THE SCHWAB FIXED ANNUITY(TM)
A FLEXIBLE PREMIUM DEFERRED FIXED ANNUITY
Distributed by
CHARLES SCHWAB & CO., INC.
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Issued by
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 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Market Value Adjustment on the amounts withdrawn from the Guarantee Period Fund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. This Contract may not be available in all states.
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withdrawn in the first three years.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 (or
longer, if required by state law), 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 or take a distribution upon the death of the Owner or Annuitant
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 800-838-0650 or P.O. Box 7666, San Francisco, California
94120-7666.
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....................................................................3
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY ................................4
THE GUARANTEE PERIOD FUND....................................................4
THE MARKET VALUE ADJUSTMENT..................................................6
APPLICATION AND CONTRIBUTIONS................................................8
TRANSFERS....................................................................9
CASH WITHDRAWALS.............................................................9
TELEPHONE TRANSACTIONS......................................................10
DEATH BENEFIT...............................................................11
CHARGES AND DEDUCTIONS......................................................13
PAYMENT OPTIONS.............................................................14
FEDERAL TAX MATTERS ........................................................17
ASSIGNMENTS OR PLEDGES......................................................21
DISTRIBUTION OF THE CONTRACTS...............................................21
SELECTED FINANCIAL DATA.....................................................22
RIGHTS RESERVED BY THE COMPANY..............................................38
LEGAL PROCEEDINGS ..........................................................38
LEGAL MATTERS...............................................................38
EXPERTS ....................................................................39
AVAILABLE INFORMATION.......................................................39
APPENDIX A..................................................................40
APPENDIX B..................................................................41
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 is not available in all states.
<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 - Great-West Life & Annuity Insurance Company, the issuer of this
annuity, located at 8515 East Orchard Road, Englewood, Colorado 80111.
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.
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 periods of time available in the Guarantee Period
Fund during which the Company will credit a stated rate of interest. The Company
may stop offering any term 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.
Guaranteed Interest Rate - 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. 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, and distributions resulting from death of the Owner or
Annuitant, 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
Guaranteed Interest Rate, 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 6.
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 91st 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 7666, San Francisco, California
94120-7666, telephone 800-838-0650.
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 GWL&A: Great-West Life & Annuity Insurance Company.
<PAGE>
1
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 (Guaranteed Interest Rate), but the
Company may declare higher rates (the stated rate of interest). The Guaranteed
Interest Rate will be disclosed in the written confirmation. The stated rate of
interest will not be less than the Guaranteed Interest Rate 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.6.) The Contract may
not be available in all states or jurisdictions. Please consult with your
representative or call the Schwab Annuity Service Center for more information.
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. 8.)
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. 13.)
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. 13.)
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 Guaranteed Interest Rate and the value of
the Contribution(s) allocated to the Guarantee Period being less than the
Contribution(s) made. (See "Market Value Adjustment," p. 6.)
<PAGE>
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. 13.) 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. 6.)
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. 6.) Amounts
withdrawn also may be subject to a Surrender Charge. (See "Charges and
Deductions," p. 13.) 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. 9.)
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 91.) 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. 14.)
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. 11.)
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 (800-838-0650) or write to the Schwab Annuity
Service Center at P.O. Box 7666, San Francisco, California 94120-7666. 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.
<PAGE>
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, 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>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
The Company is a stock life insurance company originally organized under
the laws of the state of Kansas as the National Interment Association. Its name
was changed to Ranger National Life Insurance Company in 1963 and to
Insuramerica Corporation prior to changing to its current name in 1982. In
September of 1990, GWL&A redomesticated and is now organized under the laws of
the state of Colorado.
GWL&A is authorized to engage in the sale of life insurance, accident and
health insurance and annuities. It is qualified to do business in the District
of Columbia, Puerto Rico and 49 states in the United States.
GWL&A is a wholly-owned subsidiary of The Great-West Life Assurance
Company ("Great-West Life"). Great-West Life 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 separate account established by the Company under Section
10-7-401, et. seq. of the Colorado Insurance Code. 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 only in those states where the Contract is
available. 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. 6.)
<PAGE>
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 COLORADO 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:
1-800-838-0650.
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.
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. 6.)
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, 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 Guaranteed
Interest Rate. The Company may declare higher rates. The Guaranteed Interest
Rate is based on the applicable state standard non-forfeiture law. Please see
Appendix A for the standard non-forfeiture law rate applicable to the state in
which the Contract was issued.
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, or distributions resulting
from the death of the Owner or Annuitant 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.
<PAGE>
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 +.10%)] 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 i + j differ by less than .10%, the MVA will equal 0. 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
c) A single sum payment upon death of the Owner or Annuitant.
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 B for Illustrations of the MVA.
<PAGE>
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 GWL&A) or by instructing Schwab to transfer to 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, or longer where
required by law ("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.
<PAGE>
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 @ 1-800-838-0650 (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. 6.) 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. 6.) 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. 17.)
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 with respect to which a Market Value
Adjustment may apply; or
2. payment under any of the annuity options provided under this
Contract with respect to which a Market Value Adjustment may
apply; or
3. payment on the Guarantee Period Maturity Date so that a Market
Value Adjustment will not apply.
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, and distributions resulting from death of the Owner or Annuitant 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. 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 several states. No charges are currently made
for taxes other than Premium Tax. However, we reserve the right to deduct
charges in the future for federal, state, and local taxes or the economic burden
resulting from the application of any tax laws that we determine to be
attributable to the 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.
17.)
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 91st 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. 17.)
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 Guaranteed Interest
Rate.
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 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 800-838-0650.
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.
Millions Years Ended December 31
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA
Premiums and other income $1,279 $ 1,199 $ 1,067 $ 1,000 $ 696
Net investment income 897
837 835 768 792
Realized investment gains 10
(losses) (21) 8 (72) 25
--------- --------- --------- --------- ---------
Total Revenues 2,186 1,696 1,513
2,015 1,910
Total benefits and expenses 1,930 1,593 1,417
1,824 1,733
Income tax expense 97
56 49 29 31
========= ========= ========= ========= =========
Net Income $ 159 $ $ $ $
135 128 74 65
========= ========= ========= ========= =========
BALANCE SHEET DATA
Investment assets $13,206 $12,717 $12,473 $11,791 $11,592
Separate account assets
7,847 5,485 3,999 2,555 1,680
Total assets 22,078 19,351 17,682 15,616 14,296
Total policyholder 11,791 11,687 11,492 10,929 10,592
liabilities
Total shareholder's
equity 1,186 1,034 993 777 821
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company
Great-West Life & Annuity Insurance Company (the "Company") is a stock
life insurance company originally organized under the laws of the State of
Kansas in 1907 as the National Interment Association. Its name was changed to
Ranger National Life Insurance Company and to Insuramerica Corporation prior to
changing to its current name in 1982. In September of 1990, the Company
redomesticated and is now organized under the laws of the State of Colorado. The
Company ranks in the top 2% of all U.S. life insurers in terms of assets.
The Company is authorized to engage in the sale of life insurance,
accident and health insurance and annuities. It is qualified to do business in
all states in the United States except New York, and in the District of
Columbia, Puerto Rico and Guam. The Company conducts business in New York
through First Great-West Life & Annuity Insurance Company, a subsidiary New York
life insurance company.
The Company operates in one business segment as a provider of life, health
and annuity products; however, the business operations of the Company will be
discussed in terms of its major business units, which are:
Employee Benefits - life, health, disability income and 401(k)
products for group clients. Financial Services -
accumulation and payout annuity products for both group and
individual clients, primarily in the public/non-profit
sector, as well as insurance products for individual
clients.
Investment Operations - management of assets, both general account
and separate accounts which segregate, from the
Company's general account, the assets and liabilities of
contractholders of variable products ("Separate
Accounts").
Management's discussion and analysis of financial condition and results of
operations of the Company for the three years ended 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. Other risks and uncertainties are discussed in documents
filed by the Company with the SEC.
Comparison of Years Ended December 31, 1997 and 1996
The Company's consolidated net income for 1997 increased $24.4 million or
18% to $158.8 million, when compared to 1996.
Premiums and other income increased 7% from $1,199.2 million in 1996 to
$1,278.9 million in 1997. The increase was primarily due to growth in individual
participating insurance premiums and an increase in fee income from assets under
management.
Net investment income increased $61.0 million from $836.6 million in 1996
to $897.6 million in 1997. This change reflected improved interest income on
investments and additional investment management fees recognized in prior years
by Great-West Life.
The Company's realized investment gains (losses) changed from a net
realized loss of $21.1 million in 1996 to a net realized gain of $9.8 million in
1997. The decrease in interest rates in 1997 resulted in realized gains on the
sale of fixed maturities totaling $16.0 million, while higher interest rates
contributed to $11.6 million of fixed maturity losses recorded in 1996. There
was also a 28% improvement in the provision for asset losses as the change in
the provision was reduced from $10.6 million in 1996 to $7.6 million in 1997.
Total benefits and expenses includes life and other policy benefits,
increases in reserves, interest paid or credited to contractholders, expenses,
and dividends to policyholders. The increase of 6% from $1,824.3 million in 1996
to $1,929.9 million in 1997 was primarily the result of increased operating
expenses associated with the cost of developing HMOs, system enhancements, and
developing FASCorp's business.
In October 1996 the Company recaptured certain pieces of an individual
participating block of business previously reinsured to Great-West Life. In June
1997 the Company recaptured all remaining pieces of that block of business. The
Company recorded various assets and liabilities related to the recaptures as
discussed in Note 2 to the financial statements. In recording the recaptures,
both life insurance premiums and benefits were increased by the amounts
recaptured ($155.8 million and $164.8 million in 1997 and 1996, respectively).
Consequently, the net financial results of the Company were not impacted by
recording the reinsurance transactions.
Included in the 1997 and 1996 results of operations was the effect of a
release of $47.8 million and $25.6 million for 1997 and 1996, respectively, from
a previously recorded contingent tax liability that the Company assumed from
Great-West Life in 1993 (see Note 10 to the financial statements). Of the $47.8
million released in 1997, $15.1 million was attributable to participating
policyholders and reflected as a liability on the balance sheet.
In addition to the contingent tax liability release, the Company also in
the normal course of business reviewed its deferred tax assets and liabilities
and increased its deferred tax liability by $21.6 million in 1997 (of which
$10.1 million was attributable to participating policyholders), which resulted
in a $11.5 million reduction in net income.
The effect of the non-recurring transactions described above was to
decrease net income by $4.4 million from 1996 to 1997. Excluding the effect of
these transactions, the growth in net income reflected higher variable fee
income from assets under management, improved investment income, increased
realized capital gains and favorable mortality.
The effective income tax rates were affected by the release of the
contingent tax liability discussed above in 1997 and 1996 as these amounts were
not taxable, although the increase in the deferred tax liability discussed above
negated the impact of the 1997 release.
Comparison of Years Ended December 31, 1996 and 1995
The Company's 1996 consolidated net income increased 5% to $134.6 million,
when compared to 1995.
Premiums and other income increased 12% from $1,067.4 million in 1995 to
$1,199.2 million in 1996. The 1996 premiums included $164.8 million of
reinsurance premium associated with the recapture of a block of participating
individual insurance business from Great-West Life. This transaction did not
impact consolidated net income, as it was offset by an increase in reserves (see
discussion of policy benefits below). Therefore, premiums and other income from
operations were down from 1995 levels, which reflects a 7% reduction in group
life and health premiums due to high termination rates associated with price
sensitivity and competition from managed care companies.
Net investment income increased $1.5 million from $835.1 million in 1995
to $836.6 million in 1996. This change reflected an increase in the amount of
invested assets of $243.8 million, which was largely offset by a lower effective
yield on investments purchased in late 1995 and early 1996. The increase in
invested assets is primarily the result of growth in policy loans on the
Corporate-Owned Life Insurance ("COLI") business.
The Company's realized investment gains (losses) changed from a net
realized gain of $7.5 million in 1995 to a net realized loss of $21.1 million in
1996. The increase in interest rates in 1996 resulted in realized losses on the
sale of fixed maturities totaling $11.6 million, while lower interest rates
contributed to $28.2 million of fixed maturity gains recorded in 1995. The 50%
improvement in the provision for asset losses helped to partially offset the
fixed maturities capital losses, as the change in provision was reduced from
$22.0 million in 1995 to $10.6 million in 1996.
Total benefits and expenses includes life and other policy benefits,
increase in reserves, interest paid or credited to contractholders, expenses,
and dividends to policyholders. The increase of 5% from $1,733.3 million in 1995
to $1,824.3 million in 1996 is primarily the result of the increase in reserves
of $164.8 million associated with the recapture of insurance from Great-West
Life. After this adjustment the total benefits and expenses actually decreased
from 1995 to 1996. This is the result of a reduction in group health claims
which is consistent with the premium decrease discussed previously.
Net income in 1996 also reflects a $25.6 million release of a previously
recorded contingent liability that the Company assumed from Great-West Life in
1993. The release was triggered by the resolution of 1988 and 1989 tax issues
with the Internal Revenue Service.
The effective income tax rates were reduced in 1996 by the release of the
contingent liability which was not taxable and in 1995 by the release of a $13.3
million deferred tax valuation allowance in a subsidiary investment company.
Investment Operations
The Company's primary investment objective is to acquire assets whose
durations and cash flows reflect the characteristics of the Company's
liabilities, while meeting industry, size, issuer and geographic diversification
standards. Formal liquidity and credit quality parameters have also been
established.
The Company follows rigorous procedures to control interest rate risk and
observes strict asset and liability matching guidelines. These guidelines are
designed to ensure that even in changing interest rate environments, the
Company's assets will always be able to meet the cash flow and income
requirements of its liabilities. Through dynamic modeling, using
state-of-the-art software to analyze the effects of a wide range of possible
market changes upon investments and policyholder benefits, the Company ensures
that its investment portfolio is appropriately structured to fulfill financial
obligations to its policyholders.
A summary of the Company's invested assets (Millions) follows:
1997 1996
---- ----
Fixed maturities, available for sale,
at fair value $6,698 $6,206
Fixed maturities, held-to-maturity,
at amortized cost 2,083 1,993
Mortgage loans 1,236 1,488
Real estate and common stock 133 88
Short-term investments 399 419
Policy loans 2,657 2,523
-------- --------
$13,206 $12,717
======= =======
Fixed Maturities
Fixed maturity investments include publicly traded bonds, privately placed
bonds and public and private structured assets. This latter category contains
both asset-backed and mortgage-backed securities, including collateralized
mortgage obligations ("CMOs"). The Company's strategy related to structured
assets is to focus on those with lower volatility and minimal credit risk. The
Company does not invest in higher risk CMOs such as interest-only and
principal-only strips, and currently has no plans to invest in such securities.
Private placement investments, which are primarily in the held-to-maturity
category, are generally less marketable than publicly traded assets, yet they
typically offer covenant protection which allows the Company, if necessary, to
take appropriate action to protect its investment. The Company believes that the
cost of the additional monitoring and analysis required by private placements is
more than offset by their enhanced yield.
One of the Company's primary objectives is to ensure that its fixed
maturity portfolio is maintained at a high average quality, so as to limit
credit risk. In excess of 85% of the value of the securities in this portfolio
are rated by external rating agencies. If not externally rated, the securities
are rated by the Company on a basis intended to be similar to that of the rating
agencies.
The distribution of the fixed maturity portfolio (both available for sale
and held to maturity) by credit rating is summarized as:
Credit Rating 1997 1996
------------- ---- ----
AAA 45.7% 45.9%
AA 8.8 8.1
A 23.8 23.7
BBB 20.7 20.9
BB and Below (non-investment grade) 1.0 1.4
------- -------
TOTAL 100.0% 100.0%
At December 31, 1997, the Company had no bonds in default. At December 31, 1996,
there was one bond in default with a carrying value of $8 million.
Mortgage Loans
During 1997, the mortgage portfolio declined 17% to $1.2 billion, net of
impairment reserves. The Company has not actively sought new loan opportunities
since 1989 and, as such, has experienced an ongoing reduction in this
portfolio's balance.
The Company follows a comprehensive approach to the management of mortgage
loans which includes ongoing analysis of key mortgage characteristics such as
debt service coverage, net collateral cash flow, property condition, loan to
value ratios and market conditions. Collateral valuations are performed for
those mortgages which, after review, are determined by management to present
possible risks and exposures. These valuations are then incorporated into the
determination of the Company's allowance for credit losses.
The average balance of impaired loans continued to remain low at $37.9
million in 1997 compared with $39.1 million in 1996, and foreclosures totaled
$14.1 million and $13.0 million in 1997 and 1996, respectively. The low levels
of problematic mortgages relative to the Company's overall balance sheet are due
to the ongoing decrease in the size of the mortgage portfolio, the Company's
active loan management program and improvement in market conditions.
Occasionally, the Company elects to restructure certain loans if the
economic benefits to the Company are believed to be more advantageous than those
achieved by acquiring the collateral through foreclosure. At December 31, 1997
and 1996, the Company's loan portfolio included $64.4 million and $68.3 million,
respectively, of non-impaired restructured loans.
Real Estate and Common Stock
The Company's real estate portfolio is composed primarily of the Home
Office property ($56.9 million) and properties acquired through the foreclosure
of troubled mortgages. The Company operates a wholly owned real estate
subsidiary which attempts to maximize the value of these properties through
rehabilitation, leasing and sale. The Company anticipates limited, if any,
investments in real estate assets during 1998.
The common stock portfolio is composed of mutual fund seed money and some
private equity investments. The Company anticipates a limited participation in
the stock markets in 1998.
Derivatives
The Company uses certain derivatives, such as futures, options, and swaps,
for purposes of hedging interest rate and foreign exchange risk. These
derivatives, when taken alone, may subject the Company to varying degrees of
market and credit risk; however, when used for hedging, these instruments
typically reduce risk. The Company controls the credit risk of its financial
contracts through credit approvals, limits and monitoring procedures. The
Company has also developed controls within its operations to ensure that only
Board authorized transactions are executed. Note 6 to the financial statements
contains a summary of the Company's outstanding financial hedging derivatives.
Outlook
General economic conditions continued to improve during 1997, including
improvement or stabilization in many real estate markets. The Company does not
expect to recognize any asset chargeoffs or restructurings which would result in
a material adverse effect upon the Company's financial condition in 1998.
Liquidity and Capital Resources
The Company's operations have liquidity requirements that vary among the
principal product lines. Life insurance and pension plan reserves are primarily
long-term liabilities. Accident and health reserves, including long-term
disability, consist of both short-term and long-term liabilities. Life insurance
and pension plan reserve requirements are usually stable and predictable, and
are supported primarily by long-term, fixed income investments. Accident and
health claim demands are stable and predictable but generally shorter term,
requiring greater liquidity.
Generally, the Company has met its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and utilizing
positive cash flows from operations. Liquidity for the Company has remained
strong, as evidenced by significant amounts of short-term investments and cash,
which totaled $525.4 million and $544.2 million as of December 31, 1997 and
1996, respectively.
Funds provided from premiums and fees, investment income and maturities of
investment assets are reasonably predictable and normally exceed liquidity
requirements for payment of claims, benefits and expenses. However, since the
timing of available funds cannot always be matched precisely to commitments,
imbalances may arise when demands for funds exceed those on hand. Also, a demand
for funds may arise as a result of the Company taking advantage of current
investment opportunities. The Company's capital resources represent funds
available for long-term business commitments and primarily consist of retained
earnings and proceeds from the issuance of commercial paper and equity
securities. Capital resources provide protection for policyholders and the
financial strength to support the underwriting of insurance risks, and allow for
continued business growth. The amount of capital resources that may be needed is
determined by the Company's senior management and Board of Directors as well as
by regulatory requirements. The allocation of resources to new long-term
business commitments is designed to achieve an attractive return, tempered by
considerations of risk and the need to support the Company's existing business.
The Company's financial strength provides the capacity and flexibility to
enable it to raise funds in the capital markets through the issuance of
commercial paper. The Company continues to be well capitalized, with sufficient
borrowing capacity to meet the anticipated needs of its business. The Company
had $54.1 million of commercial paper outstanding at December 31, 1997, compared
with $84.7 million at December 31, 1996. The commercial paper has been given a
rating of A-1+ by Standard & Poor's Corporation and a rating of P-1 by Moody's
Investors Service, each being the highest rating available.
Accounting Pronouncements
During the fourth quarter of 1995, the Financial Accounting Standards
Board issued a guide to implementation of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", which permits a one-time opportunity
to reclassify securities subject to SFAS No. 115. Consequently, the Company
reassessed the classification of its investment portfolio in December 1995 and
reclassed securities totaling $2.1 billion from held-to-maturity to
available-for-sale. In connection with this reclassification, an unrealized
gain, net of related policyholder amounts and deferred income taxes, of $23.4
million was recognized in stockholder's equity at the date of transfer.
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The implementation of this statement had
no material effect on the Company's results of operations, liquidity or
financial condition.
In connection with the employee transfer discussed in Note 2 to the
financial statements, effective January 1, 1997 the Company implemented SFAS No.
87, "Employers Accounting for Pensions" and SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions". Previously, employee expenses
(including costs for benefit plans) were transferred from Great-West Life to the
Company through administrative services agreements. Accordingly, the
implementation of these standards had no material effect on the financial
results of the Company.
Effective January 1, 1998, the Company will implement SFAS No. 125,
"Accounting for Transfer and Servicing of Financial Assets and Extinguishments
of Liabilities", as it relates to repurchase agreements and securities lending
arrangements. Management estimates that this change will not have a material
effect on the Company's financial results.
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
will be disclosed as 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.
Effective January 1, 1998, the Company will implement SFAS No. 132,
"Employer's Disclosures About Pensions and Other Postretirement Benefits". The
Company expects to modify its disclosure for its postretirement benefit plans to
conform to the requirements of SFAS No. 132.
Year 2000
The Company 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. The Company 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.
The Company anticipates that its systems will be year 2000 compliant on or about
first quarter 1999, but there can be no assurance that the Company will be
successful, or that interaction with other service providers will not impair the
Company's services at that time.
Regulation
General
The Company must comply with the insurance laws of all jurisdictions in
which it is licensed to do business. Although the intent of regulation varies,
most jurisdictions have laws and 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
Colorado Insurance Division and other regulators at specified intervals. The
latest financial examination by the Colorado Insurance Division was completed in
1997, and covered the five year period ending December 31, 1995. This
examination produced no significant adverse findings regarding the Company.
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 was within the usual ranges in all categories.
Insurance Holding Company Regulations
The Company is subject to and complies with insurance holding company
regulations in Colorado. These regulations contain certain restrictions and
reporting requirements for transactions between an insurer and its affiliates,
including the payments of dividends. They also regulate changes in control of an
insurance company.
Securities Laws
The Company is subject to various levels of regulation under federal
securities laws. The Company's broker-dealer subsidiaries are regulated by the
Securities and Exchange Commission ("SEC") and the National Association of
Securities Dealers, Inc. The Company's investment advisor subsidiary and
transfer agent subsidiary are regulated by the SEC. Certain of the Company's
Separate Accounts and mutual funds, are registered under the Investment Company
Act of 1940 and the offerings of certain of the Company's variable insurance and
annuity products are registered under the Securities Act of 1933.
HMO Regulation
The Company's HMO subsidiaries are subject to regulation by various
government agencies in the states in which they are licensed to do business.
This involves the regulation of solvency, contracts, rates, quality assurance,
minimum levels of benefits, and the availability and continuity of care.
Guaranty Funds
Under insurance guaranty fund laws existing in all states, insurers doing
business in those states can be assessed (up to prescribed limits) for certain
obligations of insolvent insurance companies. The Company has established a
reserve of $8.7 million as of December 31, 1997 to cover future assessments of
known insolvencies. The Company has historically recovered more than half of the
guaranty fund assessments through statutorily permitted premium tax offsets. The
Company has a prepaid asset associated with guaranty fund assessments of $5.6
million at December 31, 1997.
Canadian Regulation
Because the Company is a subsidiary of Great-West Life, which is a
Canadian company, the Office of the Superintendent of Financial Institutions
Canada conducts periodic examinations of the Company and approves certain
investments in subsidiary companies.
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; 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 A++ *
Performance
Duff & Phelps Claims Paying Ability AAA *
Corporation
Standard & Poor's Claims Paying Ability AA+ **
Corporation
Moody's Investors Insurance Financial Strength Aa2 ***
Service
* Highest ratings available.
** Second highest rating out of 19 rating categories.
*** Third highest rating out of 19 rating categories.
Miscellaneous
No customer accounted for 10% or more of the Company's consolidated
revenues in 1997. In addition, no unit of the Company's business is dependent on
a single customer or a few customers, the loss of which would have a significant
effect on the Company or any of its business units. The loss of business from
any one, or a few, independent brokers or agents would not have a material
adverse effect on the Company or any of its business units.
The Company had approximately 4,600 employees at December 31, 1997.
The executive offices of the Company consist of a 517,633 square foot
office complex located in Englewood, Colorado. The office complex is owned by a
subsidiary of the Company. The Company leases sales and claims offices
throughout the United States.
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
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
Orest T. Dackow President and Chief Executive Officer,
Great-West Lifeco
Robert G. Graham Company Director since January 1996;
previously Chairman and Chief Executive
Officer, Inter-City Products Corporation
Robert Gratton Chairman of the Board of the Company;
President and Chief Executive Officer,
Power Financial
N. Berne Hart Company Director
Kevin P. Kavanagh Company Director
William Mackness Company Director since July 1995;
previously Dean, Faculty of Management,
University of Manitoba
William T. McCallum President and Chief Executive Officer of
the Company; President and Chief Executive
Officer, United States Operations,
Great-West Life
Jerry E.A. Nickerson Chairman of the Board, H.B. Nickerson &
Sons Limited
The Honourable Vice-Chairman, Power Corporation; Member
P. Michael Pitfield, P.C., Q.C. of the Senate of Canada
Michel Plessis-Belair, F.C.A. Vice-Chairman and Chief Financial Officer,
Power Corporation; Executive
Vice-President and Chief Financial
Officer, Power Financial
Brian E. Walsh 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 President President and Chief Executive Officer of
and Chief the Company; President and Chief Executive
Executive Officer Officer, United States Operations,
Great-West Life
Dennis Low Executive Vice President, Financial
Executive Vice President, Services of the Company and Great-West Life
Financial Services
Alan D. MacLennan Executive Vice President, Employee
Executive Vice President, Benefits of the Company and Great-West Life
Employee Benefits
James D. Motz Executive Vice President, Employee
Executive Vice President, Benefits of the Company and Great-West Life
Employee Benefits
Douglas L. Wooden Executive Vice President, Financial
Executive Vice President, Services of the Company and
Financial Services Great-West Life
John A. Brown Senior Vice President, Sales, Financial
Senior Vice President, Sales, Services of the Company and Great-West Life
Financial Services
Donna A. Goldin Executive Vice President and Chief
Executive Vice President and Operating Officer, One Corporation since
Chief Operating Officer, June 1996; previously Executive Vice
One Corporation President and Chief Operating Officer,
Harris Methodist Health Plan since March 1995;
previously Executive Vice President and Chief
Operating Officer, Private Healthcare Systems,
Inc.
Mitchell T.G. Graye Senior Vice President, Chief Financial
Senior Vice President, Chief Officer of the Company; Senior Vice
Financial Officer President, Chief Financial Officer, United
States, Great-West Life
John T. Hughes Senior Vice President, Chief Investment
Senior Vice President, Officer of the Company; Senior Vice
Chief Investment Officer President, Chief Investment Officer,
United States, Great-West Life
D. Craig Lennox Senior Vice President, General Counsel and
Senior Vice President, General Secretary of the Company; Senior Vice
Counsel and Secretary President and Chief U.S. Legal Officer,
Great-West Life
Steve H. Miller Senior Vice President, Employee Benefits
Senior Vice President, Employee Sales of the Company and Great-West Life
Benefits Sales
Charles P. Nelson Senior Vice President,
Senior Vice President, Public Public Non-Profit Markets of the Company
Non-Profit Markets and Great-West Life
Martin Rosenbaum Senior Vice President, Employee Benefits
Senior Vice President, Employee Operations of the Company and Great-West
Benefits Operations Life
Robert K. Shaw Senior Vice President, Individual Markets
Senior Vice President, of the Company and Great-West Life
Individual Markets
Executive Compensation
The following table sets out all compensation paid to the individuals who
were, at December 31, 1997, the Chief Executive Officer and the other four most
highly compensated executive officers of the Company (collectively the "Named
Executive Officers") for services rendered to the Company and its subsidiaries,
and Great-West Life, in all capacities for fiscal years ended 1995, 1996 and
1997, respectively.
- ----------------------------------------------------------======================
Annual compensation Long-term
compensation awards
- ----------------------------------------------------------======================
- ----------------------------------------------------------======================
Name and Year Salary Bonus Options (1)
principal position ($) ($) (#)
- ----------------------------------------------------------======================
- ----------------------------------------------------------======================
W.T. McCallum, 1997 608,708 406,250 300,000 (3)
President and 1996 561,818 370,500 300,000 (2)
Chief Executive 1995 523,958 351,000 -
Officer
225,000(4)
- ----------------------------------------------------------======================
- ----------------------------------------------------------======================
J.T. Hughes, 1997 324,000 162,000 -
Senior Vice 1996 312,000 136,968 80,000 (2)
President, Chief 1995 301,000 150,500 -
Investment Officer
- ----------------------------------------------------------======================
- ----------------------------------------------------------======================
D. Low, Executive 1997 340,000 132,000 50,000 (3)
Vice President, 1996 325,000 146,250 150,000 (2)
Financial Services 1995 305,000 150,500 -
- ----------------------------------------------------------======================
- ----------------------------------------------------------======================
A.D. MacLennan, 1997 340,000 132,000 50,000 (3)
Executive Vice 1996 325,000 115,000 150,000 (2)
President, Employee 1995 312,000 125,000 -
Benefits
- ----------------------------------------------------------======================
- ----------------------------------------------------------======================
D.L. Wooden 1997 300,000 150,000 150,000 (3)
Executive Vice 1996 287,000 143,500 100,000 (2)
President, 1995 275,500 137,500 -
Financial Services
- ----------------------------------------------------------======================
(1) The options set out are options for common shares of Great-West Lifeco
which are granted by Great-West Lifeco pursuant to the Great-West Lifeco
Stock Option Plan ("Lifeco Options").
(2) These Lifeco Options become exercisable 20% per year commencing on the
first anniversary of the grant and expire ten years after the date of the
grant.
(3) All or portions of these Lifeco Options become exercisable if certain
financial targets are attained. If exercisable, the exercise period runs
from April 1, 2002 to June 26, 2007.
(4) A special one-time bonus payment with respect to long-term performance.
The following table describes options granted to the Named Executive
Officers during the most recently completed fiscal year. All options are Lifeco
Options granted pursuant to the Great-West Lifeco Stock Option Plan. Lifeco
Options are issued with an exercise price in Canadian dollars. Canadian dollar
amounts have been translated to U.S. dollars at a rate of 1/1.43.
- ----------------------------------------------------------======================
Potential realizable
value at assumed
Individual grants annual rates of
stock price
appreciation for
option term
- --------------------------------------------------------======================
Percent of
total
Options options Exercise
Name granted granted to or base Expiration 5% 10%
(#) employees price date ($) ($)
in fiscal ($/share)
year
- --------------------------------------------------------------------============
- --------------------------------------------------------------------============
W.T. 300,000 19.43 22.70 June 26, 2007 4,282,772 10,853,386
McCallum
- -------------------------------------------------------------------============
- -------------------------------------------------------------------============
J.T. Hughes - - - - - -
- --------------------------------------------------------------============
- --------------------------------------------------------------============
D. Low 50,000 3.24 22.70 June 26, 2007 713,795 1,808,898
- --------------------------------------------------------------------============
- --------------------------------------------------------------------============
A.D. 50,000 3.24 22.70 June 26, 2007 713,795 1,808,898
MacLennan
- --------------------------------------------------------------------============
D.L. Wooden 150,000 9.72 22.70 June 26, 2007 2,141,386 5,426,693
- --------------------------------------------------------------------============
Prior to April 24,1996, the Named Executive Officers participated in the
Power Financial Employee Share Option Plan pursuant to which options to acquire
common shares of Power Financial ("PFC Options") were granted. The following
table describes all PFC Options exercised in 1997, and all unexercised PFC
Options held as of December 31, 1997, by the Named Executive Officers. PFC
Options are issued with an exercise price in Canadian dollars. Canadian dollar
amounts have been translated to U.S. dollars at a rate of 1/1.43.
- -------------------------------------------------------========================
Unexercised options Value of unexercised
at fiscal year-end in-the-money options
(#) at fiscal year-end
($)
- -------------------------------------------------------========================
Shares
acquired Value
Name on exercise realized Exercisable Exercisable
(#) ($) Unexercisable Unexercisable
==============-------------------------------------------------------------=====
W.T. McCallum 12,000 240,445 40,000 - 1,201,486 -
------------ =====
==============-------------------------------------------------------------=====
J.T. Hughes - - 120,000 - 3,312,063 -
------------ =====
==============-------------------------------------------------------------=====
D. Low 74,600 1,123,970 - - - -
------------ =====
==============-------------------------------------------------------------=====
A.D. - - - - - -
MacLennan
------------ =====
================================================================================
D.L. Wooden - - 88,000 - 2,449,038 -
================================================================================
Commencing April 24,1996, the Named Executive Officers began participating
in the Great-West Lifeco Stock Option Plan. The following table describes all
Lifeco Options exercised in 1997, and all unexercised Lifeco Options held as of
December 31, 1997, by the Named Executive Officers. Lifeco Options are issued
with an exercise price in Canadian dollars. Canadian dollar amounts have been
translated to U.S. dollars at a rate of 1/1.43.
- --------------------------------------------------------========================
Unexercised options Value of unexercised
at fiscal year-end in-the-money options
(#) at fiscal year-end
($)
- --------------------------------------------------------========================
Shares
acquired Value
Name on exercise realized Exercisable/ Exercisable/
(#) ($) Unexercisable Unexercisable
==============-------------------------------------------------------------=====
W.T. McCallum - - 60,000/540,000 903,941/4,881,489
----------- =====
==============-------------------------------------------------------------=====
J.T. Hughes - - 16,000/64,000 241,051/964,204
----------- =====
==============-------------------------------------------------------------=====
D. Low - - 30,000/170,000 451,970/2,018,836
----------- =====
==============-------------------------------------------------------------=====
A.D. - - 30,000/170,000 451,970/2,018,836
MacLennan
----------- =====
================================================================================
D.L. Wooden - - 20,000/230,000 301,314/1,838,117
================================================================================
Pension Plan Table
The following table sets out the pension benefits payable to the Named
Executive Officers by Great-West Life or the Company.
PENSION PLAN TABLE
=========================================================================
Years of service
<TABLE>
====================================================
Remuneration
($)
15 20 25
30 35
=========================================================================
<S> <C> <C> <C>
<C> <C>
400,000 120,000 160,000 200,000
240,000 240,000
=========================================================================
500,000 150,000 200,000 250,000
300,000 300,000
=========================================================================
600,000 180,000 240,000 300,000
360,000 360,000
=========================================================================
700,000 210,000 280,000 350,000
420,000 420,000
- ---------------------====================================================
800,000 240,000 320,000 400,000
480,000 480,000
- ---------------------====================================================
- ---------------------====================================================
900,000 270,000 360,000 450,000
540,000 540,000
- ---------------------====================================================
=========================================================================
1,000,000 300,000 400,000 500,000
600,000 600,000
=========================================================================
</TABLE>
The Named Executive Officers have the following years of service.
ame.. Years of Service
W.T. McCallum 31
J.T. Hughes 7
D. Low 32
A.D. MacLennan 31
D.L. Wooden 6
For W.T. McCallum, the benefits shown are payable commencing December 31,
2000, and remuneration is the average of the highest 36 consecutive months of
compensation during the last 84 months of employment. For J.T. Hughes, D. Low,
A.D. MacLennan and D.L. Wooden, the benefits shown are payable upon the
attainment of age 62, and remuneration is the average of the highest 60
consecutive months of compensation during the last 84 months of employment.
Compensation includes salary and bonuses prior to any deferrals. The normal form
of pension is a life only annuity. Other optional forms of pension payment are
available on an actuarially equivalent basis. The benefits listed in the table
are subject to deduction for social security and other retirement benefits.
Directors of the Company
The following sets out remuneration paid by the Company to its directors.
For each director of the Company who is not also a director of Great-West
Life, the Company pays an annual fee of $15,000, and a meeting fee of $1,000 for
each meeting of the Board of Directors or a committee thereof attended. With the
exception of the President and Chief Executive Officer of Great-West Lifeco and
the President and Chief Executive Officer of the Company, for each director of
the Company who is also a director of Great-West Life, the Company pays a
meeting fee of $1,000 for each meeting of the Board of Directors or a committee
thereof attended which is not coincident with a Great-West Life meeting. In
addition, all directors are reimbursed for incidental expenses.
The above amounts are paid in the currency of the country of residence of
the director.
Compensation Committee Interlocks and Insider Participation
Executive compensation is determined by the Company's Board of Directors.
W.T. McCallum, President and Chief Executive Officer of the Company, is a member
of the Board of Directors. Mr. McCallum participated in executive compensation
matters generally but was not present when his own compensation was discussed or
determined.
Security Ownership of Certain Beneficial Owners
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 7,032,000 outstanding common shares are owned by The
Great-West Life Assurance Company, 100 Osborne Street North, Winnipeg,
Manitoba, Canada R3C 3A5.
(2) 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.
(3) 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.
(4) 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.
(5) 100% of the outstanding common shares of 171263 Canada Inc. are owned by
Marquette Communications Corporation, 751 Victoria Square, Montreal,
Quebec, Canada H2Y 2J3.
(6) 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.
(7) 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.
<PAGE>
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; (ii) the Named Executive Officers; and (iii) the directors and
executive officers of the Company as a group.
<PAGE>
- -------------------------------------------------------------------------------
Company
-------------------------------------------------------------
-------------------------------------------------------------
The Great-West Power Power
Great-West Lifeco Inc. Financial Corporation of
Life Corporation Canada
Assurance
Company
(1) (2) (3) (4)
-------------------------------------------------------------
Directors
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
J. Balog - - - -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
J. W. Burns 50 56,000 4,000 200,320
101,750 options
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
O.T. Dackow 16 35,881 10,000 options -
100,000
options
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A. Desmarais 50 20,000 10,800 170,800
306,750 options
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
P. Desmarais, Jr. 50 30,000 - 306,750 options
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
R.G. Graham - - - -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
R. Gratton - 165,000 155,000 2,500
2,160,000 150,000 options
options
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
N.B. Hart - - - -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
K. P. Kavanagh - 27,584 - -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
W. Mackness - - - -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
W.T. McCallum 17 35,133 52,000 -
60,000
options
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
J.E.A. Nickerson - - - -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
P.M. Pitfield - 45,000 35,000 50,000
121,750 options
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
M. Plessis-Belair - 10,000 1,000 7,900
21,750 options
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
B.E. Walsh - - - 3,700
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Named Executive Officers
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
W.T. McCallum 17 35,133 52,000 -
60,000
options
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
J.T. Hughes - 4,788 120,000 options -
16,000
options
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
D. Low - 8,266 64,600 -
30,000
options
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A.D. MacLennan - 9,502 - -
30,000
options
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
D.L. Wooden - 20,000 88,000 options -
options
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Directors and Executive
Officers as a Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
183 470,520 322,400 435,220
353,600 2,378,000 1,008,750
options 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 1.53% of the total number of common
shares and exercisable options for common shares of Power Financial Corporation
outstanding. The number of subordinate voting shares and exercisable options for
subordinate voting shares of Power Corporation of Canada held by the directors
and executive officers as a group represents 1.44% of the total number of
subordinate voting shares and exercisable options for subordinate voting shares
of Power Corporation of Canada outstanding. None of the remaining holdings set
out above exceed 1% of the total number of shares and exercisable options for
shares of the class outstanding.
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 Ruth B. Lurie, Vice President,
Counsel and Associate Secretary of the Company.
EXPERTS
The consolidated financial statements of Great-West Life & Annuity
Insurance Company at December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997 included in this prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
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 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, Site 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
The standard nonforfeiture rate in all states, other than those listed below is
3%
Florida 0%
Mississippi 0%
Oklahoma 0%
<PAGE>
Appendix B
On the following pages are four examples of Market Value Adjustments
illustrating (1) increasing interest rates, (2) decreasing interest rates, (3)
flat interest rates (i and j are within .10% of each other), and (4) less than 6
months to maturity.
Example #1 - Increasing Interest Rates
Deposit: $25,000 on November 1, 1996
Maturity Date: December 31, 2005
Interest Guarantee Period: 10 years
i: assumed to be 6.15%
Surrender Date: July 1, 2000
j: 7.00%
Amount Surrendered: $10,000
N: 65
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1
= {[1.0615/1.071]65/12} - 1
= .952885 - 1
= -.047115
MVA = (amount Transferred or surrendered) x MVAF
= $10,000 x - .047115
= - $471.15
Surrender Value = (amount Transferred or surrendered + MVA) x (1 -
Surrender Charge)
= ($10,000 + - $471.15) x (1 - 0)
= $9,528.85
Example #2 - Decreasing Interest Rates
Deposit: $25,000 on November 1, 1996
Maturity Date: December 31, 2005
Interest Guarantee Period: 10 years
i: assumed to be 6.15%
Surrender Date: July 1, 2000
j: 5.00%
Amount Surrendered: $10,000
N: 65
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1
= {[1.0615/1.05]65/12} - 1
= .0055323
MVAF = (amount Transferred or surrendered) x MVAF
= $10,000 x .0055323
= $553.23
Surrender Value = (amount Transferred or surrendered + MVA)
= ($10,000 + $553.23) x (1 - Surrender Charge) =
$10,553.23 x (1 - 0)
<PAGE>
Example #3 - Flat Interest Rates (i and j are within .10% of each other)
Deposit: $25,000 on November 1, 1996
Maturity Date: December 31, 2005
Interest Guarantee Period: 10 years
i: assumed to be 6.15%
Surrender Date: July 1, 2000
j: 6.24%
Amount Surrendered: $10,000
N: 65
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1
= {[1.0615/1.0634]65/12} - 1
= .99036 - 1
= -.00964
However, [i-j] is less than .10%, 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
Example #4 - N is less than 6 (less than 6 months to maturity)
Deposit: $25,000 on November 1, 1996
Maturity Date: December 31, 2005
Interest Guarantee Period: 10 years
i: assumed to be 6.15%
Surrender Date: July 1, 2005
j: 7.00%
Amount Surrendered: $10,000
N: 5
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1
= {[1.0615/1.071]5/12} - 1
= .99629 - 1
= -.00371
However, N 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>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 1997, 1996, AND 1995
AND
INDEPENDENT AUDITORS' REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
of Great-West Life & Annuity Insurance Company:
We have audited the accompanying consolidated balance sheets of Great-West Life
& Annuity Insurance Company (a wholly-owned subsidiary of The Great-West Life
Assurance Company) and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholder's equity, and cash flows
for each of the three years in the period ended December 31, 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Great-West Life & Annuity Insurance
Company and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
January 23, 1998
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------
<S> <C>
<C>
ASSETS 1997
1996
- ------
--------------
- ---------------
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost (fair value $2,151,476
and $ 2,082,716 $
1,992,681
$2,041,064)
Available-for-sale, at fair value (amortized cost $6,541,422
and 6,698,629
6,206,478
$6,151,519)
Common stock
39,021 19,715
Mortgage loans on real estate, net 1,235,594
1,487,575
Real estate, net
93,775 67,967
Policy loans 2,657,116
2,523,477
Short-term investments, available-for-sale (cost approximates 399,131
419,008
fair value)
--------------
- ---------------
Total Investments 13,205,982
12,716,901
Cash 126,278
125,182
Reinsurance receivable 84,364
196,958
Deferred policy acquisition costs 255,442
282,780
Investment income due and accrued 165,827
198,441
Other assets
121,543 57,244
Premiums in course of collection
77,008 74,693
Deferred income taxes 193,820
214,404
Separate account assets 7,847,451
5,484,631
--------------
- ---------------
TOTAL ASSETS $ 22,077,715 $
19,351,234
==============
===============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------
<S> <C>
<C>
LIABILITIES AND STOCKHOLDER'S EQUITY 1997
1996
- ------------------------------------
--------------
- ---------------
POLICY BENEFIT LIABILITIES:
Policy reserves $ 11,102,719 $
11,022,595
Policy and contract claims 375,499
372,327
Policyholders' funds 165,106
153,867
Experience refunds
84,935 87,399
Provision for policyholders' dividends
62,937 51,279
GENERAL LIABILITIES:
Due to Parent Corporation 126,656
151,431
Repurchase agreements 325,538
286,736
Commercial paper
54,058 84,682
Other liabilities 605,032
488,818
Undistributed earnings on
participating business 141,865
133,255
Separate account liabilities 7,847,451
5,484,631
--------------
- ---------------
Total Liabilities 20,891,796
18,317,020
--------------
- ---------------
STOCKHOLDER'S EQUITY:
Preferred stock, $1 par value,
50,000,000 shares authorized:
Series A, cumulative, 1500 shares authorized, liquidation value of
$100,000 per share, 600 shares issued and outstanding
60,000 60,000
Series B, cumulative, 1500 shares authorized, liquidation value of
$100,000 per share, 200 shares issued and outstanding
20,000 20,000
Series C, cumulative, 1500 shares authorized,
none outstanding
Series D, cumulative, 1500 shares authorized,
none outstanding
Series E, non-cumulative, 2,000,000 shares authorized, issued, and
outstanding, liquidation value of $20.90 per share
41,800 41,800
Common stock, $1 par value; 50,000,000 shares authorized;
7,032,000 shares issued and outstanding
7,032 7,032
Additional paid-in capital 690,748
664,265
Unrealized gains (losses) on securities available-for-sale, net
52,807 14,951
Retained earnings 313,532
226,166
--------------
- ---------------
Total Stockholder's Equity 1,185,919
1,034,214
--------------
- ---------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 22,077,715 $
19,351,234
==============
===============
</TABLE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------
1997 1996
1995
------------- -------------
- -------------
REVENUES:
<S> <C> <C> <C>
Annuity contract charges and premiums $ 115,054 $ 91,881
$ 79,816
Life, accident, and health premiums earned (net of
premiums ceded (recaptured) totaling $(94,646),
$(104,250) and $60,880) 1,163,855 1,107,367
987,611
Net investment income 897,572 836,642
835,046
Net realized gains (losses) on investments 9,800
(21,078) 7,465
------------- -------------
- -------------
2,186,281 2,014,812
1,909,938
------------- -------------
- -------------
BENEFITS AND EXPENSES:
Life and other policy benefits (net of reinsurance
recoveries totaling $44,871, $52,675,
and $43,574) 543,903 515,750
557,469
Increase in reserves 245,811
229,198 98,797
Interest paid or credited to contractholders 527,784 561,786
562,263
Provision for policyholders' share of earnings
(losses)
on participating business 3,753
(7) 2,027
Dividends to policyholders 63,799
49,237 48,150
------------- -------------
- -------------
1,385,050 1,355,964
1,268,706
Commissions 102,150 106,561
122,926
Operating expenses 419,616 336,719
314,810
Premium taxes 23,108
25,021 26,884
-------------
- -------------
-------------
1,929,924 1,824,265
1,733,326
INCOME BEFORE INCOME TAXES 256,357 190,547
176,612
------------- -------------
- -------------
PROVISION FOR INCOME TAXES:
Current 103,794
77,134 88,366
Deferred (6,197) (21,162)
(39,434)
------------- -------------
- -------------
97,597
55,972 48,932
------------- -------------
- -------------
NET INCOME $ 158,760 $ 134,575 $
127,680
============= =============
=============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Net
Additional Unrealized
Preferred Stock Common Stock
Paid-In Gains Retained
---------------------- ---------------------
Shares Amount Shares Amount
Capital (Losses) Earnings Total
---------- ---------- ----------- --------
- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
<C> <C> <C>
BALANCE, JANUARY 1, 1995 2,000,800 $ 121,800 7,032,000 $ 7,032 $ 657,265
$ (78,427) $ 69,561 $ 777,231
Change in net unrealized
gains
(losses)
137,190 137,190
Dividends
(48,980) (48,980)
Net
income
127,680 127,680
---------- ---------- ----------- --------
- ---------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 1995 2,000,800 121,800 7,032,000 7,032
657,265 58,763 148,261 993,121
Change in net unrealized
gains
(losses)
(43,812) (43,812)
Capital contributions
7,000 7,000
Dividends
(56,670) (56,670)
Net
income
134,575 134,575
---------- ---------- ----------- --------
- ---------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 1996 2,000,800 121,800 7,032,000 7,032
664,265 14,951 226,166 1,034,214
Change in net unrealized
gains
(losses)
37,856 37,856
Capital contributions
26,483 26,483
Dividends
(71,394) (71,394)
Net
income
158,760 158,760
---------- ---------- ----------- --------
- ---------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 1997 2,000,800 $ 121,800 7,032,000 $ 7,032 $ 690,748
$ 52,807 $ 313,532 $ 1,185,919
========== ========== =========== ========
========== =========== ========== ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------
1997 1996
1995
-------------- -------------
- -------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 158,760 $ 134,575
$ 127,680
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain (loss) allocated to participating 3,753
(7) 2,027
policyholders
Amortization of investments 409
15,518 26,725
Realized losses (gains) on disposal of
investments
and provisions for mortgage loans and (9,800)
21,078 (7,465)
real estate
Amortization 46,929
49,454 49,464
Deferred income taxes (6,224)
(20,258) (39,763)
Changes in assets and liabilities:
Policy benefit liabilities 498,114
358,393 346,975
Reinsurance receivable 112,594
136,966 (38,776)
Accrued interest and other receivables 30,299
24,778 (17,617)
Other, net 58,865
(8,076) 8,834
-------------- -------------
- -------------
Net cash provided by operating 893,699
712,421 458,084
activities
-------------- -------------
- -------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to-maturity
Sales 18,821
Maturities and redemptions 359,021
516,838 655,993
Available-for-sale
Sales 3,174,246 3,569,608
4,211,649
Maturities and redemptions 771,737
803,369 253,747
Mortgage loans 248,170
235,907 260,960
Real estate 36,624
2,607 4,401
Common stock 17,211 1,888
Purchases of investments:
Fixed maturities
Held-to-maturity (439,269) (453,787)
(490,228)
Available-for-sale (4,314,722) (4,753,154)
(4,932,566)
Mortgage loans (2,532)
(23,237) (683)
Real estate (64,205)
(15,588) (5,302)
Common stock (29,608)
(12,113) (4,218)
-------------- -------------
- -------------
Net cash used in investing (243,327)
(127,662) (27,426)
activities
-------------- -------------
- -------------
(Continued)
</TABLE>
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------
1997 1996
1995
------------- -------------
- -------------
FINANCING ACTIVITIES:
<S> <C> <C> <C>
Contract withdrawals, net of deposits $ (577,538) $ (413,568) $
(217,190)
Due to Parent Corporation (19,522)
1,457 (9,143)
Dividends paid (71,394) (56,670)
(48,980)
Net commercial paper repayments (30,624)
(172) (4,832)
Net repurchase agreements (repayments) borrowings 38,802 (88,563)
(191,195)
Capital contributions 11,000 7,000
------------- -------------
- -------------
Net cash used in financing activities (649,276) (550,516)
(471,340)
------------- -------------
- -------------
NET INCREASE (DECREASE) IN CASH 1,096 34,243
(40,682)
CASH, BEGINNING OF YEAR 125,182 90,939
131,621
------------- -------------
- -------------
CASH, END OF YEAR $ 126,278 $ 125,182
$ 90,939
============= =============
=============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Income taxes $ 86,829 $ 103,700
$ 83,841
Interest 15,124
15,414 17,016
See notes to consolidated financial statements.
(Concluded)
</TABLE>
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996,
AND 1995 (Amounts in Thousands, except Share Amounts)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Great-West Life & Annuity Insurance Company (the Company)
is a wholly-owned subsidiary of The Great-West Life Assurance Company
(the Parent Corporation). The Company is an insurance company domiciled
in the State of Colorado. The Company offers a wide range of life
insurance, health insurance, and retirement and investment products to
individuals, businesses, and other private and public organizations
throughout the United States.
Basis of Presentation - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The consolidated financial
statements include the accounts of the Company and its subsidiaries. All
material intercompany transactions and balances have been eliminated in
consolidation.
Investments - Investments are reported as follows:
1. Management determines the classification of fixed maturities at
the time of purchase. Fixed maturities are classified as
held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost unless fair value is less
than cost and the decline is deemed to be other than temporary,
in which case they are written down to fair value and a new cost
basis is established.
Fixed maturities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale securities
are carried at fair value, with the net unrealized gains and
losses reported as a separate component of stockholder's equity.
The net unrealized gains and losses in derivative financial
instruments used to hedge available-for-sale securities are
included in the separate component of stockholder's equity.
The amortized cost of fixed maturities classified as
held-to-maturity or available-for-sale is adjusted for
amortization of premiums and accretion of discounts using the
effective interest method over the estimated life of the related
bonds. Such amortization is included in net investment income.
Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net realized gains (losses)
on investments.
2. Mortgage loans on real estate are carried at their unpaid
balances adjusted for any unamortized premiums or discounts and
any valuation reserves. Interest income is accrued on the unpaid
principal balance. Discounts and premiums are amortized to net
investment income using the effective interest method. Accrual of
interest is discontinued on any impaired loans where collection
of interest is doubtful.
The Company maintains an allowance for credit losses at a level
that, in management's opinion, is sufficient to absorb possible
credit losses on its impaired loans and to provide adequate
provision for any possible future losses in the portfolio.
Management's judgment is based on past loss experience, current
and projected economic conditions, and extensive situational
analysis of each individual loan. The measurement of impaired
loans is based on the fair value of the collateral.
3. Real estate is carried at the lower of cost or fair value, net of
costs of disposal. Effective January 1, 1996, the Company adopted
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". The implementation
of this statement had no material effect on the Company's
financial statements.
4. Investments in common stock are carried at fair value.
5. Policy loans are carried at their unpaid balances.
6. Short-term investments include securities purchased with initial
maturities of one year or less and are carried at amortized cost.
The Company considers short-term investments to be
available-for-sale and amortized cost approximates fair value.
Gains and losses realized on disposal of investments are determined on a
specific identification basis.
Cash - Cash includes only amounts in demand deposit accounts.
Deferred Policy Acquisition Costs - Policy acquisition costs, which
consist of sales commissions and other costs that vary with and are
primarily related to the production of new and renewal business, have
been deferred to the extent recoverable. Deferred costs associated with
the annuity products are being amortized over the life of the contracts
in proportion to the emergence of gross profits. Retrospective
adjustments of these amounts are made when the Company revises its
estimates of current or future gross profits. Deferred costs associated
with traditional life insurance are amortized over the premium paying
period of the related policies in proportion to premium revenues
recognized. Amortization of deferred policy acquisition costs totaled
$44,298, $47,089, and $48,054 in 1997, 1996, and 1995, respectively.
Separate Account - Separate account assets and related liabilities are
carried at fair value. The Company's separate accounts invest in shares
of Maxim Series Fund, Inc. and Orchard Series Fund, Inc., both
diversified, open-end management investment companies which are
affiliates of the Company, shares of other external mutual funds, or
government or corporate bonds.
Life Insurance and Annuity Reserves - Life insurance and annuity policy
reserves with life contingencies of $5,741,596 and $5,242,753, at
December 31, 1997 and 1996, respectively, are computed on the basis of
estimated mortality, investment yield, withdrawals, future maintenance
and settlement expenses, and retrospective experience rating premium
refunds. Annuity contract reserves without life contingencies of
$5,346,516 and $5,766,533, at December 31, 1997 and 1996, respectively,
are established at the contractholder's account value.
Reinsurance - Policy reserves ceded to other insurance companies are
carried as reinsurance receivable on the balance sheet (See Note 3). The
cost of reinsurance related to long-duration contracts is accounted for
over the life of the underlying reinsured policies using assumptions
consistent with those used to account for the underlying policies.
Policy and Contract Claims - Policy and contract claims include
provisions for reported claims in process of settlement, valued in
accordance with the terms of the related policies and contracts, as well
as provisions for claims incurred and unreported based primarily on
prior experience of the Company.
Participating Fund Account - Participating life and annuity policy
reserves are $3,901,297 and $3,591,077 at December 31, 1997 and 1996,
respectively. Participating business approximates 50.5% and 50.3% of the
Company's ordinary life insurance in force and 91.1% and 92.2% of
ordinary life insurance premium income at December 31, 1997 and 1996,
respectively.
The liability for undistributed earnings on participating business was
increased (decreased) by $8,610 and $(3,362) in 1997 and 1996, which
represented $3,753 and $(7) of gains (losses) on participating business,
increases (decreases) of $2,102 and $(2,924) to reflect the net change
in unrealized gains on securities classified as available-for-sale, net
of certain adjustments to policy reserves and income taxes, and
increases (decreases) of $2,755 and $(431) due to reinsurance
transactions (See Note 2).
The amount of dividends to be paid from undistributed earnings on
participating business is determined annually by the Board of Directors.
Amounts allocable to participating policyholders are consistent with
established Company practice.
The Company has established a Participating Policyholder Experience
Account (PPEA) for the benefit of all participating policyholders which
is included in the accompanying consolidated balance sheet. Earnings
associated with the operation of the PPEA are credited to the benefit of
all participating policyholders. In the event that the assets of the
PPEA are insufficient to provide contractually guaranteed benefits, the
Company must provide such benefits from its general assets.
The Company has also established a Participation Fund Account (PFA) for
the benefit of the participating policyholders previously transferred to
the Company from the Parent under an assumption reinsurance transaction.
The PFA is part of the PPEA. Earnings derived from the operation of the
PFA accrue solely for the benefit of the acquired participating
policyholders.
Recognition of Premium Income and Benefits and Expenses - Life insurance
premiums are recognized as earned. Annuity premiums with life
contingencies are recognized as received. Accident and health premiums
are earned on a monthly pro rata basis. Revenues for annuity and other
contracts without significant life contingencies consist of contract
charges for the cost of insurance, contract administration, and
surrender fees that have been assessed against the contract account
balance during the period. Benefits and expenses on policies with life
contingencies are associated with premium income by means of the
provision for future policy benefit reserves, resulting in recognition
of profits over the life of the contracts. The average crediting rate on
annuity products was approximately 6.6%, 6.8%, and 7.2% in 1997, 1996,
and 1995.
Income Taxes - Income taxes are recorded using the asset and liability
approach which requires, among other provisions, the recognition of
deferred tax assets and liabilities for expected future tax consequences
of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, all
expected future events (other than the enactments or changes in the tax
laws or rules) are considered. Although realization is not assured,
management believes it is more likely than not that the deferred tax
asset, net of a valuation allowance, will be realized.
Repurchase Agreements and Securities Lending - The Company enters into
repurchase agreements with third-party broker-dealers in which the
Company sells securities and agrees to repurchase substantially similar
securities at a specified date and price. Such agreements are accounted
for as collateralized borrowings. Interest expense on repurchase
agreements is recorded at the coupon interest rate on the underlying
securities. The repurchase fee received or paid is amortized over the
term of the related agreement and recognized as an adjustment to
investment income.
The Company will implement Statement of Financial Accounting Standards
(SFAS) No. 125 "Accounting for Transfer and Servicing of Financial
Assets and Extinguishments of Liabilities" in 1998 as it relates to
repurchase agreements and securities lending arrangements. Management
estimates the effect of the change will not have a material affect on
the Company's financial statements.
Derivatives - The Company makes limited use of derivative financial
instruments to manage interest rate, market, and foreign exchange risk.
Such hedging activity consists of interest rate swap agreements,
interest rate floors and caps, foreign currency exchange contracts and
equity swaps. The differential paid or received under the terms of these
contracts are recognized as an adjustment to net investment income on
the accrual method. Gains and losses on foreign exchange contracts are
deferred and recognized in net investment income when the hedged
transactions are realized.
Interest rate swap agreements are used to convert the interest rate on
certain fixed maturities from a floating rate to a fixed rate. Interest
rate swap transactions generally involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying principal amount. Interest rate floors and caps are interest
rate protection instruments that require the payment by a counter-party
to the Company of an interest rate differential. The differential
represents the difference between current interest rates and an
agreed-upon rate, the strike rate, applied to a notional principal
amount. Foreign currency exchange contracts are used to hedge the
foreign exchange rate risk associated with bonds denominated in other
than U.S. dollars. Equity swap transactions generally involve the
exchange of variable market performance of a basket of securities for a
fixed interest rate.
Although derivative financial instruments taken alone may expose the
Company to varying degrees of market and credit risk when used solely
for hedging purposes, these instruments typically reduce overall market
and interest rate risk. The Company controls the credit risk of its
financial contracts through credit approvals, limits, and monitoring
procedures. As the Company generally enters into transactions only with
high quality institutions, no losses associated with non-performance on
derivative financial instruments have occurred or are expected to occur.
2. RELATED-PARTY TRANSACTIONS
On June 30, 1997 the Company recaptured all remaining pieces of an
individual participating insurance block of business previously
reinsured to the Parent Corporation on December 31, 1992. The Company
recorded, at estimated fair value, the following at June 30, 1997 as a
result of this transaction:
<TABLE>
Assets Liabilities and Stockholder's
Equity
-------- -------------------------------
<S> <C> <C>
Cash $ 160,000 Policy reserves $
155,798
Bonds 17,975 Due to parent
corporation 9,373
Other 60 Deferred income
taxes 2,719
Undistributed earnings on
participating business (855)
Stockholder's
equity 11,000
-----------
- ----------
$ 178,035 $
178,035
===========
==========
</TABLE>
<PAGE>
On October 31, 1996 the Company recaptured certain pieces of an
individual participating insurance block of business previously
reinsured to the Parent Corporation on December 31, 1992. The Company
recorded, at estimated fair value, the following at October 31, 1996 as
a result of this transaction:
<TABLE>
Assets Liabilities and Stockholder's
Equity
--------- -------------------------------
<S> <C> <C>
Cash $ 162,000 Policy reserves $
164,839
Mortgages 19,753 Due to parent
corporation 9,180
Other 118 Deferred income
taxes 1,283
Undistributed earnings on
participating business (431)
Stockholder's
equity 7,000
============
===========
$ 181,871 $
181,871
============
===========
</TABLE>
Effective January 1, 1997 all employees of the U.S. operations of the
Parent Corporation and the related benefit plans were transferred to the
Company. All related employee benefit plan assets and liabilities were
also transferred to the Company (see Note 9). The transfer did not have
a material effect on the Company's operating expenses as the costs
associated with the employees and the benefit plans were charged
previously to the Company under administrative service agreements
between the Company and the Parent Corporation.
Prior to January 1997, the Parent Corporation administered, distributed,
and underwrote business for the Company and administered the Company's
investment portfolio under various administrative agreements. As of
January 1, 1997, the Company performs these services for the U.S.
operations of the Parent Corporation. The following represents
allocations between the two companies for services provided pursuant to
these service agreements:
<TABLE>
Years Ended December 31,
- -----------------------------------------
1997 1996
1995
----------- -----------
- -----------
<S> <C> <C> <C>
Investment management revenue (expense) $ 801 $ (14,800) $
(15,182)
Administrative and underwriting revenue 6,292 (304,599)
(301,529)
(payments)
</TABLE>
At December 31, 1997 and 1996, due to Parent Corporation includes $8,957
and $31,639 due on demand and $117,699 and $119,792 of notes payable
which bear interest and mature at various dates through December 31,
2005. These notes may be prepaid in whole or in part at any time without
penalty; the issuer may not demand payment before the maturity date. The
due on demand to the Parent Corporation bears interest at the public
bond rate (7.1% and 7.0% at December 31, 1997 and 1996, respectively)
while the remainder bear interest at various rates ranging from 6.6% to
9.5%.
3. REINSURANCE
In the normal course of business, the Company seeks to limit its
exposure to loss on any single insured and to recover a portion of
benefits paid by ceding risks to other insurance enterprises under
excess coverage and co-insurance contracts. The Company retains a
maximum of $1.5 million of coverage per individual life.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company; consequently, allowances are
established for amounts deemed uncollectible. The Company evaluates the
financial condition of its reinsurers and monitors concentrations of
credit risk arising from similar geographic regions, activities, or
economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. At December 31, 1997 and
1996, the reinsurance receivable had a carrying value of $84,364 and
$196,958, respectively.
Total reinsurance premiums assumed from the Parent Corporation were
$1,712, $1,693, and $1,606 in 1997, 1996, and 1995, respectively.
The Company considers all accident and health policies to be
short-duration contracts. The following schedule details life insurance
in force and life and accident/health premiums:
<TABLE>
Assumed
Ceded Primarily
Percentage
Primarily From of
Amount
to
Gross the Parent Other Net
Assumed to
Amount Corporation Companies Amount
Net
------------- ------------ ------------ -------------
- -----------
December 31, 1997:
Life insurance in
force:
<S> <C> <C> <C>
<C> <C>
Individual $ 24,598,679 $ 4,040,398 $ 3,667,235 $
24,225,516 15.1%
Group 51,179,343 2,031,477
53,210,820 3.8%
------------- ------------ ------------ -------------
Total $ 75,778,022 $ 4,040,398 $ 5,698,712 $ 77,436,336
============= ============ ============ =============
Premiums:
Life insurance $ 361,093 $ (127,291)$ 19,923 $
508,307 3.9%
Accident/health 628,398 32,645 59,795
655,548 9.1%
------------- ------------ ------------ -------------
Total $ 989,491 $ (94,646)$ 79,718 $ 1,163,855
============= ============ ============ =============
December 31, 1996:
Life insurance in
force:
Individual $ 23,409,823 $ 5,246,079 $ 3,482,118 $
21,645,862 16.1%
Group 47,682,237 1,817,511
49,499,748 3.7%
------------- ------------ ------------ -------------
Total $ 71,092,060 $ 5,246,079 $ 5,299,629 $ 71,145,610
============= ============ ============ =============
Premiums:
Life insurance $ 334,127 $ (111,743)$ 19,633 $
465,503 4.2%
Accident/health 592,577 7,493 56,780
641,864 8.8%
------------- ------------ ------------ -------------
Total $ 926,704 $ (104,250)$ 76,413 $ 1,107,367
============= ============ ============ =============
December 31, 1995:
Life insurance in
force:
Individual $ 22,388,520 $ 7,200,882 $ 3,476,784 $
18,664,422 18.6%
Group 48,415,592 1,954,313
50,369,905 3.9%
============= ============ ============ =============
Total $ 70,804,112 $ 7,200,882 $ 5,431,097 $ 69,034,327
============= ============ ============ =============
Premiums:
Life insurance $ 339,342 $ 51,688 $ 21,028 $
308,682 6.8%
Accident/health 623,626 9,192 64,495
678,929 9.5%
------------- ------------ ------------ -------------
Total $ 962,968 $ 60,880 $ 85,523 $ 987,611
============= ============ ============ =============
</TABLE>
<PAGE>
<TABLE>
4. NET INVESTMENT INCOME
Net investment income is summarized as follows:
Years Ended December 31,
- ------------------------------------------------
1997 1996
1995
--------------- ---------------
- --------------
Investment income:
Fixed maturities and short-term
<S> <C> <C> <C>
investments $ 633,975 $ 601,913 $
591,561
Mortgage loans on real estate 118,274 140,823
171,008
Real estate 20,990 5,292
3,936
Policy loans 194,826 175,746
163,547
Other 22,119 3,321
--------------- ---------------
- --------------
990,184 927,095
930,052
Investment expenses, including
interest on amounts charged
by the Parent Corporation
of $9,758, $11,282, and $10,778 92,612 90,453
95,006
--------------- ---------------
- --------------
Net investment income $ 897,572 $ 836,642 $
835,046
=============== ===============
==============
5. NET REALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains (losses) on investments are as follows:
Years Ended December 31,
- -------------------------------------------------
1997 1996
1995
--------------- ---------------
- ---------------
Realized gains (losses):
Fixed Maturities $ 15,966 $ (11,624) $
28,166
Mortgage loans on real estate 1,081 1,143
1,309
Real estate
363 (10)
Provisions (7,610) (10,597)
(22,000)
--------------- ---------------
- ---------------
Net realized gains (losses) on $ 9,800 $ (21,078) $
7,465
investments
=============== ===============
===============
</TABLE>
<PAGE>
6. SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 1997 are summarized as follows:
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Carrying
Cost Gains Losses Value
Value
---------- --------- ---------- -----------
- -----------
Held-to-Maturity:
U.S. Treasury Securities
<S> <C> <C> <C> <C>
and obligations of U.S. $ $ 1,186 $ 25 $ 27,044
$ 25,883
Government 25,883
Agencies - Other:
Collateralized mortgage 174
obligations 5,006
5,180 5,006
Public utilities 11,214 3
245,394 256,605
245,394
Corporate bonds 1,668,710 57,036 3,069 1,722,677
1,668,710
Foreign governments 659
10,268 10,927
10,268
State and municipalities 1,588
127,455 129,043
127,455
--------- ---------- -----------
----------
- -----------
$ 2,082,716 $ 71,857 $ 3,097 $ 2,151,476 $
2,082,716
========== ========= ========== ===========
===========
Available-for-Sale:
U.S. Treasury Securities
and
obligations of U.S.
Government
Agencies
Collateralized mortgage
obligations $ $ 17,339 $ 310 $ $
652,975 670,004
670,004
Direct mortgage
pass-through
certificates 7,911 2,668
917,216 922,459
922,459
Other 1,794 244
297,337 298,887
298,887
Collateralized mortgage
obligations 19,494 1,453
682,158 700,199
700,199
Public utilities 8,716 1,320
549,435 556,831
556,831
Corporate bonds 3,265,039 107,740 4,350
3,368,429
3,368,429
Foreign governments 4,115 60
131,586 135,641
135,641
State and municipalities 503
45,676
46,179 46,179
- -----------
---------- --------- ---------- -----------
$ 6,541,422 $ 167,612 $ 10,405 $ $
6,698,629
6,698,629
========== ========= ========== ===========
===========
</TABLE>
<PAGE>
6. SUMMARY OF INVESTMENTS [Continued]
Fixed maturities owned at December 31, 1996 are summarized as follows:
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Carrying
Cost Gains Losses Value
Value
---------- ---------- ---------- ----------
- -----------
Held-to-Maturity:
U.S. Treasury Securities
and
<S> <C> <C> <C>
obligations of U.S. $ $ 630 $ 106 $ $
Government 10,935 11,459
10,935
Agencies - Other:
Public utilities 12,755 320
284,954 297,389
284,954
Corporate bonds 1,634,745 41,195 7,360 1,668,580
1,634,745
Foreign governments 556 3
12,577 13,130
12,577
State and municipalities 1,051 15
49,470 50,506
49,470
---------- ---------- ----------
----------
- -----------
$ 1,992,681 $ 56,187 $ 7,804 $ 2,041,064 $
1,992,681
========== ========== ========== ==========
===========
Available-for-Sale:
U.S. Treasury Securities
and
obligations of U.S.
Government
Agencies:
Collateralized mortgage
obligations $ $ 8,058 $ 3,700 $ $
658,612 662,970
662,970
Direct mortgage
pass-through
certificates 5,093 10,908
844,291 838,476
838,476
Other 596 2,686
359,220 357,130
357,130
Collateralized mortgage
obligations 13,619 3,553
614,773 624,839
624,839
Public utilities 6,523 5,375
628,382 629,530
629,530
Corporate bonds 2,907,875 56,551 5,250 2,959,176
2,959,176
Foreign governments 1,762 5,673
110,013 106,102
106,102
State and municipalities 21 119
28,353 28,255
28,255
- -----------
---------- ---------- ---------- ----------
$ 6,151,519 $ 92,223 $ 37,264 $ 6,206,478 $
6,206,478
========== ========== ========== ==========
===========
</TABLE>
The collateralized mortgage obligations consist primarily of sequential
and planned amortization classes with final stated maturities of two to
thirty years and average lives of less than one to fifteen years.
Prepayments on all mortgage-backed securities are monitored monthly and
amortization of the premium and/or the accretion of the discount
associated with the purchase of such securities is adjusted by such
prepayments.
In November 1995, the Financial Accounting Standards Board issued a
special report entitled "A Guide to Implementation of Statement of
Financial Accounting Standards No. 115 (SFAS No. 115) on Accounting for
Certain Investments in Debt and Equity Securities". In accordance with
the adoption of this guidance, the Company reassessed the classification
of its investment portfolio in December 1995 and reclassed securities
totalling $2,119,814 from held-to-maturity to available-for-sale. In
connection with this reclassification, an unrealized gain, net of
related adjustments, of $23,449 was recognized in stockholder's equity
at the date of transfer.
See Note 8 for additional information on policies regarding estimated
fair value of fixed maturities.
The amortized cost and estimated fair value of fixed maturity
investments at December 31, 1997, by projected maturity, are shown
below. Actual maturities will likely differ from these projections
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
<TABLE>
Held-to-Maturity Available-for-Sale
-------------------------
- -------------------------
Amortized Estimated Amortized
Estimated
Cost Fair Value Cost Fair
Value
------------ ----------- ------------
- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 286,088 $ 290,164 $ 447,703 $
462,719
Due after one year through five 787,376 809,237 1,182,390
1,209,692
years
Due after five years through ten 718,818 751,753 842,019
865,153
years
Due after ten years 129,957 137,190 447,642
466,949
Mortgage-backed securities 5,006 5,180 2,252,349
2,292,662
Asset-backed securities 155,471 157,952 1,369,319
1,401,454
------------ -----------
=========== ============
===========
$ 2,082,716 $ 2,151,476 $ 6,541,422 $
6,698,629
============ =========== ============
===========
</TABLE>
Proceeds from sales of securities available-for-sale were $3,174,246,
$3,569,608, and $4,211,649 during 1997, 1996, and 1995, respectively.
The realized gains on such sales totaled $20,543, $24,919, and $39,755
for 1997, 1996, and 1995, respectively. The realized losses totaled
$10,643, $40,748, and $15,516 for 1997, 1996, and 1995, respectively.
During 1997, 1996, and 1995 held-to-maturity securities with an
amortized cost of $0, $0, and $18,087 were sold due to credit
deterioration with insignificant realized gains and losses.
At December 31, 1997 and 1996, pursuant to fully collateralized
securities lending arrangements, the Company had loaned $162,817 and
$230,419 of fixed maturities, respectively.
The Company engages in hedging activities to manage interest rate and
exchange risk. The following table summarizes the 1997 financial hedge
instruments:
<TABLE>
Notional Strike/Swap
December 31, 1997 Amount Rate
Maturity
--------------------------------- --------------- ----------------------
- -----------------
<S> <C> <C> <C>
Interest Rate Floor $ 100,000 4.5% (LIBOR) 1999
Interest Rate Caps 565,000 6.75% to 11.82%(CMT) 1999 to
2002
Interest Rate Swaps 212,139 6.20% to 9.35% 01/98 to
02/2003
Foreign Currency
Exchange Contracts 57,168 N/A 09/98 to
07/2006
Equity Swap 100,000 5.64% 12/98
</TABLE>
<PAGE>
The following table summarizes the 1996 financial hedge instruments:
<TABLE>
Notional Strike/Swap
December 31, 1996 Amount Rate
Maturity
--------------------------------- --------------- ----------------------
- ---------------
<S> <C> <C> <C>
Interest Rate Floor $ 100,000 4.5% [LIBOR] 1999
Interest Rate Caps 260,000 11.0% to 11.82%[CMT] 2000 to
2001
Interest Rate Swaps 187,847 6.20% to 9.35% 01/98 to
02/2003
Foreign Currency
Exchange Contracts 61,012 N/A 09/98 to
03/2003
</TABLE>
LIBOR - London Interbank Offered Rate
CMT - Constant Maturity Treasury Rate
The Company has established specific investment guidelines designed to
emphasize a diversified and geographically dispersed portfolio of
mortgages collateralized by commercial and industrial properties located
in the United States. The Company's policy is to obtain collateral
sufficient to provide loan-to-value ratios of not greater than 75% at
the inception of the mortgages. At December 31, 1997 approximately 32%
and 10% of the Company's mortgage loans were collateralized by real
estate located in California and Michigan, respectively.
The following represents impairments and other information with respect
to impaired loans:
<TABLE>
1997
1996
-----------
- -----------
<S> <C> <C> <C>
Loans with related allowance for credit losses of $2,493 and $ 13,193 $
16,443
$2,793
Loans with no related allowance for credit losses 20,013
31,709
Average balance of impaired loans during the year 37,890
39,064
Interest income recognized [while impaired] 2,428
923
Interest income received and recorded [while impaired] using
the 2,484
1,130
cash basis method of recognition
</TABLE>
As part of an active loan management policy and in the interest of
maximizing the future return of each individual loan, the Company may
from time to time alter the original terms of certain loans. These
restructured loans, all performing in accordance with their modified
terms that are not impaired, aggregated $64,406, and $68,254 at December
31, 1997, and 1996, respectively.
The following table presents changes in the allowance for credit losses:
<TABLE>
1997 1996 1995
---------------- ----------------
- ----------------
<S> <C> <C>
<C> <C>
Balance, beginning of year $ 65,242 63,994 $
57,987 $
Provision for loan losses 4,521 4,470 15,877
Chargeoffs (2,521) (3,468)
(10,480)
Recoveries 246 610
================ ================
================
Balance, end of year $ 67,242 65,242 $
63,994 $
================ ================
================
</TABLE>
<PAGE>
7. COMMERCIAL PAPER
The Company has a commercial paper program which is partially supported
by a $50,000 standby letter-of-credit. At December 31, 1997, commercial
paper outstanding has maturities ranging from 41 to 99 days and interest
rates ranging from 5.6% to 5.8%. At December 31, 1996, maturities ranged
from 49 to 123 days and interest rates ranged from 5.4% to 5.6%.
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table provides estimated fair value for all assets and
liabilities and hedge contracts considered to be financial instruments:
<TABLE>
December 31,
- -------------------------------------------------------
1997 1996
----------------------------
- --------------------------
Estimated
Carrying Estimated Carrying Fair
Amount Fair Value Amount Value
------------ -------------- -----------
- -------------
ASSETS:
Fixed maturities and
short-
<S> <C> <C> <C> <C>
term investments $ 9,180,476 $ 9,249,235 $ 8,618,167 $ 8,666,550
Mortgage loans on
real estate 1,235,594 1,261,949 1,487,575 1,506,162
Policy loans 2,657,116 2,657,116 2,523,477 2,523,477
Common stock 39,021 39,021 19,715 19,715
LIABILITIES:
Annuity contract reserves
without life 5,346,516 5,373,818 5,766,533 5,808,095
contingencies
Policyholders' funds 165,106 165,106 153,867 153,867
Due to Parent Corporation 126,656 124,776 151,431 154,479
Repurchase agreements 325,538 325,538 286,736 286,736
Commercial paper 54,058 54,058 84,682 84,682
HEDGE CONTRACTS:
Interest rate floor 25 25 62 124
Interest rate cap 130 130 173 173
Interest rate swaps 4,265 4,265 4,746 4,746
Foreign currency
exchange contracts 3,381 3,381 (8,954) (8,954)
Equity swaps 856 856
</TABLE>
The estimated fair value of financial instruments has been determined
using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented are not necessarily indicative of
the amounts the Company could realize in a current market exchange. The
use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
The estimated fair value of fixed maturities that are publicly traded
are obtained from an independent pricing service. To determine fair
value for fixed maturities not actively traded, the Company utilized
discounted cash flows calculated at current market rates on investments
of similar quality and term.
Mortgage loans fair value estimates generally are based on a discounted
cash flow basis. A discount rate "matrix" is incorporated whereby the
discount rate used in valuing a specific mortgage generally corresponds
to that mortgage's remaining term. The rates selected for inclusion in
the discount rate "matrix" reflect rates that the Company would quote if
placing loans representative in size and quality to those currently in
the portfolio.
Policy loans accrue interest generally at variable rates with no fixed
maturity dates and, therefore, estimated fair value approximates
carrying value.
The fair value of annuity contract reserves without life contingencies
is estimated by discounting the cash flows to maturity of the contracts,
utilizing current credited rates for similar products.
The estimated fair value of policyholders' funds is the same as the
carrying amount as the Company can change the crediting rates with 30
days notice.
The estimated fair value of due to Parent Corporation is based on
discounted cash flows at current market spread rates on high quality
investments.
The carrying value of repurchase agreements and commercial paper is a
reasonable estimate of fair value due to the short-term nature of the
liabilities.
The estimated fair value of financial hedge instruments, all of which
are held for other than trading purposes, is the estimated amount the
Company would receive or pay to terminate the agreement at each
year-end, taking into consideration current interest rates and other
relevant factors. Included in the net gain position for interest rates
swaps are $0 and $160 of unrealized losses in 1997 and 1996,
respectively. Included in the net loss position for foreign currency
exchange contracts are $0 and $8,954 of loss exposures in 1997 and 1996,
respectively.
9. EMPLOYEE BENEFIT PLANS
Effective January 1, 1997, all employees of the U.S. operations of the
Parent Corporation and the related benefit plans were transferred to
the Company. See Note 2 for further discussion.
The Company's defined benefit pension plan (pension plan) covers
substantially all of its employees. The benefits are based on years of
service, age at retirement, and the compensation during the last seven
years of employment. The Company's funding policy is to contribute
annually the maximum amount that can be deducted for federal income tax
purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned
in the future. Investments of the pension plan are managed by the
Company and invested primarily in investment contracts and separate
accounts.
The Company's Parent had previously accounted for the pension plan under
the Canadian Institute of Chartered Accountants (CICA) guidelines and
had recorded a prepaid pension asset of $19,091. As generally accepted
accounting principles do not materially differ from CICA guidelines and
the transfer is between related parties, the prepaid pension asset was
transferred at cost. As a result, the Company recorded the following
effective January 1, 1997:
<TABLE>
<S> <C> <C>
Prepaid pension cost $ 19,091 Undistributed earnings $ 3,608
on
participating
business
Stockholder's equity 15,483
===============
==============
$ 19,091 $ 19,091
===============
==============
</TABLE>
<PAGE>
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
87, "Employers Accounting for Pensions" effective January 1, 1997,
immediately following the transfer. The following table sets forth the
pension plan's funded status and amounts at December 31, 1997, in
accordance with SFAS No. 87:
<TABLE>
Actuarial present value of accumulated benefit obligation,
<S> <C> <C>
including vested benefits of $88,235 $ 91,387
Actuarial present value of projected benefit obligation
for service rendered to date 112,331
Plan assets at fair value 162,422
- --------------
Plan assets in excess of projected benefit obligation 50,091
Unrecognized net (gain) loss from past experience
different from that assumed (8,595)
Unrecognized net obligation being recognized over 15 years (21,198)
- --------------
Prepaid pension cost included in other assets $ 20,298
==============
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of
the projected benefit obligation were 7.0% and 4.5%, respectively.
Components of net pension cost for the year ended December 31, 1997 were
as follows:
Service cost - benefits earned during the period $
5,491
Interest accrued on projected benefit obligation
7,103
Return on plan assets
(28,072)
Net amortization and deferral
14,271
- ---------------
Net pension benefit $
(1,207)
===============
</TABLE>
The Company also sponsors a post-retirement medical plan (medical plan)
which provides health benefits to employees who have worked for 15 years
and attained age 65 while in service with the Company. The medical plan
is contributory and contains other cost sharing features which may be
adjusted annually for the expected general inflation rate. The Company's
policy will be to fund the cost of the medical plan benefits in amounts
determined at the discretion of management. The Plan as of January 1,
1997 was not funded. The Parent Company was not required under CICA
guidelines to record any liability related to the Plan.
Effective January 1, 1997, on the date of transfer, the Company has
adopted SFAS No. 106, "Post-retirement Benefits Other Than Pensions."
The Company has elected to delay recognition of the unfunded accumulated
post-retirement benefit obligation and has set up a transition
obligation to be amortized over 20 years.
<PAGE>
The following table sets forth the medical plan status of December 31, 1997:
<TABLE>
Accumulated post-retirement benefit obligation:
<S> <C>
Retirees $
4,985
Fully eligible active plan participants
2,438
Other active plan participants
12,031
- ---------------
19,454
Unrecognized net gain (loss) from past experience different from
(1,500)
that assumed
Unrecognized net transition obligation at December 31, 1997,
being recognized over 20 years
(15,352)
- ---------------
Accrued post-retirement benefit obligation included in other $
2,602
liabilities
===============
</TABLE>
For measurement purposes, a 7.5% annual rate of increase in the per
capita cost of covered health care benefits was assumed. The health care
cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend
rates by 1% in each year would increase the accumulated post-retirement
benefit obligation as of December 31, 1997 by $3,847.
The weighted average discount rate used in determining the accumulated
post-retirement benefit obligation was 7.0%.
Components of net other post-retirement benefit cost for the year ended
December 31, 1997 were as follows:
<TABLE>
<S> <C>
Service cost - benefits earned during the year $ 1,158
Interest accrued on benefits obligation 1,191
Net amortization and deferral 808
- ---------------
Net other post-retirement benefit cost $ 3,157
===============
</TABLE>
The Company sponsors a defined contribution 401(k) retirement plan which
provides eligible participants with the opportunity to defer up to 15%
of compensation. The Company matches 50% of the first 5% of participant
contributions. Company contributions for the year ended December 31,
1997 totalled $3,475.
10. FEDERAL INCOME TAXES
The following is a reconciliation between the federal income tax rate
and the Company's effective rate:
<TABLE>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal tax rate 35.0 % 35.0 % 35.0 %
Change in tax rate resulting from:
Settlement of prior years tax (6.5) (4.7)
Provision for contingencies 8.4
Change in valuation allowance 0.8 (7.8)
Investment income not subject to (0.3) (1.0) (0.5)
federal tax
State and environmental taxes 0.6 0.7 0.7
Other, net 0.9 (1.4) 0.3
======== ======== ========
Total 38.1 % 29.4 % 27.7 %
======== ======== ========
</TABLE>
<PAGE>
Temporary differences which give rise to the deferred tax assets and liabilities
as of December 31, 1997 and 1996 are as follows:
<TABLE>
1997 1996
--------------------------
- --------------------------
Deferred Deferred Tax Deferred Deferred
Tax
Tax Asset Liability Tax Asset Liability
----------- ------------- -----------
- -------------
<S> <C> <C> <C>
Policyholder reserves $ 163,975 $ $ 151,239 $
Deferred policy acquisition 47,463 57,031
costs
Deferred acquisition cost
proxy tax 79,954 70,413
Investment assets 2,226 35,658
Net operating loss 9,427 12,295
carryforwards
Other 10,729 5,366
----------- ------------ ----------
- ------------
Subtotal 255,582 58,192 274,971 57,031
Valuation allowance (3,570) (3,536)
=========== ============ ==========
============
Total Deferred Taxes $ 252,012 $ 58,192 $ 271,435 $ 57,031
=========== ============ ==========
============
</TABLE>
Amounts related to investment assets above include $30,085 and $8,530
related to the unrealized gains on the Company's fixed maturities
available-for-sale at December 31, 1997 and 1996, respectively.
The Company files a separate tax return and, therefore, losses incurred
by subsidiaries cannot be offset against operating income of the
Company. At December 31, 1997, the Company's subsidiaries have
approximately $26,934 of net operating loss carryforwards, expiring
through the year 2011. The tax benefit of subsidiaries' net operating
loss carryforwards, net of a valuation allowance of $3,570 and $3,536
are included in the deferred tax assets at December 31, 1997 and 1996,
respectively.
The Company's valuation allowance was increased/(decreased) in 1997,
1996, and 1995 by $34, $1,463, and $(13,145), respectively, as a result
of the re-evaluation by management of future estimated taxable income in
the subsidiaries.
Under pre-1984 life insurance company income tax laws, a portion of life
insurance company gain from operations was not subject to current income
taxation but was accumulated, for tax purposes, in a memorandum account
designated as "policyholders' surplus account." The aggregate
accumulation in the account is $7,742 and the Company does not
anticipate any transactions which would cause any part of the amount to
become taxable. Accordingly, no provision has been made for possible
future federal income taxes on this accumulation.
Pursuant to a December 31, 1993 agreement between the Company and its
Parent whereby the Company assumed responsibility for the Parent
Corporation's income tax liability for fiscal years prior to 1994, the
Company had previously recorded a contingent liability provision. The
Company's 1997 and 1996 results of operations include a release of
$47,750 and $25,600 from the provision, to reflect the resolution of
certain tax issues related to 1990 - 1991 and 1988 - 1989 audit years,
respectively, with the Internal Revenue Service (IRS). In addition, in
1997 the tax provision was increased for contingent items related to
open tax years. The IRS is currently auditing tax years 1992 and 1993.
In the opinion of Company management, the amounts paid or accrued are
adequate; however, it is possible that the Company's accrued amounts may
change as a result of the completion of the IRS audits.
<PAGE>
11. STOCKHOLDER'S EQUITY, DIVIDEND RESTRICTIONS, AND OTHER MATTERS
All of the Company's outstanding series of preferred stock are owned by
the Parent Corporation. The dividend rate on the Series A Stated Rate
Auction Preferred Stock (STRAPS) is 7.3% through December 30, 2002. The
Series A STRAPS are redeemable at the option of the Company on or after
December 29, 2002 at a price of $100,000 per share, plus accumulated and
unpaid dividends.
Through December 30, 1997, the Series B STRAPS had a dividend rate of
5.8%. Thereafter, short-term dividend periods of approximately 49 days
will be in effect. The dividend rate for each short-term dividend period
will be determined in accordance with a formula set out in the share
conditions. The Series B STRAPS are redeemable at the option of the
Company at the end of any short-term dividend period, at a price of
$100,000 per share, plus accumulated and unpaid dividends.
The Company's Series E 7.5% non-cumulative, non-redeemable preferred
shares are redeemable by the Company after April 1, 1999. The shares are
convertible into common shares at the option of the holder on or after
September 30, 1999, at a conversion price negotiated between the holder
and the Company or at a formula determined conversion price in
accordance with the share conditions.
The Company's net income and capital and surplus, as determined in
accordance with statutory accounting principles and practices for
December 31 are as follows:
<TABLE>
1997 1996 1995
-------------- --------------
- ---------------
(Unaudited)
<S> <C> <C> <C>
Net Income $ 181,312 $ 180,634 $ 114,931
Capital and Surplus 759,429 713,324 653,479
</TABLE>
The maximum amount of dividends which can be paid to stockholders by
insurance companies domiciled in the State of Colorado is subject to
restrictions relating to statutory surplus and statutory net gain from
operations. Statutory surplus and net gains from operations at December
31, 1997 were $759,429 and $180,834 (unaudited), respectively. The
Company should be able to pay up to $180,834 (unaudited) of dividends in
1998.
Dividends of $8,854, $8,587, and $9,217, were paid on preferred stock in
1997, 1996, and 1995, respectively. In addition, dividends of $62,540,
$48,083, and $39,763, were paid on common stock in 1997, 1996 and 1995,
respectively. Dividends are paid as determined by the Board of
Directors.
The Company is involved in various legal proceedings which arise in the ordinary
course of its business. In the opinion of management, after consultation with
counsel, the resolution of these proceedings should not have a material adverse
effect on its financial position or results of operations.
