THE SCHWAB FIXED ANNUITY(TM)
A FLEXIBLE PREMIUM DEFERRED FIXED ANNUITY
Distributed by
CHARLES SCHWAB & CO., INC.
---------------------------------------------
Issued by
FIRST GREAT-WEST LIFE & ANNUITY
INSURANCE COMPANY
This prospectus describes interests under a flexible premium deferred annuity
contract, The Schwab Fixed Annuity (the "Contract"). The Contract is issued
either on a group basis or as individual contracts by First Great-West Life &
Annuity Insurance Company (the "Company"). Participation in a group contract
will be accounted for by the issuance of a certificate showing an interest under
the group contract. The certificate and the individual contract are hereafter
both referred to as the "Contract."
Your investment in the Contract may be allocated to the available Guarantee
Periods. You are allowed to select one or more Guarantee Periods, each of which
offers you a specified interest rate for a specified period. There may be a
Market Value Adjustment on the amounts withdrawn from the Guarantee Period Fund
prior to maturity. The Contract described by this prospectus is available only
in New York and Iowa.
The minimum initial investment is $5,000 ($2,000 if an IRA) or $1,000 if made
under an Automatic Contribution Plan ("ACP"). The minimum subsequent
Contribution is $500 (or $100 per month if made under an ACP).
A maximum Surrender Charge of three percent may be applicable for amounts
withdrawn in the first three years. The Contract provides a Free Look Period of
10 days (30 days for replacement policies) from your receipt of the Contract,
during which time you may cancel your investment in the Contract. Contributions
will be allocated directly into the specified Guarantee Period(s).
Amounts allocated to a Guarantee Period may be subject to a Market Value
Adjustment which could result in receipt of more or less than your Contributions
if you surrender, Transfer, make a partial withdrawal, apply amounts to purchase
an annuity before a Guarantee Period Maturity Date. Whether such a result
actually occurs depends on the timing of the transaction, the amount of the
Market Value Adjustment and the interest rate credited. The interest rate in
subsequent Guarantee Periods may be more or less than the rate of a previous
Guarantee Period.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. NO PERSON IS AUTHORIZED BY THE COMPANY TO GIVE INFORMATION OR
TO MAKE ANY REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN
CONNECTION WITH THE OFFERS CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE. PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE.
Prospectus Dated May 1, 1998
The Contracts are not deposits of, or guaranteed or endorsed by any bank, nor
are the Contracts federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency. The
Contracts involve certain investment risks, including possible loss of
principal.
To Place Orders and for Annuity Account Information: Contact the Schwab Annuity
Service Center at 800-838-0649 or P.O. Box 7806, San Francisco, California
94120-7806.
About This Prospectus: This prospectus concisely presents important information
you should have before investing in the Contract. Please read it carefully and
retain it for future reference.
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TABLE OF CONTENTS
Page
DEFINITIONS................................................................iii
KEY FEATURES OF THE ANNUITY................................................. 1
FEE TABLE....................................................................2
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY ..........................3
THE GUARANTEE PERIOD FUND....................................................3
THE MARKET VALUE ADJUSTMENT..................................................5
APPLICATION AND CONTRIBUTIONS................................................6
TRANSFERS....................................................................7
CASH WITHDRAWALS.............................................................8
TELEPHONE TRANSACTIONS.......................................................9
DEATH BENEFIT................................................................9
CHARGES AND DEDUCTIONS......................................................11
PAYMENT OPTIONS.............................................................12
FEDERAL TAX MATTERS ........................................................16
ASSIGNMENTS OR PLEDGES......................................................19
DISTRIBUTION OF THE CONTRACTS...............................................20
SELECTED FINANCIAL DATA.....................................................20
RIGHTS RESERVED BY THE COMPANY..............................................28
LEGAL PROCEEDINGS ..........................................................28
LEGAL MATTERS...............................................................28
EXPERTS ....................................................................28
AVAILABLE INFORMATION.......................................................28
APPENDIX A..................................................................29
FINANCIAL STATEMENTS.......................................................F-1
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THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESPERSON, OR OTHER
PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED ON.
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The Contract described in this prospectus is available only in New York and
Iowa.
<PAGE>
DEFINITIONS
Accumulation Period - The period between the Effective Date and the Payment
Commencement Date.
Annuitant - The person named in the application upon whose life the payment of
an annuity is based and who will receive annuity payments. If a Contingent
Annuitant is named, then the Annuitant will be considered the Primary Annuitant.
While the Annuitant is living and at least 30 days prior to the annuity
commencement date, the Owner may, by Request, change the Annuitant.
Annuity Account - An account established by the Company in the name of the Owner
that reflects all account activity under this Contract.
Annuity Account Value - The sum of the value of all Guarantee Periods credited
to the Owner under the Annuity Account; less Transfers, partial withdrawals,
amounts applied to an annuity option, periodic withdrawals, charges deducted
under the Contract and, less Premium Tax, if any.
Annuity Payment Period - The period beginning on the annuity commencement date
and continuing until all annuity payments have been made under the Contract.
Automatic Contribution Plan ("ACP") - A plan which allows for automatic periodic
Contributions. The Contribution amount will be withdrawn from a designated
pre-authorized account and automatically credited to the Annuity Account.
Beneficiary - The person(s) designated by the Owner, in the application, or as
subsequently changed by the Owner by Request, to receive any death benefit which
may become payable under the terms of the Contract. If the surviving spouse of
an Owner is the surviving Joint Owner, the surviving spouse will become the
Beneficiary upon such Owner's death and may elect to take the death benefit, if
any, or elect to continue the Contract in force.
Company - First Great-West Life & Annuity Insurance Company, the issuer of this
annuity, located at 125 Wolf Road, Suite 110, Albany, New York 12205.
Contingent Annuitant - The person named in the application, unless later changed
by the Owner by Request while the Annuitant is alive and before annuity payments
have commenced, who becomes the Annuitant when the Primary Annuitant dies. No
new Contingent Annuitant may be designated after the death of the Primary
Annuitant.
Contractual Guarantee of a Minimum Rate of Interest - The minimum interest rate
applicable to each Guarantee Period equal to an annual effective rate in effect
at the time the Contribution is made and as reflected in written confirmation of
the Contribution. This is the minimum rate allowed by law and is subject to
change in accordance with changes in applicable law. Under current law the
minimum rate is 3%.
Contributions - Purchase amounts received under the Contract prior to any
Premium Tax or other deductions.
Effective Date - The date on which the first Contribution is credited to the
Annuity Account.
Guarantee Period - One of the time intervals available in the Guarantee Period
Fund during which the Company will credit a stated rate of interest. The Company
may stop offering any time interval at any time for new Contributions. Amounts
allocated to one or more Guaranteed Periods may be subject to a Market Value
Adjustment.
Guarantee Period Fund - A fixed interest investment option in which amounts
allocated will be credited a stated rate of interest for the applicable
Guarantee Period(s).
Guarantee Period Maturity Date - The last day of any Guarantee Period.
Individual Retirement Annuity (IRA) - An annuity contract used in a retirement
savings program that is intended to satisfy the requirements of Section 408 of
the Internal Revenue Code of 1986, as amended.
Market Value Adjustment - An adjustment which may be made to amounts paid out
before the Guarantee Period Maturity Date due to surrenders, partial
withdrawals, Transfers, amounts applied to the periodic withdrawal option or to
purchase an annuity, as applicable. Market Value Adjustments may increase or
decrease the amount payable on one of the above-described distributions. A
negative adjustment may result in an effective interest rate lower than the
applicable Contractual Guarantee of a Minimum Rate of Interest, and the value of
the Contribution(s) allocated to the Guarantee Period being less than the
Contribution(s) made. The Market Value Adjustment is detailed on page 5.
Non-Qualified Annuity Contract - An annuity contract which is not intended to be
part of a qualified retirement plan and is not intended to satisfy the
requirements of Section 408 of the Internal Revenue Code of 1986, as amended.
Owner (Joint Owner) or You - The person(s), while the Annuitant is living, named
in the Contract Data Page who is entitled to exercise all rights and privileges
under the Contract. Joint Owners must be husband and wife as of the date the
Contract is issued. The Annuitant will be the Owner unless otherwise indicated
in the application. If a Contract is purchased as an IRA, the Owner and the
Annuitant must be the same individual and no Joint Owner may be named. Any
reference to Owner in the singular tense shall include the plural, and vice
versa, as applicable.
Payment Commencement Date - The date on which annuity payments or periodic
withdrawals commence under a payment option. The Payment Commencement Date must
be at least one year after the Effective Date of the Contract. If a Payment
Commencement Date is not shown on the Contract Data Page, annuity payments will
commence on the first day of the month of the Annuitant's 90th birthday. The
Payment Commencement Date may be changed by the Owner within 60 days prior to
commencement of annuity payments or it may be changed by the Beneficiary upon
the death of the Owner. If this is an IRA, payments which satisfy the minimum
distribution requirements of the Internal Revenue Code of 1986, as amended, must
begin no later than the Owner's attainment of age 70 1/2.
Premium Tax - The amount of tax, if any, charged by a state or other
governmental authority.
Request - Any written, telephoned, or computerized instruction in a form
satisfactory to the Company and received at the Schwab Annuity Service Center
(or other annuity service center subsequently named) from the Owner or the
Owner's designee (as specified in a form acceptable to the Company) or the
Beneficiary (as applicable) as required by any provision of the Contract or as
required by the Company. All Requests are subject to any action taken or payment
made by the Company before it was processed.
Schwab Annuity Service Center - P.O. Box 7806, San Francisco, California
94120-7806, telephone 800-838-0649.
Simplified Employee Pension - An individual retirement annuity (IRA) which may
accept contributions from one or more employers under a retirement savings
program intended to satisfy the requirements of Section 408(k) of the Internal
Revenue Code of 1986, as amended.
Surrender Charge - a maximum charge of three percent will be assessed if funds
are withdrawn in the first three Contract years.
Surrender Value - The Annuity Account Value with a Market Value Adjustment, if
applicable, and/or less any Surrender Charge, if applicable, on the effective
date of the surrender, less Premium Tax, if any.
Transaction Date - The date on which any Contribution or Request from the Owner
will be processed by the Company at the Schwab Annuity Service Center.
Contributions and Requests received after 4:00 p.m. EST/EDT will be deemed to
have been received on the next business day. Requests will be processed each day
that the New York Stock Exchange is open for trading.
Transfer - To move money among the Guaranteed Periods.
We, our, us, or First GWL&A: First Great-West Life & Annuity Insurance Company.
<PAGE>
32
KEY FEATURES OF THE ANNUITY
The Contract currently allows Owners to invest in the Guarantee Period Fund
which is comprised of Guarantee Periods, each of which has its own stated rate
of interest and its own maturity date. The stated rate of interest for the
Guarantee Period will depend on the date the Guarantee Period is established and
the duration of the Guarantee Period you select from among those available. The
rates declared are subject to a minimum (Contractual Guarantee of a Minimum Rate
of Interest), but the Company may declare higher rates (the stated rate of
interest). The Contractual Guarantee of a Minimum Rate of Interest will be
disclosed in the written confirmation. The stated rate of interest will not be
less than the Contractual Guarantee of a Minimum Rate of Interest and will also
be disclosed in the written confirmation. Amounts withdrawn or transferred from
a Guarantee Period prior to the Guarantee Period Maturity Date may be subject to
a Market Value Adjustment. (See "Market Value Adjustment", p. 5.)
Who should invest. The Contract is designed for investors who are seeking
long-term tax deferred asset accumulation on a fixed interest rate basis. The
Contract can be used for retirement or other long-term investment purposes. The
deferral of income taxes is particularly attractive to investors in high federal
and state tax brackets who have already fully taken advantage of their ability
to make IRA contributions or "pre-tax" contributions to their employer sponsored
retirement or savings plans.
How to Invest. You must complete a Contract application form, in order to invest
in the Contract, and pay by check or instruct us to transfer funds from your
Schwab account. The minimum initial investment is $5,000 (or $2,000 if in an
IRA). Subsequent investments must be at least $500. The minimum initial
investment may be reduced to $1,000 should the Owner agree to make additional
$100 per month minimum recurring deposits through an ACP.
Free Look Period. The Contract provides for a Free Look Period which allows you
to cancel your investment generally within 10 days (30 days for replacement
policies) of your receipt of the Contract. You can cancel the Contract during
the Free Look Period by delivering or mailing the Contract to the Schwab Annuity
Service Center. The cancellation is not effective unless we receive a notice
which is postmarked before the end of the Free Look Period. If the Contract is
returned, the contract will be void from the start and the greater of: (a)
Contributions received less surrenders, withdrawals and distributions or (b) the
Annuity Account Value less surrenders, withdrawals and distributions, will be
refunded. These procedures may vary where required by state law.
(See "Application and Contributions," p. 6.)
Allocation of the Initial Investment. Your initial investment in the Guarantee
Period Fund will be directly allocated to the Guarantee Period(s) specified in
the application.
Charges and Deductions Under the Contract. The Contract is a "low load" annuity
and, as such, imposes no sales charge when Contributions are made, and only a
maximum Surrender Charge of three percent if funds are withdrawn in the first
three Contract years.
No Contract Maintenance Charge will be deducted from your Annuity Account Value.
There will be a transfer fee of $10 for each Transfer in excess of twelve
Transfers per calendar year. (See "Charges and Deductions," p. 11.)
Depending on your state of residence, we may deduct a charge for Premium Tax
from purchase payments or amounts withdrawn or at the Payment Commencement Date.
(See "Charges and Deductions," p. 11.)
The Market Value Adjustment may increase or decrease the amount Transferred or
withdrawn from the value of a Guarantee Period if the Guarantee Period is broken
prior to the Guarantee Period Maturity Date. A negative adjustment may result in
an effective interest rate lower than the stated rate of interest for the
applicable Guarantee Period and the Contractual Guarantee of a Minimum Rate of
Interest and the value of the Contribution(s) allocated to the Guarantee Period
being less than the Contribution(s) made. (See "Market Value Adjustment," p. 5.)
Switching Investments. You may switch Contributions among the Guarantee Periods
as often as you like with no immediate tax consequences. You may make a Transfer
Request to the Schwab Annuity Service Center. A transfer fee may apply. (See
"Charges and Deductions," p. 11.) Amounts Transferred out of a Guarantee Period
prior to the Guarantee Period Maturity Date may be subject to a Market Value
Adjustment. (See "Market Value Adjustment," p. 5.)
Full and Partial Withdrawals. You may withdraw all or part of your Annuity
Account Value before the earlier of the annuity commencement date you selected
or the Annuitant's or Owner's death. Withdrawals may be taxable and if made
prior to age 59 1/2 may be subject to a 10% penalty tax. Withdrawals from a
Guarantee Period prior to the Guarantee Period Maturity Date may be subject to
Market Value Adjustment. (See "Market Value Adjustment," p. 5.) Amounts
withdrawn also may be subject to a Surrender Charge. (See "Charges and
Deductions," p. 11.) The minimum partial withdrawal prior to the Market Value
Adjustment is $500. There is no limit on the number of withdrawals made. The
Company may delay payment of withdrawals from the Guarantee Period Fund by up to
6 months. (See "Cash Withdrawals," p. 8.)
Annuity Options. Beginning on the first day of the month immediately following
the annuity commencement date you select, you may receive annuity payments on a
fixed basis. (The default date is the first day of the month that the Annuitant
attains age 90.) A wide range of annuity options are available to provide
flexibility in choosing an annuity payment schedule that meets your particular
needs. These annuity options include payment options designed to provide
payments for life (for either a single or joint life), with or without a
guaranteed minimum number of payments. (See "Payment Options," p. 12.)
Death Benefit. The amount of the death benefit, if payable before annuity
payments commence, will be the greater of (a) the Annuity Account Value with a
Market Value Adjustment, if applicable, as of the date a Request for payment is
received, less Premium Tax, if any; or (b) the sum of Contributions paid, less
partial withdrawals and Periodic Withdrawals, less charges deducted under the
Contract, if any, less Premium Tax, if any.
(See "Death Benefit," p. 9.)
Customer Service. Schwab's professional representatives are available toll-free
to assist you. If you have any questions about your Contract, please telephone
the Schwab Annuity Service Center (800-838-0649) or write to the Schwab Annuity
Service Center at P.O. Box 7806, San Francisco, California 94120-7806. All
inquiries should include the Contract number and the Owner's name. As a Contract
Owner you will receive periodic statements confirming any transactions relating
to your Contract, as well as a quarterly statement and an annual report.
FEE TABLE
The purpose of this table is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly when investing in
the Contract. The information set forth should be considered together with the
narrative provided under the heading "Charges and Deductions." In addition to
the expenses listed below, a Premium Tax may be applicable.
Contract Owner Transaction Expenses
Sales Load None
Surrender Fee Maximum 3%
Transfer Fee (First 12 Per Year)1 None
Contract Maintenance Charge None
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1 There is a $10 fee for each Transfer in excess of twelve in any contract
year.
<PAGE>
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
The Company is a stock life insurance company organized under the laws of
the state of New York. First GWL&A was incorporated on April 9, 1996 and is a
wholly owned subsidiary of Great-West Life & Annuity Insurance Company
("Great-West"). First GWL&A commenced operations upon receipt of its certificate
of authority from the Superintendent of Insurance of New York on May 28, 1997.
First GWL&A is principally engaged in the sale of life insurance, accident
and health insurance and annuities. It is admitted to do business in the states
of New York and Iowa.
Great-West is a wholly-owned subsidiary of The Great-West Life Assurance
Company ("GWL"). GWL is a subsidiary of Great-West Lifeco Inc., a holding
company. Great-West Lifeco Inc. is in turn a subsidiary of Power Financial
Corporation, a financial services company. Power Corporation of Canada, a
holding and management company, has voting control of Power Financial
Corporation. Mr. Paul Desmarais, through a group of private holding companies,
which he controls, has voting control of Power Corporation of Canada.
THE GUARANTEE PERIOD FUND
Guarantee Period Fund
Contributions under the Contract will be deposited to, and accounted for,
in a non-unitized market value separate account established by the Company under
Section 4240 of the New York Insurance Code and in accordance with New York
Regulation 128. A non-unitized separate account is a separate account in which
the Owner does not participate in the performance of the assets through unit
values. Therefore, Owner's do not receive a unit ownership of assets accounted
for in this separate account. The assets accrue solely to the benefit of the
Company and any gain or loss in the separate account is borne entirely by the
Company. For amounts contributed, Owners will receive the Contract guarantees
made by the Company.
Contributions will be allocated to one or more Guarantee Periods of a
duration selected by the Owner from those currently being offered by the
Company. Every Guarantee Period offered by the Company will have a duration of
at least one year. Contributions will be credited on the Transaction Date.
Each Guarantee Period will have its own stated rate of interest and
Guarantee Period Maturity Date. The stated rate of interest applicable to a
Guarantee Period will depend on the date the Guarantee Period is established and
the duration chosen by the Owner.
As of the date of this prospectus, Guarantee Periods with time intervals
of 1 to 10 years are offered. The Guarantee Periods may be changed in the
future; however, any such modification will not have an impact on any Guarantee
Period then in effect.
The value of amounts in each Guarantee Period is the Owner's
Contributions, less Premium Tax, if any, in that Guarantee Period, plus interest
earned, less amounts distributed, withdrawn (in whole or in part), Transferred
or applied to an annuity option, periodic withdrawals, and charges deducted
under the Contract. If a Guarantee Period is broken, a Market Value Adjustment
may be assessed. Any such amount withdrawn or Transferred from a Guarantee
Period will be paid in accordance with the MVA formula. (See "Market Value
Adjustment," p. 5.)
Investments
The Company intends to invest in assets which, in the aggregate, have
characteristics, especially cash flow patterns, reasonably related to the
characteristics of its liabilities. Various techniques will be used to achieve
the objective of close aggregate matching of assets and liabilities. The Company
will primarily invest in investment-grade fixed income securities including:
Securities issued by the U.S. Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the U.S.
Government.
Debt securities which have an investment grade, at the time of
purchase, within the four highest grades assigned by Moody's Investment
Services, Inc. (Aaa, Aa, A or Baa), Standard & Poor's Corporation (AAA,
AA, A or BBB) or any other nationally recognized rating service.
Other debt instruments, including, but not limited to, issues of
banks or bank holding companies and of corporations, which obligations,
although not rated by Moody's, Standard & Poor's, or other nationally
recognized rating firms, are deemed by the Company's management to have an
investment quality comparable to securities which may be purchased as
stated above.
Commercial paper, cash or cash equivalents, and other short-term
investments having a maturity of less than one year which are considered
by the Company's management to have investment quality comparable to
securities which may be purchased as stated above.
In addition, the Company may invest in futures and options. Financial
futures and related options thereon and options on securities are purchased
solely for non-speculative hedging purposes. The Company may sell a futures
contract or purchase a put option on futures or securities to protect the value
of securities held in or to be sold for the general account or the non-unitized
separate account in the event the securities prices are anticipated to decline.
Similarly, if securities prices are expected to rise, the Company may purchase a
futures contract or a call option thereon against anticipated positive cash flow
or may purchase options on securities.
WHILE THE FOREGOING GENERALLY DESCRIBES THE INVESTMENT STRATEGY FOR THE
GUARANTEE PERIOD FUND, THE COMPANY IS NOT OBLIGATED TO INVEST THE ASSETS
ATTRIBUTABLE TO THE GUARANTEE PERIOD FUND ACCORDING TO ANY PARTICULAR STRATEGY,
EXCEPT AS MAY BE REQUIRED BY NEW YORK AND OTHER STATE INSURANCE LAWS, NOR WILL
THE STATED RATE OF INTEREST THAT THE COMPANY ESTABLISHES NECESSARILY RELATE TO
THE PERFORMANCE OF THE NON-UNITIZED SEPARATE ACCOUNT.
Subsequent Guarantee Periods
Prior to the date annuity payments commence, you may invest the value of
amounts held in a maturing Guarantee Period in any Guarantee Period that we
offer at that time. On the quarterly statement issued prior to the end of any
Guarantee Period, we will notify you of the upcoming maturity of a Guarantee
Period. THE GUARANTEE PERIOD AVAILABLE FOR NEW CONTRIBUTIONS MAY BE CHANGED AT
ANY TIME, INCLUDING BETWEEN THE DATE OF NOTIFICATION OF A MATURING GUARANTEE
PERIOD AND THE DATE A SUBSEQUENT GUARANTEE PERIOD BEGINS. Information regarding
the current Guarantee Periods then available and their stated rate of interest
may be obtained by calling the Schwab Annuity Service Center at:
1-800-838-0649.
If the Company receives no direction from the Contract Owner by the
Guarantee Period Maturity Date, the Company will automatically allocate the
amount from the maturing Guarantee Period to a Guarantee Period equal in
duration to the one just ended. If at that time, the duration previously chosen
is no longer available, the amount will be allocated to the next shortest
available Guarantee Period duration. In any event, a Guarantee Period will not
renew for a term equal in duration to the one just ended if the Guarantee Period
will mature after the Payment Commencement Date. No Guarantee Period may mature
later than six months after a Payment Commencement Date. For example, if a
3-year Guarantee Period matures and the Payment Commencement Date begins 1 3/4
years from the Guarantee Period Maturity Date, the matured value will be
transferred to a 2-year Guarantee Period.
<PAGE>
Breaking A Guarantee Period
Any Transfer, withdrawal or the selection of an annuity option prior to
the Guarantee Period Maturity Date will be known as breaking a Guarantee Period.
When a Request to break a Guarantee Period is received, the Guarantee Period
that is closest to the Guarantee Period Maturity Date will be broken first. If a
Guarantee Period is broken, a Market Value Adjustment may be assessed. The
Market Value Adjustment may increase or decrease the value of the amount
Transferred or withdrawn from the Guarantee Period Fund. The Market Value
Adjustment may reduce the value of amounts held in a Guarantee Period below the
amount of your Contribution(s) allocated to that Guarantee Period. (See "Market
Value Adjustment," p. 5.)
Interest Rates
Declared rates are effective annual rates of interest. The rate is
guaranteed throughout the Guarantee Period. FOR GUARANTEE PERIODS NOT YET IN
EFFECT, FIRST GWL&A MAY DECLARE INTEREST RATES DIFFERENT THAN THOSE CURRENTLY IN
EFFECT. When a subsequent Guarantee Period begins, the rate applied will not be
less than the rate then applicable to new Contracts of the same type with the
same Guarantee Period.
The stated rate of interest must be at least equal to the Contractual
Guarantee of a Minimum Rate of Interest. The Company may declare higher rates.
The Contractual Guarantee of a Minimum Rate of Interest is based on the
applicable state standard non-forfeiture law which is currently 3% for the
Contract.
The determination of the stated rate of interest is influenced by, but
does not necessarily correspond to, interest rates available on fixed income
investments which the Company may acquire using funds deposited into the
Guarantee Period Fund. In addition, the Company will consider other items in
determining the stated rate of interest including regulatory and tax
requirements, sales commissions and administrative expenses borne by the
Company, general economic trends, and competitive factors.
Market Value Adjustment
Distributions from the amounts allocated to a Guarantee Period due to a
full surrender or partial withdrawal, Transfer, application of amounts to the
periodic withdrawal option or to purchase an annuity, prior to a Guarantee
Period Maturity Date will be subject to a Market Value Adjustment ("MVA"). A MVA
may increase or decrease the amount payable on one of the above described
distributions. Amounts available for a full surrender or partial withdrawal is
the amount requested plus the MVA less any applicable Surrender Charge. The
amount available for a Transfer is the amount requested plus the MVA. The MVA is
calculated by multiplying the amount Requested by the Market Value Adjustment
Factor ("MVAF").
The MVA reflects the relationship as of the time of its calculation
between (a) the U.S. Treasury Strip ask side yield as published in the Wall
Street Journal on the last business day of the week prior to the date the stated
rate of interest was established for the Guarantee Period; and (b) the U.S.
Treasury Strip ask side yield as published in the Wall Street Journal on the
last business day of the week prior to the week the Guarantee Period is broken.
There would be a downward adjustment if Treasury rates at the time the Guarantee
Period is broken exceed Treasury rates when the Guarantee Period was created.
There would be an upward adjustment if Treasury rates at the time the Guarantee
Period is broken, are lower than when the Guarantee Period was created. The MVA
factor is the same for all Contracts.
1. The formula used to determine the MVA is:
MVA = (amount applied) X (MVAF)
The Market Value Adjustment Factor (MVAF) is:
MVAF = {[(1 + i)/(1 + j)] N/12} - 1
where:
a) i is the U.S. Treasury Strip ask side yield as published in the
Wall Street Journal on the last business day of the week prior to
the date the stated rate of interest was established for the
Guarantee Period. The term of i is measured in years and equals the
term of the Guarantee Period;
b) j is the U.S. Treasury Strip ask side yield as published in the
Wall Street Journal on the last business day of the week prior to
the week the Guarantee Period is broken. The term of j equals the
remaining term to maturity of the Guarantee Period, rounded up to
the higher number of years; and
c) N is the number of complete months remaining until maturity.
If N is less than 6, the MVA will equal 0.
2. The Market Value Adjustment will apply to any Guarantee Period six or more
months prior to the Guarantee Period Maturity Date in each of the following
situations:
a) Transfer to another Guarantee Period offered under this
Contract; or
b) Surrenders, partial withdrawals, annuitization or Periodic
Withdrawals; or
3. The Market Value Adjustment will not apply to any Guarantee Period having
fewer than six months prior to the Guarantee Period Maturity Date in each of the
following situations:
a) Transfer to another Guarantee Period offered under this
Contract; or
b) Surrenders, partial withdrawals, annuitization or Periodic
Withdrawals; or
c) A single sum payment upon death of the Owner or Annuitant.
See Appendix A for Illustrations of the MVA.
APPLICATION AND CONTRIBUTIONS
Contributions
All Contributions may be paid at the Schwab Annuity Service Center by a
check payable to the Company or by transfer to the Company of available funds
from your Schwab account.
The initial Contribution for the Contract must be at least $5,000 (or
$2,000 if for an IRA). Subsequent Contributions must be at least $500. This
minimum initial investment may be reduced to $1,000, but only if you participate
in an Automatic Contribution Plan and contribute at least $100 per month through
a recurring deposit. A confirmation will be issued to you upon the acceptance of
each Contribution.
Your Contract will be issued and your Contribution generally will be
accepted and credited within two business days after receipt of an acceptable
application and receipt of the initial Contribution at the Schwab Annuity
Service Center. All Contributions can be paid to the Schwab Annuity Service
Center by check (payable to First GWL&A) or by instructing Schwab to transfer to
First GWL&A available funds or amounts from your account with Schwab. Acceptance
is subject to there being sufficient information in a form acceptable to us and
we reserve the right to reject any application or Contribution.
The Schwab Annuity Service Center will process your application and
Contributions. If your application is complete and your initial Contribution is
being transferred from funds available in your Schwab account, then the
Contribution will generally be credited within two business days following
receipt of the application. If your application is incomplete, the Schwab
Annuity Service Center will either complete the application from information
Schwab has on file, or contact you for the additional information. No transfer
of funds will be made from your Schwab account until your application is
complete. The funds will be credited as Contributions to the Contract when they
are transferred.
If your Contribution is by check, and the application is complete, Schwab
will use its best efforts to credit the Contribution on the day of receipt, but
in all such cases it will be credited to your Contract within two business days
of receipt. If your application is incomplete, the Schwab Annuity Service Center
will complete the application from information Schwab has on file or contact you
by telephone to obtain the required information. If your application remains
incomplete for five business days, we will return to you both the check and the
application unless you consent to our retaining the initial Contribution and
crediting it as soon as the requirements are fulfilled.
A Contract may be returned within ten days after receipt ("Free Look
Period"). During the Free Look Period, all contributions will be processed as
follows:
(1) Contributions allocated to one or more of the then available
Guarantee Periods will be allocated as directed, effective upon the
Transaction Date at the stated rate and Guarantee Period Maturity
Date then effective.
(2) If the Contract is returned, the contract will be void from the
start and the greater of: (a) Contributions received less
surrenders, withdrawals and distributions or (b) the Annuity Account
Value less surrenders, withdrawals and distributions, will be
refunded. Exercising the return privilege requires the return of the
Contract to the Company or to the Schwab Annuity Service Center.
Additional Contributions may be made at any time prior to the Payment
Commencement Date, as long as the Annuitant is living. Additional Contributions
must be at least $500 or $100 per month if under an ACP. Additional
Contributions will be credited within two business days following receipt.
Total Contributions may exceed $1,000,000 with our prior approval.
The Company reserves the right to modify the limitations set forth in this
section.
TRANSFERS
In General
Prior to the Payment Commencement Date you may Transfer all or part of
your Annuity Account Value among the available Guarantee Periods by telephone or
by sending a Request to the Schwab Annuity Service Center or by calling the
voice response unit @ 1-800-838-0649 (KeyTalk(R)). The Request must specify the
amounts being Transferred, the Guarantee Period(s) from which the Transfer is to
be made, and the Guarantee Period(s) that will receive the Transfer.
Currently, there is no limit on the number of Transfers you can make
during any Contract Year. There is no charge for the first twelve Transfers each
Contract Year, but there will be a charge of $10 for each additional Transfer in
each Contract Year. We reserve the right to limit the number of Transfers you
make. The charge will be deducted from the amount transferred. All Transfers
made on a single Transaction Date will be aggregated to count as only one
Transfer toward the twelve free Transfers.
A Transfer generally will be effective on the date the Request for
Transfer is received by the Schwab Annuity Service Center if received before
4:00 p.m. Eastern Time. Under current law, there will not be any tax liability
to you if you make a Transfer.
When a Transfer is made before the Guarantee Period Maturity Date, the
amount Transferred may be subject to a Market Value Adjustment. (See "Market
Value Adjustment," p. 5.) A Request for Transfer from amounts in a Guarantee
Period made prior to the Guarantee Period Maturity Date for Transfers on the
Guarantee Period Maturity Date will not be counted for the purpose of
determining any Transfer Fee on Transfers in excess of the twelve Transfers per
year if these Transfers are to take place on the Guarantee Period Maturity Date.
Possible Restrictions
We reserve the right without prior notice to modify, restrict, suspend or
eliminate the Transfer privileges (including telephone Transfers) at any time.
We reserve the right to require that all Transfer Requests be made by the Owner
and not by an Owner's designee and to require that each Transfer Request be made
by a separate communication to us. We also reserve the right to request that
each Transfer Request be submitted in writing and be manually signed by the
Owner; facsimile Transfer Requests may not be allowed.
CASH WITHDRAWALS
Withdrawals
You (the Owner) may withdraw from the Contract all or part of your Annuity
Account Value at any time during the life of the Annuitant and prior to the date
annuity payments commence by Request at the Schwab Annuity Service Center
subject to the rules below. Federal or state laws, rules or regulations may
apply. The amount payable to you if you surrender your Contract is your Annuity
Account Value, with a Market Value Adjustment, if any, and a Surrender Charge,
if applicable, on the effective date of the surrender, and less any applicable
Premium Tax. No withdrawals may be made after the date annuity payments
commence.
A Request for a partial withdrawal will result in a reduction in your
Annuity Account Value equal to the sum of the dollar amount withdrawn. A Market
Value Adjustment may apply. (See "Market Value Adjustment," p. 5.) In addition,
the partial withdrawal may be subject to a Surrender Charge. The partial
withdrawal proceeds may be greater or less than the amount requested, depending
on the effect of the Market Value Adjustment, and the Surrender Charge.
The minimum partial withdrawal before application of the MVA is $500.
Partial withdrawals are unlimited; however, you must specify the Guarantee
Period(s) from which the withdrawal is to be made. After any partial withdrawal,
if the remaining Annuity Account Value is less than $2,000, then a full
surrender may be required.
The following terms apply:
(a) No partial withdrawals are permitted after the date annuity payments
commence.
(b) A partial withdrawal will be effective upon the Transaction Date.
(c) A partial withdrawal may be subject to the Market Value Adjustment
provisions, the Guarantee Period Fund provisions of the Contract and
the terms of the attached Guarantee Period Fund Rider(s), if any.
(d) A partial withdrawal may be subject to a Surrender Charge.
You may Request partial withdrawals from your Annuity Account Value and
direct the Company to remit such withdrawn amounts directly to your designated
Investment Manager or Financial Advisor (collectively "Consultant"). Any such
withdrawal Requests must meet the minimum withdrawal requirements and all terms
and conditions applicable to partial withdrawals, as described above. If your
Annuity Account Value exceeds your "investment in the Contract," then you may be
subject to income tax on withdrawals made from your Annuity Account even though
payments are made by the Company directly to your Consultant. In addition, the
Code may require us to withhold federal income taxes from withdrawals and report
such withdrawals to the IRS. If you Request partial withdrawals to pay
Consultant fees, your Annuity Account Value will be reduced by the sum of the
fees paid to the Consultant and the related withholding, although you may elect,
in writing, to have the Company not withhold federal income tax from
withdrawals, unless withholding is mandatory for your Contract. If you are
younger than 59 1/2, the taxable portion of any withdrawals made to pay
Consultant fees will also generally be considered early withdrawals under the
Code subjecting you to a 10% additional tax on the taxable portion of such
withdrawals. You should consult a competent tax advisor prior to authorizing the
withdrawal of any amounts from your Annuity Account to pay Consultant fees.
Withdrawals made for any purpose may be taxable (this includes Periodic
Withdrawals, discussed below). Moreover, the Internal Revenue Code (the "Code")
provides that a 10% penalty tax may be imposed on the taxable portions of
certain early withdrawals. The Code generally requires us to withhold federal
income tax from withdrawals. However, generally you will be entitled to elect,
in writing, not to have tax withholding apply unless withholding is mandatory
for your Contract. Withholding applies to the portion of the withdrawal which is
included in your income and subject to federal income tax. The tax withholding
rate is 10% of the taxable amount of the withdrawal. Withholding applies only if
the taxable amount of the withdrawal is at least $200. Some states also require
withholding for state income taxes. (See "Federal Tax Matters," p. 15.)
Withdrawal Requests must be in writing to ensure that your instructions
regarding withholding are followed. In the absence of an adequate election, the
Request will not be processed.
After a withdrawal of all of your total Annuity Account Value, or at any
time that your Annuity Account Value is zero, all your rights under the Contract
will terminate.
Since IRAs are offered by this prospectus, reference should be made to the
applicable provisions of the Code for any additional limitations or restrictions
on cash withdrawals.
TELEPHONE TRANSACTIONS
We will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine and if we follow such procedures we will
not be liable for any losses due to unauthorized or fraudulent instructions.
However, we may be liable for such losses if we do not follow those reasonable
procedures. The procedures we will follow for telephone transactions may include
requiring some form of personal identification prior to acting on instructions
received by telephone, providing written confirmation of the transaction, and/or
tape recording the instructions given by telephone.
We reserve the right to suspend telephone transaction privileges at any
time, for some or all Contracts, and for any reason. Withdrawals are not
permitted by telephone.
DEATH BENEFIT
Payment of Death Benefit
Before the date annuity payments commence, the death benefit, if any, will
be equal to the greater of: (a) the Annuity Account Value with an MVA, if
applicable, as of the date the Request for payment is received, less Premium
Tax, if any, or (b) the sum of Contributions paid, less partial withdrawals
and/or Periodic Withdrawals, less Premium Tax, if any. The death benefit will
become payable following the Company's receipt of a Request from the
Beneficiary. When an Owner or the Annuitant dies before the annuity commencement
date and a death benefit is payable to a Beneficiary, the death benefit proceeds
will remain invested in accordance with the allocation instructions given by the
Owner(s) until new allocation instructions are Requested by the Beneficiary or
until the death benefit is actually paid to the Beneficiary. The death benefit
will be determined as of the date payments commence. Subject to the distribution
rules set forth below, payment of the death benefit may be Requested to be made
as follows:
A. Proceeds from the Guarantee Period(s)
1. payment in a single sum; or
2. payment under any of the annuity options provided under this
Contract
In any event, no payment of benefits provided under the Contract will be
allowed that does not satisfy the requirements of Section 72(s) of the Code and
any other applicable federal or state laws, rules or regulations.
DISTRIBUTION RULES
1. Death of Annuitant
Upon the death of the Annuitant while the Owner is living, and before the
annuity commencement date, the Company will pay the death benefit to the
Beneficiary unless there is a Contingent Annuitant.
If a Contingent Annuitant was named by the Owner(s) prior to the
Annuitant's death, and the Annuitant dies before the annuity commencement date
while the Owner and Contingent Annuitant are living, no death benefit will be
payable by reason of the Annuitant's death and the Contingent Annuitant will
become the Annuitant.
If the Annuitant dies after the date annuity payments commence and before
the entire interest has been distributed, any benefit payable must be
distributed to the Beneficiary in accordance with and at least as rapidly as
under the payment option applicable to the Annuitant on the Annuitant's date of
death.
If a corporation or other non-individual is an Owner, or if the deceased
Annuitant is an Owner, the death of the Annuitant will be treated as the death
of an Owner and the Contract will be subject to the "Death of Owner" provisions
described below.
2. Death of Owner
If the Owner is not the Annuitant:
(1) If there is a Joint Owner who is the surviving spouse of the deceased
Owner, the Joint Owner will become the Owner and Beneficiary and may elect
to take the death benefit or elect to continue the Contract in force.
(2) In all other cases, the Company will pay the death benefit to the
Beneficiary even if a Joint Owner (who was not the Owner's spouse on the
date of the Owner's death), the Annuitant and/or the Contingent Annuitant
are alive at the time of the Owner's death, unless the sole Beneficiary is
the deceased Owner's surviving spouse and the Beneficiary elects to become
the Owner and Annuitant and to continue the Contract in force.
If the Owner is not the Annuitant, and the Owner dies after annuity
payments commence and before the entire interest has been distributed while the
Annuitant is living, any benefit payable will continue to be distributed to the
Annuitant at least as rapidly as under the payment option applicable on the
Owner's death. All rights granted the Owner under the Contract will pass to any
surviving Joint Owner and, if none, to the Annuitant.
If the Owner is the Annuitant (Owner/Annuitant):
(1) If there is a Joint Owner who is the surviving spouse of the deceased
Owner and a Contingent Annuitant, the Joint Owner will become the Owner
and the Beneficiary, the Contingent Annuitant will become the Annuitant,
and the Contract will continue in force.
(2) If there is a Joint Owner who is the surviving spouse of the deceased
Owner but no Contingent Annuitant, the Joint Owner will become the Owner,
Annuitant and Beneficiary and may elect to take the death benefit or
continue the Contract in force.
(3) In all other cases, the Company will pay the death benefit to the
Beneficiary, even if a Joint Owner (who was not the Owner's spouse on the
date of the Owner's death), Annuitant and/or Contingent Annuitant are
alive at the time of the Owner's death, unless the sole Beneficiary is the
deceased Owner's surviving spouse and the Beneficiary Requests to become
the Owner and Annuitant and to continue the Contract in force.
Any death benefit payable to the Beneficiary upon an Owner's death will be
distributed as follows:
(1) If the Owner's surviving spouse is the person entitled to receive
benefits upon the Owner's death, the surviving spouse will be treated as
the Owner and will be allowed to take the death benefit or continue the
Contract in force; or
(2) If the Beneficiary is a non-spouse individual, she/he may elect, not
later than one year after the Owner's date of death, to receive the death
benefit in either a single sum or payment under any of the fixed annuity
options available under the Contract, provided that (a) such annuity is
distributed in substantially equal installments over the life or life
expectancy of the Beneficiary or over a period not extending beyond the
life expectancy of the Beneficiary; and (b) such distributions begin not
later than one year after the Owner's date of death. If no election is
received by the Company from a non-spouse Beneficiary such that
substantially equal installments have begun not later than one year after
the Owner's date of death, then the entire amount must be distributed
within five years of the Owner's date of death. The death benefit will be
determined as of the date the payments commence; or
(3) If a corporation or other non-individual entity is entitled to receive
benefits upon the Owner's death, the death benefit must be completely
distributed within five years of the Owner's date of death.
Beneficiary
You may select one or more Beneficiaries. If more than one Beneficiary is
selected, unless you indicate otherwise, they will share equally in any death
benefit payable. You may change the Beneficiary any time before the Annuitant's
death.
You may, while the Annuitant is living, change the Beneficiary by Request.
A change of Beneficiary will take effect as of the date the Request is processed
by the Schwab Annuity Service Center, unless a certain date is specified by the
Owner. If the Owner dies before the Request was processed, the change will take
effect as of the date the Request was made, unless the Company has already made
a payment or otherwise taken action on a designation or change before receipt or
processing of such Request. A beneficiary designated irrevocably may not be
changed without the written consent of that Beneficiary, except as allowed by
law.
The interest of any Beneficiary who dies before the Owner or the Annuitant
will terminate at the death of the Beneficiary. The interest of any Beneficiary
who dies at the time of, or within 30 days after, the death of an Owner or the
Annuitant will also terminate if no benefits have been paid to such Beneficiary,
unless the Owner otherwise indicates by Request. The benefits will then be paid
as though the Beneficiary had died before the deceased Owner or Annuitant. If no
Beneficiary survives the Owner or Annuitant, as applicable, the Company will pay
the death benefit proceeds to the Owner's estate.
If the surviving spouse of an Owner is the surviving Joint Owner, the
surviving spouse will become the Beneficiary upon such Owner's death and may
elect to take the death benefit or may elect to continue the Contract in force.
If there is no surviving Joint Owner, and no named Beneficiary is alive at the
time at the time of an Owner's death, any benefits payable will be paid to the
Owner's estate.
Contingent Annuitant
While the Annuitant is living, the Owner(s) may, by Request, designate or
change a Contingent Annuitant from time to time. A change of Contingent
Annuitant will take effect as of the date the Request is processed at the Schwab
Annuity Service Center, unless a certain date is specified by the Owner(s).
CHARGES AND DEDUCTIONS
No deductions are made from Contributions except for any applicable
Premium Tax. Therefore, the full amount of the Contributions (less any
applicable Premium Tax) are invested in the Contract.
As more fully described below, charges under the Contract are assessed
only as deductions for Premium Tax, if applicable, for certain Transfers, and as
a Surrender Charge, if applicable. In addition, a Market Value Adjustment may
apply to withdrawals and surrenders, Transfers, amounts applied to purchase an
annuity, if the amounts held in a Guarantee Period are paid out prior to the
Guarantee Period Maturity Date.
Surrender Charge
A maximum Surrender Charge of three percent (3%) will be applied to
amounts withdrawn/distributed within the first three Contact years. The
Surrender Charge applies to the amounts withdrawn/distributed after they have
been adjusted by any MVA. The applicable Surrender Charge will decrease over
time as indicated in the table below.
Years Completed Percentage of Distribution
1 3%
2 2%
3 1%
4+ 0%
The Contract describes specific situations in which there is no Surrender
Charge, such as death, annuitization, other than in a single sum, and Periodic
Withdrawals of at least 36 months.
Premium Tax
We may be required to pay state premium taxes or retaliatory taxes
currently ranging from 0% to 3.5% in connection with Contributions or values
under the Contracts. Currently, the premium tax rate in New York for annuities
is 0%. Depending upon applicable state law, we will deduct charges for the
premium taxes we incur with respect to a particular Contract from the
Contributions, from amounts withdrawn, or from amounts applied on the Payment
Commencement Date. In some states, charges for both direct premium taxes and
retaliatory premium taxes may be imposed at the same or different times with
respect to the same Contribution, depending on applicable state law.
Transfer Fee
There will be a $10 charge for each Transfer in excess of twelve Transfers
in any calendar year. We do not expect a profit from the transfer fee for excess
Transfers.
Other Taxes
Under present laws, we will incur state or local taxes (in addition to the
Premium Tax described above) in New York. No charges are currently made for
taxes other than Premium Tax. However, we reserve the right to deduct charges in
the future for federal, state, and local taxes or the economic burden resulting
from the application of any tax laws that we determine to be attributable to the
Contracts.
PAYMENT OPTIONS
Periodic Withdrawal Option
The Owner may Request that all or part of the Annuity Account Value be
applied to a Periodic Withdrawal Option. The amount applied to a Periodic
Withdrawal is the Annuity Account Value with an MVA, if applicable, less Premium
Tax or Surrender Charges, if any.
In Requesting Periodic Withdrawals, the Owner must elect:
- The withdrawal frequency of either 12, 6, 3, or 1 month intervals;
- A withdrawal amount; a minimum of $100 is required;
- The calendar day of the month on which withdrawals will be made;
- One withdrawal option; and
- The allocation of withdrawals from the Owner's Guarantee Period(s) as
follows:
1) Prorate the amount to be paid across all Guarantee Periods in
proportion to the assets in each sub-account; or
2) Select the Guarantee Period(s) from which withdrawals will be
made. Once the Guarantee Periods have been depleted, the
Company will automatically prorate the remaining withdrawals
against all remaining available Guarantee Periods unless the
Owner Requests the selection of another Guarantee Period.
The Owner may elect to change the withdrawal option and/or the frequency
once each calendar year.
While Periodic Withdrawals are being received:
1. the Owner may continue to exercise all contractual rights that are
available prior to electing an annuity option, except that no
Contributions may be made;
2. for Periodic Withdrawals from Guarantee Periods six or more months
prior to its Guarantee Period Maturity Date, a Market Value
Adjustment, if applicable, will be assessed;
3. the Owner may keep the same Guarantee Periods as were in force
before periodic withdrawals began;
4. charges and fees under the Contract continue to apply; and 5. maturing
Guarantee Periods renew into the shortest Guarantee Period then
available.
Periodic Withdrawals will cease on the earlier of the date:
1. the amount elected to be paid under the option selected has been reduced
to zero;
2. the Annuity Account Value is zero; or 3. the Owner Requests that
withdrawals stop; 4. an Owner or the Annuitant dies.
The Owner must elect one of the following five (5) withdrawal options:
1. Income for a Specified Period for at least thirty-six (36) months - The
Owner elects the duration over which withdrawals will be made. The amount
paid will vary based on the duration.
2. Income of a Specified Amount for at least thirty-six (36) months - The
Owner elects the dollar amount of the withdrawals. Based on the amount
elected, the duration may vary; or
3. Interest Only - The withdrawals will be based on the amount of interest
credited to the Guarantee Period Fund between each withdrawal; or
4. Minimum Distribution - If this is an IRA contract, the Owner may
Request minimum distributions as specified under Code Section 401(a)(9);
or
5. Any Other Form for a period of at least thirty-six (36) months - Any
other form of Periodic Withdrawal which is acceptable to the Company.
If Periodic Withdrawals cease, the Owner may resume making Contributions.
The Owner may elect to restart a Periodic Withdrawal program; however, the
Company may limit the number of times the Owner may restart a Periodic
Withdrawal program.
Periodic Withdrawals made for any purpose may be taxable, subject to
withholding and subject to the 10% penalty tax. IRAs are subject to complex
rules with respect to restrictions on and taxation of distributions, including
the applicability of penalty taxes. A competent tax adviser should be consulted
before a Periodic Withdrawal Option is requested. (See "Federal Tax Matters," p.
15.)
You may Request a Periodic Withdrawal to remit fees paid to your
Investment Manager or Financial Advisor; however, any such Periodic Withdrawal
Requests must meet the requirements and comply with all terms and conditions
applicable to Periodic Withdrawals, as described above. As well, there may be
income tax consequences to any Periodic Withdrawal made for this purpose. (See
"Cash Withdrawals," page .)
Annuity Date
The date annuity payments commence may be chosen when the Contract is
purchased or at a later date. This date must be at least one year after the
initial Contribution. In the absence of an earlier election, the annuity date is
the first day of the month of the Annuitant's 90th birthday.
If an option has not been elected within 30 days of the annuity
commencement date, the Annuity Account Value will be applied under Annuity
Payment Option 3, discussed below, to provide payments for life with a
guaranteed period of 20 years.
Under section 401(a)(9) of the Code, a Contract which is purchased and
used in connection with an Individual Retirement Account or with certain other
plans qualifying for special federal income tax treatment is subject to complex
"minimum distribution" requirements, which require that distributions under such
a plan must begin by a specific date, and also that the entire interest of the
plan participant must be distributed within certain specified periods under
formulas that specify minimum annual distributions. The application of the
minimum distribution requirements to each person will vary according to the
person's age and other circumstances. A prospective purchaser may wish to
consult a competent tax adviser regarding the application of the minimum
distribution requirements. (See "Federal Tax Matters," p. 15.)
Annuity Options
An annuity option may be selected by the Owner when the Contract is
purchased, or at a later date. This selection may be changed, by Request, at any
time up to 30 days before the annuity date. In the absence of an election,
payments will automatically commence on the annuity date as described above. The
amount to be applied is the Annuity Account Value on the annuity date. The
minimum amount that may be withdrawn from the Annuity Account Value to purchase
an annuity payment option is $2,000 with an MVA, if applicable. If the amount is
less than $2,000, the Company may pay the amount in a single sum subject to the
Contract provisions applicable to a partial withdrawal. Payments may be elected
to be received monthly, quarterly, semi-annually or annually. Payments to be
made under the annuity payment option selected must be at least $50. The Company
reserves the right to make payments using the most frequent payment interval
which produces a payment of not less than $50. The maximum amount that may be
applied under any payment option is $1,000,000, unless prior approval is
obtained from the Company.
A single sum payment may be elected. If it is, then the amount to be paid
is the Surrender Value. If an owner elects an annuity option, then the amount to
be applied is the Annuity Account Value, as of the annuity commencement date
with an MVA, if applicable, less any applicable Premium Tax.
Annuity Payment Options
Option 1: Income of Specified Amount
The amount applied under this option may be paid in equal annual,
semiannual, quarterly or monthly installments of the dollar amount elected for
not more than 240 months. Upon death of the Annuitant, the Beneficiary will
begin to receive the remaining payments at the same interval that was elected by
the Owner.
Option 2: Income for a Specified Period
Payments are paid annually, semiannually, quarterly or monthly, as
elected, for a selected number of years not to exceed 240 months. Upon death of
the Annuitant, the Beneficiary will begin to receive the remaining payments at
the same interval that was elected by the Owner.
Option 3: Fixed Life Annuity with Guaranteed Period
This option provides for monthly payments during a designated period and
thereafter throughout the lifetime of the Annuitant. The designated period may
be 5, 10, 15 or 20 years. Upon death of the Annuitant, for each remaining
designated period, the amounts payable under this payment option will be paid to
the Beneficiary.
Option 4: Fixed Life Annuity
This annuity is payable monthly during the lifetime of the Annuitant,
terminating with the last payment due prior to the death of the Annuitant. Since
no minimum number of payments is guaranteed, this option may offer the maximum
level of monthly payments of the annuity options. It is possible that only one
payment may be made if the Annuitant died before the date on which the second
payment was due. No other payments nor death benefits would be payable.
Option 5: Any Other Form
This option allows an Owner the ability to choose any other form of
annuity which is acceptable to the Company.
***
For annuity options involving life income, the actual age and/or sex of
the Annuitant will affect the amount of each payment. We reserve the right to
ask for satisfactory proof of the Annuitant's age. We may delay annuity payments
until satisfactory proof is received. Since payments to older Annuitants are
expected to be fewer in number, the amount of each annuity payment under a
selected annuity form will be greater for older Annuitants than for younger
Annuitants.
If the age of the Annuitant has been misstated, the payments established
will be made on the basis of the correct age. If payments were too large because
of misstatement, the difference with interest may be deducted by the Company
from the next payment or payments. If payments were too small, the difference
with interest may be added by the Company to the next payment. This interest is
at an annual effective rate which will not be less than the Contractual
Guarantee of a Minimum Rate of Interest.
The Payment Commencement Date and annuity options available for IRAs may
also be controlled by endorsements, the plan documents, or applicable law.
Once payments start under the annuity form selected by the Owner: (a) no
changes can be made in the annuity form, (b) no additional Contributions will be
accepted under the Contract, and (c) no further withdrawals, other than
withdrawals made to provide annuity benefits, will be allowed.
***
A portion or the entire amount of the annuity payments may be taxable as
ordinary income. If, at the time the annuity payments begin, we have not
received a proper written election not to have federal income taxes withheld, we
must by law withhold such taxes from the taxable portion of such annuity
payments and remit that amount to the federal government (an election not to
have taxes withheld is not permitted for certain Qualified Contracts). State
income tax withholding may also apply. (See "Federal Tax-Matters," below.)
FEDERAL TAX MATTERS
Introduction
The following discussion is a general description of federal income tax
considerations relating to the Contracts and is not intended as tax advice.
Further, this discussion is based on the assumption that the Contract qualifies
as an annuity contract for federal income tax purposes. This discussion is not
intended to address the tax consequences resulting from all of the situations in
which a person may be entitled to or may receive a distribution under the
Contract. Any person concerned about these tax implications should consult a
competent tax adviser before initiating any transaction. This discussion is
based upon our understanding of the present federal income tax laws as they are
currently interpreted by the Internal Revenue Service. No representation is made
as to the likelihood of the continuation of the present federal income tax laws
or of the current interpretation by the Internal Revenue Service. Moreover, no
attempt has been made to consider any applicable state or other tax laws.
The Contract may be purchased on a non-tax qualified basis ("Non-Qualified
Contract") or purchased and used in connection with IRAs. The ultimate effect of
federal income taxes on the amounts held under a Contract, on annuity payments,
and on the economic benefit to you, the Annuitant, or the Beneficiary may depend
on the type of Contract, and on the tax status of the individual concerned. In
addition, certain requirements must be satisfied in purchasing an IRA and
receiving distributions from an IRA in order to continue receiving favorable tax
treatment. Therefore, purchasers of IRAs should seek competent legal and tax
advice regarding the suitability of the Contract for their situation, the
applicable requirements, and the tax treatment of the rights and benefits of the
Contract. The following discussion assumes that an IRA is purchased with
proceeds from and/or Contributions that qualify for the intended special federal
income tax treatment.
Tax Status
The Company is taxed as a life insurance company under Part I of
Subchapter L of the Code.
Taxation of Annuities
In General
Section 72 of the Code governs taxation of annuities in general. An Owner
who is a natural person generally is not taxed on increases (if any) in the
value of an Annuity Account Value until distribution occurs by withdrawing all
or part of the Annuity Account Value (e.g., withdrawals or annuity payments
under the annuity form elected). However, under certain circumstances, the Owner
may be subject to taxation currently. In addition, an assignment, pledge, or
agreement to assign or pledge any portion of the Annuity Account Value generally
will be treated as a distribution. The taxable portion of a distribution (in the
form of a single sum payment or an annuity) is taxable as ordinary income. An
IRA Contract may not be assigned as collateral.
The Owner of any annuity contract who is not a natural person (e.g. a
corporation) generally must include in income any increase in the excess of the
Annuity Account Value over the "investment in the contract" (discussed below)
during each taxable year. The rule does not apply where the non-natural person
is the nominal owner of a Contract and the beneficial owner is a natural person.
The rule also does not apply in the following circumstances: (1) where the
annuity Contract is acquired by the estate of a decedent, (2) where the Contract
is held under an IRA, (3) where the Contract is a qualified funding asset for a
structured settlement, and (4) where the Contract is purchased on behalf of an
employee upon termination of a qualified plan. A prospective Owner that is not a
natural person may wish to discuss these matters with a competent tax adviser.
The following discussion generally applies to a Contract owned by a
natural person.
Withdrawals
In the case of a withdrawal under an IRA, including withdrawals under the
Periodic Withdrawal Option, a ratable portion of the amount received may be
non-taxable. The amount of the non-taxable portion is generally determined by
the ratio of the "investment in the contract" to the individual's total accrued
benefit under the retirement plan. The "investment in the contract" generally
equals the amount of any nondeductible Contributions paid by or on behalf of any
individual. Special tax rules may be available for certain distributions from an
IRA.
With respect to Non-Qualified Contracts, partial withdrawals, including
Periodic Withdrawals, are generally treated as taxable income to the extent that
the Annuity Account Value immediately before the withdrawal exceeds the
"investment in the contract" at that time. If a partial withdrawal is made from
a Guarantee Period which is subject to a Market Value Adjustment, then the
Annuity Account Value immediately before the withdrawal will not be altered to
take into account the Market Value Adjustment. As a result, for purposes of
determining the taxable portion of the partial withdrawal, the Annuity Account
Value will not reflect the amount, if any, deducted from or added to the
Guarantee Period due to the Market Value Adjustment. Full surrenders are treated
as taxable income to the extent that the amount received exceeds the "investment
in the contract." The taxable portion of any annuity payment is taxed at
ordinary income tax rates.
Annuity Payments
Although the tax consequences may vary depending on the annuity form
elected under the Contract, in general, only the portion of the annuity payment
that represents the amount by which the Annuity Account Value exceeds the
"investment in the contract" will be taxed; after the investment in the contract
is recovered, the full amount of any additional annuity payments is taxable. For
fixed annuity payments, in general there is no tax on the portion of each
payment which represents the same ratio that the "investment in the contract"
bears to the total expected value of the annuity payments for the term of the
payments; however, the remainder of each annuity payment is taxable. Once the
investment in the Contract has been fully recovered, the full amount of any
additional annuity payments is taxable. If the annuity payments cease as a
result of an Annuitant's death before full recovery of the "investment in the
contract," you should consult a competent tax adviser regarding the
deductibility of the unrecovered amount.
Penalty Tax
In the case of a distribution pursuant to a Non-Qualified Contract, there
may be imposed a federal income tax penalty equal to 10% of the amount treated
as taxable income. In general, however, there is no penalty tax on
distributions: (1) made on or after the date on which the Owner attains age 59
1/2; (2) made as a result of death or disability of the Owner; or (3) received
in substantially equal periodic payments (at least annually for the life or life
expectancy of the Owner or the joint lives or life expectancies of the Owner and
a "designated beneficiary." Other exemptions or tax penalties may apply to
distributions from a Non-Qualified Contract or certain distributions pursuant to
an IRA. For more details regarding these exemptions or penalties consult a
competent tax adviser.
Taxation of Death Benefit Proceeds
Amounts may be distributed from the Contract because of the death of an
Owner or the Annuitant. Generally such amounts are includible in the income of
the recipient as follows: (1) if distributed in a lump sum, they are taxed in
the same manner as a full surrender, as described above, or (2) if distributed
under an annuity form, they are taxed in the same manner as annuity payments, as
described above.
Distribution-at-Death Rules
In order to be treated as an annuity contract, the terms of the Contract
must provide the following two distribution rules: (A) if any Contract Owner
dies on or after the date annuity payments commence, and before the entire
interest in the Contract has been distributed, the remainder of his/her interest
will not be distributed under a slower distribution schedule than that provided
for in the method in effect on the Contract Owner's death; and (B) if any
Contract Owner dies before the date annuity payments commence, his/her entire
interest must generally be distributed within five years after the date of death
provided that if such interest is payable to a designated Beneficiary, then such
interest may be made over the life of that designated Beneficiary or over a
period not extending beyond the life expectancy of that Beneficiary, so long as
payments commence within one year after the Contract Owner's death. If the sole
designated Beneficiary is the spouse of the Contract Owner, the Contract may be
continued in the name of the spouse as Contract Owner. The designated
Beneficiary is the natural person designated by the terms of the Contract or by
the Contract Owner as the individual to whom ownership of the contract passes by
reason of the Contract Owner's death. If the Contract Owner is not an
individual, then for purposes of the distribution at death rules, the Primary
Annuitant is considered the Contract Owner. In addition, when the Contract Owner
is not an individual, a change in the Primary Annuitant is treated as the death
of the Contract Owner. Distributions made to a Beneficiary upon the Owner's
death from an IRA must be made pursuant to the rules in Section 401(a)(9) of the
Code.
Transfers, Assignments, or Exchanges
A Transfer of ownership of a Contract, the designation of an Annuitant,
Payee or other Beneficiary who is not also the Owner, or the exchange of a
Contract may result in adverse tax consequences to the Owner that are not
discussed herein. An Owner contemplating any such designation, transfer,
assignment, or exchange of a Contract should contact a competent tax adviser
with respect to the potential tax effects of such a transaction.
Multiple Contracts
All deferred, non-qualified annuity contracts that are issued by the
Company (or our affiliates) to the same Owner during any calendar year will be
treated as one annuity contract for purposes of determining the amount
includible in gross income under section 72(e) of the Code. Amounts received
under any such Contract may be taxable (and may be subject to the 10% Penalty
Tax) to the extent of the combined income in all such Contracts. In addition,
the Treasury Department has specific authority to issue regulations that prevent
the avoidance of section 72(e) through the serial purchase of annuity contracts
or otherwise. Congress has also indicated that the Treasury Department may have
authority to treat the combination purchase of an immediate annuity contract and
separate deferred annuity contracts as a single annuity contract under its
general authority to prescribe rules as may be necessary to enforce the income
tax laws.
Withholding
Annuity distributions generally are subject to withholding for the
recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions. Certain distributions from IRAs are subject to mandatory federal
income tax withholding.
Possible Changes in Taxation
In past years, legislation has been proposed that would have adversely
modified the federal taxation of certain annuities. For example, one such
proposal would have changed the tax treatment of non-qualified annuities that
did not have "substantial life contingencies" by taxing income as it is credited
to the annuity. There is always the possibility that the tax treatment of
annuities could change by legislation or other means (such as IRS regulations,
revenue rulings, judicial decisions, etc.). Moreover, it is also possible that
any change could be retroactive (that is, effective prior to the date of the
change).
Section 1035 Exchanges
Code Section 1035 provides that no gain or loss shall be recognized on the
exchange of one annuity contract for another. Contracts issued on or after
January 19, 1985 in an exchange for another annuity contract are treated as new
contracts for the purposes of the penalty and distribution at death rules.
Special rules apply to Contracts issued prior to August 14, 1982. Prospective
Owners wishing to take advantage of a Section 1035 exchange should consult their
tax adviser.
Individual Retirement Annuities
The Contract may be used with IRAs as described in Section 408 of the Code
which permits eligible individuals to contribute to an individual retirement
program known as an Individual Retirement Annuity. Also, certain kinds of
distributions from certain types of qualified and non-qualified retirement plans
may be "rolled over" following the rules set out in the Code to maintain
favorable tax treatment, to an Individual Retirement Annuity. The sale of a
Contract for use with an IRA may be subject to special disclosure requirements
of the Internal Revenue Service. Purchasers of the Contract for use with IRA's
will be provided with supplemental information required by the Internal Revenue
Service or other appropriate agency. Such purchasers will have the right to
revoke their purchase within seven days of purchase of the IRA Contract.
Various tax penalties may apply to contributions in excess of specified
limits, distributions that do not satisfy specified requirements, and certain
other transactions. The Contract will be amended as necessary to conform to the
requirements of the Code. Purchasers should seek competent advice as to the
suitability of the Contract for use with IRA's.
If a Contract is issued in connection with an employer's Simplified
Employee Pension ("SEP") plan, Owners, Annuitants and Beneficiaries are
cautioned that the rights of any person to any of the benefits under the
Contract may be subject to the terms and conditions of the plan itself,
regardless of the terms and conditions of the Contract.
If a Contract is purchased to fund an IRA the Annuitant must also be the
Owner. In addition, if a Contract is purchased to fund an IRA, minimum
distributions must commence not later than April 1st of the calendar year
following the calendar year in which you attain age 70 1/2. You should consult
your tax adviser concerning these matters.
At the time the Initial Contribution is paid, a prospective purchaser must
specify whether he or she is purchasing a Non-Qualified Contract or an IRA. If
the initial Contribution is derived from an exchange or surrender of another
annuity contract, we may require that the prospective purchaser provide
information with regard to the federal income tax status of the previous annuity
contract. We will require that persons purchase separate Contracts if they
desire to invest monies qualifying for different annuity tax treatment under the
Code. Each such separate Contract would require the minimum initial Contribution
stated above. Additional Contributions under a Contract must qualify for the
same federal income tax treatment as the initial Contribution under the
Contract; we will not accept an additional Contribution under a Contract if the
federal income tax treatment of such Contribution would be different from that
of the initial Contribution.
Seek Tax Advice
The foregoing discussion of the federal income tax consequences is only a
brief summary and is not intended as tax advice. Further, the federal income tax
consequences discussed herein reflect our understanding of current law and the
law may change. Federal estate tax consequences and state and local estate,
inheritance, and other tax consequences of ownership or receipt of distributions
under a Contract depend on the individual circumstances of each Owner or
recipient of the distribution. A COMPETENT TAX ADVISER SHOULD BE CONSULTED FOR
FURTHER INFORMATION.
ASSIGNMENTS OR PLEDGES
Generally, rights in the Contract may be assigned or pledged for loans at
any time during the life of the Annuitant; however, if the Contract is an IRA,
the Owner may not assign the Contract as collateral.
If a non-IRA Contract is assigned, the interest of the assignee has
priority over the interest of the Owner and the interest of the Beneficiary. Any
amount payable to the assignee will be paid in a single sum.
A copy of any assignment must be submitted to the Company at the Schwab
Annuity Service Center. Any assignment is subject to any action taken or payment
made by the Company before the assignment was processed. The Company is not
responsible for the validity or sufficiency of any assignment.
If any portion of the Annuity Account Value is assigned or pledged for a
loan, it may be treated as a distribution. A competent tax adviser should be
consulted for further information.
DISTRIBUTION OF THE CONTRACTS
Charles Schwab & Co., Inc. ("Schwab") is the distributor of the Contracts.
Schwab is registered with the Securities and Exchange Commission as a
broker/dealer and is a member of the National Association of Securities Dealers,
Inc. ("NASD"). Its principal offices are located at 101 Montgomery, San
Francisco, California 94104, telephone 800-838-0649.
Certain administrative services are provided by Schwab to assist the
Company in the processing of the Contracts, which services are described in
written agreements between Schwab and the Company.
The Company has agreed to indemnify Schwab (and its agents, employees, and
controlling persons) for certain damages arising out of the sale of the
Contracts, including those arising under the securities laws.
SELECTED
FINANCIAL
DATA
The following is a summary of certain financial data of the
Company. This summary has been derived in part from, and should be
read in conjunction with, the financial statements of the Company
included elsewhere in this Prospectus.
(Dollars in Thousands)
For the Period from
April 4, 1997
(Inception) through
December 31, 1997
INCOME STATEMENT DATA
Premiums and other $ 21
income
Net investment income 243
Total Revenues 264
Total benefits and expenses 213
Income tax expense 18
============
Net Income $ 33
============
BALANCE SHEET DATA
Investment assets $ 5,381
Separate account assets 9,045
Total assets 16,154
Total policyholder liabilities 84
Total shareholder's equity 6,538
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company
The Company is authorized to engage in the sale of life insurance,
annuities, and accident and health insurance. The Company became licensed to do
business in New York and Iowa in 1997. The Company's business is currently
limited to the sale of individual annuity products.
The Company was capitalized on April 4, 1997. The table that follows
summarizes premiums and deposits for the period April 4, 1997 through December
31, 1997. For further information concerning the Company.
(Dollars in Thousands)
Premiums and other income $ 21
Deposits for Investment-type contracts
84
Deposits to Separate Accounts
9,121
Management's discussion and analysis of financial condition and results of
operations of the Company for the period from April 4, 1997 (inception) to
December 31, 1997 follows. In connection with, and because it desires to take
advantage of, the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, the Company cautions readers regarding certain
forward-looking statements contained in the following discussion and elsewhere
in this report and in any other statements made by, or on behalf of, the
Company, whether or not in future filings with the SEC. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results, or other developments. In
particular, statements using verbs such as "expect," "anticipate," "believe," or
words of similar import generally involve forward-looking statements. Without
limiting the foregoing, forward-looking statements include statements which
represent the Company's beliefs concerning future or projected levels of sales
of the Company's products, investment spreads or yields, or the earnings or
profitability of the Company's activities.
Forward-looking statements are necessarily based upon estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which, with respect to future business decisions,
are subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those expressed
in any forward-looking statements made by, or on behalf of, the Company. Whether
or not actual results differ materially from forward-looking statements may
depend on numerous foreseeable and unforeseeable events or developments, some of
which may be national in scope, such as general economic conditions and interest
rates, some of which may be related to the insurance industry generally, such as
pricing competition, regulatory developments and industry consolidation, and
others of which may relate to the Company specifically, such as credit,
volatility and other risks associated with the Company's investment portfolio,
and other factors. Readers are also directed to consider other risks and
uncertainties discussed in documents filed by the Company with the SEC.
Results of Operations
The Company's operations during the period April 4, 1997 (inception) to
December 31, 1997 were focused on obtaining a New York insurance license (which
occurred May 28, 1997), and preliminary marketing activities.
Sales have been limited to individual fixed and variable qualified and
non-qualified deferred annuities marketed through Charles Schwab & Co., Inc.
Although sales of fixed annuities have been minimal ($84 thousand),
contributions received for variable annuities were $9.1 million for the period
the Company has been licensed.
The net income of $33 thousand was the result of investment income on
surplus less operating expenses associated with establishing the Company.
It is expected that the sale of individual annuities will continue and
increase during 1998. The Company will continue to focus its efforts on
individual annuity sales while continuing to develop other products for
submission to the New York Department of Insurance for approval.
The Company's investment strategies and portfolios are intended to match
the duration of the related liabilities and provide sufficient cash flow to meet
obligations while maintaining a competitive rate of return. At December 31,
1997, $5.0 million of the Company's general funds were invested in a U.S.
Treasury Note with a maturity date of May 31, 1998, and the remainder in short
term investments.
Liquidity and Capital Resources
The Company meets its operating requirements by maintaining appropriate
levels of liquidity in its investment portfolio. Liquidity for the Company is
strong, as evidenced by significant amounts of short-term investments and cash,
which totaled $2.0 million as of December 31, 1997. As discussed above, the
Company and GWL&A have an agreement whereby GWL&A has undertaken to provide the
Company with certain financial support related to maintaining required statutory
surplus and liquidity.
Accounting Pronouncements
Effective January 1, 1998, the Company will implement SFAS No. 130,
"Reporting Comprehensive Income", which requires the disclosure of comprehensive
income and its components. The Company recognizes unrealized gains and losses,
net of adjustments, on its investments available for sale portfolio. These items
are considered to be comprehensive income.
Effective October 1, 1998, the Company will implement the disclosure
requirements of SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information". SFAS No. 131 redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company anticipates, with
the adoption of SFAS No. 131, that it will incorporate segment disclosures of
its current operating units. The Company believes the segment information
required to be disclosed under SFAS No. 131 will be more comprehensive than
previously provided, including expanded disclosures of income statement and
balance sheet items for each of its reportable operating segments.
Year 2000
As mentioned, GWL&A provides administrative services to the Company. GWL&A
has a number of existing computer programs that use only two digits to identify
a year in the date field, which creates a problem with the upcoming change in
the century. GWL&A has developed detailed plans that it expects to rectify the
year 2000 problem. These plans include modifying programs where necessary,
replacing certain programs with year 2000 compliant software, and working with
vendors and business partners including banks, custodians and investment
managers, who need to become year 2000 compliant. The resources that are being
devoted to this effort are substantial. Management estimates that the total cost
to implement these plans will not be material, and has budgeted the expense as
part of its computer systems operating costs in 1998 and early 1999. GWL&A
anticipates that its systems will be year 2000 compliant on or about first
quarter 1999, but there can be no assurance that GWL&A will be successful, or
that interaction with other service providers will not impair the Company's
Services at that time.
Reserves
Reserves for deferred annuities are equal to cumulative deposits plus
credited interest less withdrawals and other charges. With additions from
deposits to be received and interest, such reserves are expected to be
sufficient to meet the Company's contract obligations at their maturities, and
pay expected death or retirement benefits or surrender requests.
Investments
GWL&A manages the Company's general and Separate Account funds.
Investments under management at year-end 1997 totaled $14.4 million, comprised
of $5.4 million of general funds and $9.0 million of Separate Account assets.
The limited size of the Company's investment portfolio makes it difficult
to diversify and avoid industry concentration at this time. At December 31,
1997, $5.0 million of the Company's general funds were invested in a U.S.
Treasury Note with a maturity date of May 31, 1998, and the remainder in short
term investments.
Regulation
General
The Company must comply with the insurance laws of New York and
Iowa. This includes regulations governing rates, solvency, standards of business
conduct and various insurance and investment products. The form and content of
statutory financial reports and the type and concentration of investments are
also regulated.
The Company's operations and accounts are subject to examination by the
New York Insurance Division at specified intervals.
Solvency Regulation
The National Association of Insurance Commissioners has adopted risk-based
capital rules for life insurance companies. These rules recommend a specified
level of capital depending upon the types and quality of investments held, the
types of business written, and the types of liabilities maintained. Depending on
the ratio of the insurer's adjusted capital to its risk based capital, the
insurer could be subject to various regulatory actions ranging from increased
scrutiny to conservatorship. Based on the Company's December 31, 1997 statutory
financial reports, the Company was well within these rules.
The National Association of Insurance Commissioners Insurance Regulatory
Information System ratios are another set of tools used by regulators to provide
an "early warning" as to when a company may require special attention. There are
twelve categories of financial data with defined usual ranges for each. For
1997, the Company anticipates that it will fall outside of the usual ranges for
several categories due to the start-up nature of its operations.
Insurance Holding Company Regulations
The Company is subject to and complies with insurance holding company
regulations in New York. These regulations contain certain restrictions and
reporting requirements for transactions between an insurer and its affiliates,
including the payments of dividends. They also regulate changes in control of an
insurance company.
Securities Laws
The Company is subject to various levels of regulation under federal
securities laws. The Company's Separate Accounts are registered under the
Investment Company Act of 1940 and the offerings of the Company's annuity
products are registered under the Securities Act of 1933.
Ratings
The Company is rated by a number of nationally recognized rating agencies.
The ratings represent the opinion of the rating agencies on the financial
strength of the Company and its ability to meet the obligations of its insurance
policies. The ratings take into account an agreement whereby GWL&A has
undertaken to provide the Company with certain financial support related to
maintaining required statutory surplus and liquidity; however, these ratings and
the Company's financial strength do not extend to the investment return or
principal value of the Company's separate accounts.
Rating Agency Measurement Rating
- ------------------------- ------------------------------------ ----------
A.M. Best Company Financial Condition and Operating AA+ *
Performance
Duff & Phelps Claims Paying Ability AAA *
Corporation
Standard & Poor's Claims Paying Ability AA
Corporation **
Moody's Investors Insurance Financial Strength Aa3
Service ***
* Highest ratings available.
** Third highest rating out of 19 rating categories.
*** Fourth highest rating out of 19 rating categories.
Miscellaneous
No customer accounted for 10% or more of the Company's consolidated
revenues in 1997. The Company's business is not dependent on a single customer
or a few customers, the loss of which would have a significant effect on the
Company.
As mentioned, the Company distributes its annuity products through Charles
Schwab and Co., Inc. pursuant to a marketing agreement. The loss of business
from this agent would have a material effect on the Company's distribution
process.
The Company and GWL&A have an administration service agreement whereby
GWL&A administers, distributes, and underwrites business for the Company and
administers the Company's investment portfolio The Company leases its home
office in Albany, New York.
Directors and Officers
Set forth below is information concerning the Company's directors and
executive officers, together with their principal occupation for the past five
years. Unless otherwise indicated, all of the directors have been engaged for
not less than five years in their present principal occupations or in another
executive capacity with the companies or firms identified.
Director Principal Occupation(s) For
Last Five Years
Marcia D. Alazraki Partner, Kalkines, Arky, Zall &
Bernstein LLP since January, 1998;
previously Counsel, Simpson Thacher &
Bartlett
James Balog Company Director
James W. Burns, O.C. Chairman of the Boards of Great-West
Lifeco, Great-West Life, London
Insurance Group Inc. and London Life
Insurance Company; Deputy Chairman,
Power Corporation
Paul Desmarais, Jr. Chairman and Co-Chief Executive Officer,
Power Corporation; Chairman, Power
Financial
Robert Gratton Chairman of the Board of GWL&A;
President and Chief Executive Officer,
Power Financial
N. Berne Hart (1) Company Director
Stuart Z. Katz Partner, Fried, Frank, Harris, Shriver &
Jacobson
William T. McCallum Chairman, President and Chief Executive
Officer of the Company; President and
Chief Executive Officer, GWL&A;
President and Chief Executive Officer,
United States Operations, Great-West Life
Brian E. Walsh (1) Co-Founder and Managing Partner, Veritas
Capital Management, LLC since September
1997; previously Partner, Trinity L.P.
from January 1996; previously Managing
Director and Co-Head, Global Investment
Bank, Bankers Trust Company
Executive Officers Principal Occupation(s) For
Last Five Years
William T. McCallum Chairman, Chairman, President and Chief Executive
President and Chief Executive Officer of the Company; President and
Officer Chief Executive Officer, GWL&A;
President and Chief Executive Officer,
United States Operations, Great-West Life
Dennis Low Executive Vice President, Financial
Executive Vice President, Services of the Company, GWL&A and
Financial Services Great-West Life
James D. Motz Executive Vice President, Employee
Executive Vice President, Benefits of the Company, GWL&A and
Employee Benefits Great-West Life
Douglas L. Wooden Executive Vice President, Financial
Executive Vice President, Services of the Company, GWL&A and
Financial Services Great-West Life
Mitchell T.G. Graye Senior Vice President, Chief Financial
Senior Vice President, Chief Officer of the Company and GWL&A; Senior
Financial Officer Vice President, Chief Financial Officer,
United States, Great-West Life
John T. Hughes Senior Vice President, Chief Investment
Senior Vice President, Officer of the Company and GWL&A; Senior
Chief Investment Officer Vice President, Chief Financial Officer,
United States, Great-West Life
D. Craig Lennox Senior Vice President, General Counsel
Senior Vice President, and Secretary of the Company and GWL&A;
General Counsel and Secretary Senior Vice President and Chief U.S.
Legal Officer, Great-West Life
Martin Rosenbaum Senior Vice President, Employee Benefits
Senior Vice President, Operations of the Company, GWL&A and
Employee Benefits Operations Great-West Life
Robert K. Shaw Senior Vice President, Individual
Senior Vice President, Markets of the Company, GWL&A and
Individual Markets Great-West Life
Compensation of Executive Officers
The executive officers of the Company are not compensated for their
services to the Company. They are compensated as executive officers of GWL&A.
Compensation of Directors
For each director of the Company who is not also a director of GWL&A,
Great-West Life or Great-West Lifeco, the Company pays an annual fee of $10,000.
For each director of the Company who is also a director of GWL&A, Great-West
Life or Great-West Lifeco, the Company pays an annual fee of $5,000. The Company
pays each director a meeting fee of $1,000 for each meeting of the Board of
Directors or a committee thereof attended. In addition, all directors are
reimbursed for incidental expenses. The above amounts are paid in the currency
of the country of residence of the director.
Security Ownership of Certain Beneficial Owners
As of March 1, 1998, the following sets out the beneficial owners of more
than 5% of the Company's voting securities:
(1) 100% of the Company's 2,500 outstanding common shares are owned by
Great-West Life & Annuity Insurance Company, 8515 East Orchard Road,
Englewood, Colorado 80111.
(2) 100% of GWL&A's outstanding common shares are owned by The Great-West Life
Assurance Company, 100 Osborne Street North, Winnipeg, Manitoba, Canada
R3C 3A5.
(3) 99.5% of the outstanding common shares of The Great-West Life Assurance
Company are owned by Great-West Lifeco Inc., 100 Osborne Street North,
Winnipeg, Manitoba, Canada R3C 3A5.
(4) 81.2% of the outstanding common shares of Great-West Lifeco Inc. are
controlled by Power Financial Corporation, 751 Victoria Square, Montreal,
Quebec, Canada H2Y 2J3.
(5) 67.7% of the outstanding common shares of Power Financial Corporation are
owned by 171263 Canada Inc., 751 Victoria Square, Montreal, Quebec, Canada
H2Y 2J3.
(6) 100% of the outstanding common shares of 171263 Canada Inc. are owned by
Marquette Communications Corporation, 751 Victoria Square, Montreal,
Quebec, Canada H2Y 2J3.
(7) 100% of the outstanding common shares of Marquette Communications
Corporation are owned by Power Corporation of Canada, 751 Victoria Square,
Montreal, Quebec, Canada H2Y 2J3.
(8) Mr. Paul Desmarais, 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3,
through a group of private holding companies, which he controls, has
voting control of Power Corporation of Canada.
Security Ownership of Management
The following table sets out the number of equity securities, and
exercisable options for equity securities, of the Company or any of its parents
or subsidiaries, beneficially owned, as of March 1, 1998, by (i) the directors
of the Company; and (ii) the directors and executive officers of the Company as
a group.
<PAGE>
- -------------------------------------------------------------------------------
Company
------------------------------------------------------------
------------------------------------------------------------
The Great-West Power Financial Power Corporation
Great-West Lifeco Inc. Corporation of Canada
Life
Assurance
Company
(1) (2) (3) (4)
------------------------------------------------------------
Directors
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
M.D. Alazraki - - - -
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
J. Balog - - - -
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
J. W. Burns 50 56,000 4,000 200,320
101,750 options
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
P. Desmarais, Jr. 50 30,000 - 306,750 options
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
R. Gratton - 165,000 155,000 2,500
2,160,000 options 150,000 options
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
N.B. Hart - - - -
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
S.Z. Katz - - - -
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
W.T. McCallum 17 35,133 52,000 -
60,000
options
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
B.E. Walsh - - - 3,700
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Directors and Executive
Officers as a Group
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
117 317,635 275,600 206,520
185,600 2,368,000 options 558,500 options
options
- -------------------------------------------------------------------------------
(1) All holdings are common shares of The Great-West Life Assurance Company. (2)
All holdings are common shares, or where indicated, exercisable options for
common
shares, of Great-West Lifeco Inc.
(3) All holdings are common shares, or where indicated, exercisable options
for common shares, of Power Financial Corporation.
(4) All holdings are subordinate voting shares, or where indicated,
exercisable options for subordinate voting shares, of Power Corporation of
Canada.
The number of common shares and exercisable options for common shares of
Power Financial Corporation held by R. Gratton represents 1.31% of the total
number of common shares and exercisable options for common shares of Power
Financial Corporation outstanding. The number of common shares and exercisable
options for common shares of Power Financial Corporation held by the directors
and executive officers as a group represents 1.50% of the total number of common
shares and exercisable options for common shares of Power Financial Corporation
outstanding. None of the remaining holdings set out above exceed 1% of the total
number of shares and exercisable options for shares of the class outstanding.
Certain Relationships and Related Transactions
M.D. Alazraki, a director of the Company, was an attorney with two law
firms which provided legal services to the Company. From January 1, 1997 through
March 16, 1998, the amount of such services was approximately $218,000.
RIGHTS RESERVED BY THE COMPANY
The Company reserves the right to make certain changes if, in its
judgment, they would best serve the interests of Owners and Annuitants or would
be appropriate in carrying out the purposes of the Contracts. Any changes will
be made only to the extent and in the manner permitted by applicable laws. Also,
when required by law, the Company will obtain your approval of the changes and
approval from any appropriate regulatory authority. Such approval may not be
required in all cases, however. Examples of the changes the Company may make
include:
- To make any changes required by the Internal Revenue Code or by any
other applicable law in order to continue treatment of the Contract as an
annuity.
- To make any other necessary technical changes in the Contract in order
to conform with any action the above provisions permit the Company to
take, including to change the way the Company assess charges, but without
increasing as to any then outstanding Contract the aggregate amount of the
types of charges which the Company has guaranteed.
LEGAL PROCEEDINGS
The Company is currently not a party to, and its property is not currently
subject to, any material legal proceedings. The lawsuits to which the Company
may be a party are, in the opinion of management, in the ordinary course of
business, and are not expected to have a material adverse effect on the
financial results, conditions or prospects of the Company.
LEGAL MATTERS
Advice regarding certain legal matters concerning the federal securities
laws applicable to the issue and sale of the Contract has been provided by
Jorden Burt Boros Cicchetti Berenson & Johnson LLP. The organization of the
Company, the Company's authority to issue the Contract, and the validity of the
form of the Contract have been passed upon by W. Kay Adam, Vice President,
Counsel and Associate Secretary of the Company.
EXPERTS
The financial statements of First Great-West Life & Annuity Insurance
Company for the period April 4, 1997 [Inception] to December 31, 1997 included
in this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and is included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed a registration statement ("Registration Statement")
with the Commission under the 1933 Act relating to the Contracts offered by this
prospectus. This prospectus has been filed as a part of the Registration
Statement and does not contain all of the information set forth in the
Registration Statement and exhibits thereto. Reference is hereby made to the
Registration Statement and exhibits for further information relating to us and
the Contracts. Statements contained in this prospectus, as to the content of the
Contracts and other legal instruments, are summaries. For a complete statement
of the terms thereof, reference is made to the instruments as filed as exhibits
to the Registration Statement. The Registration Statement and its exhibits may
be inspected and copied at the offices of the Commission located at 450 Fifth
Street, N.W., Washington, D.C.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and in accordance therewith
it has filed file reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information can be
inspected and copied at the public reference facilities on the Commission at
Room 1024, 450 Fifth Street, N.W., Washington D.C., and at the Commission's
Regional Offices located at 75 Park Place, New York, New York, and Northwestern
Atrium Center, 500 West Madison Street, Ste. 1400, Chicago, Illinois. Copies of
such materials also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The commission maintains a Web Site that contains reports and information
statements and other information regarding the Company, which files such
documents electronically with the Commission, at the following address:
http://www.sec.gov.
<PAGE>
Appendix A
On the following pages are four examples of Market Value Adjustments
illustrating (1) increasing interest rates, (2) decreasing interest rates, (3)
flat interest rates, and (4) less than 6 months to maturity.
Example #1 - Increasing Interest Rates
Deposit: $25,000 on November 1, 1996
Maturity Date: December 31, 2006
Interest Guarantee Period: 10 years
i: assumed to be 6.15%
Surrender Date: July 1, 2001
j: 7.00%
Amount Surrendered: $10,000
N: 65
MVAF = {[(1 + i)/(1 + j)]N/12} - 1
= {[1.0615/1.07]65/12} - 1
= .957718 - 1
= -.042282
MVA = (amount Transferred or surrendered) x MVAF
= $10,000 x - .042282
= - $422.82
Surrender Value = (amount Transferred or surrendered + MVA) x (1 -
Surrender Charge)
= ($10,000 + - $22.82) x (1 - 0)
= $9,577.18
Example #2 - Decreasing Interest Rates
Deposit: $25,000 on November 1, 1996
Maturity Date: December 31, 2006
Interest Guarantee Period: 10 years
i: assumed to be 6.15%
Surrender Date: July 1, 2001
j: 5.00%
Amount Surrendered: $10,000
N: 65
MVAF = {[(1 + i)/(1 + j)]N/12} - 1
= {[1.0615/1.05]65/12} - 1
= 1.060778-1
= .060778
MVAF = (amount Transferred or surrendered) x MVAF
= $10,000 x .060778
= $607.78
Surrender Value = (amount Transferred or surrendered + MVA) x (1 -
Surrender Charge)
= ($10,000 + $607.78) x (1 - 0)
= $10,607.78
<PAGE>
Example #3 - Flat Interest Rates
Deposit: $25,000 on November 1, 1996
Maturity Date: December 31, 2006
Interest Guarantee Period: 10 years
i: assumed to be 6.15%
Surrender Date: July 1, 2001
j: 6.24%
Amount Surrendered: $10,000
N: 65
MVAF = {[(1 + i)/(1 + j)]N/12} - 1
= {[1.0615/1.0624]65/12} - 1
= .995420 - 1
= -.004580
MVAF = (amount Transferred or surrendered) x MVAF
= $10,000 x -.004589
= -$45.80
Surrender Value = (amount Transferred or surrendered + MVA) x (1 -
Surrender Charge)
= ($10,000 - $45.80) x (1 - 0)
= $9,954.20
Example #4 - N is less than 6 (less than 6 months to maturity)
Deposit: $25,000 on November 1, 1996
Maturity Date: December 31, 2006
Interest Guarantee Period: 10 years
i: assumed to be 6.15%
Surrender Date: July 1, 2006
j: 7.00%
Amount Surrendered: $10,000
N: 5
MVAF = {[(1 + i)/(1 + j)]N/12} - 1
= {[1.0615/1.07]5/12} - 1
= .99668 - 1
= -.00332
However, N is less than 6, so MVAF = 0
MVAF = (amount Transferred or surrendered) x MVAF
= $10,000 x 0
= $0
Surrender Value=(amount Transferred or surrendered + MVA) x (1 - Surrender
Charge)
= ($10,000 + $0) x (1 - 0)
= $10,000
<PAGE>
FRIST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(A wholly-owned subsidiary of
Great-West Life & Annuity Insurance Company)
Financial Statements for the period from April 4, 1997 [Inception] to
December 31, 1997 and Independent Auditor's Report
<PAGE>
INDEPENDENT AUDITORS' REPORT
Tothe Board of Directors and Stockholder of First Great-West Life & Annuity
Insurance Company:
We have audited the accompanying balance sheet of First Great-West Life &
Annuity Insurance Company (a wholly-owned subsidiary of Great-West Life and
Annuity Insurance Company) as of December 31, 1997, and the related statements
of income, stockholder's equity, and cash flows for the period from April 4,
1997 [inception] to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of First Great-West Life & Annuity Insurance
Company as of December 31, 1997, and the results of its operations and its cash
flows for the period from April 4, 1997 [inception] to December 31, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
January 23, 1998
<PAGE>
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
BALANCE SHEET
DECEMBER 31, 1997
- ----------------------------------------------------------------------
[Dollars in thousands except for share information.]
ASSETS
<TABLE>
INVESTMENTS:
Fixed maturities, available-for-sale, at fair value (amortized cost $4,987) $ 4,995
Short-term investments, available-for-sale (cost approximates fair value) 386
- --------------
Total Investments 5,381
<S> <C>
Cash 1,648
Investment income due and accrued 24
Other assets 6
Deferred income taxes 50
Separate account assets 9,045
- --------------
TOTAL ASSETS $ 16,154
==============
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves $ 84
GENERAL LIABILITIES:
Due to Parent Corporation 155
Other liabilities 332
Separate account liabilities 9,045
- --------------
Total Liabilities 9,616
- --------------
STOCKHOLDER'S EQUITY:
Common stock, $1,000 par value, 2,500 shares authorized,
issued and outstanding 2,500
Additional paid-in capital 4,000
Net unrealized gain on securities available-for-sale 5
Retained earnings 33
- --------------
Total Stockholder's Equity 6,538
- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 16,154
==============
</TABLE>
See notes to financial statements.
<PAGE>
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
STATEMENT OF INCOME
FOR THE PERIOD APRIL 4, 1997 [INCEPTION] TO DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------
[Dollars in Thousands]
REVENUES:
<S> <C>
Annuity contract charges and premiums $ 21
Net investment income 243
- ---------------
264
- ---------------
EXPENSES:
Commissions 9
Operating expenses 204
- ---------------
213
- ---------------
INCOME BEFORE INCOME TAXES 51
PROVISION FOR INCOME TAXES:
Current 71
Deferred (53)
- ---------------
18
- ---------------
NET INCOME $ 33
===============
</TABLE>
See notes to financial statements.
<PAGE>
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD APRIL 4, 1997 [INCEPTION] TO DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
[Dollars in Thousands]
Additional
Net
Paid-in
Unrealized Retained
Shares Amount Capital
Gains Earnings Total
------------- ------------ -------------
- ------------- ------------- -------------
<S> <C> <C> <C>
<C>
Capital contribution 2,500 $ 2,500 $ 4,000
$ $ $ 6,500
Change in net unrealized
gains
5 5
Net
income
33 33
------------- ------------ -------------
- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1997 2,500 $ 2,500 $ 4,000
$ 5 $ 33 $ 6,538
============= ============ =============
============= ============= =============
</TABLE>
See notes to financial statements.
<PAGE>
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
STATEMENT OF CASH FLOWS
FOR THE PERIOD APRIL 4, 1997 [INCEPTION] TO DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------
[Dollars in Thousands]
OPERATING ACTIVITIES:
<S> <C>
Net income $ 33
Adjustments to reconcile net income to
net cash provided by operating activities -
Amortization of investments
(19)
Deferred income taxes
(53)
Changes in assets and liabilities:
Investment income due and accrued
(24)
Other, net 326
- -------------
Net cash provided by operating activities 263
- -------------
INVESTING ACTIVITIES:
Purchases of fixed maturity investments -
Available-for-sale
(5,354)
- -------------
Net cash used in investing activities
(5,354)
- -------------
FINANCING ACTIVITIES:
Contract deposits 84
Due to Parent Corporation 155
Capital contributions 6,500
- -------------
Net cash provided by financing activities 6,739
- -------------
NET INCREASE IN CASH 1,648
CASH, BEGINNING OF PERIOD 0
- -------------
CASH, END OF PERIOD $ 1,648
=============
</TABLE>
See notes to financial statements.
<PAGE>
FIRST GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD APRIL 4, 1997 [INCEPTION] TO DECEMBER 31,1997
- ----------------------------------------------------------------------
[Dollars in Thousands, except Share Amounts]
1. ORGANIZATION
Organization - First Great-West Life & Annuity Insurance Company (the
Company) is a wholly-owned subsidiary of Great-West Life & Annuity
Insurance Company (the Parent Corporation). The Company was incorporated
as a stock life insurance company in the State of New York and was
capitalized on April 4, 1997, through a $6,000 cash investment from the
Parent Corporation for 2,000 shares of common stock. On December 29,
1997, the Company issued an additional 500 shares of common stock to the
Parent Corporation for $500. The Company was licensed as an insurance
company in the State of New York on May 28, 1997.
Basis of Presentation - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. SIGNIFICANT ACCOUNTING PRINCIPLES
Cash - Cash includes only amounts in demand deposit accounts.
Investments - Fixed maturity investments available-for-sale are carried
at fair value, with the net unrealized gain or loss included as a
component of stockholder's equity. If a decline in fair value is
determined to be other than temporary, the investment will be written
down and a realized loss recognized. The fair values of publicly traded
fixed maturities are obtained from an independent pricing service.
The amortized cost of fixed maturities available-for-sale is adjusted
for the amortization of premium and accretion of discounts using the
effective interest method over the estimated life of the related bonds.
Such amortization is included in net investment income.
At December 31, 1997, the fixed maturity investment consisted of one
U.S. Treasury Note with a maturity date of May 31, 1998.
<PAGE>
Short-term investments include securities purchased with initial
maturities of one year or less and are carried at amortized cost. The
Company considers short-term investments to be available-for-sale and
amortized cost approximates fair value.
At December 31, 1997, the short-term investment consisted of one
commercial paper with a maturity date of August 17, 1998.
Separate Account - Separate Account assets and related liabilities are
carried at fair value. The Company's Separate Accounts invest in shares
of various external mutual funds.
Due to Parent Corporation - Due to Parent Corporation includes amounts
due on demand.
Policy Reserves - Annuity contract reserves without life contingencies
of $84 are carried at contractholders' account value. The carrying value
of policy reserves is a reasonable estimate of fair value.
Recognition of Premium Income and Expenses - Revenues for annuity and
other contracts without significant life contingencies are recognized as
received. They consist of contract charges for the cost of insurance,
contract administration, and surrender fees that have been assessed
against the contract account balance during the period.
Income Taxes - Income taxes are recorded using an asset and liability
approach which requires, among other provisions, the recognition of
deferred tax assets and liabilities for expected future tax consequences
of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, all
expected future events (other than the enactments or changes in the tax
laws or rules) are considered.
Temporary differences which give rise to the deferred tax assets and
liabilities as of December 31, 1997, are as follows:
<TABLE>
Deferred Deferred Tax
Tax Asset Liability
----------------- ----------------
<S> <C> <C>
Deferred acquisition cost proxy tax $ 53 $
Investment assets 3
----------------- ----------------
Total deferred taxes $ 53 $ 3
================= ================
</TABLE>
Amounts related to investment assets above include $3 related to the
unrealized gains on the Company's fixed maturities available-for-sale at
December 31, 1997.
The Company and its Parent have entered into an income tax allocation
agreement whereby the Parent could file a consolidated federal income
tax return. Under the agreement the Company is responsible for and will
receive the benefits of any income tax liability or benefit computed on
a separate basis. In 1997 the Company will not file on a consolidated
basis with its Parent.
3. RELATED-PARTY TRANSACTIONS
The Company and the Parent Corporation have service agreements whereby
the Parent Corporation administers, distributes, and underwrites
business for the Company and administers the Company's investment
portfolio and the Company provides services for the Parent Corporation.
Certain operating expenses represent allocations made between the Parent
Corporation and the Company for services provided pursuant to these
service agreements. These transactions are summarized as follows:
Investment management expense (included in net investment income) $ 4
Administrative and underwriting payments (included in operating expenses) (14)
The Company and the Parent Corporation have an agreement whereby the
Parent Corporation provides certain financial support related to
maintaining adequate regulatory surplus and liquidity.
4. DIVIDEND RESTRICTIONS
The Company's net income and capital and surplus, as determined in
accordance with statutory accounting principles and practices for
December 31, 1997, are as follows (unaudited):
Net Loss $ (19)
Capital and Surplus 6,469
As an insurance company domiciled in the State of New York, the Company
is required to maintain a minimum of $6,000 of capital and surplus. In
addition, the maximum amount of dividends which can be paid to
stockholders is subject to restrictions relating to statutory surplus
and statutory adjusted net investment income. The Company should be able
to pay dividends of $242 in 1998. The Company paid no dividends in 1997.
