prohibit the ability of an insurer to issue new
policies if, in the regulators' judgment, the insurer is
not maintaining a minimum amount of surplus or is in
hazardous financial condition. Insurance regulators may
also limit the ability of an insurer to issue new life
insurance policies and annuity contracts above an amount
based upon the face amount and premiums of policies of a
similar type issued in the prior year. We do not believe
that the current or anticipated levels of our statutory
surplus present a material risk that any such regulator
would limit the amount of new policies that we may issue.
RISK-BASED CAPITAL The NAIC has established risk-based capital standards for
our Company as well as a model act with the intention
that these standards be applied at the state level. The
model act provides that life insurance companies must
submit an annual risk-based capital report to state
regulators reporting their risk-based capital based upon
four categories of risk: asset risk, insurance risk,
interest rate risk and business risk. For each category,
the capital requirement is determined by applying factors
to various asset, premium and reserve items, with the
factor being higher for those items with greater
underlying risk and lower for less risky items. The
formula is intended to be used by insurance regulators as
an early warning tool to identify possible weakly
capitalized companies for purposes of initiating further
regulatory action.
83
If an insurer's risk-based capital falls below specified
levels, the insurer would be subject to different degrees
of regulatory action depending upon the level. These
actions range from requiring the insurer to propose
actions to correct the capital deficiency to placing the
insurer under regulatory control. As of December 31,
2005, our risk-based capital exceeded the level of
risk-based capital that would require us to take or
become subject to any corrective action.
STATUTORY ACCOUNTING Statutory accounting principles ("SAP") is a basis of
PRINCIPLES accounting developed by insurance regulators to monitor
and regulate the solvency of insurance companies. In
developing SAP, insurance regulators were primarily
concerned with assuring an insurer's ability to pay all
its current and future obligations to policyholders. As a
result, statutory accounting focuses on conservatively
valuing the assets and liabilities of insurers, generally
in accordance with standards specified by the insurer's
domiciliary jurisdiction. Uniform statutory accounting
practices are established by the NAIC and generally
adopted by regulators in the various jurisdictions in
which we conduct business. These accounting principles
and related regulations determine, among other things,
the amounts we may pay as dividends.
U.S. GAAP is designed to measure a business on a
going-concern basis. It gives consideration to matching
of revenue and expenses and, as a result, certain
expenses are capitalized when incurred and then amortized
over the life of the associated policies. The valuation
of assets and liabilities under U.S. GAAP is based in
part upon best estimate assumptions made by the insurer.
Stockholders' equity represents both amounts currently
available and amounts expected to emerge over the life of
the business. As a result, the values for assets,
liabilities and equity reflected in financial statements
prepared in accordance with U.S. GAAP are materially
different from those reflected in financial statements
prepared under SAP.
REGULATION OF We are subject to laws and regulations that require
INVESTMENTS diversification of our investment portfolio and limit the
amount of our investments in certain asset categories,
such as below investment grade fixed maturities, equity
real estate, other equity investments and derivatives.
Failure to comply with these laws and regulations would
cause investments exceeding regulatory limitations to be
treated as non-admitted assets for purposes of measuring
surplus, and, in some instances, would require
divestiture of such noncomplying investments. We believe
our investments comply with these laws and regulations.
FEDERAL REGULATION Our variable life insurance and variable annuity products
generally are "securities" within the meaning of federal
securities laws and regulations. As a result, most of our
variable annuity products and all of our variable life
insurance products are registered under the Securities
Act of 1933 and are subject to regulation by the SEC.
These
84
products are sold by broker/dealers of member firms of
the NASD, and the NASD, along with the SEC, regulates the
sales and marketing activities with respect to these
products. Federal and state securities regulation similar
to that discussed below under "Other Laws and Regulations
-- Securities regulation" affect investment advice and
sales and related activities with respect to these
products. In addition, although the federal government
does not comprehensively regulate the business of
insurance, federal legislation and administrative
policies in several other areas, including taxation,
financial services regulation and pension and welfare
benefits regulation, can also significantly affect the
insurance industry.
FEDERAL INITIATIVES Although the federal government generally does not
directly regulate the insurance business, federal
initiatives often and increasingly have an impact on the
business in a variety of ways. From time to time, federal
measures are proposed which may significantly affect the
insurance business, including limitations on antitrust
immunity, tax incentives for lifetime annuity payouts,
simplification bills affecting tax-advantaged or
tax-exempt savings and retirement vehicles, and proposals
to modify or make permanent the estate tax repeal enacted
in 2001. In addition, various forms of direct federal
regulation of insurance have been proposed in recent
years. We cannot predict whether any such proposals will
be adopted, or what impact, if any, such proposals or, if
adopted, such laws may have on our business, financial
condition or results of operation.
CHANGES IN TAX LAWS Changes in tax laws could make some of our products less
attractive to consumers. For example, the gradual repeal
of the federal estate tax, begun in 2001, is continuing
to be phased in through 2010. The repeal and continuing
uncertainty created by the repeal of the federal estate
tax has resulted in reduced sales, and could continue to
adversely affect sales and surrenders, of some of our
estate planning products, including
survivorship/second-to-die life insurance policies. In
May 2003, the Jobs and Growth Tax Relief Reconciliation
Act of 2003 was signed into law to lower the federal
income tax rate on capital gains and certain ordinary
dividends. This reduction may provide an incentive for
certain of our customers and potential customers to shift
assets into mutual funds and away from our products,
including annuities, that are designed to defer taxes
payable on investment returns. On the other hand,
individual income tax rates are scheduled to revert to
previous levels in 2010, and that could have a positive
influence on the interest of investors in our products.
Similarly, the 2008 expiration of favorable income tax
rates for dividend income could increase interest in our
products.
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OTHER LAWS AND
REGULATIONS
SECURITIES REGULATION Certain of our policies and contracts offered are subject
to various levels of regulation under the federal
securities laws regulated by the SEC. Some of our
variable annuity contracts and all of our variable life
insurance policy separate accounts are registered under
the Investment Company Act of 1940. Some of our variable
annuity contracts and all of our variable life insurance
policies are registered under the Securities Act of 1933.
These laws and regulations are primarily intended to
protect investors in the securities markets and generally
grant supervisory agencies broad administrative powers,
including the power to limit or restrict the conduct of
business for failure to comply with such laws and
regulations. In such event, the possible sanctions that
may be imposed include suspension of individual
employees, limitations on the activities in which an
investment adviser or broker/dealer may engage,
suspension or revocation of an investment adviser or
broker/dealer registration, censure or fines. We may also
be subject to similar laws and regulations in the states
in which we offer the products described above or conduct
other securities-related activities.
We also serve as the depositor for variable annuity
contracts and other debt securities that rely on certain
exemptions from registration under the Investment Company
Act of 1940 and the Securities Act of 1933. Nevertheless,
certain provisions of the Investment Company Act of 1940
and the Securities Act of 1933 may apply to these
products issued under certain circumstances.
The Investment Company Act of 1940, the Securities
Exchange Act of 1934 and the Securities Act of 1933,
including the rules and regulations promulgated
thereunder, are subject to change, which may affect us
and any products we issue.
ENVIRONMENTAL As an owner and operator of real property, we are subject
CONSIDERATIONS to extensive U.S. federal and state environmental laws
and regulations. Potential environmental liabilities and
costs in connection with any required remediation of such
properties also is an inherent risk in property ownership
and operation. In addition, we hold equity interests in
companies and have made loans secured by properties that
could potentially be subject to environmental
liabilities. We routinely have environmental assessments
performed with respect to real estate being acquired for
investment and real property to be acquired through
foreclosure. We cannot provide assurance that unexpected
environmental liabilities will not arise. However, based
upon information currently available to us, we believe
that any costs associated with compliance with
environmental laws and regulations or any remediation of
such properties will not have a material adverse effect
on our business, financial condition or results of
operations.
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ERISA CONSIDERATIONS We provide certain products and services to certain
employee benefit plans that are subject to ERISA or the
Internal Revenue Code. As such, our activities are
subject to the restrictions imposed by ERISA and the
Internal Revenue Code, including the requirement under
ERISA that fiduciaries must perform their duties solely
in the interests of ERISA plan participants and
beneficiaries and the requirement under ERISA and the
Internal Revenue Code that fiduciaries may not cause a
covered plan to engage in certain prohibited transactions
with persons who have certain relationships with respect
to such plans. The applicable provisions of ERISA and the
Internal Revenue Code are subject to enforcement by the
U.S. Department of Labor, the IRS and the Pension Benefit
Guaranty Corporation.
USA PATRIOT ACT The USA Patriot Act of 2001 ("the Patriot Act") enacted
in response to the terrorist attacks on September 11,
2001, contains anti-money laundering and financial
transparency laws and mandates the implementation of
various new regulations applicable to broker/dealers and
other financial services companies including insurance
companies. The Patriot Act seeks to promote cooperation
among financial institutions, regulators and law
enforcement entities in identifying parties that may be
involved in terrorism or money laundering. Anti-money
laundering laws outside of the U.S. contain similar
provisions. The increased obligations of financial
institutions to identify their customers, watch for and
report suspicious transactions, respond to requests for
information by regulatory authorities and law enforcement
agencies, and share information with other financial
institutions, require the implementation and maintenance
of internal practices, procedures and controls. We
believe that we have implemented, and that we maintain,
appropriate internal practices, procedures and controls
to enable us to comply with the provisions of the Patriot
Act. Certain additional requirements will be applicable
under the Patriot Act in May of 2006, and we will comply
with those new provisions as they become applicable.
PRIVACY OF CONSUMER U.S. federal and state laws and regulations require
INFORMATION financial institutions, including insurance companies, to
protect the security and confidentiality of consumer
financial information and to notify consumers about their
policies and practices relating to their collection and
disclosure of consumer information and their policies
relating to protecting the security and confidentiality
of that information. Similarly, federal and state laws
and regulations also govern the disclosure and security
of consumer health information. In particular,
regulations promulgated by the U.S. Department of Health
and Human Services regulate the disclosure and use of
protected health information by health insurers and
others, the physical and procedural safeguards employed
to protect the security of that information and the
electronic transmission of such information. Congress and
state legislatures are expected to consider additional
legislation relating to privacy and other aspects of
consumer information.
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Risk Factors
RISKS RELATING TO
OUR BUSINESSES
Interest rate fluctuations could adversely affect our
business and profitability.
Our insurance and investment products are sensitive to
interest rate fluctuations and expose us to the risk that
falling interest rates will reduce our "spread," or the
difference between the returns we earn on the investments
that support our obligations under these products and the
amounts that we must pay policyholders and
contractholders. Because we may reduce the interest rates
we credit on most of these products only at limited,
pre-established intervals, and because some of them have
guaranteed minimum crediting rates, declines in interest
rates may adversely affect the profitability of those
products.
During periods of increasing market interest rates, we
may offer higher crediting rates on interest-sensitive
products, such as universal life insurance and fixed
annuities, and we may increase crediting rates on
in-force products to keep these products competitive. In
addition, rapidly rising market interest rates may cause
increased policy surrenders, withdrawals from annuity
contracts and requests for policy loans, as policyholders
and contractholders shift assets into higher yielding
investments. Increases in crediting rates, as well as
surrenders and withdrawals, could have an adverse effect
on our financial condition and results of operations.
Interest rate fluctuations also could have an adverse
effect on the results of our investment portfolio. During
periods of declining market interest rates, the interest
we receive on variable interest rate investments
decreases. In addition, during those periods, we are
forced to reinvest the cash we receive as interest or
return of principal on our investments in lower-yielding
high-grade instruments or in lower-credit instruments to
maintain comparable returns. Issuers of fixed-income
securities also may decide to prepay their obligations in
order to borrow at lower market rates, which exacerbates
the risk that we may have to invest the cash proceeds of
these securities in lower-yielding or lower-credit
instruments. Declining interest rates from 2003 to 2004
contributed to a decrease in our weighted average
investment yield from 4.6% for the year ended
December 31, 2003 to 4.5% for the year ended December 31,
2004. Our weighted average investment yield increased to
5.3% for the year ended December 31, 2005.
Downturns and volatility in equity markets could
adversely affect our business and profitability.
Significant downturns and volatility in equity markets
could have an adverse effect on our financial condition
and results of operations in two principal ways. First,
market downturns and volatility may discourage purchases
of separate account products, such as variable annuities
and variable life insurance, 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.
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Second, downturns and volatility in equity markets can
have an adverse effect on the revenues and returns from
our separate accounts. Because these products and
services depend on fees related primarily to the value of
assets under management, a decline in the equity markets
could reduce our revenues by reducing the value of the
investment assets we manage. In addition, some of our
variable annuity products contain guaranteed minimum
death benefits and guaranteed minimum income payments
tied to the investment performance of the assets held
within the variable annuity. A significant market decline
could result in declines in account values which could
increase our payments under guaranteed minimum death
benefits and certain income payments in connection with
variable annuities, which could have an adverse effect on
our financial condition and results of operations.
Defaults in our fixed-income securities and commercial
mortgage loan portfolio may reduce our earnings.
Issuers of the fixed-income securities and commercial
mortgage loans that we own may default on principal and
interest payments. An economic downturn or a variety of
other factors could cause declines in the value of our
fixed maturities portfolio and cause our net earnings to
decline.
A downgrade or a potential downgrade in our financial
strength or credit ratings could result in a loss of
business and adversely affect our financial condition and
results of operations.
Financial strength ratings, which various ratings
organizations publish as measures of an insurance
company's ability to meet contractholder and policyholder
obligations, are important to maintaining public
confidence in our products, the ability to market our
products and our competitive position. We currently have
financial strength ratings of "AA-" (Very Strong) from
S&P and Fitch and "Aa3" (Excellent) from Moody's. The
"AA-" rating is the fourth-highest of S&P's 20 ratings
categories. The "Aa3" rating is the fourth-highest of
Moody's 21 ratings categories. The "AA-" rating is the
fourth-highest of Fitch's 24 ratings categories.
A downgrade in our financial strength ratings, or the
announced potential for a downgrade, could have a
significant adverse effect on our financial condition and
results of operations in many ways, including:
. reducing new sales of insurance products, annuities
and other investment products;
. adversely affecting our relationships with
independent sales intermediaries and our dedicated
sales specialists;
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. materially increasing the number or amount of policy
surrenders and withdrawals by contractholders and
policyholders;
. requiring us to reduce prices for many of our
products and services to remain competitive; and
. adversely affecting our ability to obtain
reinsurance or obtain reasonable pricing on
reinsurance.
In addition to our financial strength ratings, ratings
agencies also publish our credit ratings. The credit
ratings have an impact on the interest rates we pay on
the money we borrow. Therefore, a downgrade in our credit
ratings could increase our cost of borrowing and have an
adverse effect on our financial condition and results of
operations.
Our ratings are not evaluations directed to the
protection of policyholders and contractholders.
Our ratings described under "-- Financial Strength
Ratings" reflect each rating agency's current opinion of
our financial strength, operating performance and ability
to meet obligations to policyholders and contractholders.
These factors are of concern to policyholders,
contractholders, agents, sales intermediaries and
lenders. In addition, the standards used by rating
agencies in determining financial strength are different
from capital requirements set by state insurance
regulators. We may need to take actions in response to
changing standards set by any of the rating agencies, as
well as statutory capital requirements, which could cause
our business and operations to suffer.
If our reserves for future policy claims are inadequate,
we may be required to increase our reserve liabilities,
which could adversely affect our results of operations
and financial condition.
We calculate and maintain reserves for estimated future
payments of claims to our policyholders and
contractholders in accordance with U.S. GAAP. We release
these reserves as those future obligations are
extinguished. The reserves we establish reflect estimates
and actuarial assumptions with regard to our future
experience. These estimates and actuarial assumptions
involve the exercise of significant judgment. Our future
financial results depend significantly upon the extent to
which our actual future experience is consistent with the
assumptions we have used in pricing our products and
determining our reserves. Many factors can affect future
experience, including economic and social conditions,
inflation, healthcare costs, changes in doctrines of
legal liability and damage awards in litigation.
Therefore, we cannot determine with precision the
ultimate amounts we will pay for actual claims or the
timing of those payments.
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We continually monitor our reserves. If we conclude that
our reserves are insufficient to cover actual or expected
policy and contract benefits and claims payments, we
would be required to increase our reserves and incur
income statement charges for the period in which we make
the determination, which could adversely affect our
results of operations and financial condition.
Some of our investments are relatively illiquid.
Our investments in privately placed fixed maturities,
commercial mortgage loans, policy loans, limited
partnership interests and restricted other invested
assets are relatively illiquid. These asset classes
represented 44.7% of the carrying value of our total cash
and invested assets as of December 31, 2005. If we
require significant amounts of cash on short notice in
excess of our normal cash requirements, we may have
difficulty selling these investments in a timely manner,
be forced to sell them for less than we otherwise would
have been able to realize, or both. If an unexpected
number of contractholders exercise their right to early
termination and we are unable to access other liquidity
sources, we may have to liquidate assets quickly. Our
inability to quickly dispose of illiquid investments
could have an adverse effect on our financial condition
and results of operations.
Intense competition could negatively affect our ability
to maintain or increase our market share and
profitability.
Our businesses are subject to intense competition. We
believe the principal competitive factors in the sale of
our products are product features, price, commission
structure, marketing and distribution arrangements,
brand, reputation, financial strength ratings and service.
Many other companies actively compete for sales in our
Retirement Income and Investments and Protection markets,
including other major insurers, banks, other financial
institutions, mutual fund and money asset management
firms and specialty providers.
In many of our product lines, we face competition from
competitors that have greater market share or breadth of
distribution, offer a broader range of products, services
or features, assume a greater level of risk, have lower
profitability expectations or have higher financial
strength ratings than we do. Many competitors offer
similar products and use similar distribution channels.
The substantial expansion of banks' and insurance
companies' distribution capacities and expansion of
product features in recent years have intensified
pressure on margins and production levels and have
increased the level of competition in many of our
business lines. In addition, in recent years, banks,
insurance companies and other financial services
companies, many of
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which offer products similar to ours and use similar
distribution channels, have consolidated. Further
consolidation among banks, insurance companies and other
financial services companies could have an adverse effect
on our financial condition and results of operations if
the surviving entity requires more favorable terms than
we had previously been offering to one or more of the
combined companies or if it elects not to continue to do
business with us following the consolidation.
We may be unable to attract and retain independent sales
intermediaries and dedicated sales specialists.
We distribute our products through financial
intermediaries, independent producers and dedicated sales
specialists. We compete with other financial institutions
to attract and retain commercial relationships in each of
these channels, and our success in competing for sales
through these sales intermediaries depends upon factors
such as the amount of sales commissions and fees we pay,
the variety of our product offerings, the strength of our
brand, our perceived stability and our financial strength
ratings, the marketing and services we provide to them
and the strength of the relationships we maintain with
individuals at those firms. From time to time, due to
competitive forces, we have experienced unusually high
attrition in particular sales channels for specific
products. An inability to recruit productive independent
sales intermediaries and dedicated sales specialists, or
our inability to retain strong relationships with the
individual agents at our independent sales
intermediaries, could have an adverse effect on our
financial condition and results of operations.
If the counterparties to our reinsurance arrangements or
to the derivative instruments we use to hedge our
business risks default or fail to perform, we may be
exposed to risks we had sought to mitigate, which could
adversely affect our financial condition and results of
operations.
We use reinsurance and derivative instruments to mitigate
our risks in various circumstances. Reinsurance does not
relieve us of our direct liability to our policyholders,
even when the reinsurer is liable to us. Accordingly, we
bear credit risk with respect to our reinsurers. We
cannot assure you that our reinsurers will pay the
reinsurance recoverable owed to us now or in the future
or that they will pay these recoverables on a timely
basis. A reinsurer's insolvency, inability or
unwillingness to make payments under the terms of its
reinsurance agreement with us could have an adverse
effect on our financial condition and results of
operations.
Prior to the completion of Genworth's IPO, we ceded to
UFLIC effective as of January 1, 2004, policy obligations
under our structured settlement contracts, which had
reserves of $0.3 billion, and our variable annuity
contracts which had general account reserves of $2.5
billion and separate account reserves of $7.6 billion, in
each case as of
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December 31, 2003. These contracts represent
substantially all of our contracts, excluding the
Retirement Answer product that was not reinsured, that
were in force as of December 31, 2003 for these products.
UFLIC has established trust accounts for our benefit to
secure its obligations under the reinsurance
arrangements, and General Electric Capital Corporation
("GE Capital"), an indirect subsidiary of GE, has agreed
to maintain UFLIC's risk-based capital above a specified
minimum level. If UFLIC becomes insolvent notwithstanding
this agreement, and the amounts in the trust accounts are
insufficient to pay UFLIC's obligations to us, our
financial condition and results of operations could be
materially adversely affected.
In addition, we may use derivative instruments to hedge
various business risks. We may enter into a variety of
derivative instruments, including options, forwards,
interest rate and currency swaps and options to enter
into interest rate and currency swaps with a number of
counterparties. If our counterparties fail or refuse to
honor their obligations under the derivative instruments,
our hedges of the related risk will be ineffective. Such
failure could have an adverse effect on our financial
condition and results of operations.
We are heavily regulated, and changes in regulation may
reduce our profitability and limit our growth.
As an insurance company, we are subject to a wide variety
of laws and regulations. State insurance laws regulate
most aspects of our insurance business, and we are
regulated by the insurance department of the state in
which we are domiciled and the states in which we are
licensed.
State laws grant insurance regulatory authorities broad
administrative powers with respect to, among other things:
. licensing companies and agents to transact business;
. calculating the value of assets to determine
compliance with statutory requirements;
. mandating certain insurance benefits;
. regulating certain premium rates;
. reviewing and approving policy forms;
. regulating unfair trade and claims practices,
including through the imposition of restrictions on
marketing and sales practices, distribution
arrangements and payment of inducements;
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. establishing statutory capital and reserve
requirements and solvency standards;
. fixing maximum interest rates on insurance policy
loans and minimum rates for guaranteed crediting
rates on life insurance policies and annuity
contracts;
. approving changes in control of insurance companies;
and
. regulating the types, amounts and valuation of
investments.
State insurance regulators and the NAIC regularly
reexamine existing laws and regulations applicable to
insurance companies and their products. Changes in these
laws and regulations, or in interpretations thereof, are
often made for the benefit of the consumer at the expense
of the insurer and thus could have an adverse effect on
our financial condition and results of operations.
In December 2004, the NAIC approved amendments to the
NAIC's model Producer Licensing Act. The amendments
contain new disclosure requirements for producers
regarding compensation arrangements. The NAIC amendments
would require producers to disclose to customers, in
certain circumstances, information concerning
compensation arrangements. Certain states have adopted
these or similar amendments, and legislation or
regulation adopting such amendments has been proposed in
other states. The NAIC also directed its Executive Task
Force on Broker Activities to give further consideration
to the development of additional requirements for
recognition of a fiduciary responsibility on the part of
producers, disclosure of all quotes received by a broker
and disclosures relating to reinsurance arrangements
between insurers and reinsurance companies affiliated
with a producer. We cannot predict the effect that the
NAIC's recent compensation disclosure amendments or
anticipated future activities in this area, at the NAIC
or state level, will have on influencing future legal
actions, changes to business practices or regulatory
requirements applicable to us.
Currently, the U.S. federal government does not regulate
directly the business of insurance. However, federal
legislation and administrative policies in several areas
can significantly and adversely affect insurance
companies. These areas include financial services
regulation, securities regulation, pension regulation,
privacy, tort reform legislation and taxation. In
addition, various forms of direct federal regulation of
insurance have been proposed. These proposals include
"The State Modernization and Regulatory Transparency
Act," which would maintain state-based regulation of
insurance but would affect state regulation of certain
aspects of the business of insurance including rates,
agent and company licensing, and market conduct
examinations. We cannot predict whether this or other
proposals will be adopted, or
94
what impact, if any, such proposals or, if enacted, such
laws may have on our business, financial condition or
results of operation.
Many of our customers and independent sales
intermediaries also operate in regulated environments.
Changes in the regulations that affect their operations
also may affect our business relationships with them and
their ability to purchase or to distribute our products.
Accordingly, these changes could have an adverse effect
on our financial condition and results of operation.
Compliance with applicable laws and regulations is time
consuming and personnel-intensive, and changes in these
laws and regulations may increase materially our direct
and indirect compliance and other expenses of doing
business, thus having an adverse effect on our financial
condition and results of operations.
Legal and regulatory investigations and actions are
increasingly common in the insurance business and may
result in financial losses and harm our reputation.
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. 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, product disclosure, administration, additional
premium charges for premiums paid on a periodic basis,
denial or delay of benefits, charging excessive or
impermissible fees on products, recommending unsuitable
products to customers and breaching fiduciary or other
duties to customers. In our investment-related
operations, we are subject to litigation involving
commercial disputes with counterparties. We are also
subject to litigation arising out of our general business
activities such as our contractual relationships.
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, federal and international 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.
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Recently, the insurance industry has become the focus of
increased scrutiny by regulatory and law enforcement
authorities concerning certain practices within the
insurance industry. In this regard, in May 2005, we
received a subpoena from the Northeast Regional Office of
the SEC, requiring the production of documents related to
"certain loss mitigation insurance products," such as
finite risk reinsurance. We responded to the SEC's
subpoena in June and July 2005. In June 2005, GE received
a subpoena from the United States Attorney's Office for
the Southern District of New York, also on the same
general subject. In the subpoena, GE is defined as
including, among other things, its subsidiaries and
affiliates. We cooperated with GE in connection with GE's
response to the subpoena.
We cannot assure you that the current investigations and
proceedings will not have a material adverse effect on
our business, financial condition or results of
operations. It is also possible that related
investigations and proceedings may be commenced in the
future, and we could become subject to further
investigations and have lawsuits filed or enforcement
actions initiated against us. In addition, 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.
We have significant operations in India that could be
adversely affected by changes in the political or
economic stability of India or government policies in
India or the U.S.
Through an arrangement with an outsourcing provider, we
have a substantial team of professionals in India who
provide a variety of services to us, including customer
service, transaction processing, and functional support
including finance, investment research, actuarial, risk
and marketing. A significant change in India's economic
liberalization and deregulation policies could adversely
affect business and economic conditions in India
generally and our business in particular.
The political or regulatory climate in the U.S. or
elsewhere also could change so that it would not be
practical or legal for us to use international operations
centers, such as call centers. For example, changes in
privacy regulations, or more stringent interpretation or
enforcement of these regulations, could require us to
curtail our use of low-cost operations in India to
service our businesses, which could reduce the cost
benefits we currently realize from using these operations.
Our computer systems may fail or their security may be
compromised, which could damage our business and
adversely affect our financial condition and results of
operation.
Our business is highly dependent upon the uninterrupted
operation of our computer systems. We rely on these
systems throughout our business for a variety of
functions,
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including processing claims and applications, providing
information to customers and distributors, performing
actuarial analyses and maintaining financial records.
Despite the implementation of security measures, our
computer systems may be vulnerable to physical or
electronic intrusions, computer viruses or other attacks,
programming errors and similar disruptive problems. The
failure of these systems for any reason could cause
significant interruptions to our operations, which could
result in a material adverse effect on our business,
financial condition or results of operation.
We retain confidential information in our computer
systems, and we rely on sophisticated commercial
technologies to maintain the security of those systems.
Anyone who is able to circumvent our security measures
and penetrate our computer systems could access, view,
misappropriate, alter, or delete any information in the
systems, including personally identifiable customer
information and proprietary business information. In
addition, an increasing number of states and foreign
countries require that customers be notified if a
security breach results in the disclosure of personally
identifiable customer information. Any compromise of the
security of our computer systems that results in
inappropriate disclosure of personally identifiable
customer information could damage our reputation in the
marketplace, deter people from purchasing our products,
subject us to significant civil and criminal liability
and require us to incur significant technical, legal and
other expenses.
The occurrence of natural or man-made disasters or a
disease pandemic could adversely affect our financial
condition and results of operation.
We are exposed to various risks arising out of natural
disasters, including earthquakes, hurricanes, floods and
tornadoes, man-made disasters, including acts of
terrorism and military actions and disease pandemics
(such as could arise from the avian flu). For example, a
natural or man-made disaster or a disease pandemic could
lead to unexpected changes in persistency rates as
policyholders and contractholders who are affected by the
disaster may be unable to meet their contractual
obligations, such as payment of premiums on our insurance
policies and deposits into our investment products. They
could also significantly increase our mortality and
morbidity experience above the assumptions we used in
pricing our insurance and investment products. The
continued threat of terrorism and ongoing military
actions may cause significant volatility in global
financial markets, and a natural or man-made disaster or
a disease pandemic could trigger an economic downturn in
the areas directly or indirectly affected by the
disaster. These consequences could, among other things,
result in a decline in business and increased claims from
those areas. Disasters or a disease pandemic also could
disrupt public and private infrastructure, including
communications and financial services, which could
disrupt our normal business operations.
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A natural or man-made disaster or a disease pandemic also
could disrupt the operations of our counterparties or
result in increased prices for the products and services
they provide to us. For example, a natural or man-made
disaster or a disease pandemic could lead to increased
reinsurance prices and potentially cause us to retain
more risk than we otherwise would retain if we were able
to obtain reinsurance at lower prices. In addition, a
disaster or a disease pandemic could adversely affect the
value of the assets in our investment portfolio if it
affects companies' ability to pay principal or interest
on their securities. See "-- We may face losses if there
are significant deviations from our assumptions regarding
the future persistency of our insurance policies and
annuity contracts".
We may face losses if mortality rates differ
significantly from our pricing expectations.
We set prices for our insurance and some annuity products
based upon expected claims and payment patterns, using
assumptions for, among other things, mortality rates, or
likelihood of death, of our policyholders and
contractholders. The long-term profitability of these
products depends upon how our actual experience compares
with our pricing assumptions. For example, if mortality
rates are lower than our pricing assumptions, we could be
required to make greater payments under annuity contracts
than we had projected. Conversely, if mortality rates are
higher than our pricing assumptions, we could be required
to make greater payments under our life insurance
policies and annuity contracts with guaranteed minimum
death benefits than we had projected.
We may be required to accelerate the amortization of
deferred acquisition costs and the present value of
future profits, which would increase our expenses and
reduce profitability.
Deferred acquisition costs ("DAC") represent 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 and
investment contracts. 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. Under U.S. GAAP, DAC is subsequently amortized
to income, over the lives of the underlying contracts, in
relation to the anticipated recognition of premiums or
gross profits. In addition, when we acquire a block of
insurance policies or investment contracts, we assign a
portion of the purchase price to the right to receive
future net cash flows from existing insurance and
investment contracts and policies. 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. We amortize
the value of this intangible asset in a manner similar to
the amortization of DAC.
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Our amortization of DAC and PVFP generally depends upon
anticipated profits from investments, surrender and other
policy and contract charges, mortality, morbidity and
maintenance expense margins. Unfavorable experience with
regard to expected expenses, investment returns,
mortality, morbidity, withdrawals or lapses may cause us
to increase the amortization of DAC or PVFP, or both, or
to record a charge to increase benefit reserves.
We regularly review DAC and PVFP to determine if they are
recoverable from future income. If these costs are not
recoverable, they are charged to expenses in the
financial period in which we make this determination. For
example, if we determine that we are unable to recover
DAC from profits over the life of a block of insurance
policies or annuity contracts, or if withdrawals or
surrender charges associated with early withdrawals do
not fully offset the unamortized acquisition costs
related to those policies or annuities, we would be
required to recognize the additional DAC amortization as
a current-period expense.
Medical advances, such as genetic research and diagnostic
imaging, and related legislation could adversely affect
the financial performance of our life insurance and
annuities businesses.
Genetic research includes procedures focused on
identifying key genes that render an individual
predisposed to specific diseases, such as particular
types of cancer and other diseases. Other medical
advances, such as diagnostic imaging technologies, also
may be used to detect the early onset of diseases such as
cancer and cardiovascular disease. We believe that if
individuals learn through medical advances that they are
predisposed to particular conditions that may reduce life
longevity, they will be more likely to purchase our life
policies or not to permit existing polices to lapse. In
contrast, if individuals learn that they lack the genetic
predisposition to develop the conditions that reduce
longevity, they will be less likely to purchase our life
insurance products but more likely to purchase certain
annuity products. In addition, such individuals that are
existing policyholders will be more likely to permit
their policies to lapse.
If we were to gain access to the same genetic or medical
information as our prospective policyholders and
contractholders, then we would be able to take this
information into account in pricing our life insurance
policies and annuity contracts. However, there are a
number of regulatory proposals that would make genetic
and other medical information confidential and
unavailable to insurance companies. The U.S. Senate has
approved a bill that would prohibit group health plans,
health insurers and employers from making enrollment
decisions or adjusting premiums on the basis of genetic
testing information. This legislation is now pending
before a committee at the House of Representatives.
Legislators in certain states also have introduced
similar legislation. If these regulatory proposals were
enacted, prospective
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policyholders and contractholders would only disclose
this information if they chose to do so voluntarily.
These factors could lead us to reduce sales of products
affected by these regulatory proposals and could result
in a deterioration of the risk profile of our portfolio,
which could lead to payments to our policyholders and
contractholders that are higher than we anticipated.
Medical advances also could lead to new forms of
preventative care. Preventative care could extend the
life and improve the overall health of individuals. If
this were to occur, the duration of payments under
certain of our annuity products likely would increase,
thereby reducing net earnings in that business.
We may face losses if there are significant deviations
from our assumptions regarding the future persistency of
our insurance policies and annuity contracts.
The prices and expected future profitability of our
insurance and deferred annuity products are based in part
upon expected patterns of premiums, expenses and
benefits, using a number of assumptions, including those
related to persistency, which is the probability that a
policy or contract will remain in-force from one period
to the next. The effect of persistency on profitability
varies for different products. For most of our life
insurance and deferred annuity products, actual
persistency that is lower than our persistency
assumptions could have an adverse impact on
profitability, especially in the early years of a policy
or contract primarily because we would be required to
accelerate the amortization of expenses we deferred in
connection with the acquisition of the policy or
contract. For our life insurance policies, increased
persistency that is the result of the sale of policies to
third parties that continue to make premium payments on
policies that would otherwise have lapsed, also known as
life settlements, could have an adverse impact on
profitability because of the higher claims rate
associated with settled policies. For the years ended
December 31, 2005, 2004 and 2003, persistency in fixed
annuity businesses has been slightly higher than we
assumed, and persistency in our variable annuity and
certain health insurance products has been slightly lower
than we had assumed.
Because our assumptions regarding persistency experience
are inherently uncertain, reserves for future policy
benefits and claims may prove to be inadequate if actual
persistency experience is different from those
assumptions. Although some of our products permit us to
increase premiums during the life of the policy or
contract, we cannot guarantee that these increases would
be sufficient to maintain profitability. Moreover, many
of our products do not permit us to increase premiums or
limit those increases during the life of the policy or
contract. Significant deviations in experience from
pricing expectations regarding persistency could have an
adverse effect on the profitability of our products.
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Changes in tax laws could make some of our products less
attractive to consumers.
Changes in tax laws could make some of our products less
attractive to consumers. For example, in May 2003, U.S.
President George W. Bush signed into law the Jobs and
Growth Tax Relief Reconciliation Act of 2003, which
reduced the federal income tax that investors are
required to pay on long-term capital gains and on some
dividends paid on stock. This reduction may provide an
incentive for some of our customers and potential
customers to shift assets into mutual funds and away from
products, including annuities, designed to defer taxes
payable on investment returns. Because the income taxes
payable on long-term capital gains and some dividends
paid on stock have been reduced, investors may decide
that the tax-deferral benefits of annuity contracts are
less advantageous than the potential after-tax income
benefits of mutual funds or other investment products
that provide dividends and long-term capital gains. A
shift away from annuity contracts and other tax-deferred
products would reduce our income from sales of these
products, as well as the assets upon which we earn
investment income.
The President's Advisory Panel on Federal Tax Reform made
two alternative proposals in 2005 that, while not
currently reflected in pending legislation, would create
uncertainty for, and without further refinement would
adversely affect, the attractiveness of some of our
products that offer tax advantages under current law. We
cannot predict whether these proposals or any other
legislation will be enacted, what the specific terms of
any such legislation will be or how, if at all, this
legislation or any other legislation could have an
adverse effect on our financial condition and results of
operations.
Changes in U.S. federal and state securities laws may
affect our operations and our profitability.
U.S. federal and state securities laws apply to
investment products that are also "securities," including
variable annuities and variable life insurance policies.
As a result, some of the policies and contracts we offer
are subject to regulation under these federal and state
securities laws. Most of our variable annuity separate
accounts and all of our variable life separate accounts
are registered as investment companies under the
Investment Company Act of 1940. Some variable annuity
contracts and variable life insurance policies issued by
us are registered under the Securities Act of 1933.
Securities laws and regulations are primarily intended to
ensure the integrity of the financial markets and to
protect investors in the securities markets or investment
advisory or brokerage clients. These laws and regulations
generally grant supervisory agencies broad administrative
powers, including the power to limit or restrict the
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conduct of business for failure to comply with those laws
and regulations. Changes to these laws or regulations
that restrict the conduct of our business could have an
adverse effect on our financial condition and results of
operations.
The terms of our arrangements with GE may be more
favorable than we would be able to obtain from an
unaffiliated third-party. We may be unable to replace the
services GE provides us in a timely manner or on
comparable terms.
Genworth and GE entered into a transition services
agreement and other agreements in connection with the
IPO. Pursuant to these arrangements, GE and its
affiliates agreed to provide us with a variety of
services, including investment management, treasury,
payroll and other financial services, human resources and
employee benefit services, legal services, information
systems and network services, and procurement and
sourcing support.
Genworth negotiated these arrangements with GE in the
context of a parent-subsidiary relationship. Although GE
is contractually obligated to provide us with services
during the terms of these arrangements, we cannot assure
you that these services will be sustained at the same
level after the expiration of those arrangements, or that
we will be able to replace these services in a timely
manner or on comparable terms. Other agreements with GE
also govern the relationship between us and GE and
provide for the allocation of employee benefit, tax and
other liabilities and obligations attributable or related
to periods or events prior to Genworth's IPO. They also
contain terms and provisions that may be more favorable
than terms and provisions we might have obtained in
arm's-length negotiations with unaffiliated
third-parties. Genworth has negotiated and is continuing
to negotiate its own arrangements with third-party
providers for services, and these arrangements could
result in increased costs.
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Unresolved Staff Comments
We have no unresolved staff comments from the SEC.
103
Properties
We conduct our business from various facilities, all of
which are leased except for one building in Richmond,
Virginia, which we own.
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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, product disclosure, administration,
additional premium charges for premiums paid on a
periodic basis, denial or delay of benefits, charging
excessive or impermissible fees on products, recommending
unsuitable products to customers and breaching fiduciary
or other duties to customers. In our investment-related
operations, we are subject to litigation involving
commercial disputes with counterparties. 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. In this regard, in May 2005, we
received a subpoena from the Northeast Regional Office of
the SEC, requiring the production of documents related to
"certain loss mitigation insurance products," such as
finite reinsurance. We responded to the SEC's subpoena in
June and July 2005. Additionally, in May and June 2005,
we received information requests from the State of
Delaware Department of Insurance and the State of
Connecticut Insurance Department on the same general
subject, to which we responded. In 2005, GE received a
subpoena from the United States Attorney's Office for the
Southern District of New York, also on the same general
subject. In the subpoena, GE is defined as including,
among other things, its subsidiaries and affiliates. We
cooperated with GE in connection with GE's response to
the subpoena.
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
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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.
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Submission of Matters to a Vote of Security Holders
Information omitted in accordance with General
Instruction I (2)(c).
107
Market For the Registrant's Common Equity, Related Shareholder Matters and
Issuer Purchases of Equity Securities
At December 31, 2005, all of our common stock, our sole
class of common equity on the date hereof, is owned by
GLIC. 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.
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Selected Financial Data
The following table sets forth selected financial
information. The selected financial information as of
December 31, 2005 and 2004, and for the years ended
December 31, 2005, 2004 and 2003 has been derived from
our financial statements, which have been audited by KPMG
LLP and are included in our Annual Report. You should
read this information in conjunction with the information
under "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations," our
financial statements, the related notes and the
accompanying independent registered public accounting
firm's report (which refers to a change in accounting for
certain nontraditional long-duration contracts and for
separate accounts in 2004), which are included elsewhere
in our Annual Report.
Years Ended December 31,
--------------------------------------
(Dollar amounts in millions) 2005 2004/1/ 2003 2002 2001
- ------------------------------------------------------------------------------------
Statement of Earnings Information
- ------------------------------------------------------------------------------------
Revenues $705.2 $699.9 $940.8 $1,045.4 $1,134.4
Income before cumulative effect of change in
accounting principle 29.5 198.7 19.7 115.8 129.6
- ------------------------------------------------------------------------------------
109
As of December 31,
--------------------------------------------------
(Dollar amounts in millions) 2005 2004/1/ 2003 2002 2001
- -----------------------------------------------------------------------------------
Statement of Financial Position
Information
- -----------------------------------------------------------------------------------
Total investments $ 6,890.9 $ 8,850.6 $11,329.2 $11,591.0 $11,779.1
Separate account assets 8,777.3 8,636.7 8,034.9 7,182.8 8,994.3
Reinsurance recoverable 2,307.4 2,753.8 160.7 174.4 151.1
All other assets 906.4 596.8 1,337.8 1,332.8 1,538.2
--------- --------- --------- --------- ---------
Total assets $18,882.0 $20,837.9 $20,862.6 $20,281.0 $22,462.7
--------- --------- --------- --------- ---------
Policyholder liabilities $ 8,490.7 $ 9,929.9 $10,431.6 $11,220.0 $11,255.7
Separate account liabilities 8,777.3 8,636.7 8,034.9 7,182.8 8,994.3
All other liabilities 516.2 681.3 574.1 174.0 630.5
--------- --------- --------- --------- ---------
Total liabilities $17,784.2 $19,247.9 $19,040.6 $18,576.8 $20,880.5
--------- --------- --------- --------- ---------
Accumulated other comprehensive
income $ 13.6 $ 75.3 $ 88.1 $ (9.7) $ (25.5)
Total stockholders' equity $ 1,097.8 $ 1,590.0 $ 1,822.0 $ 1,704.2 $ 1,582.2
U.S. Statutory Information/2/
Statutory capital and surplus $ 476.0 $ 817.2 $ 562.4 $ 550.7 $ 584.4
Asset valuation reserve 65.3 86.8 62.9 82.0 127.8
- -----------------------------------------------------------------------------------
/1/ We entered into several significant reinsurance
transactions with UFLIC, an indirect, wholly-owned
subsidiary of GE. As part of these transactions,
effective as of January 1, 2004, we ceded to UFLIC
policy obligations under our structured settlement
contracts, which had reserves of $0.3 billion, and our
variable annuity contracts which had general account
reserves of $2.5 billion and separate account reserves
of $7.6 billion, each as of December 31, 2003. These
contracts represent substantially all of our contracts
that were in force, excluding the Retirement Answer
product that was not reinsured, as of December 31, 2003
for these products. In the aggregate, these blocks of
business did not meet our target return thresholds, and
although we remain liable under these contracts and
policies as the ceding insurer, the reinsurance
transactions have the effect of transferring the
financial results of the reinsured blocks to UFLIC.
/2/ We derived the U.S Statutory Information from our
Annual Statements that were filed with the Commonwealth
of Virginia, Bureau of Insurance and prepared in
accordance with statutory accounting practices
prescribed or permitted by the Commonwealth of
Virginia, Bureau of Insurance. These statutory
accounting practices vary in certain material respects
from U.S. GAAP.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis of our consolidated
financial condition and results of operations should be
read in conjunction with our audited financial statements
and related notes included herein.
CAUTIONARY NOTE
REGARDING
FORWARD-LOOKING
STATEMENTS
This Annual Report contains certain "forward-looking
statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements
may be 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 items
identified above under "Item 1A -- Risk Factors".
We undertake no obligation to publicly update or review
any forward-looking statement, whether as a result of new
information, future developments or otherwise.
OVERVIEW
OUR BUSINESS 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 life insurance, investment and retirement
products and mortgage insurance. Our product offerings
are divided along two segments of consumer needs:
(1) Retirement Income and Investments and (2) Protection.
. Retirement Income and Investments. 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 GICs and funding agreements as
investment products to institutional buyers.
. Protection. 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.
111
We also have a Corporate and Other segment, which
consists primarily of net realized investment gains
(losses), unallocated corporate income, expenses and
income taxes.
REVENUES AND EXPENSES Our revenues consist primarily of the following:
. Retirement Income and Investments. The revenues in
our Retirement Income and Investments segment
consist primarily of:
. net investment income allocated to this segment; and
. policy fees and other income, including surrender
charges and mortality and expense charges.
. Protection. The revenues in our Protection segment
consist primarily of:
. net premiums earned on individual life and Medicare
supplement insurance policies;
. net investment income allocated to this segment's
lines of business; and
. policy fees and other income, including fees for
mortality and surrender charges primarily from
universal life insurance policies, and other
administrative charges.
. Corporate and Other. The revenues in our Corporate
and Other segment consist primarily of:
. unallocated net investment income; and
. net realized investment gains (losses).
We allocate net investment income from our Corporate and
Other segment to our Retirement Income and Investments
and Protection segments using an approach based
principally upon the investment portfolio established to
support each of those segments' products and targeted
capital levels.
All net realized investment gains (losses) are reflected
in the Corporate and Other segment and are not reflected
in the results of any of our other segments.
Our expenses consist primarily of the following:
. benefits provided to policyholders and
contractholders and changes in reserves;
. interest credited on general account balances;
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. acquisition and operating expenses, including
commissions, marketing expenses, policy and contract
servicing costs, overhead and other general expenses
that are not capitalized (shown net of deferrals);
. amortization of deferred policy acquisition costs
and other intangible assets; and
. income taxes.
We allocate corporate expenses to each of our operating
segments based on the amount of capital allocated to that
segment.
BUSINESS TRENDS In recent years, our business has been, and we expect
AND CONDITIONS will continue to be, influenced by a number of
industry-wide and product-specific trends and conditions.
For a discussion of the market and economic environment,
see "Item 1 -- Business -- Market Environment and
Opportunities."
Interest rate fluctuations. Fluctuations in market
General conditions interest rates and the related yield curve may have a
and trends significant effect on our sales of insurance and
affecting investment products and our margins on these products.
our businesses 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 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. In addition, the recent flattening of the
yield curve reduces the attractiveness of certain fixed
annuity products relative to other short-term investment
alternatives. A gradual increase in longer term interest
rates generally will 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.
Volatile equity markets. Equity market volatility may
discourage purchases of separate account products, such
as variable annuities and variable life insurance, 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
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turn, affects our earnings from fee-based products. After
several years of declines, equity markets increased in
2003 and 2004 and stabilized in 2005. We expect that
increases or relative stability in equity markets, along
with certain guaranteed product options we offer, could
have a favorable impact on our sales of variable products
and our earnings from those 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 and structured
settlement business. 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.
Credit default risk. As a result of the economic
downturn in 2000 through 2002 and some high-profile
corporate bankruptcies and scandals, the number of
companies defaulting on their debt obligations increased
dramatically in 2001 and 2002. These defaults and other
declines in the value of some of our investments resulted
in impairment charges. Credit defaults have decreased in
recent years as the economy has improved. Charges
associated with impairments of investments were $12.2
million, $0.9 million and $26.4 million for the years
ended December 31, 2005, 2004 and 2003, respectively. A
weakening in the economic recovery could lead to
increased credit defaults.
Investment portfolio. The yield on our investment
portfolio is affected by the practice, prior to
Genworth's separation from GE, of realizing investment
gains through the sale of appreciated securities and
other assets during a period of historically low interest
rates. This strategy had been pursued to offset
impairments and losses in our investment portfolio, fund
consolidations and restructurings in our business and
provide current income, which resulted in, gross realized
gains of $80.2 million for the year ended December 31,
2003. Our current investment strategy is to optimize
investment income without relying on realized investment
gains. As a result, our gross realized gains decreased to
$10.7 million and $12.0 million for the years ended
December 31, 2004 and 2005, respectively. Although the
interest rate environment since Genworth's IPO has been
challenging, the yield on our investment portfolio has
stabilized, with the potential for yield increases in a
rising interest-rate environment. Our overall investment
yield declined from 4.6% for the year ended December 31,
2003 to 4.5% for the year ended December 31, 2004 and
increased to 5.3% for the year ended December 31, 2005.
We seek to improve our investment yield by continuously
evaluating our asset class mix, pursuing additional
investment classes and accepting additional credit risk
with higher returns when we believe that it is prudent to
do so.
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Annuities. Retirement Income and Investments segment
Developments affectingresults are affected by investment performance, net
our product lines interest spreads, equity market fluctuations and new
product sales. In addition, our competitive position
within many of our distribution channels depends
significantly upon product features, including current
and minimum crediting rates on spread-based products
relative to our competitors, surrender charge periods in
fixed annuities as well as guaranteed features we offer
in variable products. We continually evaluate our
competitive position based upon each of those features,
and we make adjustments as appropriate to meet our target
return thresholds. Total new deposits in variable
annuities, excluding our Income Distribution Series,
decreased by 25.6% from $728.3 million for the year ended
December 31, 2004 to $541.5 million for the year ended
December 31, 2005. This decline is primarily due to a
decrease in additional deposits on a block of reinsured
business, as well as a market shift to variable annuity
products with certain guaranteed benefit features that we
chose not to offer because of their risk profile.
We have continued to focus on our Income Distribution
Series of variable annuity products and riders in
response to customers who desire guaranteed minimum
income streams with equity market upside at the end of
the contribution and accumulation period. Our Income
Distribution Series of variable annuity products and
riders provides the contractholder with a guaranteed
minimum income stream that they cannot outlive, along
with an opportunity to participate in market
appreciation, but reduces some of the risks to insurers
that generally accompany traditional products with
guaranteed minimum income benefits. We are targeting
people who are focused on building a personal portable
retirement plan or are moving from the accumulation to
the distribution phase of their retirement planning.
Sales of our Income Distribution Series increased by
81.8% from $258.0 million for the year ended December 31,
2004 to $469.0 million for the year ended December 31,
2005.
CRITICAL ACCOUNTING The accounting policies discussed in this section are
POLICIES 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.
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 using market inputs regarding credit
quality, liquidity and other factors that affect
estimated values. We regularly review investment
securities for impairment in
115
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 maturities, whether the issuer is in compliance
with terms and covenants of the security. 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 Incorporated
("GEAM"), an affiliate of GE, and other third-party
managers, as required. We actively perform comprehensive
market research, monitor market conditions and segment
our investments by credit risk in order to minimize
impairment risks. See note 2 in our financial statements
under "Item 8 -- Financial Statements and Supplementary
Data."
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 and investment contracts.
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 policies and contracts, in relation to the
anticipated recognition of premiums or gross profits.
The amortization of DAC for traditional long-duration
insurance products 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 5-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
116
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 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.
Valuation of goodwill. Goodwill resulting from
acquisitions is tested for impairment at least annually
using a fair value approach, which requires the use of
estimates and judgment. To the extent the carrying amount
of goodwill exceeds its fair value, an impairment charge
to income would be recorded. Based on the results of our
testing, we recorded a goodwill impairment charge of
$57.5 million and $59.8 million in 2005 and 2004,
respectively. As of December 31, 2005, there is no
goodwill balance remaining as a result of these charges.
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 the ultimate amounts that
we will pay for actual claims or the timing of those
payments.
117
Insurance reserves differ for long- and short-duration
insurance policies and annuity contracts. Measurement of
long-duration insurance reserves 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.
Contingent liabilities. A liability is contingent if the
amount is not presently known, but may become known in
the future as a result of the occurrence of some
uncertain future event. We estimate our contingent
liabilities based on management's estimates about the
probability of outcomes and their ability to estimate the
range of exposure. Accounting standards require that a
liability be recorded if management determines that it is
probable that a loss has occurred and the loss can be
reasonably estimated. In addition, it must be probable
that the loss will be confirmed by some future event. As
part of the estimation process, management is required to
make assumptions about matters that are by their nature
highly uncertain.
The assessment of contingent liabilities, including legal
contingencies and income tax liabilities, involves the
use of critical estimates, assumptions and judgments.
Management's estimates are based on their belief that
future events will validate the current assumptions
regarding the ultimate outcome of these exposures.
However, there can be no assurance that future events,
such as court decisions or Internal Revenue Service
positions, will not differ from management's assessments.
Whenever practicable, management consults with third
party experts (attorneys, accountants, claim
administrators, etc.) to assist with the gathering and
evaluation of information related to contingent
liabilities. Based on internally and/or externally
prepared evaluations, management makes a determination
whether the potential exposure requires accrual in the
financial statements.
118
RESULTS OF OPERATIONS
The following table sets forth our results of operations.
Years ended December 31,
-----------------------
(Dollar amounts in millions) 2005 2004 2003
- -------------------------------------------------------------------------------------------
Revenues:
- -------------------------------------------------------------------------------------------
Net investment income $411.7 $ 421.0 $538.0
Net realized investment gains (losses) (4.5) 5.7 3.9
Premiums 103.5 96.8 104.0
Cost of insurance 144.7 142.2 153.1
Variable product fees 21.8 9.4 106.3
Other income 28.0 24.8 35.5
------ ------- ------
Total revenues 705.2 699.9 940.8
Benefits and expenses:
- -------------------------------------------------------------------------------------------
Interest credited 269.1 291.2 410.6
Benefits and other changes in policy reserves 190.4 182.8 245.7
Acquisition and operating expenses, net of deferrals 89.9 63.2 149.0
Amortization of deferred acquisition costs and intangibles 101.0 107.3 118.9
------ ------- ------
Total benefits and expenses 650.4 644.5 924.2
Income before income taxes and cumulative effect of change in
accounting principle 54.8 55.4 16.6
Provision (benefit) for income taxes 25.3 (143.3) (3.1)
------ ------- ------
Income before cumulative effect of change in accounting principle $ 29.5 $ 198.7 $ 19.7
Cumulative effect of change in accounting principle, net of tax of
$0.4 million -- 0.7 --
------ ------- ------
Net income $ 29.5 $ 199.4 $ 19.7
- -------------------------------------------------------------------------------------------
2005 vs. 2004
Net income. Net income in 2005 was $29.5 million, a
$169.9 million decrease from 2004. The decrease is
primarily due to an increase in taxes of $168.6 million.
In 2004, we entered into reinsurance transactions, in
which we ceded to UFLIC substantially all of our in-force
blocks of variable annuities and structured settlements.
The reinsurance transactions with UFLIC were completed
and accounted for at book value and were 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.
Net investment income. Net investment income decreased
$9.3 million, or 2.2%, to $411.7 million in 2005 from
$421.0 million in 2004. The decrease was primarily a
result of a $1,722.9 million, or 18.3%, decline in
average invested assets due to the decline in GICs and
funding agreements as a result of a planned reduction in
these products. This decrease was offset by an increase
in yields on floating rate investments, an adjustment to
our allowance for commercial mortgage loan losses from a
change in the process for estimating credit losses and
higher derivative income.
119
Net realized investment gains (losses). Net realized
investment gains (losses) consist of gross realized
investment gains and gross realized investment (losses),
including charges related to impairments. Net realized
investment losses were $(4.5) million in 2005 compared to
net realized gains of $5.7 million in 2004. For 2005,
gross realized gains and (losses) were $12.0 million and
$(16.5) million, respectively. Realized losses for 2005
included $12.2 million of impairments that were primarily
attributable to fixed-maturities and limited partnerships
($11.2 million and $1.0 million, respectively). The fixed
maturity impairments primarily related to securities
issued by companies in transportation, retail and timber
industries ($5.4 million, $5.1 million and $0.7 million,
respectively). 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-maturities. The fixed maturity impairment
related to a security issued by a company in the
transportation industry.
Premiums. Premiums increased $6.7 million, or 6.9% to
$103.5 million in 2005 from $96.8 million in 2004. The
increase was primarily due to our Medicare supplement
product. Medicare supplement premiums increased $9.1
million in 2005 due to an adjustment to due premiums in
2004, growth in new business and in-force premium rate
actions. There was also an increase of $1.9 million
related to an adjustment in ceded premiums. These
increases were partially offset by a decline of $3.7
million in premiums from our runoff blocks of life
insurance policies.
Cost of insurance. Cost of insurance increased $2.5
million, or 1.8% to $144.7 million in 2005 from $142.2
million in 2004. The increase was primarily attributable
to an increase in fees for rider benefits on new variable
annuity business.
Variable product fees. Variable product fees increased
$12.4 million to $21.8 million in 2005 from $9.4 million
in 2004. The increase was primarily attributable to
growth in our assets under management of variable annuity
business.
Other income. Other income increased $3.2 million, or
12.9%, to $28.0 million in 2005 from $24.8 million in
2004. The increase was primarily the result of an
increase in surrender and other fees attributable to the
growth in our in-force block of variable annuity business.
Interest credited. Interest credited decreased $22.1
million, or 7.6%, to $269.1 million for 2005 from $291.2
million for 2004. This decrease was primarily due to a
$19.9 million decrease attributable to our GICs and
funding agreements as a result of a planned reduction in
these products and a $6.3 million decline attributable to
the runoff of our universal life business. These
decreases were partially offset by a $6.5 million
increase in our floating rate funding agreement backed
notes.
120
Benefits and other changes in policy reserves. Benefits
and other changes in policy reserves increased $7.6
million, or 4.2%, to $190.4 million in 2005 from $182.8
million in 2004. The increase was primarily attributable
to higher levels of in-force annuities.
Acquisition and operating expenses, net of
deferrals. Acquisition and operating expenses, net of
deferrals, increased $26.7 million, or 42.2%, to $89.9
million in 2005 from $63.2 million in 2004. This increase
was due to a $12.4 million increase in legal expenses
primarily attributable to settlements reached during the
year. Additionally, there was an increase of $14.7
million related to our annuity products as a result of
growth in our in-force block of variable annuity business.
Amortization of deferred acquisition costs and
intangibles. Amortization of deferred acquisition costs
and intangibles decreased $6.3 million, or 5.9%, to
$101.0 million in 2005 from $107.3 million in 2004. The
decrease is primarily the result of a decrease of $10.3
million related to our runoff blocks of business offset
by an increase in amortization of deferred acquisition
costs of $3.7 million primarily as a result of growth in
our variable annuity business. There was a goodwill
impairment charge of $57.5 million and $59.8 million
recorded in 2005 and 2004, respectively.
Provision (benefit) for income taxes. Provision for
income taxes increased $168.6 million to a provision of
$25.3 million for the year ended December 31, 2005 from a
benefit of $(143.3) million for the year ended
December 31, 2004. The increase in the tax provision was
primarily attributable to a tax benefit associated with
the reinsurance transaction with UFLIC in 2004 partially
offset by favorable current year examination developments
benefiting the year ended December 31, 2005.
2004 vs. 2003
Net income. 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 UFLIC, an affiliate,
substantially all of our in-force blocks of variable
annuities and structured settlements. The reinsurance
transactions with UFLIC were completed and accounted for
at book value and were 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 $62.7 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.
121
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 GICs and
funding agreement liabilities as a result of a planned
reduction in these products.
Net realized investment gains. Net realized investment
gains consist of gross realized investment gains and
gross realized investment (losses), including charges
related to impairments. Net realized investment gains
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.
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 GICs
122
and funding agreements as a result of a planned reduction
in these products. This decrease was due to a combination
of a decrease in future annuity and contract liabilities
and reduced average 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 $16.0 million reserve
strengthening in 2003 related to whole life products.
Acquisition and operating expenses, net of
deferrals. Acquisition and operating 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 $30.5
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 were 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.
Cumulative effect of change in accounting principle. 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. The cumulative effect of change in
accounting principle related to adopting SOP 03-1 was
$0.7 million, net of taxes, for the change in reserves,
less additional amortization of deferred acquisition
costs, on variable annuity contracts with guaranteed
minimum death benefits.
123
INVESTMENTS
INVESTMENT RESULTS The following table sets forth information about our
investment income, excluding realized gains and losses,
for the components of our investment portfolio for the
periods indicated:
For the years ended December 31,
------------------------------------------
2005 2004 2003
- --------------------------------------------------------------------------------------------
(Dollar amounts in millions) Yield Amount Yield Amount Yield Amount
- --------------------------------------------------------------------------------------------
Fixed maturities -- taxable 5.5% $331.3 4.4% $345.2 4.5% $458.6
Fixed maturities -- non-taxable 22.3% 0.1 7.6% 0.1 2.8% 0.1
Commercial mortgage loans 6.7% 75.3 6.3% 77.1 7.2% 81.8
Equity securities 4.2% 0.8 0.5% 0.1 2.2% 0.9
Other investments 2.2% 3.4 (0.8)% (1.2) (2.4)% (2.9)
Policy loans 6.6% 10.1 5.2% 7.5 8.2% 10.8
------ ------ ------
Gross investment income before expenses and fees 5.5% 421.0 4.5% 428.8 4.7% 549.3
Expenses and fees (9.3) (7.8) (11.3)
------ ------ ------
Net investment income 5.3% $411.7 4.5% $421.0 4.6% $538.0
- --------------------------------------------------------------------------------------------
Yields are based on average carrying values except for
fixed maturities, equity securities and securities
lending activity. Yields for fixed maturities and equity
securities are based on amortized cost and cost,
respectively. Yields for securities lending activity,
which is included in other investments, are calculated
net of the corresponding securities lending liability.
The increase in the investment yield in 2005 was
primarily attributable to an increase in yields on
floating rate investments, an adjustment to our allowance
for commercial mortgage loan losses from a change in the
process for estimating credit losses and higher
derivative income. The decline in investment yield in
2004 was primarily attributable to purchases of assets in
an interest rate environment where current market yields
are lower than the existing portfolio yields.
The following table sets forth gross realized investment
gains and losses resulting from the sales and impairments
of investment securities classified as available-for-sale
were as follows for the years ended December 31:
(Dollar amounts in millions) 2005 2004 2003
-------------------------------------------------------------------
Gross realized investment:
Gains on sale $ 12.0 $10.7 $ 80.2
Losses on sale (4.3) (4.1) (49.9)
Impairment losses (12.2) (0.9) (26.4)
------ ----- ------
Net realized investments gains (losses) $ (4.5) $ 5.7 $ 3.9
-------------------------------------------------------------------
For a discussion of the change in net realized investment
gains (losses), see the comparison for this line item
under "-- Results of Operations".
124
IMPAIRMENTS OF We regularly review each investment security for
INVESTMENT SECURITIES 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 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 GEAM
and other third-party asset managers, as required.
For fixed maturities, we recognize an impairment charge
to earnings in the period in which we determine that we
do not expect either to collect principal and interest in
accordance with the contractual terms of the instruments
or to recover based on underlying collateral values,
considering events such as a 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.
For the year ended December 31, 2005, 2004 and 2003, we
recognized impairment losses of $12.2 million, $0.9
million and $26.4 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 aggregate fair value of
securities sold at a loss during the year ended December
31, 2005 was $188.5 million, which was approximately
98.3% of book value.
125
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, as of December 31,
2005:
Less Than 12 Months 12 Months or More
------------------------------------ ------------------------------------
Gross Gross
Estimated Fair Unrealized # of Estimated Fair Unrealized # of
(Dollar amounts in millions) Value Losses Securities Value Losses Securities
- --------------------------------- - - - -
Description of Securities
- ---------------------------------------------------------------------------------------------------------
Fixed maturities:
U.S. government and
agency $ 36.9 $ (0.2) 7 $ 13.8 $ (0.3) 3
Government -- non U.S. 12.6 (0.2) 11 -- -- --
U.S. corporate 782.6 (13.7) 164 310.0 (9.7) 64
Corporate -- non U.S. 155.5 (2.4) 35 83.7 (3.2) 13
Asset backed 538.7 (7.6) 44 109.2 (1.4) 20
Mortgage backed 538.1 (8.9) 101 210.8 (6.2) 50
-------- ------ --- ------ ------ ---
Total temporarily impaired
securities $2,064.4 $(33.0) 362 $727.5 $(20.8) 150
% Below cost -- fixed
maturities:
(less than)20% Below cost $2,064.4 $(33.0) 362 $722.6 $(18.3) 147
20-50% Below cost -- -- -- 4.9 (2.5) 3
(greater than)50% Below cost -- -- -- -- -- --
-------- ------ --- ------ ------ ---
Total fixed maturities $2,064.4 $(33.0) 362 $727.5 $(20.8) 150
Investment grade $1,988.2 $(31.0) 337 $714.3 $(18.0) 140
Below investment grade 76.2 (2.0) 25 13.2 (2.8) 10
Not Rated -- -- -- -- -- --
-------- ------ --- ------ ------ ---
Total temporarily impaired
securities $2,064.4 $(33.0) 362 $727.5 $(20.8) 150
- ---------------------------------------------------------------------------------------------------------
The investment securities in an unrealized loss position
as of December 31, 2005 consist of 512 securities
accounting for unrealized losses of $53.8 million. Of
these unrealized losses, 91.1% is investment grade (rated
AAA through BBB-) and 95.4% is less than 20% below cost.
The amount of the unrealized loss on these securities is
primarily attributable to increases in interest rates and
changes in credit spreads.
For the investment securities in an unrealized loss
position as of December 31, 2005, three securities are
below cost 20% or more and below investment grade (rated
BB+ and below) for twelve months or more accounting for
unrealized losses of $2.5 million. These securities
consist of two issuers in the airline and automotive
industries and are current on all terms. All airline
securities are collateralized by commercial jet aircraft
associated with several domestic airlines. We believe
these airline security holdings are in a temporary loss
position as a result of ongoing negative market reaction
to difficulties in the commercial airline industry. The
unrealized loss on the automotive investments was
primarily caused by legacy issues and declines in market
share. The
126
automotive issuer continues to maintain significant
liquidity relative to their maturities and we expect to
collect full principal and interest.
Because we have the ability and intent to hold these
investment securities until the recovery of the fair
value up to the cost of the investments, which may be
maturity, we do not consider these investments to be
other-than-temporarily impaired at December 31, 2005.
CAPITAL RESOURCES
CONSOLIDATED Total Investments. Total investments decreased $1,959.7
BALANCE SHEET million, or 22.1%, to $6,890.9 million at December 31,
2005 from $8,850.6 million at December 31, 2004. The
decrease was primarily attributable to a decline in
investments supporting GICs and funding agreement
liabilities. GICs and funding agreement liabilities
decreased by $944.6 million, which resulted from
scheduled maturities and a planned reduction in these
products. Also contributing to the decrease in total
investments was a $406.9 million decline in collateral
held in other invested assets for securities lending.
Investment securities comprise mainly investment grade
debt securities. Fixed maturities and equity securities
were $5,300.6 million, including gross unrealized gains
and (losses) of $89.4 million and $(53.8) million,
respectively at December 31, 2005 ($7,028.0 million,
including gross unrealized gains and losses of $192.6
million and $(41.2) million, respectively at December 31,
2004). Market value for these purposes is defined by
relevant accounting standards and should not be viewed as
a forecast of future gains or losses.
Investment securities transferred in the secured
borrowing that closed on August 19, 2005 with an
affiliate SPE (discussed in note 2 of the financial
statements) were recorded in other invested assets and
the liability equal to the proceeds received upon
transfer has been included in other liabilities. The fair
value of the investment securities held and included in
other invested assets was $332.0 million at December 31,
2005.
In 2005, we paid a common stock dividend of $440.3
million consisting of securities to our stockholder. In
2004, we paid a dividend to our stockholder consisting of
securities in the amount of $379.1 million.
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, 2005, we held
$8,777.3 million of separate
127
account assets. The increase of $140.6 million, or 1.6%,
from $8,636.7 million at December 31, 2004 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 $1,403.1 million, to $8,201.5
million at December 31, 2005 from $9,604.6 million at
December 31, 2004. The decrease was primarily
attributable to a $944.6 million decline in GICs and
funding agreements, which resulted from scheduled
maturities and a planned reduction in these products. The
decrease was also attributable to a $358.5 million
decline in future annuity and contract benefits related
to the general account portion of a reinsured block of
variable annuity products, a $71.2 million decrease
attributable to a runoff block of deferred annuities and
a $25.9 million decrease attributable to runoff of our
life business.
Stockholders' Equity. Stockholders' equity decreased
$492.2 million to $1,097.8 million at December 31, 2005
from $1,590.0 million at December 31, 2004. The decrease
was primarily attributable to the $440.3 million of
dividends paid to the common stockholder and $9.6 million
of dividends paid to the preferred stockholder. The
decrease was also attributable to a decline in net
unrealized gains on invested securities of $61.7 million,
which was partially offset by current year net income of
$29.5 million.
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
Corporation, of $500.0 million to provide liquidity to
meet normal variation in cash requirements.
The following table sets forth our condensed cash flows
for the periods indicated:
Years ended December 31,
---------------------------
(Dollar amounts in millions) 2005 2004 2003
---------------------------------------------------------------
Net cash from operating activities $ 177.9 $ 421.5 $ 492.9
Net cash from investing activities 1,210.6 359.6 478.7
Net cash from financing activities (1,070.9) (767.1) (959.2)
---------------------------------------------------------------
Cash flows from operating activities are affected by the
timing of premiums and fees received and investment
income and expenses paid. Principal sources of cash
include
128
sales of our products and services. The decrease in cash
flows from operating activities in 2005 was primarily the
result of the timing of cash settlements of other assets
and liabilities.
The increase in cash from investing activities for the
year ended December 31, 2005 was primarily the result of
a reduction in purchases of investments primarily driven
by a decline in investments needed to support GICs and
funding agreements.
The net cash from financing activities primarily relates
to investment contract issuances and redemptions. Our net
change in investment contracts was $(1,071.0) million in
2005 compared to $(731.6) million in 2004.
The overall increase in cash of $317.6 million in 2005 is
primarily a result of the $300.0 million registered note
issuance in December 2005.
As of December 31, 2005, we had approximately $200.0
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. Of the $200.0 million
aggregate amount outstanding as of December 31, 2005,
$50.0 million had put option features of 180 days.
During 2005, we transferred approximately $344.6 million
of investment securities to an affiliated special purpose
entity ("SPE"), whose sole purpose is to securitize these
investment securities and issue secured notes to various
affiliated companies. The securitized investments are
owned in their entirety by the SPE and are not available
to satisfy the claims of our creditors. The value of
those securities as of December 31, 2005 was $332.0
million.
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,
2005.
-----------------------
BBB/Baa or above 92.8%
BB/Ba and below 7.2
Not Rated --
------
Total portfolio 100.0%
-----------------------
129
Certain of our products contain provisions for charges
for surrender of, or withdrawals from, the policy. At
December 31, 2005 and 2004, approximately 79.6% and
66.6%, respectively, of our annuity contracts were
subject to surrender charges or contained non-surrender
provisions.
As of December 31, 2005, we had approximately $1,985.8
million of GICs. Substantially all of these contracts
allow for the payment of benefits at contract value to
ERISA plans 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 $33.0 million in
dividends in 2006 without obtaining regulatory approval.
OFF-BALANCE SHEET TRANSACTIONS
We have used off-balance sheet securitization
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. The
transactions we have used 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, 2005 and
2004, were $254.1 million and $297.9 million,
respectively.
There were no off-balance sheet securitization
transactions in 2005, 2004 and 2003.
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.
Financial support is provided under credit support
agreements, in which Genworth 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.
130
NEW ACCOUNTING STANDARDS
RECENTLY ADOPTED On January 1, 2004, we adopted the American Institute of
Certified Public Accountants ("AICPA") Statement of
Position ("SOP") 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.
ACCOUNTING In September 2005, the AICPA issued SOP 05-1, Accounting
PRONOUNCEMENTS by Insurance Enterprises for Deferred Acquisition Costs
NOT YET ADOPTED in Connection With Modifications or Exchanges of
Insurance Contracts. This statement provides guidance on
accounting for deferred acquisition costs and other
deferred balances on an internal replacement, defined
broadly as a modification in product benefits, features,
rights or coverages that occurs by the exchange of an
existing contract for a new contract, or by the
amendment, endorsement, or rider to an existing contract,
or by the election of a benefit, feature, right, or
coverage within an existing contract. Depending on the
type of modification, the period over which these
deferred balances will be recognized could be
accelerated. SOP 05-1 is effective for internal
replacements occurring in fiscal years beginning after
December 15, 2006. We are currently evaluating the impact
SOP 05-1 will have on our results of operations or
financial position.
131
Quantitative and Qualitative Disclosures About Market Risk and Interest Rate
Management
Market risk is the risk of the loss of fair value
resulting from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange
rates and equity prices. Market risk is directly
influenced by the volatility and liquidity in the markets
in which the related underlying financial instruments are
traded. The following is a discussion of our market risk
exposures and our risk management practices.
We enter into market-sensitive instruments primarily for
purposes other than trading. The carrying value of our
investment portfolio as of December 31, 2005 and 2004 was
$6,890.9 million and $8,850.6 million, respectively, of
which 76.6% and 79.1%, respectively, was invested in
fixed maturities. The primary market risk to our
investment portfolio is interest rate risk associated
with investments in fixed maturities. We mitigate the
market risk associated with our fixed maturities
portfolio by closely matching the duration of our fixed
maturities with the duration of the liabilities that
those securities are intended to support.
We are exposed to equity risk on our holdings of common
stocks and other equities. We manage equity price risk
through industry and issuer diversification and asset
allocation techniques.
We may use derivative financial instruments, such as
interest rate and currency swaps, currency forwards and
option-based financial instruments, as part of our risk
management strategy. We use these derivatives to mitigate
certain risks, including interest rate risk, currency
risk and equity risk, by:
. reducing the risk between the timing of the receipt
of cash and its investment in the market;
. converting the asset duration to match the duration
of the liabilities;
. reducing our exposure to fluctuations in equity
market indices that underlie some of our products;
and
. protecting against the early termination of an asset
or liability.
As a matter of policy, we have not and will not engage in
derivative market-making, speculative derivative trading
or other speculative derivatives activities.
SENSITIVITY ANALYSIS
Sensitivity analysis measures the impact of hypothetical
changes in interest rates, foreign exchange rates and
other market rates or prices on the profitability of
market-sensitive financial instruments.
132
The following discussion about the potential effects of
changes in interest rates and equity market prices is
based on so-called "shock-tests," which model the effects
of interest rate and equity market price shifts on our
financial condition and results of operations. Although
we believe shock tests provide the most meaningful
analysis permitted by the rules and regulations of the
SEC, they are constrained by several factors, including
the necessity to conduct the analysis based on a single
point in time and by their inability to include the
extraordinarily complex market reactions that normally
would arise from the market shifts modeled. Although the
following results of shock tests for changes in interest
rates and equity market prices may have some limited use
as benchmarks, they should not be viewed as forecasts.
These forward-looking disclosures also are selective in
nature and address only the potential impacts on our
financial instruments. They do not include a variety of
other potential factors that could affect our business as
a result of these changes in interest rates and equity
market prices.
One means of assessing exposure of our fixed maturities
portfolio to interest rate changes is a duration-based
analysis that measures the potential changes in market
value resulting from a hypothetical change in interest
rates of 100 basis points across all maturities. This is
sometimes referred to as a parallel shift in the yield
curve. Under this model, with all other factors constant
and assuming no offsetting change in the value of our
liabilities, we estimated that such an increase in
interest rates would cause the market value of our fixed
income securities portfolio to decline by approximately
$186.1 million, based on our securities positions as of
December 31, 2005.
One means of assessing exposure to changes in equity
market prices is to estimate the potential changes in
market values on our equity investments resulting from a
hypothetical broad-based decline in equity market prices
of 10%. Under this model, with all other factors
constant, we estimated that such a decline in equity
market prices would cause the market value of our equity
investments to decline by approximately $1.9 million,
based on our equity positions as of December 31, 2005. In
addition, fluctuations in equity market prices affect our
revenues and returns from our separate account products,
which depend upon fees that are related primarily to the
value of assets under management.
DERIVATIVE
COUNTERPARTY
CREDIT RISK
We manage derivative counterparty credit risk 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 the 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
133
master swap agreements containing mutual credit downgrade
provisions that provide the ability to require assignment
or replacement in the event either parties unsecured debt
rating is downgraded to or below Moody's "Baa" or S&P's
"BBB."
Swaps, purchased options and forwards with contractual
maturities longer than one year are conducted within the
credit policy constraints provided in the table below.
Our policy requires foreign exchange forwards with
contractual maturities shorter than one year to be
executed with counterparties having a credit rating by
Moody's of "A-1" and by S&P of "P-1".
The following table sets forth derivative counterparty
credit limits by credit rating:
(Dollar amounts in millions)
Long term Aggregate limits
(exposures over (including those
one year) net of under one year) Aggregate Limit
S&P rating Moody's rating collateral/1/ net of collateral/1/ (gross of collateral)/1/
- ----------------------------------------------------------------------------------------
AAA Aaa $50 $125 $300
AA- Aa3 25 100 250
A A2 15 90 200
- ----------------------------------------------------------------------------------------
/1/ Credit exposure limits noted in this table are set by
Genworth, our ultimate parent, and apply in the
aggregate to all companies that are consolidated into
Genworth.
Our net derivative position as of December 31, 2005 was
$3.7 million.
134
Experts
The consolidated financial statements and schedules of
Genworth Life and Annuity Insurance Company and
subsidiary (the Company) as of December 31, 2005 and
2004, and for each of the years in the three-year period
ended December 31, 2005, 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 March 10, 2006 with respect
to the consolidated financial statements and schedules of
Genworth Life and Annuity Insurance Company and
subsidiary refer to a change in accounting for certain
nontraditional long-duration contracts and for separate
accounts in 2004.
135
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY
Consolidated Financial Statements
Year ended December 31, 2005
(With Report of Independent Registered Public Accounting Firm Thereon)
Genworth Life and Annuity Insurance 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 Stockholders' Equity........ F-4
Consolidated Statements of Cash Flows.................. F-5
Notes to Consolidated Financial Statements............. F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Genworth Life and Annuity Insurance Company:
We have audited the accompanying consolidated balance sheets of Genworth
Life and Annuity Insurance Company and subsidiaries (the Company) as of
December 31, 2005 and 2004 and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2005. 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 Genworth
Life and Annuity Insurance Company and subsidiaries as of December 31, 2005 and
2004, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2005, 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.
/s/ KPMG LLP
Richmond, Virginia
March 10, 2006
F-1
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
(Dollar amounts in millions)
Years Ended December 31,
-----------------------
2005 2004 2003
------ ------- ------
Revenues:
Net investment income....................................................... $411.7 $ 421.0 $538.0
Net realized investment gains (losses)...................................... (4.5) 5.7 3.9
Premiums.................................................................... 103.5 96.8 104.0
Cost of insurance........................................................... 144.7 142.2 153.1
Variable product fees....................................................... 21.8 9.4 106.3
Other income................................................................ 28.0 24.8 35.5
------ ------- ------
Total revenues.......................................................... 705.2 699.9 940.8
------ ------- ------
Benefits and expenses:
Interest credited........................................................... 269.1 291.2 410.6
Benefits and other changes in policy reserves............................... 190.4 182.8 245.7
Acquisition and operating expenses, net of deferrals........................ 89.9 63.2 149.0
Amortization of deferred acquisition costs and intangibles.................. 101.0 107.3 118.9
------ ------- ------
Total benefits and expenses............................................. 650.4 644.5 924.2
------ ------- ------
Income before income taxes and cumulative effect of change in accounting
principle.................................................................... 54.8 55.4 16.6
Provision (benefit) for income taxes........................................... 25.3 (143.3) (3.1)
------ ------- ------
Income before cumulative effect of change in accounting principle.............. 29.5 198.7 19.7
Cumulative effect of change in accounting principle, net of tax of $0.4 million -- 0.7 --
------ ------- ------
Net income..................................................................... $ 29.5 $ 199.4 $ 19.7
====== ======= ======
See Notes to Consolidated Financial Statements.
F-2
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar amounts in millions, except share amounts)
December 31,
-------------------
2005 2004
--------- ---------
Assets
Investments:
Fixed maturities available-for-sale, at fair value............................ $ 5,277.3 $ 7,001.2
Equity securities available-for-sale, at fair value........................... 23.3 26.8
Commercial mortgage loans..................................................... 1,042.1 1,207.7
Policy loans.................................................................. 158.3 148.4
Other invested assets ($332.0 and $0.0 restricted)............................ 389.9 466.5
--------- ---------
Total investments...................................................... 6,890.9 8,850.6
Cash and cash equivalents......................................................... 344.0 26.4
Accrued investment income......................................................... 63.6 81.5
Deferred acquisition costs........................................................ 321.1 248.1
Goodwill.......................................................................... -- 57.5
Intangible assets................................................................. 131.6 120.6
Reinsurance recoverable........................................................... 2,307.4 2,753.8
Deferred income tax asset......................................................... 0.1 5.9
Other assets...................................................................... 46.0 56.8
Separate account assets........................................................... 8,777.3 8,636.7
--------- ---------
Total assets........................................................... $18,882.0 $20,837.9
========= =========
Liabilities and Stockholders' equity
Liabilities:
Future annuity and contract benefits.......................................... $ 8,201.5 $ 9,604.6
Liability for policy and contract claims...................................... 82.1 89.4
Other policyholder liabilities................................................ 207.1 235.9
Other liabilities ($333.3 and $0.0 restricted)................................ 516.2 681.3
Separate account liabilities.................................................. 8,777.3 8,636.7
--------- ---------
Total liabilities...................................................... 17,784.2 19,247.9
--------- ---------
Commitments and contingencies
Stockholders' equity:
Accumulated other comprehensive income:
Net unrealized investment gains............................................ 12.5 72.0
Derivatives qualifying as hedges........................................... 1.1 3.3
--------- ---------
Total accumulated other comprehensive income.................................. 13.6 75.3
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.................................................... 938.6 1,061.1
Retained earnings............................................................. -- 308.0
--------- ---------
Total stockholders' equity............................................. 1,097.8 1,590.0
--------- ---------
Total liabilities and stockholders' equity............................. $18,882.0 $20,837.9
========= =========
See Notes to Consolidated Financial Statements.
F-3
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollar amounts in millions, except share amounts)
Accumulated
Preferred Stock Common Stock Additional Other Total
-------------- ------------- Paid-In Comprehensive Retained Stockholders'
Share Amount Share Amount Capital Income Earnings Equity
------- ------ ------ ------ ---------- ------------- -------- -------------
Balances at January 1, 2003 120,000 $120.0 25,651 $25.6 $1,050.7 $ (9.7) $ 517.6 $1,704.2
Comprehensive income:
Net income................ -- -- -- -- -- -- 19.7 19.7
Net unrealized gains on
investment securities... -- -- -- -- -- 99.7 -- 99.7
Derivatives qualifying as
hedges.................. -- -- -- -- -- (1.9) -- (1.9)
--------
Total comprehensive
income................ 117.5
Contributed capital........ -- -- -- -- 9.9 -- -- 9.9
Cash dividends............. -- -- -- -- -- -- (9.6) (9.6)
------- ------ ------ ----- -------- ------ ------- --------
Balances at December 31,
2003..................... 120,000 120.0 25,651 25.6 1,060.6 88.1 527.7 1,822.0
--------
Comprehensive income:
Net income................ -- -- -- -- -- -- 199.4 199.4
Net unrealized gains on
investment securities... -- -- -- -- -- (15.7) -- (15.7)
Derivatives qualifying as
hedges.................. -- -- -- -- -- 2.9 -- 2.9
--------
Total comprehensive
income................ 186.6
Contributed capital........ -- -- -- -- 0.5 -- -- 0.5
Cash dividends............. -- -- -- -- -- -- (40.0) (40.0)
Non-cash dividend.......... -- -- -- -- -- -- (379.1) (379.1)
------- ------ ------ ----- -------- ------ ------- --------
Balances at December 31,
2004..................... 120,000 120.0 25,651 25.6 1,061.1 75.3 308.0 1,590.0
--------
Comprehensive income:
Net income................ -- -- -- -- -- -- 29.5 29.5
Net unrealized gains on
investment securities... -- -- -- -- -- (59.5) -- (59.5)
Derivatives qualifying as
hedges.................. -- -- -- -- -- (2.2) -- (2.2)
--------
Total comprehensive
income................ (32.2)
Cash dividends declared and
paid..................... -- -- -- -- -- -- (9.6) (9.6)
Non-cash dividend and other
transactions with
stockholders............. -- -- -- -- (122.5) -- (327.9) (450.4)
------- ------ ------ ----- -------- ------ ------- --------
Balances at December 31,
2005..................... 120,000 $120.0 25,651 $25.6 $ 938.6 $ 13.6 $ -- $1,097.8
======= ====== ====== ===== ======== ====== ======= ========
See Notes to Consolidated Financial Statements.
F-4
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar amounts in millions)
Years Ended December 31,
-------------------------------
2005 2004 2003
--------- --------- ---------
Cash flows from operating activities:
Net income.............................................................. $ 29.5 $ 199.4 $ 19.7
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.................................... 122.4 341.1 407.5
Net realized investments (gains) losses............................. 4.5 (5.7) (3.9)
Amortization of investment premiums and discounts................... 18.5 28.3 46.5
Acquisition costs deferred.......................................... (93.3) (89.1) (167.7)
Amortization of deferred acquisition costs and intangibles.......... 101.0 107.3 118.9
Deferred income taxes............................................... 39.1 (174.0) 18.3
Change in certain assets:
Decrease (increase) in:
Accrued investment income........................................ 13.6 26.6 32.6
Other, net....................................................... 5.5 (20.4) (39.0)
Change in certain liabilities:
Increase (decrease) in:
Policy and contract claims....................................... (4.2) 64.2 (183.9)
Other policyholder liabilities................................... (28.5) 88.6 (59.6)
Other liabilities................................................ (30.2) (144.1) 303.5
--------- --------- ---------
Net cash from operating activities.................................. 177.9 421.5 492.9
--------- --------- ---------
Cash flows from investing activities:
Short-term investment activity, net..................................... -- 99.6 178.4
Proceeds from sales and maturities of investment securities and other
invested assets....................................................... 1,989.4 1,734.9 4,328.0
Principal collected on mortgage and policy loans........................ 297.0 217.5 268.6
Purchases of investment securities and other invested assets............ (940.2) (1,465.9) (3,784.0)
Mortgage loan originations and increase in policy loans................. (135.6) (226.5) (512.3)
--------- --------- ---------
Net cash from investing activities........................... 1,210.6 359.6 478.7
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of investment contracts.......................... 1,537.6 1,293.0 3,107.0
Redemption and benefit payments on investment contracts................. (2,608.6) (2,024.6) (4,044.8)
Proceeds from secured borrowings from affiliate......................... 20.5 -- --
Proceeds from short-term borrowings..................................... 388.0 251.4 346.5
Payments on short-term borrowings....................................... (398.8) (246.9) (358.3)
Cash dividends to stockholders.......................................... (9.6) (40.0) (9.6)
--------- --------- ---------
Net cash from financing activities........................... (1,070.9) (767.1) (959.2)
--------- --------- ---------
Net change in cash and cash equivalents...................... 317.6 14.0 12.4
Cash and cash equivalents at beginning of year.......................... 26.4 12.4 --
--------- --------- ---------
Cash and cash equivalents at end of year................................ $ 344.0 $ 26.4 $ 12.4
========= ========= =========
See Notes to Consolidated Financial Statements.
F-5
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004 and 2003
(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 Genworth Life and Annuity Insurance Company
("GLAIC"), formerly known as GE Life and Annuity Assurance Company, and its
subsidiaries, Assigned Settlement, Inc. and GNWLAAC Real Estate Holding, LLC.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Genworth Life and Annuity Insurance 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. An affiliate of the General
Electric Company ("GE") acquired us on April 1, 1996 and ultimately contributed
the majority of the outstanding common stock to Genworth Life Insurance Company
("GLIC"), formerly known as General Electric Capital Assurance Company.
On May 24, 2004, we became an indirect, wholly-owned subsidiary of Genworth
Financial, Inc. ("Genworth"). On May 25, 2004, Genworth's Class A common stock
began trading on The New York Stock Exchange.
On May 31, 2004, we became a direct, wholly-owned subsidiary of GLIC while
remaining an indirect, wholly-owned subsidiary of Genworth.
As of December 31, 2005, GE beneficially owned approximately 18% of
Genworth's outstanding stock. On March 8, 2006, a subsidiary of GE completed a
secondary offering to sell its remaining interest in Genworth. Our preferred
shares are owned by an affiliate, Brookfield Life Assurance Company Limited.
(b) Basis of Presentation
These consolidated financial statements have been prepared on the basis of
U.S. generally accepted accounting principles ("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 may 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 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
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
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).
Approximately 10.2% of our variable annuity product sales in 2005 were through
one national bank. However, we do not believe that the loss of such business
would have a long-term adverse effect on our business and operations due to our
competitive position in the marketplace and the availability of business from
other distributors.
(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 recognized 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, 2005, 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.
F-7
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
(g) Investment Securities
We have designated 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 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 other comprehensive income.
We regularly review investment securities 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 maturities,
whether the issuer is in compliance with terms and covenants of the security.
Qualitative criteria include the financial strength and specific prospects for
the issuer as well as our intent to hold the security until recovery.
Securities that in our judgment are considered to be other-than-temporarily
impaired are recognized as a charge to realized investment gains (losses) in
the period in which such determination is made.
(h) Securities Lending Activity
We engaged in securities lending transactions for the purpose of enhancing
the yield on our investment securities portfolio, which required 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 maintained effective control over all
loaned securities and therefore, continued to report such securities as fixed
maturities in the Consolidated Balance Sheets.
Cash and non-cash collateral, such as a security, received by us 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. The fair value of collateral held and included in other
invested assets was $0.0 million and $406.9 million at December 31, 2005 and
2004, respectively. We had non-cash collateral of $0.0 million and $23.8
million at December 31, 2005 and 2004, respectively.
(i) Commercial Mortgage Loans
Commercial mortgage loans are stated at principal amounts outstanding, net
of deferred expenses and allowance for loan losses. Interest on loans is
recognized on an accrual basis at the applicable interest rate on the principal
amount outstanding. Loan origination fees and direct costs as well as premiums
and discounts are amortized as level yield adjustments over the respective loan
terms. Unamortized net fees or costs are recognized upon early repayment of the
loans. Loan commitment fees are generally deferred and amortized on an
effective yield basis over the term of the loan. Impaired loans are generally
carried on a non-accrual status. Loans are ordinarily placed on non-accrual
status when, in management's opinion, the collection of principal or interest
is unlikely, or when the collection of principal or interest is 90 days or more
past due.
The allowance for loan losses is maintained at a level that management
determines is adequate to absorb estimated probable incurred losses in the loan
portfolio. Management's evaluation process to determine the adequacy of the
allowance utilizes an analytical model based on historical loss experience,
adjusted for current events, trends and economic conditions. The actual amounts
realized could differ in the near term from the amounts assumed in arriving at
the allowance for loan losses reported in the financial statements.
F-8
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
All losses of principal are charged to the allowance for loan losses in the
period in which the loan is deemed to be uncollectible. Additions and
reductions are made to the allowance through periodic provisions charged to
current operations and recovery of principal on loans previously charged off.
(j) Other Invested Assets
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.
(k) Cash and Cash Equivalents
Certificates of deposit, 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.
(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:
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. For
the years ending December 31, 2005, 2004 and 2003, there were no significant
charges to income recorded as a result our DAC recoverability testing.
(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
F-9
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
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.
For the years ending December 31, 2005, 2004 and 2005, there were no
significant charges to income recorded as a result our PVFP recoverability
testing.
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, and for fixed annuities with crediting rates 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 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 DAC, were reinsured effective
January 1, 2004. 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 DAC.
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.
(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. Based on the
results of our testing, we recorded a goodwill impairment charge of $57.5
million and $59.8 million in 2005 and 2004, respectively. There was no
impairment charge in 2003. As of December 31, 2005, there is no goodwill
balance remaining as a result of these charges.
F-10
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
(o) Reinsurance
Premium revenue, benefits, acquisition and operating 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
contractholders and variable life policyholders. We assess mortality risk fees
and administration charges on the variable mutual fund portfolios. 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, GLIC, and its other life insurance
affiliates. We were subject to a tax-sharing agreement, as approved by state
insurance regulators, 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.
F-11
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
For the period beginning January 1, 2004, and ending on the date of the
transfer of our outstanding capital stock to Genworth, we were included in the
consolidated federal income tax return of GE. During this period, we were
subject to a tax-sharing arrangement that allocates tax on a separate company
basis, but provided benefit for current utilization of losses and credits.
Intercompany balances were settled at least annually.
Subsequent to the transfer of our outstanding capital stock to Genworth, we
filed a consolidated life insurance federal income tax return with our parent,
GLIC, and its other life insurance affiliates. We are subject to a separate
tax-sharing agreement, as approved by state insurance regulators, which
allocates taxes on a separate company basis but provides benefit for current
utilization of losses and credits. Intercompany balances are 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 SOP 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.
(u) Accounting Pronouncements Not Yet Adopted
In September 2005, the AICPA issued SOP 05-1, Accounting by Insurance
Enterprises for Deferred Acquisition Costs in Connection With Modifications or
Exchanges of Insurance Contracts. This statement provides guidance on
accounting for deferred acquisition costs and other deferred balances on an
internal replacement, defined broadly as a modification in product benefits,
features, rights or coverages that occurs by the exchange of an existing
contract for a new contract, or by the amendment, endorsement, or rider to an
existing contract, or by the election of a benefit, feature, right, or coverage
within an existing contract. Depending on the type of modification, the period
over which these deferred balances will be recognized could be accelerated. SOP
05-1 is effective for internal replacements occurring in fiscal years beginning
after December 15, 2006. We are currently evaluating the impact SOP 05-1 will
have on our results of operations or financial position.
F-12
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
(2) Investments
(a) Net Investment Income
For the years ended December 31, the sources of our investment income were
as follows:
(Dollar amounts in millions) 2005 2004 2003
---------------------------- ------ ------ ------
Fixed maturities--taxable....................... $331.3 $345.2 $458.6
Fixed maturities--non-taxable................... 0.1 0.1 0.1
Commercial mortgage loans....................... 75.3 77.1 81.8
Equity securities............................... 0.8 0.1 0.9
Other investments............................... 3.4 (1.2) (2.9)
Policy loans.................................... 10.1 7.5 10.8
------ ------ ------
Gross investment income before expenses and fees 421.0 428.8 549.3
Expenses and fees............................... (9.3) (7.8) (11.3)
------ ------ ------
Net investment income........................... $411.7 $421.0 $538.0
====== ====== ======
(b) Net Realized Investment Gains (Losses)
For the years ended December 31, gross realized investment gains and losses
from the sales and impairments of investment securities classified as
available-for-sale were as follows:
(Dollar amounts in millions) 2005 2004 2003
---------------------------- ------ ----- ------
Gross realized investment:
Gains on sale....................... $ 12.0 $10.7 $ 80.2
Losses on sale...................... (4.3) (4.1) (49.9)
Impairment losses................... (12.2) (0.9) (26.4)
------ ----- ------
Net realized investments gains (losses) $ (4.5) $ 5.7 $ 3.9
====== ===== ======
(c) Unrealized Gains and Losses
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 DAC that would have resulted had such gains and
losses been realized. Net unrealized gains and losses on available-for-sale
investment securities reflected as a separate component of accumulated other
comprehensive income as of December 31, are summarized as follows:
(Dollar amounts in millions) 2005 2004 2003
- ---------------------------- ------ ------ ------
Net unrealized gains (losses) on available-for-sale investment securities:
Fixed maturities............................................................... $ 27.6 $145.4 $204.6
Equity securities.............................................................. 8.0 6.0 3.0
Restricted other invested assets............................................... (1.3) -- --
------ ------ ------
Subtotal................................................................... 34.3 151.4 207.6
------ ------ ------
Adjustments to the present value of future profits and deferred acquisitions costs (15.1) (40.7) (72.6)
Deferred income taxes, net........................................................ (6.7) (38.7) (47.3)
------ ------ ------
Net unrealized gains on available-for-sale investment securities........... $ 12.5 $ 72.0 $ 87.7
====== ====== ======
F-13
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
The change in the net unrealized gains (losses) on available-for-sale
investment securities reported in accumulated other comprehensive income for
the years ended December 31, is as follows:
(Dollar amounts in millions) 2005 2004 2003
- ---------------------------- ------- ------ ------
Net unrealized gains (losses) on investment securities as of January 1................ $ 72.0 $ 87.7 $(12.0)
------- ------ ------
Unrealized gains (losses) on investment arising during the period:
Unrealized gains (losses) on investment securities................................. (120.0) (52.5) 201.2
Adjustment to deferred acquisition costs........................................... 6.9 19.7 (10.7)
Adjustment to present value of future profits...................................... 18.7 12.2 (32.4)
Provision for deferred income taxes................................................ 32.0 8.6 (55.9)
------- ------ ------
Changes in unrealized gains (losses) on investment securities.................. (62.4) (12.0) 102.2
Reclassification adjustments to net realized investment (gains) losses net of deferred
taxes of $(1.6), $2.0 and $1.4...................................................... 2.9 (3.7) (2.5)
------- ------ ------
Net unrealized gains on investment securities as of December 31....................... $ 12.5 $ 72.0 $ 87.7
======= ====== ======
(d) Fixed Maturities and Equity Securities
As of December 31, 2005 and 2004, the amortized cost, gross unrealized gains
and losses and fair value of our fixed maturities and equity securities
classified as available-for-sale were as follows:
2005 Gross Gross
---- Amortized unrealized unrealized Estimated
(Dollar amounts in millions) cost gains losses fair value
---------------------------- --------- ---------- ---------- ----------
Fixed maturities:
U.S. government and agency......... $ 70.2 $ 0.5 $ (0.5) $ 70.2
Non-U.S. government................ 101.9 9.7 (0.2) 111.4
U.S. corporate..................... 2,784.5 55.8 (23.3) 2,817.0
Non-U.S. corporate................. 455.7 10.1 (5.6) 460.2
Mortgage and asset-backed.......... 1,837.4 5.3 (24.2) 1,818.5
-------- ------ ------ --------
Total fixed maturities.......... 5,249.7 81.4 (53.8) 5,277.3
Equity securities.................. 15.3 8.0 -- 23.3
-------- ------ ------ --------
Total available-for-sale securities $5,265.0 $ 89.4 $(53.8) $5,300.6
======== ====== ====== ========
2004 Gross Gross
---- Amortized unrealized unrealized Estimated
(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 and asset-backed.......... 1,987.2 21.1 (9.0) 1,999.3
-------- ------ ------ --------
Total fixed maturities.......... 6,855.8 186.6 (41.2) 7,001.2
Equity securities.................. 20.8 6.0 -- 26.8
-------- ------ ------ --------
Total available-for-sale securities $6,876.6 $192.6 $(41.2) $7,028.0
======== ====== ====== ========
F-14
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
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 or
recover principal and interest in accordance with the contractual terms of the
instruments or 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.
We generally intend to hold securities in unrealized loss positions until
they recover. However, from time to time, we sell securities in the ordinary
course of managing our portfolio to meet diversification, credit quality, yield
and liquidity requirements. The aggregate fair value of securities sold at a
loss during the year ended December 31, 2005 was $188.5 million, which was
approximately 98.3% of book value.
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, as of December 31, 2005:
Less Than 12 Months 12 Months or More
----------------------------------------- -----------------------------------------
Gross Gross
Estimated fair unrealized Estimated fair unrealized
(Dollar amounts in millions) value losses # of securities value losses # of securities
- ---------------------------- -------------- ---------- --------------- -------------- ---------- ---------------
Description of Securities
Fixed maturities:
U.S. government and agency..... $ 36.9 $ (0.2) 7 $ 13.8 $ (0.3) 3
Government--non U.S............ 12.6 (0.2) 11 -- -- --
U.S. corporate................. 782.6 (13.7) 164 310.0 (9.7) 64
Corporate--non U.S............. 155.5 (2.4) 35 83.7 (3.2) 13
Asset backed................... 538.7 (7.6) 44 109.2 (1.4) 20
Mortgage backed................ 538.1 (8.9) 101 210.8 (6.2) 50
-------- ------ --- ------ ------ ---
Total temporarily impaired
securities................... $2,064.4 $(33.0) 362 $727.5 $(20.8) 150
======== ====== === ====== ====== ===
% Below cost--fixed maturities:
(less than)20% Below cost...... $2,064.4 $(33.0) 362 $722.6 $(18.3) 147
20-50% Below cost.............. -- -- -- 4.9 (2.5) 3
(greater than)50% Below cost... -- -- -- -- -- --
-------- ------ --- ------ ------ ---
Total fixed maturities......... $2,064.4 $(33.0) 362 $727.5 $(20.8) 150
======== ====== === ====== ====== ===
Investment grade............... $1,988.2 $(31.0) 337 $714.3 $(18.0) 140
Below investment grade......... 76.2 (2.0) 25 13.2 (2.8) 10
Not Rated...................... -- -- -- -- -- --
-------- ------ --- ------ ------ ---
Total temporarily impaired
securities................... $2,064.4 $(33.0) 362 $727.5 $(20.8) 150
======== ====== === ====== ====== ===
The investment securities in an unrealized loss position as of December 31,
2005 consist of 512 securities accounting for unrealized losses of $53.8
million. Of these unrealized losses, 91.1% are investment grade (rated
F-15
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
AAA through BBB-) and 95.4% is less than 20% below cost. The amount of the
unrealized loss on these securities is primarily attributable to increases in
interest rates and changes in credit spreads.
For the investment securities in an unrealized loss position as of
December 31, 2005, three securities are below cost 20% or more and below
investment grade (rated BB+ and below) for twelve months or more accounting for
unrealized losses of $2.5 million. These securities consist of two issuers in
the airline and automotive industries and are current on all terms. All airline
securities are collateralized by commercial jet aircraft associated with
several domestic airlines. We believe these airline security holdings are in a
temporary loss position as a result of ongoing negative market reaction to
difficulties in the commercial airline industry. The unrealized loss on the
automotive investments was primarily caused by legacy issues and declines in
market share. The automotive issuer continues to maintain significant liquidity
relative to their maturities and we expect to collect full principal and
interest.
Because management expects these investments to continue to perform as to
contractual obligations and we have the ability and intent to hold these
investment securities until the recovery of the fair value up to the cost of
the investments, which may be maturity, we do not consider these investments to
be other-than-temporarily impaired at December 31, 2005.
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, as of December 31, 2004:
Less Than 12 Months 12 Months or More
----------------------------------------- -----------------------------------------
Gross Gross
Estimated fair unrealized Estimated fair unrealized
(Dollar amounts in millions) value losses # of securities value losses # of securities
- ---------------------------- -------------- ---------- --------------- -------------- ---------- ---------------
Description of Securities
Fixed maturities:
U.S. government and agency..... $ 7.2 $ -- 4 $ 0.3 $ -- 1
Government--non U.S............ 2.9 -- 3 -- -- --
U.S. corporate................. 494.5 (10.7) 104 267.0 (18.6) 29
Corporate--non U.S............. 129.0 (2.2) 30 17.3 (0.7) 4
Asset backed................... 221.6 (1.2) 38 1.6 -- 1
Mortgage backed................ 470.9 (6.3) 76 56.1 (1.5) 20
-------- ------ --- ------ ------ --
Total temporarily impaired
securities................... $1,326.1 $(20.4) 255 $342.3 $(20.8) 55
======== ====== === ====== ====== ==
% Below cost--fixed maturities:
(less than)20% Below cost...... $1,324.8 $(19.9) 253 $323.5 $(14.7) 51
20-50% Below cost.............. 1.3 (0.5) 2 18.8 (6.1) 4
(greater than)50% Below cost... -- -- -- -- -- --
-------- ------ --- ------ ------ --
Total fixed maturities......... $1,326.1 $(20.4) 255 $342.3 $(20.8) 55
======== ====== === ====== ====== ==
Investment grade............... $1,203.8 $(16.6) 223 $208.2 $(11.8) 40
Below investment grade......... 103.0 (3.5) 26 134.1 (9.0) 15
Not Rated...................... 19.3 (0.3) 6 -- -- --
-------- ------ --- ------ ------ --
Total temporarily impaired
securities................... $1,326.1 $(20.4) 255 $342.3 $(20.8) 55
======== ====== === ====== ====== ==
F-16
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
The scheduled maturity distribution of fixed maturities at December 31, 2005
follows. Actual maturities may differ from contractual maturities because
issuers of securities may have the right to call or prepay obligations with or
without call or prepayment penalties.
Estimated
(Dollar amounts in millions) Amortized cost fair value
---------------------------- -------------- ----------
Due in one year or less............... $ 301.3 $ 300.1
Due after one year through five years. 1,378.8 1,390.2
Due after five years through ten years 984.7 1,000.0
Due after ten years................... 747.5 768.5
-------- --------
Subtotal........................... 3,412.3 3,458.8
Mortgage and asset-backed............. 1,837.4 1,818.5
-------- --------
Total fixed maturities............. $5,249.7 $5,277.3
======== ========
As of December 31, 2005, $588.2 million of our investments (excluding
mortgage and asset-backed securities) were subject to certain call provisions.
As of December 31, 2005, securities issued by finance and insurance,
utilities and energy and consumer--non cyclical industry groups represented
approximately 30.6%, 17.3% and 13.3% 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, 2005, we did not hold any fixed maturities, which
individually exceeded 10% of stockholders' equity.
As required by law, we have amounts invested, with governmental authorities
and banks for the protection of policyholders, of $4.9 million and $5.6 million
as of December 31, 2005 and 2004, respectively.
(e) Commercial Mortgage Loans
Our mortgage loans are collateralized by commercial properties, including
multifamily residential buildings. The carrying value of commercial mortgage
loans is stated at original cost net of prepayments, amortization and allowance
for loan losses.
We diversify our commercial mortgage loans by both property type and
geographic region. The following table sets forth the distribution across
property type and geographic region for commercial mortgage loans as of the
dates indicated:
December 31,
--------------------------------------------------
Property Type 2005 2004
- ------------- ------------------------ ------------------------
(Dollar amounts in millions) Carrying value % of total Carrying value % of total
- ---------------------------- -------------- ---------- -------------- ----------
Office................ $ 346.8 33.3% $ 356.1 29.5%
Industrial............ 353.7 33.9 386.2 32.0
Retail................ 233.5 22.4 335.9 27.8
Apartments............ 91.5 8.8 105.6 8.7
Mixed use/other....... 16.6 1.6 23.9 2.0
-------- ----- -------- -----
Total................. $1,042.1 100.0% $1,207.7 100.0%
======== ===== ======== =====
F-17
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
December 31,
--------------------------------------------------
Geographic Region 2005 2004
- ----------------- ------------------------ ------------------------
(Dollar amounts in millions) Carrying value % of total Carrying value % of total
- ---------------------------- -------------- ---------- -------------- ----------
Pacific................ $ 299.4 28.7% $ 332.8 27.6%
South Atlantic......... 190.1 18.2 255.3 21.1
Middle Atlantic........ 115.5 11.1 129.3 10.7
East North Central..... 204.0 19.6 215.1 17.8
Mountain............... 97.8 9.4 101.4 8.4
West South Central..... 38.6 3.7 65.8 5.4
West North Central..... 48.1 4.6 52.0 4.3
East South Central..... 17.3 1.7 15.4 1.3
New England............ 31.3 3.0 40.6 3.4
-------- ----- -------- -----
Total.................. $1,042.1 100.0% $1,207.7 100.0%
======== ===== ======== =====
For the years ended December 31, 2005 and 2004, respectively, we originated
$4.8 million and $28.0 million of mortgages secured by real estate in
California, which represents 4.0% and 14.2% of our total originations for those
years.
"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.
Under these principles, we have two types of "impaired" loans: loans
requiring specific allowances for losses (none as of December 31, 2005 and
2004) 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 as of December 31, 2005 and 2004). Average investment
in specifically impaired loans during December 31, 2005, 2004 and 2003 was $0.8
million, $1.1 million and $2.8 million, respectively, and interest income
earned on these loans while they were considered impaired was $0.0, $0.0 and
$0.1 million for the years ended December 31, 2005, 2004 and 2003, respectively.
The following table presents the activity in the allowance for losses during
the years ended December 31:
(Dollar amounts in millions) 2005 2004 2003
---------------------------- ----- ----- -----
Balance as of January 1................... $10.4 $10.4 $ 8.9
Provision charged (released) to operations (4.6) 1.0 1.5
Transfers................................. -- (0.6) --
Amounts written off, net of recoveries.... (1.5) (0.4) --
----- ----- -----
Balance as of December 31................. $ 4.3 $10.4 $10.4
===== ===== =====
The allowance for losses on mortgage loans at December 31, 2005, 2004 and
2003 represented 0.4%, 0.9% and 0.8% of gross mortgage loans, respectively.
Non-income producing mortgage loans were $0.8 million as of December 31, 2005
and 2004.
F-18
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
During 2005, we adjusted our process for estimating credit losses in our
commercial mortgage loan portfolio. As a result of this adjustment, we released
$4.6 million of commercial mortgage loan reserves to net investment income in
the fourth quarter of 2005.
(f) Other Invested Assets
The following table sets forth the carrying values of our other invested
assets as of the dates indicated:
December 31,
--------------------------------------------------
2005 2004
------------------------ ------------------------
(Dollar amounts in millions) Carrying value % of total Carrying value % of total
- ---------------------------- -------------- ---------- -------------- ----------
Restricted other invested assets $332.0 85.2% $ -- -- %
Securities lending.............. -- -- 406.9 87.2
Limited partnerships............ 48.6 12.4 53.0 11.4
Other investments............... 9.3 2.4 6.6 1.4
------ ----- ------ -----
Total........................... $389.9 100.0% $466.5 100.0%
====== ===== ====== =====
Restricted other invested assets
On August 19, 2005, we transferred approximately $344.6 million of
investment securities to an affiliated special purpose entity ("SPE"), whose
sole purpose is to securitize these investment securities and issue secured
notes (the "Secured Notes") to various affiliated companies. The securitized
investments are owned in their entirety by the SPE and are not available to
satisfy the claims of our creditors. However, we are entitled to principal and
interest payments made on the Secured Notes we hold. Under U.S. GAAP, the
transaction is accounted for as a secured borrowing. Accordingly, the Secured
Notes are included within our consolidated financial statements as
available-for-sale fixed maturities and the liability equal to the proceeds
received upon transfer has been included in Other Liabilities. Additionally,
the investment securities transferred are included in Other Invested Assets and
are shown as restricted assets.
As of December 31, 2005, the amortized cost, gross unrealized gains and
losses, and estimated fair value of our restricted other invested assets are as
follows:
2005 Gross Gross
---- Amortized unrealized unrealized Estimated
(Dollar amounts in millions) cost gains losses fair value
---------------------------- --------- ---------- ---------- ----------
Fixed maturities:
Foreign other............... $324.3 $2.9 $(4.3) $322.9
U.S. corporate.............. 9.0 0.2 (0.1) 9.1
------ ---- ----- ------
Total restricted securities. $333.3 $3.1 $(4.4) $332.0
====== ==== ===== ======
F-19
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
The scheduled maturity distribution of the restricted fixed maturity
portfolio at December 31, 2005 follows. Expected maturities may differ from
scheduled contractual maturities because issuers of securities may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Estimated
(Dollar amounts in millions) cost fair value
---------------------------- --------- ----------
Due in one year or less............... $ 24.5 $ 24.5
Due after one year through five years. 95.8 94.3
Due after five years through ten years 168.4 167.6
Due after ten years................... 44.6 45.6
------ ------
Total restricted fixed maturities.. $333.3 $332.0
====== ======
As of December 31, 2005, $55.9 million of our restricted other invested
assets were subject to certain call provisions.
As of December 31, 2005, we did not hold any restricted fixed maturity
securities, which individually exceeded 10% of stockholders' equity.
(3) Deferred Acquisition Costs
Activity impacting deferred acquisition costs for the years ended
December 31, was as follows:
(Dollar amounts in millions) 2005 2004 2003
---------------------------- ------ ------- ------
Unamortized balance as of January 1................. $255.2 $ 923.8 $843.3
Cost deferred....................................... 93.3 89.1 167.7
Amortization, net................................... (27.2) (23.6) (87.2)
Transfers due to reinsurance transactions with UFLIC -- (734.1) --
------ ------- ------
Unamortized balance as of December 31............... 321.3 255.2 923.8
Cumulative effect of net unrealized investment gains (0.2) (7.1) (26.8)
------ ------- ------
Balance as of December 31........................... $321.1 $ 248.1 $897.0
====== ======= ======
(4) Intangible Assets and Goodwill
At December 31, 2005 and 2004, the gross carrying amount and accumulated
amortization of intangibles, net of interest accretion, subject to amortization
were as follows:
2005 2004
-------------------- --------------------
Gross Gross
carrying Accumulated carrying Accumulated
(Dollar amounts in millions) amount amortization amount amortization
- ---------------------------- -------- ------------ -------- ------------
Present value of future profits ("PVFP")..... $142.4 $(41.4) $123.7 $(27.6)
Capitalized software......................... 37.1 (14.4) 31.1 (11.9)
Deferred sales inducements to contractholders 8.7 (0.8) 5.5 (0.2)
All other.................................... 1.0 (1.0) 1.0 (1.0)
------ ------ ------ ------
Total........................................ $189.2 $(57.6) $161.3 $(40.7)
====== ====== ====== ======
F-20
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
Amortization expense related to intangible assets for the years ended
December 31, 2005, 2004, and 2003 was $16.3 million, $23.9 million and $31.7
million, respectively. Amortization expense related to deferred sales
inducements to contractholders of $0.6 million and $0.2 million was included in
benefits and other changes in policy reserves for the years ended December 31,
2005 and 2004, respectively. There were no deferred sales inducements to
contractholders in the year ended December 31, 2003.
(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.
The following table presents the activity in PVFP for the years ended
December 31:
(Dollar amounts in millions) 2005 2004 2003
- ---------------------------- ------ ------ ------
Unamortized balance as of January 1....................................... $129.7 $173.9 $202.2
Interest accreted at 4.9%, 5.2% and 5.4%, respectively.................... 6.0 7.1 10.2
Amortization.............................................................. (19.8) (27.6) (38.5)
Amounts transferred in connection with reinsurance transactions with UFLIC -- (23.7) --
------ ------ ------
Unamortized balance as of December 31..................................... 115.9 129.7 173.9
Accumulated effect of net unrealized investment gains..................... (14.9) (33.6) (45.8)
------ ------ ------
Balance as of December 31................................................. $101.0 $ 96.1 $128.1
====== ====== ======
The estimated percentage of the December 31, 2005 PVFP balance net of
interest accretion, before the effect of unrealized investment gains or losses,
to be amortized over each of the next five years is as follows:
2006 10.2%
2007 8.9%
2008 7.8%
2009 7.1%
2010 6.4%
Amortization expenses for PVFP for future periods will be affected by
acquisitions, dispositions, realized gains (losses) or other factors affecting
the ultimate amount of gross profits realized from certain lines of businesses.
Similarly, future amortization expenses for other intangibles will depend on
future acquisitions, dispositions and other business transactions.
F-21
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
(b) Goodwill
Our goodwill balance by segment and activity was as follows:
Retirement
Income &
(Dollar amounts in millions) Investments Protection Total
---------------------------- ----------- ---------- ------
Balance as of December 31, 2003 $59.8 $57.5 $117.3
Impairment..................... 59.8 -- 59.8
----- ----- ------
Balance as of December 31, 2004 -- 57.5 57.5
Impairment..................... -- 57.5 57.5
----- ----- ------
Balance as of December 31, 2005 $ -- $ -- $ --
===== ===== ======
In 2005, we recognized an impairment of $57.5 million to amortization
expense in our Protection segment. We currently are not actively writing life
insurance in our Protection segment. The fair value of that reporting unit was
estimated using the expected present value of future cash flows.
In 2004, as a result of the reinsurance transactions with Union Fidelity
Life Insurance Company ("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 to amortization expense 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 November 30, 2005, we entered into a reinsurance agreement with First
Colony Life Insurance Company ("FCL"), an affiliate, on an indemnity
coinsurance, funds withheld basis, to cede 90% of the institutional liabilities
arising from the funding agreements issued as part of our registered note
program. The maximum amount of the funding agreement liabilities that can be
ceded to FCL, without prior notice, is $2.0 billion.
This agreement is accounted for as deposit accounting as it does not
transfer adequate insurance risk. No ceding commission was paid under this
agreement. We withhold amounts due to FCL as security for the performance of
FCL's obligations under this agreement. We are required to invest the withheld
amounts pursuant to investment guidelines agreed to with FCL and to pay the net
profit to FCL. Any amounts due under this agreement are settled quarterly.
On April 15, 2004, we entered into reinsurance transactions in which we
ceded to UFLIC, an affiliate, substantially all of our in-force blocks of
variable annuities and structured settlements. Our in-force variable annuity
contracts, excluding the RetireReady/SM/ Retirement Answer/ /Variable Annuity
("Retirement Answer") 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. The in-force blocks of general account variable annuities and
structured settlements ceded to UFLIC had
F-22
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
aggregate policyholder reserves of $2.0 billion and $0.2 billion as of
December 31, 2005, respectively, and $2.4 billion and $0.2 billion as of
December 31, 2004, 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 had $6.9 billion and $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 as of December 31, 2005 and 2004, respectively. The
reinsurance transactions with UFLIC were 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. In
addition, pursuant to a Capital Maintenance Agreement, General Electric Capital
Corporation ("GE Capital") agreed to maintain sufficient capital in UFLIC to
maintain UFLIC's risk-based capital at not less than 150% of its company action
level, as defined from time to time by the National Association of Insurance
Commissioners ("NAIC").
Concurrently with the consummation of the reinsurance transactions with
UFLIC, we paid a dividend to our stockholder 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, 2005, we had no significant
concentrations of variable annuity net at risk reinsurance with any one
reinsurer that could have a material impact
F-23
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
on our results of operations. At December 31, 2005, 30.4% of our reinsured life
insurance net at risk exposure ceded to one company.
Net life insurance in force as of December 31 is summarized as follows:
(Dollar amounts in millions) 2005 2004 2003
---------------------------- --------- --------- ---------
Direct life insurance in force...... $22,219.1 $24,723.4 $26,889.2
Amounts ceded to other companies.... (3,313.6) (4,045.2) (4,129.4)
Amounts assumed from other companies 1,638.3 1,863.3 1,970.2
--------- --------- ---------
Net in force........................ $20,543.8 $22,541.5 $24,730.0
========= ========= =========
Percentage of amount assumed to net. 8.0% 8.3% 8.0%
========= ========= =========
The following table sets forth the effects of reinsurance on premiums earned
for the years ended December 31:
(Dollar amounts in millions) 2005 2004 2003
---------------------------- ------ ------ ------
Direct............................. $113.3 $110.8 $122.9
Assumed............................ 3.8 2.5 2.5
Ceded.............................. (13.6) (16.5) (21.4)
------ ------ ------
Net premiums earned................ $103.5 $ 96.8 $104.0
====== ====== ======
Percentage of amount assumed to net 3.7% 2.6% 2.4%
====== ====== ======
Due to the nature of our insurance contracts, premiums earned approximate
premiums written.
Reinsurance recoveries recognized as a reduction of benefit expenses
amounted to $20.7 million, $21.3 million and $23.9 million for the years ended
December 31, 2005, 2004 and 2003, respectively. Reinsurance recoveries
recognized as a reduction of change in policy reserves amounted to $157.5
million, $106.2 million and $5.0 million for the years ended December 31, 2005,
2004 and 2003, respectively.
(6) Future Annuity and Contract Benefits
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.
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 historical
F-24
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
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 table sets forth the major assumptions underlying our recorded
liabilities for future annuity and contract benefits:
Mortality/ December 31,
morbidity Interest rate -----------------
(Dollar amounts in millions) assumption assumption 2005 2004
- ---------------------------- ---------- ------------- -------- --------
Investment contracts....................... Account
balance N/A $5,888.3 $7,267.9
Limited payment contracts.................. (a) 3.5% - 11.25% 203.6 203.5
Traditional life insurance contracts....... (b) 6.45% - 7.40% 295.8 309.2
Universal life type contracts.............. Account
balance N/A 1,756.6 1,769.1
Accident and health........................ (c) 4.5% - 5.25% 57.2 54.9
-------- --------
Total future annuity and contracts benefits $8,201.5 $9,604.6
======== ========
- --------
(a)Either the United States Population Table, 1983 Group Annuitant Mortality
Table or 1983 Individual Annuity Mortality Table and Company experience.
(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.
Assumptions as to persistency are based on the Company's experience.
As described in Note 5, on April 15, 2004 we reinsured our in-force variable
annuity contracts, excluding Retirement Answer, to UFLIC, effective as of
January 1, 2004. We have continued to sell variable annuities and are retaining
that business for our own account.
Our variable annuity contracts provide a basic GMDB, which provides a
minimum account value to be paid on the annuitant's death. Our contractholders
have the option to purchase through riders, at an additional charge, enhanced
death benefits. Our separate account guarantees are predominately death
benefits; we also have some guaranteed minimum withdrawal benefits.
The total account value (excluding the block of business reinsured through
the transaction mentioned above) of our variable annuities with death benefits,
including both separate account and fixed account assets, is approximately
$1,929.4 million and $1,003.9 million at December 31, 2005 and 2004,
respectively, with related death benefit exposure (or net amount at risk) of
approximately $8.2 million and $3.4 million at December 31, 2005 and 2004,
respectively. The liability for our variable annuity contracts with death
benefits net of reinsurance is $2.3 million and $0.5 million at December 31,
2005 and 2004, respectively.
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.
F-25
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
(7) Income Taxes
The total provision (benefit) for income taxes for the years ended
December 31, consisted of the following components:
(Dollar amounts in millions) 2005 2004 2003
- ---------------------------- ------ ------- ------
Current federal income tax............................ $(13.2) $ 34.2 $(21.4)
Deferred federal income tax........................... 37.2 (166.6) 18.3
------ ------- ------
Total federal income tax........................... 24.0 (132.4) (3.1)
------ ------- ------
Current state income tax.............................. (0.8) (3.5) --
Deferred state income tax............................. 2.1 (7.4) --
------ ------- ------
Total state income tax............................. 1.3 (10.9) --
------ ------- ------
Total provision (benefit) for income taxes..... $ 25.3 $(143.3) $ (3.1)
====== ======= ======
The reconciliation of the federal statutory rate to the effective income tax
rate for the years ended December 31, is as follows:
(Dollar amounts in millions) 2005 2004 2003
---------------------------- ----- ------ -----
Statutory U.S. federal income tax rate............. 35.0% 35.0% 35.0%
State income tax, net of federal income tax benefit 1.6 (4.2) (0.1)
Non-deductible goodwill impairment................. 36.8 37.8 --
Dividends-received deduction....................... (17.4) (11.9) (53.1)
Reinsurance transactions with UFLIC................ -- (315.9) --
Other, net......................................... (9.8) 0.4 (0.8)
----- ------ -----
Effective rate.................................. 46.2% (258.8)% (19.0)%
===== ====== =====
The components of the net deferred income tax asset as of December 31, are
as follows:
(Dollar amounts in millions) 2005 2004
---------------------------- ------ ------
Assets:
Future annuity and contract benefits.......... $ 55.8 $ 65.7
Accrued expenses.............................. 48.6 17.5
Deferred tax losses........................... -- 11.0
Other......................................... 17.5 28.8
------ ------
Total deferred income tax asset........... 121.9 123.0
------ ------
Liabilities:
Net unrealized gains on investment securities. 6.7 38.7
Net unrealized gains on derivatives........... 0.6 1.9
Investments................................... 6.1 10.4
Present value of future profits............... 20.1 22.4
Deferred acquisition costs.................... 57.8 4.5
Other......................................... 30.5 39.2
------ ------
Total deferred income tax liability....... 121.8 117.1
------ ------
Net deferred income tax asset............. $ 0.1 $ 5.9
====== ======
F-26
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
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 $15.5 million, $38.1 million and $7.3
million for the years ended December 31, 2005, 2004 and 2003, respectively.
At December 31, 2005 and 2004, the net deferred income tax asset was $0.1
million and $5.9 million, respectively. At December 31, 2005 and 2004, the
current income tax receivable was $1.2 million and $2.6 million, respectively.
(8) Related Party Transactions
We and other direct and indirect subsidiaries of Genworth are parties to an
amended and restated services and shared expenses agreement under which each
company agrees to provide and each company agrees to receive certain general
services. These services include, but are not limited to, data processing,
communications, marketing, public relations, advertising, investment
management, human resources, accounting, actuarial, legal, administration of
agent and agency matters, purchasing, underwriting and claims. Under the terms
of the agreement, settlements are made quarterly.
Under this agreement, amounts incurred for these items aggregated $124.7
million, $117.7 million and $47.8 million for the years ended December 31,
2005, 2004 and 2003, respectively. We also charge affiliates for certain
services and for the use of facilities and equipment, which aggregated $65.0
million, $65.9 million and $93.7 million for the years ended December 31, 2005,
2004 and 2003, respectively.
We pay GE Asset Management Incorporated ("GEAM"), an affiliate of GE, for
investment services under an investment management agreement. We paid $2.5
million, $3.9 million and $10.5 million in 2005, 2004 and 2003, respectively,
to GEAM under this agreement. We also pay Genworth, our ultimate parent, for
investment related services. We paid $6.3 million and $3.0 million to Genworth
in 2005 and 2004, respectively. We were not assessed these charges in 2003.
We pay interest on outstanding amounts under a credit funding agreement with
GNA Corporation, the parent company of GLIC. We have a credit line of $500.0
million with GNA Corporation. Interest expense under this agreement was $0.2
million, $0.1 million and $0.1 million for the years ended December 31, 2005,
2004 and 2003, respectively. We pay interest at the cost of funds of GNA
Corporation, which were 4.3%, 2.2% and 1.3%, as of December 31, 2005, 2004 and
2003, respectively. There was no amount outstanding as of December 31, 2005.
The amount outstanding as of December 31, 2004 was $10.7 million and was
included with other liabilities in the Consolidated Balance Sheets.
(9) Commitments and Contingencies
Commitments
We have certain investment commitments to provide fixed-rate commercial
mortgage 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 $1.6 million and $6.1 million as of December 31, 2005 and 2004,
respectively, in U.S. mortgage loans, which will be held for investment
purposes.
We have limited partnership commitments outstanding of $0.3 million and $0.4
million at December 31, 2005 and December 31, 2004, respectively.
F-27
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
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. At this time, it is not feasible to predict or determine the
ultimate outcomes of all pending investigations and legal proceedings or to
provide reasonable ranges of potential losses.
Guarantees
We guaranteed the payment of certain structured settlement benefits sold by
Assigned Settlement, Inc., our wholly-owned subsidiary, from March 2004 through
December 2005 which were funded by products of our parent and one of our
affiliates. The structured settlement reserves related to this guarantee were
$275.1 million as of December 31, 2005.
(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, other invested assets and derivative financial instruments.
Other financial assets and liabilities--those not carried at fair value or
disclosed separately--are discussed below. Apart from certain of our
borrowings, certain derivative instruments 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 basis on which we estimate fair values is as follows:
Commercial mortgage loans. Based on quoted market prices, recent
transactions and/or discounted future cash flows, using current market 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.
F-28
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
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
as of December 31:
2005 2004
---------------------------- ----------------------------
Notional Carrying Estimated Notional Carrying Estimated
(Dollar amounts in millions) amount amount fair value amount amount fair value
- ---------------------------- -------- -------- ---------- -------- -------- ----------
Assets:
Commercial mortgage loans................ $ (a) $1,042.1 $1,054.7 $ (a) $1,207.7 $1,252.4
Other financial instruments.............. (a) 19.6 27.0 (a) 23.1 27.1
Liabilities:
Borrowings and related instruments:
Borrowings........................... (a) -- -- (a) 10.7 10.7
Investment contract benefits......... (a) 5,888.3 5,835.0 (a) 7,267.9 7,276.0
Other firm commitments:
Ordinary course of business lending
commitments............................ 1.6 -- -- 31.5 -- --
Commitments to fund limited partnerships. 0.3 -- -- 0.4 -- --
- --------
(a)These financial instruments do not have notional amounts.
(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 SPEs as
of December 31:
(Dollar amounts in millions) 2005 2004
---------------------------- ------ ------
Assets secured by:
Commercial mortgage loans. $ 96.5 $112.7
Fixed maturities.......... 66.1 86.4
Other receivables......... 91.5 98.8
------ ------
Total assets.......... $254.1 $297.9
====== ======
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.
F-29
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
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 SPEs is provided under credit support
agreements, in which Genworth 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 off-balance sheet securitization transactions in 2005, 2004 and
2003.
Retained interests and recourse obligations related to such sales that are
recognized in our consolidated financial statements are as follows:
December 31,
---------------------
2005 2004
---------- ----------
Fair Fair
(Dollar amounts in millions) Cost value Cost value
---------------------------- ---- ----- ---- -----
Retained interests--assets. $8.0 $10.4 $9.7 $11.5
Servicing assets........... -- -- -- --
Recourse liability......... -- -- -- --
---- ----- ---- -----
Total...................... $8.0 $10.4 $9.7 $11.5
==== ===== ==== =====
Retained interests. In certain securitization transactions, we retain an
interest in transferred assets. Those interests take various forms and may be
subject to credit prepayment and interest rate risks. 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
F-30
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
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 Commission, Bureau of Insurance.
Based on statutory results as of December 31, 2005, we are able to distribute
$33.0 million in dividends in 2006 without obtaining regulatory approval.
In 2005, we declared and paid a common stock dividend of $440.3 million
consisting of securities. In 2004, concurrently with the consummation of the
reinsurance transactions with UFLIC, we paid a dividend to our stockholder
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 common stock dividends, we declared and paid preferred
stock dividends of $9.6 million for each of the years ended December 31, 2005,
2004 and 2003.
(13) Supplementary Financial Data
We file financial statements with state insurance regulatory authorities and
the 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
stockholders' equity. 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, statutory net (loss) income and statutory
capital and surplus is summarized below:
(Dollar amounts in millions) 2005 2004 2003
---------------------------- ------ ------ ------
Statutory net income (loss).. $144.4 $105.8 $(28.0)
Statutory capital and surplus 476.0 817.2 562.4
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, 2005 and 2004, we exceeded the minimum required RBC
levels.
(14) Operating Segment Information
Our operations are conducted under two reporting segments corresponding to
customer needs: (1) Retirement Income and Investments and (2) 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.
F-31
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
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.
We also have a Corporate and Other segment, which consists primarily of net
realized investment gains (losses), unallocated corporate income, expenses and
income taxes.
We use the same accounting policies and procedures to measure segment
earnings and assets as we use to measure our consolidated net income and
assets. Segment earnings are generally income before income taxes and
cumulative effect of accounting change. Realized gains (losses), net of taxes,
are allocated to the Corporate and Other segment. Segment earnings represent
the basis on which the performance of our business is assessed by management.
Premiums and fees, other income, benefits and acquisition and operating
expenses and policy related amortization are attributed directly to each
operating segment. Net investment income and invested assets are allocated
based on the assets required to support the underlying liabilities and capital
of the products included in each segment.
The following is a summary of industry segment activity for December 31,
2005, 2004 and 2003:
Retirement
Income and Corporate
2005 Investments Protection and Other Consolidated
- ---- ----------- ---------- --------- ------------
(Dollar amounts in millions)
- ----------------------------
Net investment income........................................... $ 229.5 $ 141.0 $ 41.2 $ 411.7
Net realized investment losses.................................. -- -- (4.5) (4.5)
Premiums........................................................ 0.1 103.4 -- 103.5
Other revenues.................................................. 58.6 135.9 -- 194.5
--------- -------- ------ ---------
Total revenues............................................... 288.2 380.3 36.7 705.2
--------- -------- ------ ---------
Interest credited, benefits and other changes in policy reserves 194.1 265.4 -- 459.5
Acquisition and operating expenses, net of deferrals............ 33.3 34.6 22.0 89.9
Amortization of deferred acquisition costs and intangibles...... 20.1 80.9 -- 101.0
--------- -------- ------ ---------
Total benefits and expenses.................................. 247.5 380.9 22.0 650.4
--------- -------- ------ ---------
Income (loss) before income taxes............................ 40.7 (0.6) 14.7 54.8
Provision (benefit) for income taxes......................... 3.2 20.2 1.9 25.3
--------- -------- ------ ---------
Net income (loss)............................................ $ 37.5 $ (20.8) $ 12.8 $ 29.5
========= ======== ====== =========
Total assets.................................................... $15,507.4 $2,680.0 $694.6 $18,882.0
========= ======== ====== =========
F-32
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
Retirement
Income and Corporate
2004 Investments Protection and Other Consolidated
- ---- ----------- ---------- --------- ------------
(Dollar amounts in millions)
- ----------------------------
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
Acquisition and operating 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 (loss) before 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 $2,748.2 $1,347.3 $20,837.9
========= ======== ======== =========
Retirement
Income and Corporate
2003 Investments Protection and Other Consolidated
- ---- ----------- ---------- --------- ------------
(Dollar amounts in millions)
- ----------------------------
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
Acquisition and operating 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
========= ======== ======== =========
F-33
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 2005, 2004 and 2003
(Dollar amounts in millions)
(15) Quarterly Financial Data (unaudited)
Our unaudited summarized quarterly financial data for the years ended
December 31, were as follows:
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- ------------- -------------- -------------
(Dollar amounts in millions) 2005 2004 2005 2004 2005 2004 2005 2004
- ---------------------------- ------ ------ ------ ------ ------ ------ ------ ------
Net investment income............ $107.8 $129.1 $ 98.1 $ 84.4 $101.5 $100.0 $104.3 $107.5
====== ====== ====== ====== ====== ====== ====== ======
Total revenues................... $184.1 $232.2 $170.9 $119.0 $172.3 $174.5 $177.9 $174.2
====== ====== ====== ====== ====== ====== ====== ======
Earnings (loss) before cumulative
effect of change in accounting
principle (1).................. $ 27.0 $ 6.5 $ 15.4 $150.4 $(37.9) $ 19.0 $ 25.0 $ 22.8
====== ====== ====== ====== ====== ====== ====== ======
Net income (loss)................ $ 27.0 $ 7.2 $ 15.4 $150.4 $(37.9) $ 19.0 $ 25.0 $ 22.8
====== ====== ====== ====== ====== ====== ====== ======
- --------
(1)See note 1 (t) of the Consolidated Financial Statements.
The Consolidated Statements of Cash Flows previously reported in our 2005
quarterly reports on Form 10-Q have been revised to reflect changes in the
treatment of net receivable/payable from unsettled investment purchases and
sales. These changes previously classified within cash flows from operating
activities have been reclassified to cash flows from investing activities, as
such balances pertained to investments.
As a result of the revisions, previously reported cash flows from operating
activities and cash flows from investing activities were increased or decreased
for the following periods:
Three months ended Six months ended Nine months ended
March 31, June 30, September 30,
----------------- --------------- ----------------
(Dollar amounts in millions) 2005 2004 2005 2004 2005 2004
- ---------------------------- ------- ------ ------ ------- -------- ------
Net cash from operating activities:
As originally reported............ $ 41.6 $ 99.1 $143.8 $ 35.8 $ 73.9 $281.6
Impact of revisions............... 274.8 59.0 47.4 112.5 99.7 (16.7)
------- ------ ------ ------- -------- ------
Revised........................... $ 316.4 $158.1 $191.2 $ 148.3 $ 173.6 $264.9
======= ====== ====== ======= ======== ======
Net cash from investing activities:
As originally reported............ $ 534.4 $169.0 $880.8 $ 308.6 $1,130.1 $231.4
Impact of revisions............... (274.8) (59.0) (47.4) (112.5) (99.7) 16.7
------- ------ ------ ------- -------- ------
Revised........................... $ 259.6 $110.0 $833.4 $ 196.1 $1,030.4 $248.1
======= ====== ====== ======= ======== ======
The revisions have no impact on the total change in cash and cash
equivalents within our Consolidated Statements of Cash Flows or on our
Consolidated Statements of Income or Consolidated Balance Sheets.
F-34
Appendix
MARKET VALUE
ADJUSTMENT
EXAMPLES
The formula used to determine the Market Value Adjustment
factor is:
((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 = $103,526.08
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
Prospectus Delivery Obligations
Until May 1, 2007, all registered representatives that effect transactions
in these securities are required to deliver a prospectus.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The expenses in connection with the issuance and distribution of the
contract, other than any underwriting discounts and commissions, are as follows:
Securities and Exchange Commission
Registration Fees (approximate amount we
will wire).............................. $11,711 (based on a total of $50,000,000 Proposed
Maximum Aggregate Offering)*
Printing and engraving.................... $ 9,725
Accounting fees and expenses.............. $ 5,000
Legal fees and expenses................... $ 3,000
Miscellaneous............................. $ 2,500
-------
Total expenses (approximate)........... $31,936
=======
- --------
* Registered previously with Pre-Effective Amendment No. 1 filed on December
13, 2001.
Item 14. Indemnification of Directors and Officers.
Sections 13.1-876 and 13.1-881 of the Code of Virginia, in brief, allow a
corporation to indemnify any person made party to a proceeding because such
person is or was a director, officer, employee, or agent of the corporation,
against liability incurred in the proceeding if: (1) he conducted himself in
good faith; and (2) he believed that (a) in the case of conduct in his official
capacity with the corporation, his conduct was in its best interests; and (b)
in all other cases, his conduct was at least not opposed to the corporation's
best interests and (3) in the case of any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful. The termination of a
proceeding by judgment, order, settlement or conviction is not, of itself,
determinative that the director, officer, employee, or agent of the corporation
did not meet the standard of conduct described. A corporation may not indemnify
a director, officer, employee, or agent of the corporation in connection with a
proceeding by or in the right of the corporation, in which such person was
adjudged liable to the corporation, or in connection with any other proceeding
charging improper personal benefit to such person, whether or not involving
action in his official capacity, in which such person was adjudged liable on
the basis that personal benefit was improperly received by him. Indemnification
permitted under these sections of the Code of Virginia in connection with a
proceeding by or in the right of the corporation is limited to reasonable
expenses incurred in connection with the proceeding.
Genworth Life and Annuity Insurance Company's Articles of Incorporation
provide that Genworth Life and Annuity Insurance Company shall, and may through
insurance coverage, indemnify any directors or officers who are a party to any
proceeding by reason of the fact that he or she was or is a director or officer
of Genworth Life and Annuity Insurance Company against any liability incurred
by him or her in connection with such proceeding, unless he or she engaged in
willful misconduct or a knowing violation of the criminal law or any federal or
state securities law. Such indemnification covers all judgments, settlements,
penalties, fines and reasonable expenses incurred with respect to such
proceeding. If the person involved is not a director or officer of Genworth
Life and Annuity Insurance Company, the board of directors may cause Genworth
Life and Annuity Insurance Company to indemnify, or contract to indemnify, to
the same extent allowed for its directors and officers, such person who was, is
or may become a party to any proceeding, by reason of the fact that he or she
is or was an employee or agent of Genworth Life and Annuity Insurance Company,
or is or was serving at the request of Genworth Life and Annuity Insurance
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise.
1
* * *
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
depositor pursuant to the foregoing provisions, or otherwise, the depositor has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the depositor of expenses incurred
or paid by a director, officer or controlling person of the depositor in
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the depositor will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
Item 15. Recent Sales of Unregistered Securities.
Not applicable.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
(1)(a) Underwriting Agreement. Previously filed December 12, 2001 to Form S-1 for GE Life and Annuity
Assurance Company, Registration No. 333-69786.
(1)(b) Broker-Dealer Sales Agreement. Previously filed December 12, 2001 to Form S-1 for GE Life and
Annuity Assurance Company, Registration No. 333-69786.
(2) Not applicable.
(3)(a) Certificate of Incorporation of The Life Insurance Company of Virginia. Previously filed on May 1,
1998 with Post-Effective Amendment No. 9 to Form N-4 for GE life & Annuity Separate Account 4,
Registration No. 033-76334.
(3)(a)(i) Amended and Restated Articles of Incorporation of GE Life and Annuity Assurance Company.
Previously filed on September 1, 2000 with Post-Effective Amendment No. 1 to Form N-4 for GE
Life & Annuity Separate Account 4, Registration No. 333-31172.
(3)(a)(ii) Amended and Restated Articles of Incorporation of Genworth Life and Annuity Insurance Company.
Filed herewith.
(3)(b) Amended and Restated By-laws of Genworth Life and Annuity Insurance Company. Filed herewith.
(4) Contract. Previously filed on September 19, 2001 on Form S-1 for GE Life and Annuity Assurance
Company, Registration No. 333-69620.
(4)(b) SEP Endorsements, Form P5090 7/97 and Form 5094 7/98. Previously filed on May 1, 1998 with
Post-Effective Amendment No. 9 to Form N-4 for GE life & Annuity Separate Account 4,
Registration No. 033-76334.
(4)(b)(i) Individual Retirement Annuity Endorsement, Form 5090 7/97. Previously filed on May 1, 1998 with
Post-Effective Amendment No. 9 to Form N-4 for GE life & Annuity Separate Account 4,
Registration No. 033-76334.
(4)(b)(ii) Roth Individual Retirement Annuity Endorsement, Form P5133 11/00. Previously filed on
September 19, 2001 on Form S-1 for GE Life and Annuity Assurance Company, Registration
No. 333-69620.
(4)(b)(iii) Section 403(b) Annuity Endorsement, Form 5145 12/00. Previously filed on September 19, 2001 on
Form S-1 for GE Life and Annuity Assurance Company, Registration No. 333-69620.
(4)(c) Application. Previously filed August 20, 2001 to Form S-1 for GE Life and Annuity Assurance
Company, Registration No. 333-67902.
2
(5) Opinion and Consent of Counsel. Filed herewith.
(6) Not applicable.
(7) Not applicable.
(8) Not applicable.
(9) Not applicable.
(10) Not applicable.
(11) Not applicable.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) Not applicable.
(16) Not applicable.
(17) Not applicable.
(18) Not applicable.
(19) Not applicable.
(20) Not applicable.
(21) Subsidiaries of the Registrant. Filed herewith.
(22) Not applicable.
(23)(a) Consent of Independent Registered Public Accounting Firm. Filed herewith.
(23)(b) Consent of Counsel. Included with Exhibit 5, filed herewith.
(24) Power of Attorney. Filed herewith.
(25) Not applicable.
(26) Not applicable.
(27) Not applicable.
(99)(a) Resolution of Board of Directors of GE Life and Annuity Assurance Company authorizing the
establishment of GE Life & Annuity Variable Account 6. Previously filed on August 20, 2001 to
Form S-1 for GE Life and Annuity Assurance Company, Registration No. 333-67902.
(99)(b) Resolution of Board of Directors of GE Life and Annuity Assurance Company authorizing the name
change of GE Life & Annuity Variable Account 6 to Genworth Life & Annuity MVA Separate
Account. Filed herewith.
(b) Financial Statement Schedules
3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Genworth Life and Annuity Insurance Company:
Under the date of March 10, 2006, we reported on the consolidated balance
sheets of Genworth Life and Annuity Insurance Company and subsidiaries (the
Company) as of December 31, 2005 and 2004, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 2005, which are included
herein. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedules included herein. These financial statement schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present
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.
/s/ KPMG LLP
Richmond, Virginia
March 10, 2006
4
Schedule I
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY
Summary of investments--other than investments in related parties
December 31, 2005
(Dollar amounts in millions)
Amortized
cost or Estimated Carrying
Type of Investment cost fair value value
- ------------------ --------- ---------- --------
Fixed maturities:
Bonds:
U.S. government, agencies and authorities..... $ 70.2 $ 70.2 $ 70.2
Government--non U.S........................... 101.9 111.4 111.4
Public utilities.............................. 353.9 357.2 357.2
All other corporate bonds..................... 4,400.7 4,421.6 4,421.6
-------- -------- --------
Total fixed maturities..................... 4,926.7 4,960.4 4,960.4
Equity securities.................................... 15.3 23.3 23.3
Commercial mortgage loans............................ 1,042.1 xxxxx 1,042.1
Policy loans......................................... 158.3 xxxxx 158.3
Other invested assets (1)............................ 388.6 xxxxx 387.4
-------- -------- --------
Total investments.......................... $6,531.0 xxxxx $6,571.5
======== ======== ========
- --------
(1) The amount shown in the Consolidated Balance Sheet for other invested
assets differs from cost as other invested assets include derivatives which
are reported at estimated fair value.
See Accompanying Report of Independent Registered Public Accounting Firm.
5
Schedule III
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY
Supplemental Insurance Information
(Dollar amounts in millions)
Future Annuity
And Contract Other
Benefits & Policyholder
Liability Liabilities
Deferred For Policy and (Excluding
Acquisition Contract Unearned Unearned Premium
Segment Costs Claims Premiums Premiums) Revenue
- ------- ----------- --------------- ------------- ------------ --------
December 31, 2005:
Retirement Income and Investments. $245.4 $6,095.0 $ -- $184.0 $ 0.1
Protection........................ 75.7 2,188.6 22.2 0.9 103.4
Corporate and Other............... -- -- -- -- --
------ -------- ------ ------ ------
Total......................... $321.1 $8,283.6 $ 22.2 $184.9 $103.5
====== ======== ====== ====== ======
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. $ (1.7)
Protection...................... 105.7
Corporate and Other............... --
------
Total......................... $104.0
======
Interest Amortization
Credited & Acquisition of Deferred
Net Benefits and and Operating Acquisition
Investment Other Changes Expenses, net Costs and Premiums
Segment Income Policy Reserves of deferrals Intangibles Written
- ------- ----------- --------------- ------------- ------------ --------
December 31, 2005:
Retirement Income and Investments. $229.5 $ 194.1 $ 33.3 $ 20.1 $ 0.4
Protection........................ 141.0 265.4 34.6 80.9 102.7
Corporate and Other............... 41.2 -- 22.0 -- --
------ -------- ------ ------ ------
Total......................... $411.7 $ 459.5 $ 89.9 $101.0 $103.1
====== ======== ====== ====== ======
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 and 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 and Other............... (17.2) -- 47.3 -- --
------ -------- ------ ------ ------
Total......................... $538.0 $ 656.3 $149.0 $118.9 $103.7
====== ======== ====== ====== ======
See Accompanying Report of Independent Registered Public Accounting Firm.
6
Item 17. Undertakings.
(A) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
an amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of an amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(B) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officers or, controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such-director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 5 to the registration statement to be signed
on its behalf by the undersigned thereunto duly authorized, and its seal to be
hereunto affixed and attested, in the County of Henrico in the Commonwealth of
Virginia, on the 17th day of March, 2006.
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY
(Registrant)
By: /s/ GEOFFREY S. STIFF
-----------------------------
Geoffrey S. Stiff
Senior Vice President
Pursuant to the requirements of the Securities Act of 1933 this Amendment
No. 5 to the registration statement has been signed below by the following
persons in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ *PAMELA S. SCHUTZ Chairperson of the Board, March 17, 2006
- ----------------------------- President and Chief
Pamela S. Schutz Executive Officer
/s/ *PAUL A. HALEY Director, Senior Vice March 17, 2006
- ----------------------------- President and Chief Actuary
Paul A. Haley
/s/ *BRIAN W. HAYNES Director and Senior Vice March 17, 2006
- ----------------------------- President
Brian W. Haynes
/s/ *ROBERT T. METHVEN Director and Senior Vice March 17, 2006
- ----------------------------- President
Robert T. Methven
/s/ *DANIEL C. MUNSON Director and Senior Vice March 17, 2006
- ----------------------------- President
Daniel C. Munson
/s/ *LEON E. RODAY Director and Senior Vice March 17, 2006
- ----------------------------- President
Leon E. Roday
/s/ GEOFFREY S. STIFF Director and Senior Vice March 17, 2006
- ----------------------------- President
Geoffrey S. Stiff
/s/ *THOMAS M. STINSON Director and Senior Vice March 17, 2006
- ----------------------------- President
Thomas M. Stinson
/s/ *THOMAS E. DUFFY Senior Vice President, March 17, 2006
- ----------------------------- General Counsel and
Thomas E. Duffy Secretary
8
Name Title Date
---- ----- ----
/s/ *J. KEVIN HELMINTOLLER Senior Vice President and March 17, 2006
- ----------------------------- Chief Financial Officer
J. Kevin Helmintoller
/s/ *JOHN A. ZELINSKE Vice President and Controller March 17, 2006
- -----------------------------
John A. Zelinske
*By: /s/ GEOFFREY S. STIFF , pursuant to Power of Attorney March 17, 2006
---------------------- executed on February 21, 2006.
Geoffrey S. Stiff
9