UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For The Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to _____________
Commission file number 333-1173
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Colorado 84-0467907 (State or other jurisdiction of incorporation or
organization) (I.R.S. Employer Identification No.)
8515 East Orchard Road, Englewood, Colorado 80111
(Address of principal executive offices) (Zip Code)
(303) 689-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of March 1, 1999, the aggregate market value of the registrant's voting stock
held by non-affiliates of the registrant was $0.
As of March 1, 1999, 7,032,000 shares of the registrant's common stock were
outstanding, all of which were owned by the registrant's parent company.
Note: This Form 10-K is filed by the registrant only as a consequence of the
sale by the registrant of a market value adjusted annuity product.
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TABLE OF CONTENTS
Page
PART I
Item 1. Business........................................................................1
A. Organization and Corporate Structure...................................1
B. Business of the Company ...............................................1
C. Employee Benefits .....................................................3
D. Financial Services ....................................................7
E. Investment Operations..................................................12
F. Regulation.............................................................13
G. Ratings................................................................15
H. Miscellaneous..........................................................16
Item 2. Properties......................................................................16
Item 3. Legal Proceedings...............................................................16
Item 4. Submission of Matters to a Vote of Security Holders.............................16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................................16
A. Equity Security Holders and Market Information.........................16
B. Dividends..............................................................16
Item 6. Selected Financial Data.........................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................................17
A. Company Results of Operations..........................................18
B. Employee Benefits Results of Operations................................22
C. Financial Services Results of Operations...............................25
D. Investment Operations .................................................28
E. Liquidity and Capital Resources........................................30
F. Accounting Pronouncements..............................................31
G. Year 2000 Issue .......................................................31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................33
Item 8. Financial Statements and Supplementary Data.....................................34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................................65
PART III
Item 10. Directors and Executive Officers of the Registrant..............................65
A. Identification of Directors............................................65
B. Identification of Executive Officers...................................68
Item 11. Executive Compensation..........................................................71
A. Summary Compensation Table.............................................71
B. Options................................................................72
C. Pension Plan Table.....................................................73
D. Compensation of Directors..............................................74
E. Compensation Committee Interlocks and Insider Participation............75
Item 12. Security Ownership of Certain Beneficial Owners and Management..................75
A. Security Ownership of Certain Beneficial Owners........................75
B. Security Ownership of Management.......................................76
Item 13. Certain Relationships and Related Transactions..................................78
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................78
A. Index to Financial Statements..........................................78
B. Index to Exhibits......................................................79
C. Reports on Form 8-K....................................................80
Signatures................................................................................81
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16
PART I ..............
ITEM 1. BUSINESS
A. ORGANIZATION AND CORPORATE STRUCTURE
Great-West Life & Annuity Insurance Company (the "Company") is a stock life
insurance company originally organized in 1907. The Company is domiciled in
Colorado.
The Company is a wholly-owned subsidiary of GWL&A Financial Inc. ("GWL&A
Financial"), a Delaware holding company. GWL&A Financial is an indirect
wholly-owned subsidiary of The Great-West Life Assurance Company ("Great-West
Life"), a Canadian life insurance company. Great-West Life is a subsidiary of
Great-West Lifeco Inc. ("Great-West Lifeco"), a Canadian holding company.
Great-West Lifeco is a subsidiary of Power Financial Corporation ("Power
Financial"), a Canadian holding company with substantial interests in the
financial services industry. Power Financial Corporation is a subsidiary of
Power Corporation of Canada ("Power Corporation"), a Canadian holding and
management company. Mr. Paul Desmarais, through a group of private holding
companies, which he controls, has voting control of Power Corporation.
Common and preferred shares of Great-West Life, Great-West Lifeco, Power
Financial and Power Corporation are traded publicly in Canada.
B. BUSINESS OF THE COMPANY
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,
Guam and the U.S. Virgin Islands. The Company conducts business in New York
through its subsidiary, First Great-West Life & Annuity Insurance Company. The
Company is also a licensed reinsurer in the State of New York. As of December
31, 1997, the Company ranked among the top 25 of all U.S. life insurance
companies in terms of total admitted assets.
The Company operates in the following two business segments:
Employee Benefits -life, health and 401(k) products for group clients
Financial Services -savings products for both public and non-profit employers
and individuals, and life insurance products for
individuals and businesses
The table that follows summarizes premiums and deposits for the years indicated.
For further consolidated financial information concerning the Company, see Item
6 (Selected Financial Data), and Item 8 (Financial Statements and Supplementary
Data). For commentary on the information in the following table, see Item 7
(Management's Discussion and Analysis of Financial Condition and Results of
Operations).
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Millions (1) 1998 1997 1996
------------- ------------- -------------
Premium Income
Employee Benefits
Group Life & Health $ 747 $ 465 $ 486
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Total Employee Benefits 747 465 486
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Financial Services
Savings 17 23 27
Individual Insurance 231 (3) 345 (2) 316 (2)
------------- ------------- -------------
Total Financial Services 248 368 343
------------- ------------- -------------
Premium income $ 995 $ 833 $ 829
============= ============= =============
Fee Income
Employee Benefits
Group Life & Health $ 367 $ 305 $ 277
401(k) 78 53 44
------------- ------------- -------------
------------- ------------- -------------
Total Employee Benefits 445 358 321
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------------- ------------- -------------
Financial Services
Savings 71 62 26
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Total Financial Services 71 62 26
------------- ------------- -------------
============= ============= =============
Fee income $ 516 $ 420 $ 347
============= ============= =============
============= ============= =============
Deposits for Investment-type
Contracts:
Employee Benefits $ 37 $ 25 $ 34
Financial Services 1,307 (3) 633 781
------------- ------------- -------------
Total investment-type
deposits $ 1,344 $ 658 $ 815
============= ============= =============
Deposits to Separate Accounts
Employee Benefits $ 1,568 $ 1,403 $ 1,109
Financial Services 640 742 329
------------- ------------- -------------
Total separate accounts
deposits $ 2,208 $ 2,145 $ 1,438
============= ============= =============
Self-funded equivalents (4) $ 2,606 $ 2,039 $ 1,940
============= ============= =============
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(1) All information in the above table and other tables herein is
derived from information that has been prepared in conformity
with generally accepted accounting principles, unless otherwise
indicated.
(2) These amounts include the recapture of $156 million and $164
million for the years ended December 31, 1997 and 1996,
respectively, of participating policy reserves previously
coinsured with Great-West Life under a participating life
coinsurance agreement.
(3) These amounts include $46 million in premium income for
non-participating life insurance policies and $520 million in
deposits for investment-type contracts which Great-West Life
coinsured with the Company in 1998 under two indemnity
reinsurance agreements.
(4) Self-funded equivalents generally represent paid claims under
minimum premium and administrative services only contracts, which
amounts approximate the additional premiums that would have been
earned under such contracts if they had been written as
traditional indemnity or HMO programs.
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C. EMPLOYEE BENEFITS
1. Principal Products
The Employee Benefits segment of the Company provides a full range of employee
benefits products to more than 11,300 employers across the United States. This
includes approximately 1,200 employers covered by Anthem Health & Life Insurance
Company ("AH&L"), which the Company acquired in July 1998.
The Company offers customers a variety of health plan options to help them
maximize the value of their employee benefits package. The majority of the
Company's health care business is self-funded, whereby the employer assumes all
or a significant portion of the risk. For companies with better than average
claims experience, this can result in significant health care savings.
The Company offers employers a total benefits solution - an integrated package
of group life and disability insurance, managed care programs, 401(k) savings
plans and flexible spending accounts. Through integrated pricing,
administration, funding and service, the Company helps employers provide
cost-effective benefits that will attract and retain quality employees, and at
the same time, helps employees reach their personal goals by offering benefit
choices, along with information needed to make appropriate choices. Many
customers also find this integrated approach appealing because their benefit
plans are administered through a single company with linked systems that provide
on-line administration and account access, for enhanced efficiency and
simplified plan administration.
The Company offers a choice of managed care products including Health
Maintenance Organization ("HMO") plans, which provide a high degree of managed
care, and Preferred Provider Organization ("PPO") plans and Point of Service
("POS") plans which offer more flexibility in provider choice than HMO plans.
Under HMO plans, health care for the member is coordinated by a primary care
physician who is responsible for managing all aspects of the member's health
care. HMO plans offer a broad scope of benefits coverage including routine
office visits and preventive care, as well as lower premiums and low copayments
which minimize out-of-pocket costs. Services for care not coordinated with the
primary care physician are not covered, with the exception of emergency care.
There are no claims to file when services are received through a primary care
physician. Physicians are reimbursed on a monthly capitated rate per HMO patient
for most services.
POS plans also require that a member enroll with a primary care physician who is
responsible for coordinating the member's health care. Similar to an HMO,
members receive the highest benefit coverage and the lowest out-of-pocket costs
when they use their primary care physician to coordinate their heath care. In
contrast to an HMO, members can seek care outside of the primary physician's
direction, at a reduced level of benefits. Some benefits may not be covered
outside the in-network POS plan.
PPO plans offer members a greater choice of physicians and hospitals. Members do
not need to enroll with a primary care physician - they simply select a
contracted PPO provider at the time of the service to receive the highest level
of benefits. If members seek care outside of the PPO network, they receive a
lower level of benefits.
The Company continues to offer fully insured indemnity plans. A traditional
indemnity plan allows complete freedom of choice for covered services. After
meeting an annual deductible, insureds pay their share of coinsurance for all
covered services. These plans are not typically considered managed care,
although they may include some medical management features, such as inpatient
certification, reasonable and customary charges, and some benefits for
preventive care.
The Company continues to develop its One Health Plan HMO subsidiary
organization. In 1998, it licensed four One Health Plan HMOs (Arizona, Florida,
Indiana and New Jersey). This brings the total number of licensed HMO
subsidiaries to 14. In addition to day-to-day HMO operation, the One Health
Plans also administer provider networks and provide medical management, member
services and quality assurance for the other managed care products of the
Company, AH&L and New England Life Insurance Company ("New England"). In
addition to creating economies of scale, this "pooling" of PPO, POS and HMO
membership benefits the Company by improving its position in negotiating
provider reimbursement arrangements, which leads to more competitive pricing.
The Company offers Internal Revenue Code Section 125 plans which enable
participants to set aside pre-tax dollars to pay for unreimbursed medical
expenses and dependent care expenses. This creates tax efficiencies for both the
employer and its employees.
The Company offers group life insurance. Sales of group life insurance consist
principally of renewable term coverage, the amounts of which are usually linked
to individual employee wage levels. The following table shows group life
insurance in force prior to reinsurance ceded for the years indicated:
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[Millions] Years Ended December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ---------- --------- ---------- ---------
In force,
end of year $ 84,121(1) $ 53,211 $ 49,500 $ 50,370 $ 51,051
(1) Includes $25,597 of in force group life insurance obtained from the acquisition of AH&L.
</TABLE>
The Company's 401(k) product is offered by way of a group fixed and variable
deferred annuity contract. The product provides a variety of funding and
distribution options for employer-approved retirement plans that qualify under
Internal Revenue Code Section 401(k).
The 401(k) product investment options for the employer include guaranteed
interest rates for various lengths of time and variable investment options. For
the fully guaranteed option, the difference between the income earned on
investments in the Company's general account and the interest credited to the
participant's account balance flows through to operating income. Variable
investment options utilize separate accounts to provide participants with a
vehicle to assume the investment risks. Assets held under these options are
invested, as designated by the participant, in separate accounts which in turn
invest in shares of underlying funds managed by a subsidiary of the Company or
by selected external fund managers. The participant currently has up to 32
different variable investment options.
Of the total 401(k) assets under administration in 1998, 96% were allocated to
variable investment options versus 94% in 1997.
The Company is compensated by the separate accounts for bearing expense risks
pertaining to the variable annuity contract, and for providing administrative
services. A subsidiary of the Company also receives fees for serving as an
investment advisor for those underlying funds which are managed by the
subsidiary.
Customer retention is a key factor for the profitability of the Company's 401(k)
product. The annuity contract imposes a charge for termination during a
designated period of time after the contract's inception. The charge is
determined in accordance with a formula in the contract. Existing federal tax
penalties on distributions prior to age 59 1/2 provide an additional
disincentive to premature surrenders of account balances, but do not impact
rollovers to products of competitors.
The Company offers a rollover Individual Retirement Annuity, which allows
individuals to move retirement funds from a 401(k) plan to a qualified
Individual Retirement Account.
The Company offers a Non-Qualified Deferred Compensation ("NQDC") supplement to
its 401(k) product. NQDC allows highly compensated employees to defer
compensation on a pre-tax basis beyond 401(k) limits until retirement.
In the following table, the amount of 401(k) business in force is measured by
the total of individual account balances:
[Millions]
Year Ended
December 31, Fixed Annuities Variable Annuities
----------------------- ------------------- -----------------------
1994 345 1,324
1995 358 2,227
1996 347 3,229
1997 328 4,568
1998 299 5,770
2. Method of Distribution
The Company distributes its products and services through field sales staff of
the Company, AH&L and New England located in 80 sales offices throughout the
United States. Although each sales organization markets some common products,
they also sell products under distinctive brand identities. This enables each
distribution system to capitalize on existing market strengths and business
relationships. Each sales office works with insurance brokers, agents and
consultants in their local market. 3. Competition
The employee benefits industry is highly competitive. Over the past year, the
United States health care industry has experienced a number of mergers and
consolidations. A number of larger carriers dropped out of the group health
market entirely. Although there are still many different carriers in the
marketplace, it has become dominated by an increasingly smaller number of
carriers, including the Company.
The highly competitive marketplace creates pricing pressures, which encourage
employers to seek competitive bids each year. Although most employers are
looking for affordably priced employee benefits products, they want to offer
product choices because employee needs differ. In many cases it is more
cost-effective and efficient for an employer to contract with a carrier such as
the Company, which offers multiple product lines and centralized administration.
In addition to price, there are a number of other factors which influence
employer decision-making. These factors include quality of services; scope,
cost-effectiveness and quality of provider networks; product responsiveness to
customers' needs; cost-containment services; and effectiveness of marketing and
sales.
4. Reserves
For group whole life and term insurance products, policy reserve liabilities are
equal to the present value of future benefits and expenses less the present
value of future net premiums using best estimate assumptions for interest,
mortality and expenses (including margins for adverse deviation). For disability
waiver of premium and paid up group whole life contracts, the policy reserves
equal the present value of future benefits and expenses using best estimate
assumptions for interest, mortality and expenses (including margins for adverse
deviation). For group universal life, the policy reserves equal the accumulated
fund balance (which reflects cumulative deposits plus credited interest less
charges thereon). Reserves for long-term disability products are established for
lives currently in payment status using industry and Company morbidity factors,
and interest rates based on Company experience. In addition, reserves are held
for lives that have not satisfied their waiting period and for claims that have
been incurred but not reported.
For medical, dental and vision insurance products, reserves reflect the ultimate
cost of claims including, on an estimated basis, (i) claims that have been
reported but not settled, and (ii) claims that have been incurred but not
reported. Claim reserves are based upon factors derived from past experience.
Reserves also reflect retrospective experience rating that is done on certain
types of business.
Reserves for investment contracts (401(k) deferred annuities) are equal to
cumulative deposits, less withdrawals and charges, plus credited interest
thereon.
Assumptions for mortality and morbidity experience are periodically reviewed
against published industry data and company experience.
The above mentioned reserves are computed amounts that, with additions from
premiums and deposits to be received, and with interest on such reserves, are
expected to be sufficient to meet the Company's policy obligations at their
maturities, and pay expected death or retirement benefits or surrender requests.
5. Reinsurance
The Company has a marketing and administrative services arrangement with New
England. Under reinsurance agreements, New England issues group life and health
and 401(k) products and then immediately reinsures 50% of its group life and
health business, and nearly 100% of its guaranteed 401(k) business, with the
Company.
The Company seeks to limit its exposure on any single insured and to recover a
portion of benefits paid by ceding risks to other insurance enterprises under
excess coverage and coinsurance contracts. The maximum amount of group life
insurance retained on any one life is $1.0 million. The maximum amount of group
monthly disability income benefit at risk on any one life is $6,000 per month.
D. FINANCIAL SERVICES
1. Principal Products
The Financial Services segment of the Company develops, administers and sells
retirement savings and life insurance products and services for individuals, and
for employees of state and local governments, hospitals, non-profit
organizations and public school districts.
The Company's core savings business is in the public/non-profit pension market.
The Company provides investment products, and administrative and communication
services, to employees of state and local governments (Internal Revenue Code
Section 457 plans), as well as employees of hospitals, non-profit organizations
and public school districts (Internal Revenue Code Section 401, 403(b) and 408
plans). The Company provides pension plan administrative services through a
subsidiary company, Financial Administrative Services Corporation ("FASCorp").
The Company provides marketing and communication services through another
subsidiary company, Benefits Communication Corporation, and BenefitsCorp
Equities, Inc., a broker-dealer subsidiary of Benefits Communication Corporation
(collectively, "BenefitsCorp").
The Company's primary marketing emphasis in the public/non-profit pension market
is group fixed and variable annuity contracts for defined contribution
retirement savings plans. Defined contribution plans provide for participant
accounts with benefits based upon the value of contributions to, and investment
returns on, the individual's account. This has been the fastest growing portion
of the pension marketplace in recent years.
The Company has a marketing agreement with Charles Schwab & Co., Inc. to sell
individual fixed and variable qualified and non-qualified deferred annuities.
The variable annuity product offers several investment options. The fixed
product is a Guarantee Period Fund, which was established as a non-unitized
separate account in which the owner does not participate in the performance of
the assets. The assets accrue solely to the benefit of the Company and any gain
or loss in the Guarantee Period Fund is borne entirely by the Company. Guarantee
period durations of one to ten years are currently being offered by the Company.
Distributions from the amounts allocated to a Guarantee Period Fund more than
six months prior to the maturity date results in a market value adjustment
("MVA"). The MVA reflects the relationship as of the time of its calculation
between the current U.S. Treasury Strip ask side yield and the U.S. Treasury
Strip ask side yield at the inception of the contract.
The Company's variable annuity products provide the opportunity for
contractholders to assume the risks of, and receive all the benefits from, the
investment of retirement assets. The variable product assets are invested, as
designated by the participant, in separate accounts which in turn invest in
shares of underlying funds managed by a subsidiary of the Company or by selected
external fund managers.
Demand for investment diversification for customers and their participants
continued to grow during 1998. The Company continues to expand the annuity
products available through Maxim Series Fund, Inc., a subsidiary of the Company
which is an insurance products fund company, and through arrangements with
external fund managers. This array of funds allows customers to diversify their
investments across a wide range of investment products, including fixed income,
stock and international equity fund offerings.
On a very limited basis the Company offers single premium annuities and
guaranteed certificates, which provide guarantees of principal and interest with
a fixed maturity date.
Customer retention is a key factor for the profitability of annuity products. To
encourage customer retention, annuity contracts typically impose a surrender
charge on policyholder balances withdrawn for a period of time after the
contract's inception. The period of time and level of the charge vary by
product. Existing federal tax penalties on distributions prior to age 59 1/2
provide an additional disincentive to premature surrenders of annuity balances,
but do not impede transfers of those balances to products of competitors.
Annuity products generate earnings from the investment spreads on the guaranteed
investment options and from the fees collected for mortality and expense risks
associated with the variable options. The Company also receives fees for
providing administration services to contractholders. A subsidiary of the
Company receives fees for serving as an investment advisor for underlying funds
which are managed by the subsidiary.
The Company's annuity products are supported by the general account assets of
the Company for guaranteed investment options, and the separate accounts for the
variable investment options.
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The amount of annuity products in force is measured by account balances. The
following table shows guaranteed investment contract and group and individual
annuity account balances for the years indicated:
[Millions]
Guaranteed
Year Ended Investment Fixed Variable
December 31, Contracts Annuities Annuities
----------------------- ---------------- -------------- ------------
1994 930 5,672 1,231
1995 664 5,722 1,772
1996 525 5,531 2,256
1997 409 5,227 3,280
1998 275 4,849 4,330
In addition to providing administrative services to customers of the Company's
annuities, FASCorp also provides comprehensive third-party administrative and
recordkeeping services for other financial institutions and employer-sponsored
retirement plans. Assets under administration with unaffiliated organizations
totaled $12.6 billion at December 31, 1998 and $8.5 billion at December 31,
1997.
Life insurance products in force include participating and non-participating
term life, whole life and universal life. Participating policyholders share in
the financial results (differences in experience of actual financial results
versus pricing expectations) of the participating business in the form of
dividends. Participating products are no longer actively marketed by the Company
but continue to produce renewal premium ($283.8 million in 1998). Participating
dividends for 1998 and 1997 were $71.4 million and $63.8 million, respectively.
The provision for participating policyholder earnings is reflected in
liabilities under undistributed earnings on participating policyholders in the
consolidated balance sheets of the Company. Participating policyholder earnings
are not included in the consolidated net income of the Company.
Term life provides coverage for a stated period and pays a death benefit only if
the insured dies within the period. Whole life provides guaranteed death
benefits and level premium payments for the life of the insured. Universal life
products include a cash value component that is credited with interest at
regular intervals. The Company's earnings result from the difference between the
investment income and interest credited on customer cash values and from
differences between charges for mortality and actual death claims. Universal
life cash values are charged for the cost of insurance coverage and for
administrative expenses.
At December 31, 1998 and 1997, the Company had $3.5 billion and $3.3 billion,
respectively, of policy reserves on individual insurance products sold to
corporations to provide coverage on the lives of certain employees - so-called
Corporate-Owned Life Insurance ("COLI"). Due to legislation enacted during 1996
which phases out the interest deductions on COLI policy loans over a two-year
period ending 1998, COLI sales have ceased. The Company continues to work
closely with existing COLI customers to determine the options available to them
and is confident that the effect of the legislative changes will not be material
to the Company's operations.
The Company has shifted its emphasis to the Bank-Owned Life Insurance ("BOLI")
market. BOLI was not affected by the 1996 legislation. This interest-sensitive
whole life product funds post-retirement benefits for bank employees. At
December 31, 1998 and 1997, the Company had $1.0 billion and $0.5 billion,
respectively, of BOLI policy reserves.
Sales of life insurance products typically have high initial marketing expenses.
Retention, an important factor in profitability, is encouraged through product
features. For example, the Company's universal and whole life insurance
contracts typically impose a surrender charge on policyholder balances withdrawn
within the first ten years of the contract's inception. The period of time and
level of the charge vary by product. In addition, more favorable credit rates
may be offered after policies have been in force for a period of time.
Certain of the Company's life insurance and group annuity products allow policy
owners to borrow against their policies. At December 31, 1998, approximately 5%
of outstanding policy loans were on individual life policies that had fixed
interest rates ranging from 5% to 8%. The remaining 95% of outstanding policy
loans had variable interest rates averaging 6.5% at December 31, 1998.
Investment income from policy loans was $180.9 million for the year ended
December 31, 1998.
The following table summarizes changes in individual life insurance in force
prior to reinsurance ceded for the years indicated:
Years Ended December 31,
---------------------------------------------------------
[Millions] 1998 1997 1996 1995 1994
----------- ---------- ---------- --------- ----------
In force, begin-
ning of year 28,266 $ 26,892 25,865 24,877 20,259
Sales and
additions 16,215 3,119 2,695 2,520 6,302
(1)
Terminations 1,515 1,745 1,668 1,532 1,684
----------- ---------- ---------- --------- ----------
Net 14,700 1,374 1,027 988 4,618
----------- ---------- ---------- --------- ----------
In force,
end of year 42,966 28,266 26,892 25,865 24,877
(1) Includes approximately $8.5 billion in adjustments related to COLI
policyholders exercising non-forfeiture options to increase the face
value of their policies, and $5.2 billion related to the reinsurance
transactions referred to in footnote (3) on page 2.
In 1998, the Company obtained membership in the Insurance Marketplace Standards
Association, which is granted in recognition of high standards of ethical
company behavior in advertising, sales and service for individually sold life
insurance and annuity products.
2. Method of Distribution
Financial Services primarily uses BenefitsCorp to distribute pension products
and to provide communication and enrollment services to employers in the
public/non-profit market. Pension products are also distributed through
independent marketing agencies.
The Company distributes universal and joint survivor life insurance, as well as
individual fixed and variable qualified and non-qualified deferred annuities,
through Charles Schwab & Co., Inc. Individual life products are also sold
through large banks and other financial institutions. BOLI products are
currently marketed through one broker, Clark/Bardes, Inc.
3. Competition
The life insurance, savings and investments marketplace is highly competitive.
The Company's competitors include mutual fund companies, insurance companies,
banks, investment advisors and certain service and professional organizations.
No one competitor or small number of competitors is dominant. Competition
focuses on service, technology, cost, variety of investment options, investment
performance, product features, price and financial strength as indicated by
ratings issued by nationally recognized agencies. For more information on the
Company's ratings see Item 1(G) (Ratings).
4. Reserves
Reserves for universal life policies are equal to cumulative deposits, less
withdrawals and mortality and expense charges, plus credited interest.
Reserves for all fixed individual life insurance contracts are computed on the
basis of assumed investment yield, mortality, morbidity and expenses (including
a margin for adverse deviation). These reserves are calculated as the present
value of future benefits (including dividends) and expenses less the present
value of future net premiums. The assumptions used in calculating the reserves
generally vary by plan, year of issue and policy duration.
For all life insurance contracts (including universal life insurance), reserves
are established for claims that have been incurred but not reported based on
factors derived from past experience.
Reserves for limited payment contracts (immediate annuities with life contingent
payouts) are computed on the basis of assumed investment yield, mortality,
morbidity and expenses. These assumptions generally vary by plan, year of issue
and policy duration. Reserves for investment contracts (deferred annuities and
immediate annuities without life contingent payouts) are equal to cumulative
deposits plus credited interest less withdrawals and other charges.
The above-mentioned reserves are computed amounts that, with additions from
premiums and deposits to be received, and with interest on such reserves, are
expected to be sufficient to meet the Company's policy obligations at their
maturities, and pay expected death or retirement benefits or surrender requests.
5. Reinsurance
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 coinsurance contracts. The Company retains
a maximum of $1.5 million of coverage per individual life.
E. INVESTMENT OPERATIONS
The Company's investment division manages the Company's general and separate
accounts in support of cash and liquidity requirements of the Company's
insurance and investment products. Investments under management at December 31,
1998 totaled $23.8 billion, comprised of general account assets of $13.7 billion
and separate account assets of $10.1 billion.
The Company invests in a broad range of asset classes, including domestic and
international fixed maturities, common stocks, mortgage loans, real estate and
short-term investments. Fixed maturity investments include public and privately
placed corporate bonds, public and privately placed structured assets,
government bonds and redeemable preferred stocks. The Company's portfolio of
structured assets consists of mortgage-backed securities and other asset-backed
securities.
The Company manages the characteristics of its investment assets, such as
liquidity, currency, yield and duration, to reflect the underlying
characteristics of related insurance and policyholder liabilities, which vary
among the Company's principal product lines. The Company observes strict asset
and liability matching guidelines, which are designed to ensure that the
investment portfolio will appropriately meet the cash flow and income
requirements of its liabilities. In connection with its investment strategy, the
Company uses derivative instruments in hedging applications to manage market
risk. Derivative instruments are not used for speculative purposes. For more
information on derivatives, see Notes 1 and 6 to the consolidated financial
statements of the Company (the "Consolidated Financial Statements"), which are
included in Item 8 (Financial Statements and Supplementary Data).
The Company routinely monitors and evaluates the status of its investments in
light of current economic conditions, trends in capital markets and other
factors. These other factors include investment size, quality, concentration by
industry and other diversification considerations for fixed maturity
investments.
The Company's fixed maturity investments constituted 67% of investment assets as
of December 31, 1998. The Company reduces credit risk for the portfolio as a
whole by investing primarily in investment grade fixed maturities rated by
either third-party rating agencies, or in the case of securities which may not
be rated by third-parties, by the Company (for private investments).
The Company's mortgage portfolio constituted 8% of investment assets as of
December 31, 1998. The Company's mortgage investment policy emphasizes a broadly
diversified portfolio of commercial and industrial mortgages. Mortgage loans are
subject to underwriting criteria addressing loan-to-value ratios, debt service
coverage, cash flow, tenant quality, leasing, market, location and financial
strength of borrower. Since 1986, the Company has reduced the overall weighting
of its mortgage portfolio with a greater emphasis in bond investments.
At December 31, 1998 only 0.5% of investment assets were invested in real
estate.
The following table sets forth the distribution of invested assets, cash and
accrued investment income for the Company's general account, as of the end of
the years indicated:
[Carrying Value 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
in Millions]
Debt Securities:
Bonds
U.S. Government
Securities and
obligations of U.S.
Government
Agencies 1,951 2,091 1,947 1,990 1,672
Corporate bonds 7,117 6,544 6,133 6,168 5,079
Foreign
Governments 69 146 119 159 368
--------- --------- --------- --------- ---------
Total 9,137 8,781 8,199 8,317 7,119
Common Stock 49 39 20 9 5
Mortgage loans 1,133 1,236 1,488 1,713 2,011
Real estate 73 94 68 61 44
Policy loans 2,859 2,657 2,523 2,238 1,905
Short-term
investments 420 399 419 135 707
--------- --------- --------- --------- ---------
Total investments 13,671 13,206 12,717 12,473 11,791
========= ========= ========= ========= =========
Cash 176 126 125 91 132
Accrued investment
income 158 166 198 212 196
The following table summarizes general account investment results of the
Company's operations:
Net Earned Net
[Millions] Investment Investment
Income Income Rate
----------------- -----------------
For the year:
1998 897 7.03 %
1997 882 7.21
1996 835 7.05
1995 835 7.36
1994 768 7.23
F. REGULATION
1. Insurance Regulation
The business of the Company is subject to comprehensive state and federal
regulation and supervision throughout the United States, which primarily
provides safeguards for policyholders rather than investors. The laws of the
various state jurisdictions establish supervisory agencies with broad
administrative powers with respect to such matters as admittance of assets,
premium rating methodology, policy forms, establishing reserve requirements and
solvency standards, maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, the type, amounts and
valuation of investments permitted and HMO operations.
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.
The National Association of Insurance Commissioners has adopted risk-based
capital rules and other financial ratios for life insurance companies. Based on
the Company's December 31, 1998 statutory financial reports, the Company has
risk-based capital well in excess of that required and was within the usual
ranges of all ratios.
2. 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.
3. 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,
mutual funds and variable insurance and annuity products are registered under
the Investment Company Act of 1940 and the Securities Act of 1933.
4. 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 $6.6 million as of December 31, 1998 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 $4.5
million at December 31, 1998.
5. 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.
6. Potential Legislation
United States legislation and administrative developments in various areas,
including pension regulation, financial services regulation, health care
legislation and the insurance industry could significantly and adversely affect
the Company in the future. For example, Congress is currently considering
legislation relating to health care reform and managed care issues (including
patients' rights, privacy of medical records and managed care plan or enterprise
liability), and legislation relating to the taxation of policyholder surplus
accounts and the capitalization of deferred acquisition costs. Congress has from
time to time also considered the deferral of taxation on the accretion of value
within certain annuities and life insurance products, financial services reform
legislation establishing frameworks for banks engaging in the insurance
business, changes in regulation for the Employee Retirement Income Security Act
of 1974, as amended, and the availability of Section 401(k) for individual
retirement accounts.
It is not possible to predict whether future legislation or regulation adversely
affecting the business of the Company will be enacted and, if enacted, the
extent to which such legislation or regulation will have an effect on the
Company and its competitors.
G. 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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Rating Agency Measurement Rating
- ------------------------------ ------------------------------------------ ------------
A.M. Best Company Financial Condition and Operating A++ *
Performance
Duff & Phelps Corporation Claims Paying Ability AAA *
Standard & Poor's Corporation Claims Paying Ability AA+ **
Moody's Investors Service Insurance Financial Strength Aa2 ***
</TABLE>
* Highest ratings available.
** Second highest rating out of 19 rating categories.
*** Third highest rating out of 19 rating categories.
H. MISCELLANEOUS
No customer accounted for 10% or more of the Company's consolidated revenues in
1998. In addition, no segment 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 segments. 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 segments.
The Company had approximately 6,500 employees at December 31, 1998.
ITEM 2. PROPERTIES
The Head Office of the Company consists 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.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1998 to a vote of security
holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. EQUITY SECURITY HOLDERS AND MARKET INFORMATION
There is no established public trading market for the Company's common equity.
B. DIVIDENDS
In the two most recent fiscal years, the Company has paid quarterly dividends on
its common shares. Dividends on common stock totaled $73.3 million in 1998 and
$62.5 million in 1997. Dividends on preferred stock totaled $6.7 million and
$8.9 million in 1998 and 1997, respectively.
Under Colorado law, the Company cannot, without the approval of the Colorado
Commissioner of Insurance, pay a dividend if, as a result of such payment, the
total of all dividends paid in the preceding twelve months would exceed the
greater of (i) 10% of the Company's statutory surplus as regards policyholders
as at the preceding December 31; or (ii) the Company's statutory net gain from
operations as at the preceding December 31.
ITEM 6. 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 Company's Consolidated Financial Statements.
[Millions]
<TABLE>
Years Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------
INCOME STATEMENT 1998 1997 1996 1995 1994
---------- ----------- ---------- ---------- ----------
DATA
Premiums $ 995 $ 833 $ 829 $ 732 $ 706
Fee income 516 420 347 335 294
Net investment income 897 882 835 835 768
Realized investment
gains (losses) 38 10 (21) 8 (72)
---------- ----------- ---------- ---------- ----------
Total Revenues 2,446 2,145 1,990 1,910 1,696
Policyholder benefits 1,462 1,385 1,356 1,269 1,184
Operating expenses 688 552 469 464 409
---------- ----------- ---------- ---------- ----------
Total benefits and
expenses 2,150 1,937 1,825 1,733 1,593
---------- ----------- ---------- ---------- ----------
Income from operations 296 208 165 177 103
Income tax expense 99 49 30 49 29
========== =========== ========== ========== ==========
Net Income $ 197 $ 159 $ 135 $ 128 $ 74
========== =========== ========== ========== ==========
Deposits for
investment-
type contracts $ 1,344 $ 658 $ 815 $ 868 $ 1,006
Deposits to separate
accounts 2,208 2,145 1,438 1,165 1,013
Self-funded premium
equivalents 2,606 2,039 1,940 2,140 1,907
December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ----------- ---------- ---------- ----------
BALANCE SHEET DATA
Investment assets $ 13,671 $ 13,206 $ 12,717 $ 12,473 $ 11,791
Separate account assets 10,100 7,847 5,485 3,999 2,555
Total assets 25,123 22,078 19,351 17,682 15,616
Total policyholder
liabilities 12,583 11,706 11,600 11,408 10,859
Total long-term
obligations (1) 35 118 120 122 124
Total stockholder's 1,199 1,186 1,034 993 777
equity
</TABLE>
(1)Represents long-term portion of "Due to Parent Corporation" amounts
disclosed in the Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-K contains forward-looking statements. Forward-looking statements
are statements not based on historical information and which relate to future
operations, strategies, financial results or other developments. In particular,
statements using verbs such as "expect," "anticipate," "believe" or words of
similar import generally involve forward-looking statements. Without limiting
the foregoing, forward-looking statements include statements which represent the
Company's beliefs concerning future or projected levels of sales of the
Company's products, investment spreads or yields, or the earnings or
profitability of the Company's activities. Forward-looking statements are
necessarily based upon estimates and assumptions that are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond the Company's control and many of which, with respect
to future business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company. Whether or not actual results differ materially from
forward-looking statements may depend on numerous foreseeable and unforeseeable
events or developments, some of which may be national in scope, such as general
economic conditions and interest rates, some of which may be related to the
insurance industry generally, such as pricing competition, regulatory
developments and industry consolidation, and others of which may relate to the
Company specifically, such as credit, volatility and other risks associated with
the Company's investment portfolio, and other factors. Readers are also directed
to consider other risks and uncertainties discussed in documents filed by the
Company and certain of its subsidiaries with the Securities and Exchange
Commission.
Management's discussion and analysis of financial condition and results of
operations of the Company for the three years ended December 31, 1998 follows.
A. COMPANY RESULTS OF OPERATIONS
1. Consolidated Results
The Company's consolidated net income increased $38.1 million or 24% in 1998
when compared to the year ended December 31, 1997, reflecting improved results
in both the Employee Benefits segment and the Financial Services segment. The
Employee Benefits segment contributed $8.8 million or 23% to the improved
consolidated results compared to the Financial Services segment which
contributed $29.3 million or 77% to the overall improvement. Of total
consolidated net income in 1998 and 1997, the Employee Benefits segment
contributed 54% and 62%, respectively, while the Financial Services segment
contributed 46% and 38%, respectively.
The Company's consolidated net income increased $24.2 million or 18% in 1997
when compared to the year ended December 31, 1996. In 1997, the Employee
Benefits segment contributed $3.0 million or 12% to the overall growth and the
Financial Services segment contributed $21.2 million or 88% to the overall
growth.
The Company's 1997 and 1996 consolidated net income increased by $21.1 million
and $25.6 million, respectively, due to changes in income tax provisions for
these years. The current income tax provisions were decreased by $42.2 million
and $31.2 million for 1997 and 1996, respectively, due to the release of a
contingent liability relating to taxes of Great-West Life's U.S. branch
associated with the blocks of business that had been transferred from Great-West
Life's U.S. branch to the Company, as discussed below.
Of the amount released in 1997, $15.1 million was attributable to participating
policyholders and, therefore, had no effect on the net income of the Company.
In 1989, Great-West Life began a series of transactions to transfer its U.S.
business from its U.S. branch to the Company; this process was essentially
completed in 1993. The objective of these transactions was to transfer to the
Company all of the risks and rewards of Great-West Life's U.S.-related business.
The transfers of insurance contracts and related assets were accomplished
through several reinsurance agreements executed by the Company and Great-West
Life's U.S. branch during these years. As part of this transfer of Great-West
Life's U.S. business, the Company in 1993 entered into a tax agreement with
Great-West Life in order to transfer the tax liabilities associated with the
insurance contracts and related assets that had been transferred.
In addition to the contingent tax liability release described above, the
Company's income tax provisions for 1997 and 1996 also reflect increases for
additional contingent items related to open tax years where it was determined to
be probable that additional tax liabilities could be owed based on changes in
facts and circumstances. The increase in 1997 was $16.0 million, of which $10.1
million was attributable to participating policyholders and, therefore, had no
effect on the net income of the Company. The increase in 1996 was $5.6 million.
Certain reclassifications, primarily related to the classification of the
release of the contingent liability described above (see Note 10 to the
Consolidated Financial Statements), have been made to the 1997 and 1996
financial statements.
In 1998 total revenues increased $301.1 million or 14% to $2.4 billion when
compared to the year ended December 31, 1997. The growth in revenues in 1998 was
comprised of increased premium income of $161.7 million, increased fee income of
$95.3 million, increased net investment income of $15.7 million and increased
realized gains on investments of $28.4 million. In 1997 total revenues increased
$154.8 million or 8% to $2.1 billion when compared to the year ended December
31, 1996. The growth in revenues in 1997 was comprised of increased premium
income of $3.7 million, increased fee income of $73.2 million, increased net
investment income of $47.0 million and realized gains on investments of $9.8
million in 1997 versus realized losses in 1996 of $21.1 million.
The increased premium income in 1998 was comprised of growth in Employee
Benefits premium income of $281.8 million, offset by a decrease in Financial
Services premium income of $120.1 million. The growth in premium income in the
Employee Benefits segment primarily reflected $209.5 million of premium income
derived from the acquisition of Anthem Health & Life Insurance Company ("AH&L")
in July 1998 (see Other Matters below). The decrease of $120.1 million in
Financial Services premium income was due primarily to reinsurance transactions
in 1997 of $155.8 million versus only $46.2 million in premiums due to
reinsurance transactions in 1998. The increased premium income in 1997 was
comprised of a decrease in Employee Benefits premium income of $21.4 million,
offset by growth in Financial Services premium income of $25.1 million. The
decrease in Employee Benefits was attributable to terminations in 1996 which
impacted 1997 premiums (see Item 7(B) - Employee Benefits Results of
Operations). The increase in Financial Services premium income was attributable
to participating individual insurance.
The increased fee income in 1998 was comprised of growth in Employee Benefits
fee income and Financial Services fee income of $86.6 million and $8.7 million,
respectively. The growth in Employee Benefits fee income reflected $31.6 million
of fee income derived from the acquisition of AH&L. The remaining increase was
the result of new sales and increased fees on variable funds related to growth
in equity markets. The increase in fee income in 1997 was comprised of Employee
Benefits fee income and Financial Services fee income of $36.9 million and $36.3
million, respectively. The increase in both segments was attributable to new
sales and increased fees on variable funds related to growth in equity markets.
Realized investment gains increased in recent years from a realized investment
loss of $21.1 million in 1996 to realized investment gains of $9.8 million and
$38.2 million in 1997 and 1998, respectively. The decrease in interest rates in
1998 and 1997 resulted in gains on sales of fixed maturities totaling $38.4
million and $16.0 million in 1998 and 1997, respectively, while higher interest
rates contributed to $11.6 million of fixed maturity losses in 1996. Increases
in the provision for asset losses of $0.6 million and $7.6 million,
respectively, were recognized in 1998 and 1997.
Total benefits and expenses increased $213.9 million or 11% in 1998 when
compared to the year ended December 31, 1997. The increase in 1998 was due to a
combination of the acquisition of AH&L which resulted in benefits and expenses
of $258.3 million and overall growth in the group health business, partially
offset by a decrease in policyholder benefits related to reinsurance
transactions of $109.4 million. Excluding these items, benefits and expenses
would have increased $64.6 million or 3% in 1998. The increase from 1996 to 1997
was the result of increased operating expenses associated with the cost of
developing HMOs and FASCorp's business, and system enhancements.
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 3 to the Consolidated 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 income of the Company was not impacted by
the reinsurance transactions.
Income tax expense increased $49.0 million or 98% in 1998 when compared to the
year ended December 31, 1997. Income tax expense increased $19.5 million or 64%
in 1997 when compared to the year ended December 31, 1996. The increase in
income tax expense in 1998 reflects higher earnings in 1998, as well as the fact
that the 1997 income tax provision includes a net $26.2 million release of
contingent tax liabilities relating to prior open tax years, as discussed above.
The increase in income tax expense from 1996 to 1997 was partially attributable
to a growth in earnings in 1997, but also reflects net releases in 1997 and 1996
of $26.2 million and $25.6 million of contingent tax liabilities relating to
prior open tax years, as discussed above. Excluding these contingent tax
releases, the Company's income tax expense increased 30% and 27% in 1998 and
1997. See Note 10 to the Consolidated Financial Statements for a discussion of
the Company's effective tax rates.
In evaluating its results of operations, the Company also considers net changes
in deposits received for investment-type contracts, deposits to separate
accounts and self-funded equivalents. Self-funded equivalents represent paid
claims under minimum premium and administrative services only contracts, which
amounts approximate the additional premiums that would have been earned under
such contracts if they had been written as traditional indemnity or HMO
programs.
Deposits for investment-type contracts increased $686.0 million or 104% in 1998
when compared to the year ended December 31, 1997. Deposits for investment-type
contracts decreased $157.4 million or 19% in 1997 when compared to the year
ended December 31, 1996. The increase in 1998 was primarily due to two indemnity
reinsurance agreements with Great-West Life whereby the Company reinsured by
coinsurance certain Great-West Life individual non-participating life insurance
policies. This transaction increased deposits by $519.6 million in 1998 and
accounted for 78% of the growth. The 19% decrease in 1997 was the result of
decreased deposits related to COLI sales (see Item 7(C) - Financial Services
Results of Operations).
Deposits for separate accounts increased $63.7 million or 3% in 1998 when
compared to the year ended December 31, 1997. The increase in 1998 reflected a
continuing movement toward variable funds and away from fixed options. Deposits
for separate accounts increased $706.9 million or 49% in 1997 when compared to
the year ended December 31, 1996. The increase in 1997 was primarily due to
increased deposits in the Financial Services segment (see Item 7(C) - Financial
Services Results of Operations).
Self-funded premium equivalents increased $567.1 million or 28% in 1998 when
compared to the year ended December 31, 1997. Self-funded premium equivalents
increased $98.6 million or 5% in 1997 when compared to the year ended December
31, 1996. Approximately half of the 1998 increase ($281.3 million) was due to
the acquisition of AH&L, with the remainder coming from the growth in business.
Total assets increased $3.0 billion or 14% in 1998 when compared to the year
ended December 31, 1997. Separate account assets increased $2.3 billion
primarily due to the strength of the equity markets in the United States.
Invested assets increased $464.5 million, of which $258.6 million was
attributable to AH&L. The remaining growth of $205.9 million represents a 2%
increase in invested assets over 1997, which was primarily attributable to the
consideration received in connection with the reinsurance agreements discussed
previously.
2. Other Matters
On July 8, 1998, the Company acquired the outstanding common stock of AH&L, a
subsidiary of Anthem, Inc. (the Blue Cross and Blue Shield licensee for Indiana,
Kentucky, Ohio, and Connecticut). This acquisition strengthened the Employee
Benefits segment by providing nearly $975.0 million of annualized health and
life premium income and self-funded premium equivalents, and approximately
450,000 additional health care members and approximately 75 group sales
representatives.
The cost of the acquisition was $82.7 million. The purchase price was based on
adjusted book value and is subject to further minor adjustments. The acquisition
was accounted for as a purchase and was financed through internally generated
funds. The fair value of tangible assets acquired and liabilities assumed was
$379.9 million and $317.4 million, respectively. Goodwill of $20.2 million was
recorded at the time of the acquisition.
The majority of AH&L's customers are in the Company's target market of small to
mid-size employers who prefer to self-fund their benefit plans. As of November
1, 1998, the Company began integrating the AH&L business to a common systems
platform with a scheduled completion date of July 1999. New and existing
customers are being migrated to the Company's One Health Plan network, which
will provide substantial new growth for the One Health Plan subsidiary
organization.
Life and health premium and fee income for AH&L since the date of acquisition
totaled $241.1 million, while self-funded premium equivalents were $281.3
million. The Company recorded a small loss associated with AH&L operations in
1998. The results of AH&L since the date of acquisition are included in the
Employee Benefits segment.
B. EMPLOYEE BENEFITS RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Employee Benefits
segment:
(Millions) Years Ended December 31,
----------------------------------
INCOME STATEMENT 1998 1997 1996
---------- ---------- ----------
DATA
Premiums 747 465 486
Fee income 445 358 321
Net investment income 95 100 88
Realized investment gains (losses) 8 3 (3)
---------- ---------- ----------
Total Revenues 1,295 926 892
Policyholder benefits 590 371 406
Operating expenses 547 428 368
---------- ---------- ----------
---------- ---------- ----------
Total benefits and expenses 1,137 799 774
---------- ---------- ----------
Income from operations 158 127 118
Income tax expense 51 29 22
========== ========== ==========
Net Income 107 98 96
========== ========== ==========
Deposits for investment-type
contracts 37 25 34
Deposits to separate accounts 1,568 1,403 1,109
Self-funded premium equivalents 2,606 2,039 1,940
<PAGE>
During 1998, the Employee Benefits segment experienced:
o significant growth in 401(k) assets under administration, o increased sales
and improved customer retention in group life and health, o favorable mortality
results, and o license approval for four HMO subsidiaries, for a total of 14
fully operational HMOs.
Net income for Employee Benefits increased 9% in 1998 and 2% in 1997. The
improvement in earnings in 1998 and 1997 reflects increased fee income from the
variable 401(k) assets and improved group life mortality experience which more
than offset unfavorable morbidity experience and the increased level of
operating expenses associated with building the HMO network in 1998 and 1997.
The changes in income tax provisions discussed above under "Company Results of
Operations" resulted in increases in net income for the Employee Benefits
segment of $17.6 million and $18.2 million in 1997 and 1996, respectively.
401(k) premiums and deposits for 1998 and 1997 increased 14% and 25%,
respectively, as the result of higher recurring deposits from existing customers
and sales in 1997. Assets under administration (including third-party
administration) in 401(k) increased 26% over 1997 to $6.7 billion and 38% from
1996 to 1997, primarily due to strong equity markets.
Equivalent premium revenue and fee income for group life and health increased
32% from 1997 levels as the result of a combination of increased sales (41%) and
the AH&L acquisition (59%). From 1996 to 1997, equivalent premium revenue and
fee income had increased 4% as growth was constrained by competitive pressures.
1. Group Life and Health
The Employee Benefits segment experienced strong sales growth during 1998 with a
net increase of 593 group health care customers (versus 440 in 1997), which
added 143,699 new individual health care members, excluding the AH&L
acquisition. Much of the health care growth can be attributed to the
introduction of new HMOs in markets with high sales potential, and the Company's
ability to offer a choice of managed care products.
To position itself for the future, the Employee Benefits segment is focused on
putting in place the products, strategies and processes that will strengthen its
competitive position in the evolving managed care environment.
With a heightened sensitivity to price comes the demand for more tightly managed
health plans, which is why HMO development remains Employee Benefits' most
important product development initiative. In 1998, the Company licensed HMOs in
Arizona, Florida, Indiana and New Jersey and applied for licenses in North
Carolina and Pennsylvania. The Company also entered into agreements with another
insurance carrier which will exclusively market the HMO product in various
states. This type of arrangement will augment growth in the Company's HMO
programs in the future.
The Company experienced a 35% increase in total health care membership,
including the AH&L acquisition, from 1,675,800 at the end of 1997 to 2,266,700
at year-end 1998. Excluding the AH&L acquisition, which added 450,000 members,
total health care membership increased 8%. Gatekeeper (i.e., POS and HMO)
members grew 34% from 414,500 in 1997 to 556,800 in 1998 including 61,800 AH&L
members. Excluding the AH&L acquisition, gatekeeper members increased 19%. The
Company expects this segment of the business to grow as additional HMO licenses
are obtained.
Total health care membership increased from 1996 to 1997 by 8% (1996 was the
first year the Company offered HMO plans). Gatekeeper members grew 18% from 1996
to 1997.
2. 401(k)
The number of new 401(k) case sales (employer groups), including third-party
administration business generated through the Company's marketing and
administration arrangement with New England, decreased 33% to 800 in 1998 from
1,200 in 1997 (1,200 in 1996). The decrease in 1998 was the result of a shift in
emphasis to group life and health sales. The 401(k) block of business under
administration total 6,100 employer groups and more than 475,000 individual
participants, compared to 5,700 employer groups and 430,000 individual
participants in 1997, and 4,900 employer groups and 355,000 individual
participants in 1996.
During 1998, the in-force block of 401(k) business continued to perform well,
with customer retention of 93% versus 94% in 1997. This, combined with strong
equity markets, resulted in a 26% and 39% increase in assets under management
during 1998 and 1997, respectively.
In addition to the Company's internally-managed funds, the Company offers
externally-managed funds from recognized mutual funds companies such as AIM,
Fidelity, Putnam, American Century, Founders and T. Rowe Price. This strategy,
supported by participant education efforts, is validated by the fact that 99% of
assets contributed in 1998 were allocated to variable funds.
To promote long-term asset retention, the Company enhanced a number of products
and services including prepackaged "lifestyle" funds (The Profile Series),
expense reductions for high-balance accounts, a rollover IRA product, more
effective enrollment communications, one-on-one retirement planning assistance
and personal plan illustrations.
3. Outlook
In 1999, the Company will continue to enhance managed care programs and
services, further HMO development, seek National Committee for Quality Assurance
accreditation for its HMOs, refine quality assurance programs and introduce
member communications directed at health improvements. Management intends to
enhance the health claims payment system in 1999 to provide medical
auto-adjudication capabilities to reduce administrative expenses and improve
claims processing time. The Company will enhance the 401(k) product for large
cases by adding additional investment fund options, reviewing and replacing
current funds, as well as offering funds outside the annuity contract. The
Company plans to add the 401(k) product to AH&L's product portfolio in the
latter part of 1999.
C. FINANCIAL SERVICES RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Financial Services
segment:
(Millions) Years Ended December 31,
---------------------------------------
INCOME STATEMENT 1998 1997 1996
------------ ----------- ----------
DATA
Premiums 248 368 343
Fee income 71 62 26
Net investment income 802 782 747
Realized investment gains 30 7 (18)
(losses)
------------ ----------- ----------
Total Revenues 1,151 1,219 1,098
Policyholder benefits 872 1,014 950
Operating expenses 141 124 101
------------ ----------- ----------
Total benefits and expenses 1,013 1,138 1,051
------------ ----------- ----------
Income from operations 138 81 47
Income tax expense 48 20 8
============ =========== ==========
Net Income 90 61 39
============ =========== ==========
Deposits for investment-type
contracts 1,307 633 781
Deposits to separate accounts 640 742 329
During 1998, the Financial Services segment experienced:
o significant growth in participants and separate account funds
primarily attributable to the public/non-profit business,
o very good persistency in all lines of business, and
o strong sales of BOLI.
Net income for Financial Services increased 48% in 1998 and 56% in 1997. The
improvement in earnings in 1998 reflects higher earnings from an increased asset
base, an increase in investment margins, and larger capital gains on fixed
maturities. The 1997 earnings improvement was the result of a reduction of the
mortgage provision for asset impairments, increased fee income on a larger asset
base, capital gains on fixed maturities and an increase in investment margins.
The changes in income tax provisions discussed above under "Company Results of
Operations" resulted in increases in net income for the Financial Services
segment of $3.6 million and $7.4 million in 1997 and 1996, respectively.
1. Savings
Premiums decreased $5.9 million or 26%, from $22.6 million in 1997 to $16.8
million in 1998. Premiums decreased $4.0 million or 15%, from $26.7 million in
1996 to $22.6 million in 1997. The decrease in both years is attributable to the
continuing trend of policyholders selecting variable annuity options (separate
accounts) as opposed to the more traditional fixed annuity products.
Fee income increased $8.6 million or 14%, from $62.4 million in 1997 to $71.0
million in 1998. Fee income increased $36.1 million or 137%, from $26.3 million
in 1996 to $62.4 million in 1997. The growth in fee income in 1998 and 1997 was
the result of new sales and increased fees on variable funds related to growth
in equity markets.
Deposits for investment-type contracts increased $20.4 million or 9%, from
$218.6 million in 1997 to $239.0 million in 1998. Deposits for investment-type
contracts increased $4.3 million or 2%, from $214.3 million in 1996 to $218.6
million in 1997.
Deposits to separate accounts decreased $101.5 million or 14%, from $742.1
million in 1997 to $640.6 million in 1998. Deposits to separate accounts
increased $413.6 million or 126% from $328.5 million in 1996 to $742.1 million
in 1997. The decrease in 1998 was the result of 1997 being inflated by the
receipt of a large single deposit in the amount of $120.0 million. The increase
in 1997 was due to a combination of the $120.0 million deposit and the
commencement of marketing a new fixed and variable qualified and non-qualified
annuity product through Charles Schwab & Co., Inc., which resulted in $239.9
million in deposits to separate accounts (the amount of such deposits from
Schwab in 1998 was $204.7 million).
The Financial Services segment's core savings business is in the
public/non-profit pension market. The assets of the public/non-profit business,
including separate accounts but excluding Guaranteed Investment Contracts
("GICs"), increased 9% and 8% during 1998 and 1997 to $7.8 billion and $7.2
billion, respectively. Much of the growth came from the variable annuity
business, which was driven by premiums and deposits and strong investment
returns in the equity markets.
The Financial Services segment's savings business experienced strong growth in
1998. The number of new participants in 1998 was 151,300 compared to 129,200 in
1997 (51,900 in 1996), bringing the total lives under administration to 643,200
in 1998 and 536,200 in 1997. BenefitsCorp sold 21 new large employer cases
compared to 13 in 1997 and increased the penetration of existing cases by
enrolling new employees.
The Financial Services segment again experienced a very high retention rate in
public/non-profit contract renewals in 1998, renewing 100% of its own large case
state contracts. Part of this customer loyalty comes from initiatives to provide
high-quality service while controlling expenses.
The Company continued to limit sales of GICs and to allow this block of business
to contract in response to the highly competitive GIC market. As a result, GIC
assets decreased 33% in 1998, to $274.8 million. In 1997, GIC assets decreased
22% from 1996, to $409.1 million.
Customer demand for investment diversification continued to grow during 1998.
New contributions to variable business represented 63% of the total 1998
premiums versus 69% in 1997. The Company continues to expand the investment
products available through Maxim Series Fund, Inc., and through partnership
arrangements with external fund managers. Externally-managed funds offered to
participants in 1998 included American Century, Ariel, Fidelity, Founders,
INVESCO, Janus, Loomis Sayles, Templeton, T. Rowe Price and Vista.
Customer participation in guaranteed separate accounts increased, as many
customers prefer the security of fixed income securities and separate account
assets. Assets under management for guaranteed separate account funds were
$562.3 million in 1998, compared to $466.2 million in 1997 and $392.8 million in
1996.
FASCorp administered records for approximately 1,304,000 participants in 1998
versus 1,000,000 in 1997.
2. Life Insurance
The Company continued its conservative approach to the manufacture and
distribution of traditional life insurance products, while focusing on customer
retention and expense management.
Individual life insurance revenue premiums and deposits of $1.3 billion in 1998
increased 71% from 1997 primarily due to reinsurance transactions with
Great-West Life, which resulted in $565.8 million of premiums and deposits in
1998 versus $155.8 million in 1997. Excluding these reinsurance transactions,
individual life insurance revenue premiums and deposits increased 14% from 1997
to 1998. The Company also experienced strong BOLI sales in 1998 which more than
offset reductions in COLI premiums. Individual life insurance premiums and
deposits decreased 14% from 1996 to 1997 due to the reduction of COLI premiums
associated with 1996 legislative changes.
During 1996, the U.S. Congress enacted legislation to phase out during 1997 and
1998 the tax deductibility of interest on policy loans on COLI products. Since
then, renewal premiums and deposits for COLI products have decreased to $179.8
million in 1998 from $299.8 million in 1997 and $384.2 million in 1996, and the
Company expects this decline to continue. As a result of these legislative
changes, the Company has shifted its emphasis from COLI to new sales in the BOLI
market. This product provides long-term benefits for bank employees and was not
affected by the 1996 legislative changes. BOLI premiums and deposits were $430.7
million during 1998, compared to $179.3 million in 1997. The Company continues
working closely with existing COLI customers to determine the options available
to them and is confident that the effect of the legislative changes will not be
material to the Company's operations.
3. Outlook
During 1999, the Company expects to continue its growth in the third party
administration area through FASCorp. Emphasis will also be placed on developing
the institutional insurance and annuity markets. During 1997, communications
were provided to policyholders in the public/non-profit market through the use
of the internet. Increased emphasis will be placed on improving internet
functionality during the upcoming year to improve this service for our
customers.
d. 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 ensure
that even under changing market conditions, the Company's assets will 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 general account invested assets follows:
[Millions]
1998 1997
---------------------
Fixed maturities, available for sale, at fair value 6,937 6,698
Fixed maturities, held-to-maturity, at amortized cost 2,200 2,083
Mortgage loans 1,133 1,236
Real estate and common stock 122 133
Short-term investments 420 399
Policy loans 2,859 2,657
========== ==========
Total invested assets 13,671 13,206
========== ==========
1. Fixed Maturities
Fixed maturity investments include public and privately placed corporate bonds,
public and privately placed structured assets and government bonds. 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.
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 1998 1997
-------------
-------------- ---------------
AAA 45.6% 45.7%
AA 9.4 8.8
A 23.8 23.8
BBB 20.7 20.7
BB and Below (non-investment grade) 0.5 1.0
-------------- ---------------
TOTAL 100.0% 100.0%
At December 31, 1998 and 1997, the Company owned no bonds in default.
2. Mortgage Loans
During 1998, the mortgage portfolio declined 8% to $1.1 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 $31.2 million
in 1998, compared with $37.9 million in 1997, and foreclosures totaled $3.0
million and $14.1 million in 1998 and 1997, 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 overall strength 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, 1998 and 1997,
the Company's loan portfolio included $52.9 million and $64.4 million,
respectively, of non-impaired restructured loans.
3. Real Estate and Common Stock
The Company's real estate portfolio is composed primarily of the Head Office
property ($54.2 million) and properties acquired through the foreclosure of
troubled mortgages ($16.3 million). 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 is currently adding a
third tower to its Head Office complex, which it anticipates completing in the
year 2000.
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 1999.
4. 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 Consolidated Financial Statements
contains a summary of the Company's outstanding financial hedging derivatives.
5. Outlook
General economic conditions continued to remain strong during 1998. The Company
does not expect to recognize any asset writedowns or restructurings in 1999 that
would result in a material adverse effect upon the Company's financial
condition.
E. 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.
The Company has a commitment to fund an addition to its Head Office complex over
the next 18 months, totaling approximately $30.0 million.
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 $596.3 million and $525.4 million as of December 31, 1998 and
1997, 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 $39.7
million of commercial paper outstanding at December 31, 1998, compared with
$54.1 million at December 31, 1997. 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.
F. ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and for Hedging Activities". This Statement provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. This Statement is effective for the Company beginning
January 1, 2000, and earlier adoption is encouraged. The Company has not adopted
this Statement as of December 31, 1998. Management has not determined the impact
of the Statement on the Company's financial position or results of operations.
See the Note 1 to the Consolidated Financial Statements for additional
information regarding accounting pronouncements.
G. YEAR 2000 ISSUE
The Year 2000 ("Y2K") problem arises when a computer performing date-based
computations or operations produces erroneous results due to the historical
practice of using two digit years within computer hardware and software. This
causes errors or misinterpretations of the century in date calculations.
Virtually all businesses, including the Company, are required to determine the
extent of their Y2K problems. Systems that have a Y2K problem must then be
converted or replaced by systems that will operate correctly with respect to the
year 2000 and beyond.
The Company has a written plan that encompasses all computer hardware, software,
networks, facilities (embedded systems) and telephone systems. The plan also
includes provisions for identifying and verifying that major vendors and
business partners are Y2K compliant. The Company is developing contingency plans
to address the possibility of both internal and external failures as well. The
plan calls for full Y2K compliance for core systems by June 30, 1999 and full
Y2K compliance for all Company systems by October 31, 1999.
The Company's plan establishes five phases for becoming Y2K compliant. Phase 1
is "impact analysis" which includes initial inventory and preliminary assessment
of Y2K impact. Phase 2 is "solution planning" which includes system by system
planning to outline the approach and timing for reaching compliance. Phase 3 is
"conversion/renovation" which means the actual process of replacing or repairing
non-compliant systems. Phase 4 is "testing" to ensure that the systems function
correctly under a variety of different date scenarios including current dates,
year 2000 and leap year dates. Phase 5 is "implementation" which means putting
Y2K compliant systems back into production.
As of December 31, 1998, the Company had completed impact analysis (phase 1) and
solution planning (phase 2) for all of its core systems and was more than 95%
complete for phases 1 and 2 with respect to its systems as a whole. In addition,
the Company was approximately 87% complete with respect to conversion and
renovation (phase 3), 79% complete with respect to testing (phase 4), and 78%
complete with respect to implementation (phase 5).
In addition to ensuring that the Company's own systems are Y2K compliant, the
Company has identified third parties with which the Company has significant
business relationships in order to assess the potential impact on the Company of
the third parties' Y2K issues and plans. The Company expects to complete this
process during the first quarter of 1999 and will conduct system testing with
third parties throughout 1999. The Company does not have control over these
third parties and cannot make any representations as to what extent the
Company's future operating results may be adversely affected by the failure of
any third party to address successfully its own Y2K issues.
On the basis of currently available information, the expense incurred by the
Company, including anticipated future expenses, related to the Y2K issue has not
and is not expected to be material to the Company's financial condition or
results of operations. The Company has spent approximately $9.7 million on its
Y2K project through the end of December 1998 and expects to spend up to
approximately $15.3 million on its Y2K project. All of these funds will come
from the Company's cash flow from operations. The Company has continued other
scheduled non-Y2K information systems changes and upgrades. Although work on Y2K
issues may have resulted in minor delays on the other projects, the delays are
not expected to have a material adverse effect on the Company's consolidated
financial condition or results of operations.
The most reasonably likely worst case Y2K scenario is that the Company will
experience isolated internal or third party computer failures and will be
temporarily unable to process insurance and annuity benefit transactions. All of
the Company's Y2K efforts have been designed to prevent such an occurrence.
However, if the Company identifies internal or third party Y2K issues which
cannot be timely corrected, there can be no assurance that the Company can avoid
Y2K problems or that the cost of curing the problem will not be material.
In an effort to mitigate risks associated with Y2K failures, the Company is in
the process of developing contingency plans to address core functions, including
relations with third parties. It is the Company's expectation that contingency
plans will address possible failures generated internally, by vendors or
business partners, and by customers. Possible general approaches include manual
processing, payments on an estimated basis and use of disaster recovery
facilities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's assets are purchased to fund future benefit payments to its
policyholders and contractholders. The primary risk of these assets is exposure
to rising interest rates. The Company's exposure to foreign currency exchange
rate fluctuations is minimal as only nominal foreign investments are held.
To manage interest rate risk, the Company invests in assets that are suited to
the products that it sells. For products with fixed and highly predictable
benefit payments such as certificate annuities and payout annuities, the Company
invests in fixed income assets with cash flows that closely match the liability
product cash flows. The Company is then protected against interest rate changes,
as any change in the fair value of the assets will be offset by a similar change
in the fair value of the liabilities. For products with uncertain timing of
benefit payments such as portfolio annuities and life insurance, the Company
invests in fixed income assets with expected cash flows that are earlier than
the expected timing of the benefit payments. The Company can then react to
changing interest rates sooner as these assets mature for reinvestment.
The Company also manages risk with interest rate derivatives such as interest
rate caps that pay when interest rates rise. These derivatives are only used to
reduce risk and are not used for speculative purposes.
To manage foreign currency exchange risk, the Company uses currency swaps to
convert the foreign currency back to United States dollars. These swaps are
purchased each time a foreign currency denominated asset is purchased.
The Company has estimated the possible effects of interest rate changes at
December 31, 1998. If interest rates increased by 100 basis points (1%), the
fair value of the fixed income assets would decrease by approximately $351
million. This calculation uses projected asset cash flows, discounted back to
December 31, 1998. The cash flow projections uses the Company's estimate of
prepayments on residential mortgages and other assets where the timing of the
borrower's repayment or prepayment might be affected by a change in interest
rates.
The Company administers separate account variable annuities for retirement
savings products. The Company collects a fee from each account, and this fee is
a percentage of the account balance. There is a market risk of lost fee revenue
to the Company if equity and bond markets decline. If the equity and bond
portfolios decline by 10%, the Company's fee revenue would decline by
approximately $10 million per year. The Company is managing this risk for 1999
with a derivative swap that pays the Company a fixed return in exchange for the
performance of a combination of equity and bond indexes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following are the Company's Consolidated Financial Statements for the Years
Ended December 31, 1998, 1997, and 1996 and the Independent Auditors' Report
thereon.
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(An indirect wholly-owned subsidiary of The Great-West Life Assurance Company)
Consolidated Financial Statements for the Years Ended December 31,
1998, 1997, and 1996 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 (an indirect wholly-owned subsidiary of The
Great-West Life Assurance Company) and subsidiaries as of December 31, 1998 and
1997, 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,
1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
January 25, 1999
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(Dollars in Thousands)
<TABLE>
<S> <C> <C>
1998 1997
-------------------- ------------------
ASSETS
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost (fair value
$2,298,936 and $2,151,476) $ 2,199,818 $ 2,082,716
Available-for-sale, at fair value (amortized
cost
$6,752,532 and $6,541,422) 6,936,726 6,698,629
Common stock, at fair value (cost $41,932 and 48,640 39,021
$34,414)
Mortgage loans on real estate, net 1,133,468 1,235,594
Real estate, net 73,042 93,775
Policy loans 2,858,673 2,657,116
Short-term investments, available-for-sale (cost
approximates fair value) 420,169 399,131
-------------------- ------------------
Total Investments 13,670,536 13,205,982
Cash 176,119 126,278
Reinsurance receivable
Related party 5,006 1,950
Other 187,952 82,414
Deferred policy acquisition costs 238,901 255,442
Investment income due and accrued 157,587 165,827
Other assets 311,078 121,543
Premiums in course of collection 84,940 77,008
Deferred income taxes 191,483 193,820
Separate account assets 10,099,543 7,847,451
-------------------- ------------------
TOTAL ASSETS $ 25,123,145 $ 22,077,715
==================== ==================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
1998 1997
------------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves
Related party 555,300 17,774
Other 11,284,414 11,084,945
Policy and contract claims 491,932 375,499
Policyholders' funds 181,779 165,106
Provision for policyholders' dividends 69,530 62,937
GENERAL LIABILITIES:
Due to Parent Corporation 52,877 126,656
Repurchase agreements 244,258 325,538
Commercial paper 39,731 54,058
Other liabilities 761,505 689,967
Undistributed earnings on participating business 143,717 141,865
Separate account liabilities 10,099,543 7,847,451
------------- ------------
Total Liabilities 23,924,586 20,891,796
------------- ------------
COMMITMENTS AND CONTINGENCIES
<TABLE>
<S> <C> <C>
1998 1997
STOCKHOLDER'S EQUITY: ------------- ------------
Preferred stock, $1 par value, 50,000,000 shares authorized
Series A, cumulative, 1,500 shares authorized,
liquidation value of $100,000 per share,
0 and 600 shares issued and outstanding 60,000
Series B, cumulative, 1,500 shares authorized,
liquidation value of $100,000 per share,
0 and 200 shares issued and outstanding 20,000
Series C, cumulative, 1,500 shares authorized,
none outstanding
Series D, cumulative, 1,500 shares authorized,
none outstanding
Series E, non-cumulative, 2,000,000 shares
authorized, liquidation value of $20.90 per share,
0 and 2,000,000 shares issued and outstanding 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 699,556 690,748
Accumulated other comprehensive income 61,560 52,807
Retained earnings 430,411 313,532
------------- --------------
Total Stockholder's Equity 1,198,559 1,185,919
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY 25,123,145 $ 22,077,715
============= ==============
</TABLE>
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
------------- ------------- -------------
REVENUES:
Premiums
Related party (net of premiums
recaptured totaling $0,
$155,798, and $164,839) $ 46,191 $ 155,798 $ 164,839
Other (net of premiums ceded
totaling $86,409, $61,152, and $60,589) 948,672 677,381 664,610
Fee income 516,052 420,730 347,519
Net investment income
Related party (9,416) (8,957) (26,082)
Other 906,776 890,630 860,719
Net realized gains (losses) on investments 38,173 9,800 (21,078)
------------- ------------- -------------
2,446,448 2,145,382 1,990,527
------------- ------------- -------------
BENEFITS AND EXPENSES:
Life and other policy benefits (net of
reinsurance recoveries totaling $81,205,
$44,871 and $52,675) 768,474 543,903 515,750
Increase in reserves
Related party 46,191 155,798 164,839
Other 78,851 90,013 64,359
Interest paid or credited to contractholders 491,616 527,784 561,786
Provision for policyholders' share of earnings
(losses) on participating business 5,908 3,753 (7)
Dividends to policyholders 71,429 63,799 49,237
------------- ------------- -------------
1,462,469 1,385,050 1,355,964
Commissions 144,246 102,150 106,561
Operating expenses (income):
Related party (4,542) (6,292) 304,599
Other 517,676 431,714 33,435
Premium taxes 30,848 24,153 25,021
------------- ------------- -------------
2,150,697 1,936,775 1,825,580
INCOME BEFORE INCOME TAXES 295,751 208,607 164,947
------------- ------------- -------------
PROVISION FOR INCOME TAXES:
Current 81,770 61,644 45,934
Deferred 17,066 (11,797) (15,562)
------------- ------------- -------------
98,836 49,847 30,372
------------- ------------- -------------
NET INCOME $ 196,915 $ 158,760 $ 134,575
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Additional Other
Preferred Stock Common Stock Paid-in Comprehensive Retained
-------------------------- -----------------------
Shares Amount Shares Amount Capital Income Earnings Total
------------ ----------- ----------- --------- ------------- ------------- ---------- ------------
BALANCE, JANUARY 1, 1996 2,000,800 121,800 7,032,000 7,032 657,265 58,763 148,261 993,121
Net income 134,575 134,575
Other comprehensive loss (43,812) (43,812)
------------
Total comprehensive income 90,763
------------
Capital contributions 7,000 7,000
Dividends (56,670) (56,670)
------------ ----------- ----------- --------- -------------------------------------- ------------
BALANCE, DECEMBER 31, 1996 2,000,800 121,800 7,032,000 7,032 664,265 14,951 226,166 1,034,214
Net income 158,760 158,760
Other comprehensive income 37,856 37,856
------------
Total comprehensive income 196,616
------------
Capital contributions 26,483 26,483
Dividends (71,394) (71,394)
------------ ----------- ----------- --------- ------------- ------------- ---------- ------------
BALANCE, DECEMBER 31, 1997 2,000,800 121,800 7,032,000 7,032 690,748 52,807 313,532 1,185,919
Net income 196,915 196,915
Other comprehensive income 8,753 8,753
------------
Total comprehensive income 205,668
------------
Capital contributions 8,808 8,808
Dividends (80,036) (80,036)
Purchase of preferred shares (2,000,800) (121,800) (121,800)
------------ ----------- ----------- --------- ------------ -------------- ---------- ------------
BALANCE, DECEMBER 31, 1998 0 0 7,032,000 7,032 699,556 61,560 430,411 1,198,559
============ =========== =========== ========= =========== =============== ========== ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
87
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
------------- ------------- ------------
OPERATING ACTIVITIES:
Net income $ 196,915 $ 158,760 $ 134,575
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain (loss) allocated to participating
policyholders 5,908 3,753 (7)
Amortization of investments (15,068) 409 15,518
Realized losses (gains) on disposal of
investments and provisions for mortgage
loans and real estate (38,173) (9,800) 21,078
Amortization 55,550 46,929 49,454
Deferred income taxes 17,066 (11,824) (14,658)
Changes in assets and liabilities:
Policy benefit liabilities 938,444 498,114 358,393
Reinsurance receivable (43,643) 112,594 136,966
Accrued interest and other receivables 28,467 30,299 24,778
Other, net (184,536) 64,465 (13,676)
------------- ------------- ------------
Net cash provided by operating activities 960,930 893,699 712,421
------------- ------------- ------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to maturity
Sales 9,920
Maturities and redemptions 471,432 359,021 516,838
Available-for-sale
Sales 6,169,678 3,174,246 3,569,608
Maturities and redemptions 1,268,323 771,737 803,369
Mortgage loans 211,026 248,170 235,907
Real estate 16,456 36,624 2,607
Common stock 3,814 17,211 1,888
Purchases of investments:
Fixed maturities
Held-to-maturity (584,092) (439,269) (453,787)
Available-for-sale (7,410,485) (4,314,722) (4,753,154)
Mortgage loans (100,240) (2,532) (23,237)
Real estate (4,581) (64,205) (15,588)
Common stock (10,020) (29,608) (12,113)
------------- ------------- ------------
Net cash provided by (used in)
investing activities $ 41,231 $ (243,327) $ (127,662)
============= ============= ============
</TABLE>
(Continued)
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
-------------- -------------- -------------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (507,237) $ (577,538) $ (413,568)
Due to Parent Corporation (73,779) (19,522) 1,457
Dividends paid (80,036) (71,394) (56,670)
Net commercial paper repayments (14,327) (30,624) (172)
Net repurchase agreements (repayments)
borrowings (81,280) 38,802 (88,563)
Capital contributions 8,808 11,000 7,000
Purchase of preferred shares (121,800)
Acquisition of subsidiary (82,669)
-------------- -------------- -------------
-------------- -------------- -------------
Net cash used in financing activities (952,320) (649,276) (550,516)
-------------- -------------- -------------
NET INCREASE IN CASH 49,841 1,096 34,243
CASH, BEGINNING OF YEAR 126,278 125,182 90,939
-------------- -------------- -------------
CASH, END OF YEAR $ 176,119 $ 126,278 $ 125,182
============== ============== =============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 111,493 $ 86,829 $ 103,700
Interest 13,849 15,124 15,414
</TABLE>
See notes to consolidated financial statements. (Concluded)
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997,
AND 1996 (Amounts in Thousands, except Share Amounts)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Great-West Life & Annuity Insurance Company (the Company)
is an indirect 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.
Certain reclassifications, primarily related to the presentation of
related party transactions and the classification of the release of a
contingent liability (see Note 10) have been made to the 1997 and 1996
financial statements.
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 accumulated other comprehensive income in
stockholder's equity. The net unrealized gains and losses on
derivative financial instruments used to hedge available-for-sale
securities are also included in other comprehensive income.
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 losses inherent in the loan 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 cost. The carrying value of real estate
is subject to periodic evaluation of recoverability.
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.
7. 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
primarily consist of sales commissions related to the production of new
and renewal business, have been deferred to the extent recoverable.
Other costs capitalized include expenses associated with the Company's
group sales representatives. These costs are variable in nature and are
dependent upon sales volume. 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 $51,724,
$44,298, and $47,089 in 1998, 1997, and 1996, respectively.
Separate Accounts - 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. Investment income and realized capital
gains and losses of the separate accounts accrue directly to the
contractholders and, therefore, are not included in the Company's
statements of income. Revenues to the Company from the separate accounts
consist of contract maintenance fees, administrative fees, and mortality
and expense risk charges.
Life Insurance and Annuity Reserves - Life insurance and annuity policy
reserves with life contingencies of $6,866,478 and $5,741,596 at
December 31, 1998 and 1997, 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
$4,908,964 and $5,346,516 at December 31, 1998 and 1997, respectively,
are established at the contractholder's account value.
Reinsurance - Policy reserves ceded to other insurance companies are
carried as a 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 life and health 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 $4,108,314 and $3,901,297 at December 31, 1998 and 1997,
respectively. Participating business approximates 32.7% and 50.5% of the
Company's ordinary life insurance in force and 71.9% and 91.1% of
ordinary life insurance premium income at December 31, 1998 and 1997,
respectively.
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 net of a management fee paid to the Company accrue solely for the
benefit of the acquired participating policyholders.
Recognition of Premium and Fee Income and Benefits and Expenses - Life
insurance premiums are recognized when due. 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. Fee income is derived primarily from
contracts for claim processing or other administrative services and from
assets under management. Fees from contracts for claim processing or
other administrative services are recorded as the services are provided.
Fees from assets under management, which consist of contract maintenance
fees, administration fees and mortality and expense risk changes, are
recognized when due. Benefits and expenses on policies with life
contingencies impact 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 6.3%, 6.6%, and 6.8% in 1998, 1997, and 1996.
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 requires collateral in an amount greater than or equal to
102% of the borrowing for all securities lending transactions.
The Company implemented 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. The
implementation of this statement had no material effect 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 is 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.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting
for Derivative Instruments and for Hedging Activities". This Statement
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. This Statement is
effective for the Company beginning January 1, 2000, and earlier
adoption is encouraged. The Company has not adopted this Statement as of
December 31, 1998. Management has not determined the impact of the
Statement on the Company's financial position or results of operations.
Stock Options - In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation", which was effective for the
Company beginning January 1, 1996. This Statement requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured based
on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company has continued to apply APB Opinion No.
25 to stock-based compensation awards to employees and has disclosed the
required pro forma effect on net income (see Note 13).
2. ACQUISITION
On July 8, 1998, the Company paid $82,669 in cash to acquire all of the
outstanding shares of Anthem Health & Life Insurance Company (AH&L). The
purchase price was based on AH&L's adjusted book value, and is subject
to further minor adjustments. The results of AH&L's operations, which
had an insignificant effect on net income, have been combined with those
of the Company since the date of acquisition.
The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to the net
assets acquired based on their estimated fair values. The fair value of
tangible assets acquired and liabilities assumed was $379,934 and
$317,440, respectively. The balance of the purchase price, $20,175, was
recorded as excess cost over net assets acquired (goodwill) and is being
amortized over 30 years on a straight-line basis. Management intends to
finalize its allocation of the purchase price within a year of the
transaction, which will likely result in a reallocation of the purchase
price, which is not expected to be material.
3. RELATED-PARTY TRANSACTIONS
On December 31, 1998, the Company and the Parent Corporation entered
into an Indemnity Reinsurance Agreement pursuant to which the Company
reinsured by coinsurance certain Parent Corporation individual
non-participating life insurance policies. The Company recorded $859 in
premium income and an increase in reserves, associated with certain
policies, as a result of this transaction. Of the $137,638 in reserves
that were recorded as a result of this transaction, $136,779 was
recorded under SFAS No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains
and Losses from the Sale of Investments" ("SFAS No. 97"), accounting
principles. The Company recorded, at the Parent Corporation's carrying
amount, which approximates estimated fair value, the following at
December 31, 1998 as a result of this transaction:
Assets Liabilities and Stockholder's Equity
Cash 24,600 Policy reserves 137,638
Deferred income taxes 3,816
Policy loans 82,649
Due from Parent Corporation 19,753
Other 6,820
----------- -----------
137,638 137,638
In connection with this transaction, the Parent Corporation made a
capital contribution of $5,608 to the Company.
On September 30, 1998, the Company and the Parent Corporation entered
into an Indemnity Reinsurance Agreement pursuant to which the Company
reinsured by coinsurance certain Parent Corporation individual
non-participating life insurance policies. The Company recorded $45,332
in premium income and an increase in reserves as a result of this
transaction. Of the $428,152 in reserves that were recorded as a result
of this transaction, $382,820 was recorded under SFAS No. 97 accounting
principles. The Company recorded, at the Parent Corporation's carrying
amount, which approximates estimated fair value, the following at
September 30, 1998 as a result of this transaction:
Assets Liabilities and Stockholder's Equity
<TABLE>
<S> <C> <C>
Bonds $ 147,475 Policy reserves $ 428,152
Mortgages 82,637 Due to Parent Corporation 20,820
Cash 134,900
Deferred policy acquisition 9,724
costs
Deferred income taxes 15,762
Policy loans 56,209
Other 2,265
---------- -----------
$ 448,972 $ 448,972
</TABLE>
In connection with this transaction, the Parent Corporation made a
capital contribution of $3,200 to the Company.
On September 30, 1998, the Company purchased furniture, fixtures and
equipment from the Parent Corporation for $25,184. In February 1997, the
Company purchased the corporate headquarters properties from the Parent
Corporation for $63,700.
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 $155,798 in premium income and an increase in reserves as a
result of this transaction. The Company recorded, at the Parent
Corporation's carrying amount, which approximates estimated fair value,
the following at June 30, 1997 as a result of this transaction:
Assets Liabilities and Stockholder's Equity
Cash 160,000 Policy reserves 155,798
Bonds 17,975 Due to Parent Corporation 20,373
Other 60 Deferred income taxes 2,719
Undistributed earnings on
participating business (855)
----------- ---------------
178,035 178,035
In connection with this transaction, the Parent Corporation made a
capital contribution of $11,000 to the Company.
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 $164,839 in premium income and an increase in reserves as a
result of this transaction. The Company recorded, at the Parent
Corporation's carrying amount, which approximates estimated fair value,
the following at October 31, 1996 as a result of this transaction:
Assets Liabilities and Stockholder's Equity
Cash 162,000 Policy reserves 164,839
Mortgages 19,753 Due to Parent Corporation 16,180
Other 118 Deferred income taxes 1,283
Undistributed earnings on
participating business (431)
------------ --------------
181,871 181,871
In connection with this transaction, the Parent Corporation made a
capital contribution of $7,000 to the Company.
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 actual
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. Since
January 1, 1997, the Company has performed these services for the U.S.
operations of the Parent Corporation. The following represents revenue
from or payments made to the Parent Corporation for services provided
pursuant to these service agreements. The amounts recorded are based
upon management's best estimate of actual costs incurred and resources
expended based upon number of policies and/or certificates in force.
<TABLE>
Years Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------
1998 1997 1996
------------ ------------ ------------
Investment management revenue (expense) $ 475 $ 801 $ (14,800)
Administrative and underwriting revenue
(payments) 4,542 6,292 (304,599)
</TABLE>
At December 31, 1998 and 1997, due to Parent Corporation includes
$17,930 and $8,957 due on demand and $34,947 and $117,699 of notes
payable which bear interest and mature at various dates through June 15,
2008. 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
amounts due on demand to the Parent Corporation bear interest at the
public bond rate (6.1% and 7.1% at December 31, 1998 and 1997,
respectively) while the remainder bear interest at various rates ranging
from 5.4% to 6.6%. Interest expense attributable to these payables was
$9,891, $9,758, and $11,282 for the years ended December 31, 1998, 1997
and 1996, respectively.
4. 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. 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, 1998 and
1997, the reinsurance receivable had a carrying value of $192,958 and
$84,364, respectively.
The following schedule details life insurance in force and life and
accident/health premiums:
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ceded Assumed Percentage
Primarily to Primarily of Amount
Gross the Parent from Other Net Assumed
Amount Corporation Companies Amount to Net
------------- ------------- ------------- ------------- ------------
December 31, 1998:
Life insurance in force:
Individual $ 34,017,379 $ 4,785,079 $ 8,948,442 $ 38,180,742 23.44%
Group 81,907,539 2,213,372 84,120,911 2.63%
============= ============= ============= =============
Total $ 115,924,918 $ 4,785,079 $ 11,161,814 $ 122,301,653
============= ============= ============= =============
Premium Income:
Life $ 352,710 $ 24,720 $ 65,452 $ 393,442 16.6%
insurance
571,992 61,689 74,284 584,587 12.7%
Accident/health
============= ============= ============= =============
Total $ 924,702 $ 86,409 $ 139,736 $ 978,029
============= ============= ============= =============
December 31, 1997:
Life insurance in force:
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
============= ============= ============= =============
Premium Income:
Life $ 320,456 $ (127,388) $ 19,923 $ 467,767 4.1%
insurance
341,837 32,645 34,994 344,186 10.0%
Accident/health
============= ============= ============= =============
Total $ 662,293 $ (94,743) $ 54,917 $ 811,953
============= ============= ============= =============
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
============= ============= ============= =============
Premium Income:
Life $ 307,516 $ (111,743) $ 19,633 $ 438,892 4.2%
insurance
339,284 7,493 34,242 366,033 9.4%
Accident/health
============= ============= ============= =============
Total $ 646,800 $ (104,250) $ 53,875 $ 804,925
============= ============= ============= =============
</TABLE>
<PAGE>
5. NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS
Net investment income is summarized as follows:
<TABLE>
Years Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
Investment income:
Fixed maturities and short-term $ 638,079 $ 633,975 $ 601,913
investments
Mortgage loans on real estate 110,170 118,274 140,823
Real estate 20,019 20,990 5,292
Policy loans 180,933 194,826 175,746
Other 285 18 1,316
------------- ------------- -------------
949,486 968,083 925,090
Investment expenses, including interest
on
amounts charged by the Parent 52,126 86,410 90,453
Corporation
of $9,891, $9,758, and $11,282
------------- ------------- -------------
Net investment income $ 897,360 $ 881,673 $ 834,637
============= ============= =============
Net realized gains (losses) on investments are as follows:
Years Ended December 31,
-------------------------------------------
1998 1997 1996
------------- ------------ --------------
Realized gains (losses):
Fixed maturities $ 38,391 $ 15,966 $ (11,624)
Mortgage loans on real estate 424 1,081 1,143
Real estate 363
Provisions (642) (7,610) (10,597)
============= ============ ==============
Net realized gains (losses) on investment $ 38,173 $ 9,800 $ (21,078)
============= ============ ==============
<PAGE>
6. SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 1998 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ------------ ----------- ----------- -----------
Held-to-Maturity:
U.S. Treasury
Securities
and obligations of $ 34,374 $ 1,822 $ $ 36,196 $ 34,374
U.S.
Government Agencies
Collateralized mortgage
obligations 194
10,135 9,941 10,135
Public utilities 213,256 12,999 460 225,795 213,256
Corporate bonds 1,809,957 78,854 3,983 1,884,828 1,809,957
Foreign governments 782
10,133 10,915 10,133
State and 121,963 9,298 131,261 121,963
municipalities
----------- ------------ ----------- ----------- -----------
$ 2,199,818 $ 103,755 $ 4,637 $ 2,298,936 $ 2,199,818
=========== ============ ========= =========== ===========
Available-for-Sale:
U.S. Treasury
Securities
and obligations of
U.S.
Government Agencies:
Collateralized
mortgage
obligations $ 863,479 $ 39,855 $ 1,704 $ 901,630 $ 901,630
Direct mortgage
pass-
through 467,100 4,344 692 470,752 470,752
certificates
Other 191,138 1,765 788 192,115 192,115
Collateralized mortgage
obligations 926,797 16,260 1,949 941,108 941,108
Public utilities 464,096 14,929 36 478,989 478,989
Corporate bonds 3,557,209 123,318 17,420 3,663,107 3,663,107
Foreign governments 2,732
56,505 59,237 59,237
State and 226,208 4,588 1,008 229,788 229,788
municipalities
----------- ------------ ----------- ----------- -----------
$ 6,752,532 $ 207,791 $ 23,597 $ 6,936,726 $ 6,936,726
=========== ============ =========== =========== ===========
Fixed maturities owned at December 31, 1997 are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
----------- ------------ ------------ ----------- -----------
Held-to-Maturity:
U.S. Treasury
Securities
and obligations of
U.S.
Government Agencies $ $ 1,186 $ 25 $ $
25,883 27,044 25,883
Collateralized
mortgage
obligations 174
5,006 5,180 5,006
Public utilities 11,214 3 256,605 245,394
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 1,588 129,043 127,455
municipalities 127,455
----------- ------------ ------------ ----------- -----------
$ 2,082,716 $ 71,857 $ 3,097 $ 2,151,476 $ 2,082,716
=========== ============ ============ =========== ===========
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
------------ ----------- ----------- ----------- -----------
Available-for-Sale:
U.S. Treasury Securities
and obligations of
U.S.
Government Agencies:
Collateralized
mortgage
obligations $ $ 17,339 $ 310 $ 670,004 $ 670,004
652,975
Direct mortgage
pass-
through 7,911 2,668 922,459 922,459
certificates 917,216
Other 1,794 244 298,887 298,887
297,337
Collateralized mortgage
obligations 19,494 1,453 700,199 700,199
682,158
Public utilities 8,716 1,320 556,831 556,831
549,435
Corporate bonds 3,265,039 107,740 4,350 3,368,429 3,368,429
Foreign governments 4,115 60 135,641 135,641
131,586
State and municipalities 503 46,179 46,179
45,676
------------ ----------- ----------- ----------- -----------
$ 6,541,422 $ 167,612 $ 10,405 $ 6,698,629 $ 6,698,629
============ =========== =========== =========== ===========
</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.
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, 1998, 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.
Held-to-Maturity Available-for-Sale
------------------------------ --------- --------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
------------- -------------- ------------ --------------
Due in one year or less 316,174 321,228 235,842 252,067
Due after one year
through five years 925,016 961,592 1,279,123 1,309,202
Due after five years
through ten years 675,444 722,685 769,278 803,498
Due after ten years 130,480 138,119 449,273 457,785
Mortgage-backed
securities 10,135 9,941 2,257,376 2,313,490
Asset-backed securities 142,569 145,371 1,761,640 1,800,684
============= ============== ============= =============
2,199,818 2,298,936 6,752,532 6,936,726
============= ============== ============= =============
Proceeds from sales of securities available-for-sale were $6,169,678,
$3,174,246, and $3,569,608 during 1998, 1997, and 1996, respectively. The
realized gains on such sales totaled $41,136, $20,543, and $24,919 for
1998, 1997, and 1996, respectively. The realized losses totaled $8,643,
$10,643, and $40,748 for 1998, 1997, and 1996, respectively. During the
years 1998, 1997, and 1996 held-to-maturity securities with an amortized
cost of $9,920, $0, and $0 were sold due to credit deterioration with
insignificant gains and losses.
At December 31, 1998 and 1997, pursuant to fully collateralized securities
lending arrangements, the Company had loaned $115,168 and $162,817 of
fixed maturities, respectively.
The Company engages in hedging activities to manage interest rate and
exchange risk. The following table summarizes the 1998 financial hedge
instruments:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Notional Strike/Swap
December 31, 1998 Amount Rate Maturity
------------------------ -------------- ------------------------- ---------------------
Interest Rate Floor $ 100,000 4.50% (LIBOR) 11/99
Interest Rate Caps 1,070,000 6.75% - 11.82% (CMT) 12/99 - 10/03
Interest Rate Swaps 242,451 4.95% - 9.35% 08/99 - 02/03
Foreign Currency
Exchange Contracts 34,123 N/A 05/99 - 07/06
Equity Swap 95,652 4.00% 12/99
The following table summarizes the 1997 financial hedge instruments:
Notional Strike/Swap
December 31, 1997 Amount Rate Maturity
------------------------ -------------- -------------------------- ---------------------
Interest Rate Floor $ 100,000 4.5% (LIBOR) 1999
Interest Rate Caps 565,000 6.75% - 11.82% (CMT) 1999 - 2002
Interest Rate Swaps 212,139 6.20% - 9.35% 01/98 - 02/03
Foreign Currency
Exchange Contracts 57,168 N/A 09/98 - 07/06
Equity Swap 100,000 5.64% 12/98
</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, 1998, approximately 33% of the
Company's mortgage loans were collateralized by real estate located in
California.
The following represents impairments and other information with respect to
impaired loans:
<TABLE>
<S> <C> <C>
1998 1997
--------------- -------------
Loans with related allowance for credit losses of
$2,492 and $2,493 $ 13,192 $ 13,193
Loans with no related allowance for credit losses 10,420 20,013
Average balance of impaired loans during the year 31,193 37,890
Interest income recognized (while impaired) 2,308 2,428
Interest income received and recorded (while impaired)
using the cash basis method of recognition 2,309 2,484
</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 modify the original terms of certain loans. These
restructured loans, all performing in accordance with their modified terms
that are not impaired, aggregated $52,913 and $64,406 at December 31, 1998
and 1997, respectively.
<PAGE>
The following table presents changes in allowance for credit losses:
1998 1997 1996
------------- ------------- --------------
Balance, beginning of year 67,242 65,242 63,994
Provision for loan losses 642 4,521 4,470
Chargeoffs (787) (2,521) (3,468)
Recoveries 145 246
============= ============= ==============
Balance, end of year 67,242 67,242 65,242
============= ============= ==============
7. COMMERCIAL PAPER
The Company has a commercial paper program that is partially supported by
a $50,000 standby letter-of-credit. At December 31, 1998, commercial paper
outstanding had maturities ranging from 69 to 118 days and interest rates
ranging from 5.10% to 5.22%. At December 31, 1997, maturities ranged from
41 to 99 days and interest rates ranged from 5.6% to 5.8%.
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
December 31,
<S> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------
1998 1997
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------- ------------- -------------
ASSETS:
Fixed maturities and
short-term investments $ 9,556,713 $ 9,655,831 $ 9,180,476 $ 9,249,235
Mortgage loans on real
estate 1,133,468 1,160,568 1,235,594 1,261,949
Policy loans 2,858,673 2,858,673 2,657,116 2,657,116
Common stock 48,640 48,640 39,021 39,021
LIABILITIES:
Annuity contract reserves
without life contingencies 4,908,964 4,928,800 5,346,516 5,373,818
Policyholders' funds 181,779 181,779 165,106 165,106
Due to Parent Corporation 52,877 52,877 126,656 124,776
Repurchase agreements 244,258 244,258 325,538 325,538
Commercial paper 39,731 39,731 54,058 54,058
HEDGE CONTRACTS:
Interest rate floor 17 17 25 25
Interest rate caps 971 971 130 130
Interest rate swaps 6,125 6,125 4,265 4,265
Foreign currency exchange
contracts 689 689 3,381 3,381
Equity swap (8,150) (8,150) 856 856
</TABLE>
The estimated fair value of financial instruments have been determined
using available information and appropriate valuation methodologies.
However, considerable judgement is necessarily required to interpret
market data to develop 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 crediting 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 of
unrealized losses in 1998 and 1997. Included in the net gain position for
foreign currency exchange contracts are $932 and $0 of loss exposures in
1998 and 1997, 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 3 for further discussion.
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 U.S. generally accepted
accounting principles do not materially differ from these CICA guidelines
and the transfer was between related parties, the prepaid pension asset
was transferred at carrying value. As a result, the Company recorded the
following effective January 1, 1997:
Prepaid pension cost 19,091 Undistributed earnings on 3,608
participating business
Stockholder's equity 15,483
------------ -----------
19,091 19,091
The following table summarizes changes from 1997 to 1998 and from 1996 to
1997, in the benefit obligations and in plan assets for the Company's
defined benefit pension plan and post-retirement medical plan. There is no
additional minimum pension liability required to be recognized. There were
no amendments to the plans due to the acquisition of AH&L.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Post-Retirement
Pension Benefits Medical Plan
------------------------- ------------------------
1998 1997 1998 1997
----------- ------------ ----------- -----------
Change in benefit obligation
Benefit obligation at beginning of $ 115,057 $ 96,417 $ 19,454 $ 16,160
year
Service cost 6,834 5,491 1,365 1,158
Interest cost 7,927 7,103 1,341 1,191
Actuarial gain (loss) 5,117 9,470 (1,613) 1,500
Benefits paid (3,630) (3,424) (603) (555)
----------- ------------ ----------- -----------
Benefit obligation at end of year 131,305 115,057 19,944 19,454
----------- ------------ ----------- -----------
Change in plan assets
Fair value of plan assets at
beginning of year 162,879 138,221
Actual return on plan assets 23,887 28,082
Benefits paid (3,630) (3,424)
----------- ------------ ----------- -----------
Fair value of plan assets at end of
year 183,136 162,879
----------- ------------ ----------- -----------
Funded status 51,831 47,822 (19,944) (19,454)
Unrecognized net actuarial loss (11,405) (6,326) (113) 1,500
Unrecognized net obligation or
(asset)
at transition (19,684) (21,198) 14,544 15,352
=========== ============ =========== ===========
Prepaid (accrued) benefit cost $ 20,742 $ 20,298 $ (5,513) $ (2,602)
=========== ============ =========== ===========
Weighted-average assumptions as of
December 31
Discount rate 6.50% 7.00% 6.50% 7.00%
Expected return on plan assets 8.50% 8.50% 8.50% 8.50%
Rate of compensation increase 4.00% 4.50% 4.00% 4.50%
Components of net periodic
benefit cost
Service cost $ 6,834 $ 5,491 $ 1,365 $ 1,158
Interest cost 7,927 7,103 1,341 1,191
Expected return on plan assets (13,691) (12,286)
Amortization of transition (1,514) (1,514) 808 808
obligation
----------- ----------- ---------- ----------
=========== =========== ========== ==========
Net periodic (benefit) cost $ (444) $ (1,206) $ 3,514 $ 3,157
=========== =========== ========== ==========
</TABLE>
The Company-sponsored post-retirement medical plan (medical plan) provides
health benefits to employees. 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.
<PAGE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the medical plan. For measurement purposes, a 6.5% annual
rate of increase in the per capita cost of covered health care benefits
was assumed. A one-percentage-point change in assumed health care cost
trend rates would have the following effects:
1-Percentage 1-Percentage
Point Point
Increase Decrease
-------------- ----------------
Effect on total of service and interest cost
on components 649 1,140
Effect on post-retirement benefit obligation 4,129 3,098
The Company sponsors a defined contribution 401(k) retirement plan which
provides eligible participants with the opportunity to defer up to 15% of
base compensation. The Company matches 50% of the first 5% of participant
pre-tax contributions. Company contributions for the years ended December
31, 1998 and 1997 totaled $3,915 and $3,475, respectively.
The Company has a deferred compensation plan providing key executives with
the opportunity to participate in an unfunded, deferred compensation
program. Under the program, participants may defer base compensation and
bonuses, and earn interest on their deferred amounts. The program is not
qualified under Section 401 of the Internal Revenue Code. The total of
participant deferrals, which is reflected in other liabilities, was
$16,102 and $13,952 at December 31, 1998 and 1997, respectively. The
participant deferrals earn interest at a rate based on the average 10-year
composite government securities rate plus 1.5%. The interest expense
related to this plan was $1,185 and $1,019 in 1998 and 1997, respectively.
The Company also provides a supplemental executive retirement plan (SERP)
to certain key executives. This plan provides key executives with certain
benefits upon retirement, disability, or death based upon total
compensation. The Company has purchased individual life insurance policies
with respect to each employee covered by this plan. The Company is the
owner and beneficiary of the insurance contracts. The incremental expense
for this plan for 1998 and 1997 was $2,840 and $2,531, respectively. The
total liability of $9,349 and $6,509 as of December 31, 1998 and 1997 is
included in other liabilities.
10. FEDERAL INCOME TAXES
The following is a reconciliation between the federal income tax rate and
the Company's effective rate after giving effect to the reclassifications
discussed below:
1998 1997 1996
----------- ----------- ---------
Federal tax rate 35.0 % 35.0 % 35.0 %
Change in tax rate resulting from:
Settlement of Parent tax exposures (20.2) (18.9)
Provision for contingencies 7.7 3.4
Prior year tax adjustment (1.5) 0.5 (1.4)
Other, net (0.1) 0.9 0.3
=========== =========== =========
Total 33.4 % 23.9 % 18.4 %
=========== =========== =========
The Company's income tax provision was favorably impacted in 1997 and 1996
by releases of contingent liabilities relating to taxes of the Parent
Corporation's U.S. branch associated with blocks of business that were
transferred from the Parent Corporation's U.S. branch to the Company from
1989 to 1993; the Company had agreed to the transfer of these tax
liabilities as part of the transfer of this business. The releases
recorded in 1997 and 1996 reflected the resolution of certain tax issues
with the Internal Revenue Service (IRS) relating to the 1990-1991 and
1988-1989 audit years, respectively. The releases totaled $42,150 for 1997
and $31,200 for 1996; however, $15,100 of the release in 1997 was
attributable to participating policyholders and therefore had no effect on
the net income of the Company since that amount was credited to the
provision for policyholders' share of earnings (losses).
The 1997 and 1996 releases were recorded in revenues in the Company's
prior financial statements, but have been reclassified in the accompanying
consolidated financial statements as a component of the current income tax
provisions for those years.
In addition to these releases of contingent tax liabilities, the Company's
income tax provisions for 1997 and 1996 also reflect increases for other
contingent items relating to open tax years where the Company determined
it was probable that additional taxes could be owed based on changes in
facts and circumstances. The increase in 1997 was $16,000, of which
$10,100 was attributable to participating policyholders and therefore had
no effect on the net income of the Company. The increase in 1996 was
$5,600. These increases in contingent tax liabilities have been reflected
as a component of the deferred income tax provisions for 1997 and 1996 as
the Company does not expect near term resolution of these contingencies.
Excluding the effect of the 1997 and 1996 tax items discussed above, the
effective tax rates for 1997 and 1996 were 34.1% and 33.9%, respectively.
Temporary differences which give rise to the deferred tax assets and
liabilities as of December 31, 1998 and 1997 are as follows:
<TABLE>
<S> <C> <C>
1998 1997
--------------------------- -------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
------------- ------------ ------------ -----------
Policyholder reserves 143,244 159,767
Deferred policy acquisition costs 39,933 47,463
Deferred acquisition cost proxy
tax 100,387 79,954
Investment assets 19,870 5,574
Net operating loss carryforwards 2,867 9,427
Other 6,566 1,279
------------- ------------ ------------ -----------
Subtotal 253,064 59,803 250,427 53,037
Valuation allowance (1,778) (3,570)
============= ============ ============ ===========
Total Deferred Taxes 251,286 59,803 246,857 53,037
============= ============ ============ ===========
</TABLE>
Amounts included in investment assets above include $34,556 and $30,085
related to the unrealized gains on the Company's fixed maturities
available-for-sale at December 31, 1998 and 1997, 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, 1998, the Company's subsidiaries had approximately $8,193 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 $0 and $1,809 are included in the deferred tax
assets at December 31, 1998 and 1997, respectively.
The Company's valuation allowance was increased (decreased) in 1998, 1997,
and 1996 by $(1,792), $34, and $1,463, respectively, as a result of the
re-evaluation by management of future estimated taxable income in its
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.
11. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income". This
Statement establishes new rules for reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no
impact on the Company's net income or stockholders' equity. This Statement
requires unrealized gains or losses on the Company's available-for-sale
securities and related offsets for reserves and deferred policy
acquisition costs, which prior to adoption were reported separately in
stockholder's equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the
requirements of Statement No. 130.
Other comprehensive income at December 31, 1998 is summarized as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
-------------- ------------------------------
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising
during
the period $ 39,430 $ (13,800) $ 25,630
Less: reclassification adjustment
for
(gains) losses realized in net (14,350) 5,022 (9,328)
income
-------------- ---------------- ------------
Net unrealized gains 25,080 (8,778) 16,302
Reserve and DAC adjustment (11,614) 4,065 (7,549)
-------------- ---------------- ------------
============== ================ ============
Other comprehensive income $ 13,466 $ (4,713) $ 8,753
============== ================ ============
Other comprehensive income at December 31, 1997 is summarized as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
-------------- ---------------- --------------
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising
during
the period $ 80,821 $ (28,313) $ 52,508
Less: reclassification adjustment
for
(gains) losses realized in net 2,012 (704) 1,308
income
-------------- ---------------- --------------
Net unrealized gains 82,833 (29,017) 53,816
Reserve and DAC adjustment (24,554) 8,594 (15,960)
============== ================ ==============
Other comprehensive income $ 58,279 $ (20,423) $ 37,856
============== ================ ==============
Other comprehensive loss at December 31, 1996 is summarized as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
-------------- ---------------- --------------
Unrealized gains on available-for-sale securities:
Unrealized holding gains (losses)
arising during the period $ (125,559) $ 43,971 $ (81,588)
Less: reclassification adjustment
for
(gains) losses realized in net 19,381 (6,783) 12,598
income
-------------- ---------------- --------------
Net unrealized gains (losses) (106,178) 37,188 (68,990)
--------------
Reserve and DAC adjustment 38,736 (13,558) 25,178
============== ================ ==============
Other comprehensive loss $ (67,442) $ 23,630 $ (43,812)
============== ================ ==============
</TABLE>
12. STOCKHOLDER'S EQUITY, DIVIDEND RESTRICTIONS, AND OTHER MATTERS
Effective September 30, 1998, the Company purchased all of its outstanding
series of preferred stock, which were owned by the Parent Corporation, for
$121,800.
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:
1998 1997 1996
--------------- ------------- -------------
(Unaudited)
Net income 225,863 $ 181,312 $ 180,634
Capital and surplus 727,124 759,429 713,324
The maximum amount of dividends which can be paid to stockholders by
insurance companies domiciled in the State of Colorado are subject to
restrictions relating to statutory surplus and statutory net gain from
operations. Statutory surplus and net gains from operations at December
31, 1998 were $727,124 and $225,586 (unaudited), respectively. The Company
should be able to pay up to $225,586 (unaudited) of dividends in 1999.
Dividends of $6,692, $8,854, and $8,587 were paid on preferred stock in
1998, 1997, and 1996, respectively. In addition, dividends of $73,344,
$62,540, and $48,083 were paid on common stock in 1998, 1997, and 1996,
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.
13. STOCK OPTIONS
The Company is an indirect subsidiary of Great-West Lifeco Inc. (Lifeco).
Lifeco has a stock option plan (the Lifeco plan) that provides for the
granting of options for common shares of Lifeco to certain officers and
employees of Lifeco and its subsidiaries, including the Company. Options
may be awarded at no less than the market price on the date of the grant.
Termination of employment prior to vesting results in forfeiture of the
options, unless otherwise determined by a committee that administers the
Lifeco plan. As of December 31, 1998, 1997 and 1996, stock available for
award under the Lifeco plan aggregated 1,424,400, 3,440,000 and 6,244,000
shares.
The plan provides for the granting of options with varying terms and
vesting requirements. The basic options under the plan become exercisable
twenty percent per year commencing on the first anniversary of the grant
and expire ten years from the date of grant. Options granted in 1997 and
1998 totaling 1,832,000 and 278,000, respectively, become exercisable if
certain long-term cumulative financial targets are attained. If
exercisable, the exercise period runs from April 1, 2002 to June 26, 2007.
Additional options granted in 1998 totaling 380,000 become exercisable if
certain sales or financial targets are attained. During 1998, 30,000 of
these options vested and accordingly, the Company recognized compensation
expense of $116. If exercisable, the exercise period runs from the date
that the particular options become exercisable until January 27, 2008.
The following table summarizes the status of, and changes in, Lifeco
options outstanding and the weighted-average exercise price (WAEP) for the
years ended December 31. As the options granted relate to Canadian stock,
the values, which are presented in U.S. dollars, will fluctuate as a
result of exchange rate fluctuations:
<PAGE>
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---------------------- ---------------------- ----------------------
Options WAEP Options WAEP Options WAEP
------------ -------- ----------- -------- ----------- ---------
Outstanding, Jan. 1, 5,736,000 $ 7.71 4,104,000 $ 6.22 0 $ .00
Granted 988,000 13.90 1,932,000 10.82 4,104,000 6.62
Exercised 99,176 6.33 16,000 5.95 0 .00
Expired or canceled 80,000 13.05 284,000 6.12 0 .00
============ ======== =========== ======== =========== =========
Outstanding, Dec. 31, 6,544,824 8.07 5,736,000 7.71 4,104,000 6.22
============ ======== =========== ======== =========== =========
Options exercisable
at year-end 1,652,424 $ 5.72 760,800 $ 5.96 0 $ .00
============ ======== =========== ======== =========== =========
Weighted average fair
value of options
granted during year $ 1.18 $ 2.65 $ 4.46
============ =========== ===========
The following table summarizes the range of exercise prices for
outstanding Lifeco common stock options at December 31, 1998:
Outstanding Exercisable
---------------------------------------- ----------------------------
Average Average
Exercise Average Exercise Exercise
Price Range Options Life Price Options Price
------------------- -------------- ---------- ----------- ------------- ------------
$ 5.54 - $ 7.36 3,804,824 7.62 $ 5.61 1,622,424 $ 5.58
$10.61 - $13.23 2,740,000 8.70 $ 11.48 30,000 $ 13.23
</TABLE>
Of the exercisable Lifeco options, 1,622,424 relate to basic option grants
and 30,000 relate to variable grants.
Power Financial Corporation (PFC), which is the parent corporation of
Lifeco, has a stock option plan (the PFC plan) that provides for the
granting of options for common shares of PFC to key employees of PFC and
its affiliates. Prior to the creation of the Lifeco plan in April 1996,
certain officers of the Company participated in the PFC plan. Under the
PFC plan, options may be awarded at no less than the market price on the
date of the grant. Termination of employment prior to vesting results in
forfeiture of the options, unless otherwise determined by a committee that
administers the PFC plan. As of December 31, 1998, 1997 and 1996, stock
available for award under the PFC plan aggregated 4,400,800, 4,400,800 and
5,440,800 shares.
Options granted to officers of the Company under the PFC plan become
exercisable twenty percent per year commencing on the date of the grant
and expire ten years from the date of grant.
The following table summarizes the status of, and changes in, PFC options
outstanding and the weighted-average exercise price (WAEP) for the years
ended December 31. As the options granted relate to Canadian stock, the
values, which are presented in U.S. dollars, will fluctuate as a result of
exchange rate fluctuations:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---------------------- ---------------------- ---------------------
Options WAEP Options WAEP Options WAEP
----------- --------- ----------- -------- ----------- --------
Outstanding, Jan. 1, 1,076,000 $ 3.05 1,329,200 $ 3.14 1,436,000 $ 3.17
Exercised 720,946 3.60 253,200 2.68 106,800 2.95
=========== ========= =========== ======== =========== ========
Outstanding, Dec. 31, 355,054 2.89 1,076,000 3.05 1,329,200 3.14
=========== ========= =========== ======== =========== ========
Options exercisable
at year-end 355,054 $ 2.89 1,076,000 $ 3.05 1,301,200 $ 3.15
=========== ========= =========== ======== =========== ========
</TABLE>
As of December 31, 1998, the PFC options outstanding have exercise prices
between $2.25 and $3.44 and a weighted-average remaining contractual life
of 2.99 years.
The Company accounts for stock-based compensation using the intrinsic
value method prescribed by APB No. 25, "Accounting for Stock Issued to
Employees", under which compensation expenses for stock options are
generally not recognized for stock option awards granted at or above fair
market value. Had compensation expense for the Company's stock option plan
been determined based upon fair values at the grant dates for awards under
the plan in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net income, would have been reduced by $727,
$608, and $257, in 1998, 1997, and 1996, respectively. The fair value of
each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumption used for those options granted in 1998, 1997, and 1996,
respectively: dividend yield of 3.00%, expected volatility of 34.05%,
24.04%, and 15.61%, risk-free interest rates of 4.79%, 4.72%, and 4.67%,
and expected lives of 7.5 years.
14. SEGMENT INFORMATION
The Company has two reportable segments: Employee Benefits and Financial
Services. The Employee Benefits segment markets group life and health and
401(k) products to small and mid-sized corporate employers. The Financial
Services segment markets and administers savings products to public and
not-for-profit employers and individuals and offers life insurance
products to individuals and businesses.
The accounting policies of the segments are the same as those described in
Note 1. The Company evaluates performance based on profit or loss from
operations after income taxes.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately as each
segment has unique distribution channels.
The Company's operations are not materially dependent on one or a few
customers, brokers or agents.
Summarized segment financial information for the year ended and as of
December 31 was as follows:
Year ended December 31, 1998
Operations:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Employee Financial Total
Benefits Services U.S.
-------------- -------------- -------------
Revenue:
Premium income $ 746,898 $ 247,965 $ 994,863
Fee income 444,649 71,403 516,052
Net investment income 95,118 802,242 897,360
Realized investment gains (losses) 8,145 30,028 38,173
-------------- -------------- -------------
Total revenue 1,294,810 1,151,638 2,446,448
Benefits and Expenses:
Benefits 590,058 872,411 1,462,469
Operating expenses 546,959 141,269 688,228
-------------- -------------- -------------
Total benefits and expenses 1,137,017 1,013,680 2,150,697
Net operating income before income
taxes 157,793 137,958 295,751
Income taxes 50,678 48,158 98,836
============== ============== =============
Net income $ 107,115 $ 89,800 $ 196,915
============== ============== =============
</TABLE>
<PAGE>
Assets:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Employee Financial Total
Benefits Services U.S.
--------------- -------------- --------------
Investment assets $ 1,434,691 $ 12,235,845 $ 13,670,536
Separate account assets 5,704,313 4,395,230 10,099,543
Other assets 567,126 785,940 1,353,066
=============== ============== ==============
Total assets $ 7,706,130 $ 17,417,015 $ 25,123,145
=============== ============== ==============
Year ended December 31, 1997
Operations:
Employee Financial Total
Benefits Services U.S.
-------------- ------------- -------------
Revenue:
Premium income $ 465,143 $ 368,036 $ 833,179
Fee income 358,005 62,725 420,730
Net investment income 100,067 781,606 881,673
Realized investment gains (losses) 3,059 6,741 9,800
-------------- ------------- -------------
Total revenue 926,274 1,219,108 2,145,382
Benefits and Expenses:
Benefits 371,333 1,013,717 1,385,050
Operating expenses 427,969 123,756 551,725
-------------- ------------- -------------
Total benefits and expenses 799,302 1,137,473 1,936,775
Net operating income before income
taxes 126,972 81,635 208,607
Income taxes 28,726 21,121 49,847
-------------
============== =============
Net income $ 98,246 $ 60,514 $ 158,760
============== =============
===============================================================================================================
Assets:
Employee Financial Total
Benefits Services U.S.
--------------- -------------- --------------
Investment assets $ 1,346,944 $ 11,859,038 $ 13,205,982
Separate account assets 4,533,516 3,313,935 7,847,451
Other assets 355,764 668,518 1,024,282
=============== ============== ==============
Total assets $ 6,236,224 $ 15,841,491 $ 22,077,715
=============== ============== ==============
</TABLE>
<PAGE>
Year ended December 31, 1996
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Operations:
Employee Financial Total
Benefits Services U.S.
--------------- -------------- -------------
Revenue:
Premium income $ 486,565 $ 342,884 $ 829,449
Fee income 321,074 26,445 347,519
Net investment income 87,511 747,126 834,637
Realized investment gains (losses) (2,661) (18,417) (21,078)
--------------- -------------- -------------
Total revenue 892,489 1,098,038 1,990,527
Benefits and Expenses:
Benefits 406,143 949,821 1,355,964
Operating expenses 368,258 101,358 469,616
--------------- -------------- -------------
Total benefits and expenses 774,401 1,051,179 1,825,580
Net operating income before income
taxes 118,088 46,859 164,947
Income taxes 22,874 7,498 30,372
=============== ============== =============
Net income $ 95,214 $ 39,361 $ 134,575
=============== ============== =============
The following table, which summarizes premium and fee income by segment,
represents supplemental information:
1998 1997 1996
------------- ------------- -------------
Premium Income
Employee Benefits
Group Life & Health $ 746,898 $ 465,143 $ 486,565
------------- ------------- -------------
Total Employee Benefits 746,898 465,143 486,565
------------- ------------- -------------
Financial Services
Savings 16,765 22,634 26,655
Individual Insurance 231,200 345,402 316,229
------------- ------------- -------------
Total Financial Services 247,965 368,036 342,884
------------- ------------- -------------
Premium income $ 994,863 $ 833,179 $ 829,449
============= ============= =============
Fee Income
Employee Benefits
Group Life & Health $ 366,805 $ 305,302 $ 276,688
401(k) 77,844 52,703 44,386
------------- ------------- -------------
------------- ------------- -------------
Total Employee Benefits 444,649 358,005 321,074
------------- ------------- -------------
------------- ------------- -------------
Financial Services
Savings 71,403 62,725 26,445
------------- ------------- -------------
Total Financial Services 71,403 62,725 26,445
------------- ------------- -------------
============= ============= =============
Fee income $ 516,052 $ 420,730 $ 347,519
============= ============= =============
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In the two most recent fiscal years or any subsequent interim period, there has
been no change in the Company's independent accountants or resulting
disagreements on accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. IDENTIFICATION OF DIRECTORS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Director Age Served as Principal Occupation(s) For
Director From Last Five Years
James Balog 70 1993 Company Director
(1)(2)
James W. Burns, O.C. 69 1991 Chairman of the Boards of
(1)(2)(4) Great-West Lifeco, Great-West
Life, London Insurance Group
Inc. and London Life Insurance
Company; Deputy Chairman,
Power Corporation
Orest T. Dackow 62 1991 President and Chief Executive
(1)(2)(4) Officer, Great-West Lifeco
Andre Desmarais 42 1997 President and Co-Chief
(1)(2)(4)(5) Executive Officer, Power
Corporation; Deputy Chairman,
Power Financial
Paul Desmarais, Jr. 44 1991 Chairman and Co-Chief
(1)(2)(4)(5) Executive Officer, Power
Corporation; Chairman, Power
Financial
Robert G. Graham 67 1991 Company Director since January
(1)(2)(4) 1996; previously Chairman and
Chief Executive Officer, Inter-City Products Corporation
(a company engaged in
the manufacture and distribution of air conditioning,
heating and related products)
Robert Gratton 55 1991 Chairman of the Board of the
(1)(2)(4) Company; President and Chief
Executive Officer, Power
Financial
N. Berne Hart 69 1991 Company Director
(1)(2)(3)
Kevin P. Kavanagh 66 1986 Company Director; Chancellor,
(1)(3)(4) Brandon University
William Mackness 60 1991 Company Director since July
(1)(2) 1995; previously Dean, Faculty
of Management, University of
Manitoba
William T. McCallum 56 1990 President and Chief Executive
(1)(2)(4) Officer of the Company;
President and Chief Executive
Officer, United States
Operations, Great-West Life
Jerry E.A. Nickerson 62 1994 Chairman of the Board, H.B.
(3)(4) Nickerson & Sons Limited (a
management and holding company)
The Honourable 61 1991 Vice-Chairman, Power
P. Michael Pitfield, P.C., Q.C. Corporation; Member of the
(1)(2)(4) Senate of Canada
Michel Plessis-Belair, F.C.A. 56 1991 Vice-Chairman and Chief
(1)(2)(3)(4) Financial Officer, Power
Corporation; Executive
Vice-President and Chief
Financial Officer, Power
Financial
Brian E. Walsh 45 1995 Co-Founder and Managing
(1)(2) Partner, Veritas Capital
Management, LLC (a merchant banking company)
since September 1997; previously
Partner, Trinity L.P. (an investment company)
from January 1996; previously
Managing Director and Co-Head, Global Investment
Bank, Bankers Trust Company (an
investment/commercial bank)
</TABLE>
(1) Member of the Executive Committee
(2) Member of the Investment and Credit Committee
(3) Member of the Audit Committee
(4) Also a director of Great-West Life
(5) Mr. Andre Desmarais and Mr. Paul Desmarais, Jr. are brothers.
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.
Directors are elected annually to serve until the following annual meeting of
shareholders.
<PAGE>
The following lists directorships held by the directors of the Company, on
companies whose securities are traded publicly in the United States or that are
investment companies registered under the Investment Company Act of 1940.
J. Balog Elan plc
........ Euclid Mutual Fund
........ Transatlantic Holdings
........ Zweig-Glaser Mutual Fund
A. Desmarais The Seagram Company Limited
P. Desmarais, Jr. Petrofina S.A.
J.E.A. Nickerson Bank of Montreal
B.......IDENTIFICATION OF EXECUTIVE OFFICERS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Executive Officer Age Served as Executive Principal Occupation(s) For
Officer From Last Five Years
William T. McCallum 56 1984 President and Chief Executive
President and Chief Officer of the Company; President
Executive Officer and Chief Executive Officer, United
States Operations, Great-West Life
Mitchell T.G. Graye 43 1997 Executive Vice President and Chief
Executive Vice President and Financial Officer of the Company;
Chief Financial Officer Executive Vice President and Chief
Financial Officer, United States,
Great-West Life
James D. Motz 49 1992 Executive Vice President, Employee
Executive Vice President, Benefits of the Company and
Employee Benefits Great-West Life
Douglas L. Wooden 42 1991 Executive Vice President, Financial
Executive Vice President, Services of the Company and
Financial Services Great-West Life
John A. Brown 51 1992 Senior Vice President, Sales,
Senior Vice President, Financial Services of the Company
Sales, Financial Services and Great-West Life
Donna A. Goldin 51 1996 Executive Vice President and Chief
Executive Vice President and Operating Officer, One Corporation
Chief Operating Officer, since June 1996; previously
One Corporation Executive Vice President and Chief
Operating
Officer, Harris Methodist Health Plan
(a health maintenance organization) from
March 1995; previously Executive Vice
President and Chief Operating Officer,
Private Healthcare Systems, Inc.
(a managed care company)
John T. Hughes 62 1989 Senior Vice President, Chief
Senior Vice President, Investment Officer of the Company;
Chief Investment Officer Senior Vice President, Chief
Investment Officer, United States,
Great-West Life
D. Craig Lennox 51 1984 Senior Vice President, General
Senior Vice President, Counsel and Secretary of the
General Counsel and Secretary Company; Senior Vice President and
Chief U.S. Legal Officer,
Great-West Life
Steve H. Miller 46 1997 Senior Vice President, Employee
Senior Vice President, Benefits Sales of the Company and
Employee Benefits Sales Great-West Life
Charles P. Nelson 38 1998 Senior Vice President,
Senior Vice President, Public Non-Profit Markets of the
Public Non-Profit Markets Company and Great-West Life
Martin Rosenbaum 46 1997 Senior Vice President, Employee
Senior Vice President, Benefits Operations of the Company
Employee Benefits Operations and Great-West Life
Gregory E. Seller 45 1999 Senior Vice President, Major
Senior Vice President, Major Accounts of the Company and
Accounts Great-West Life
Robert K. Shaw 43 1998 Senior Vice President, Individual
Senior Vice President, Markets of the Company and
Individual Markets Great-West Life
Unless otherwise indicated, all of the executive officers 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.
</TABLE>
The appointments of executive officers are confirmed annually.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
A. SUMMARY COMPENSATION TABLE
The following table sets out all compensation paid to the individuals who were,
at December 31, 1998, 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 1996, 1997 and 1998,
respectively.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------- =========================
Annual compensation Long-term compensation
awards
- ----------------------------------------------------------------------- =========================
- -------------------------- ------------- ------------- ---------------- =========================
Name and Year Salary Bonus Options (1)
principal position ($) ($) (#)
- -------------------------- ------------- ------------- ---------------- =========================
- -------------------------- ------------- ------------- ---------------- =========================
W.T. McCallum 1998 651,667 432,250 -
President and 1997 608,708 406,250 600,000 (3)
Chief Executive Officer 1996 561,818 370,500 600,000 (2)
- -------------------------- ------------- ------------- ---------------- =========================
- -------------------------- ------------- ------------- ---------------- =========================
D.L. Wooden 1998 330,000 198,000 -
Executive Vice 1997 300,000 150,000 300,000 (3)
President, Financial 1996 287,000 143,500 200,000 (2)
Services
- -------------------------- ------------- ------------- ---------------- =========================
- -------------------------- ------------- ------------- ---------------- =========================
J.T. Hughes 1998 338,000 185,900 -
Senior Vice President, 1997 324,000 162,000 -
Chief Investment Officer 1996 312,000 136,968 160,000 (2)
- -------------------------- ------------- ------------- ---------------- =========================
- -------------------------- ------------- ------------- ---------------- =========================
J.D. Motz 1998 350,000 157,500 -
Executive Vice 1997 300,000 151,300 100,000 (2)
President, Employee 300,000 (3)
Benefits 1996 250,000 89,750 200,000 (2)
- -------------------------- ------------- ------------- ---------------- =========================
- -------------------------- ------------- ------------- ---------------- =========================
M.T.G. Graye Executive 1998 275,000 151,250 18,000 (2)
Vice President and Chief 18,000 (3)
Financial Officer 1997 219,469 117,958 132,000 (3)
1996 183,824 73,810 132,000 (2)
- -------------------------- ------------- ------------- ---------------- =========================
</TABLE>
(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.
B. OPTIONS
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 1/1.53.
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------- ========================
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 date 5% 10%
(#) employees price ($) ($)
in fiscal ($/share)
year
- ------------------- ------------ ------------- ------------ ----------------- ----------- ============
M.T.G. Graye 18,000 .85 13.23 January 27, 2008 150,028 378,642
- ------------------- ------------ ------------- ------------ ----------------- ----------- ============
- ------------------- ------------ ------------- ------------ ----------------- ----------- ============
M.T.G. Graye 18,000 .85 13.23 June 26, 2007 138,121 350,066
- ------------------- ------------ ------------- ------------ ----------------- ----------- ============
</TABLE>
Prior to April 24,1996, the Named Executive Officers participated in the Power
Financial Employee Share Option Plan pursuant to which options to acquire common
shares of Power Financial ("PFC Options") were granted. The following table
describes all PFC Options exercised in 1998, and all unexercised PFC Options
held as of December 31, 1998, by the Named Executive Officers. PFC Options are
issued with an exercise price in Canadian dollars. Canadian dollar amounts have
been translated to U.S. dollars at a rate of 1/1.53.
AGGREGATED PFC OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------- --------------------------- ============================
Unexercised options at Value of unexercised
fiscal year-end in-the-money options at
(#) fiscal year-end
($)
- --------------------------------------------------- --------------------------- ============================
Shares
acquired Value
Name on exercise realized Exercisable Exercisable
(#) ($) Unexercisable Unexercisable
==================== ---------------- ------------- ------------- ------------- ------------- ==============
W.T. McCallum 80,000 1,064,134 - - - -
------------- ==============
==================== ---------------- ------------- ------------- ------------- ------------- ==============
D.L. Wooden - - 176,000 - 3,232,239 -
------------- ==============
- -------------------- ---------------- ------------- ------------- ------------- ------------- ==============
J.T. Hughes 240,000 3,115,195 - - - -
- -------------------- ---------------- ------------- ------------- ------------- ------------- ==============
==================== ================ ============= ============= ============= ============= ==============
M.T.G. Graye - - 140,000 - 2,573,243 -
==================== ================ ============= ============= ============= ============= ==============
</TABLE>
<PAGE>
Commencing April 24,1996, the Named Executive Officers began participating in
the Great-West Lifeco Stock Option Plan. The following table describes all
Lifeco Options exercised in 1998, and all unexercised Lifeco Options held as of
December 31, 1998, by the Named Executive Officers. Lifeco Options are issued
with an exercise price in Canadian dollars. Canadian dollar amounts have been
translated to U.S. dollars at a rate of 1/1.53.
AGGREGATED LIFECO OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------- --------------------------- ============================
Unexercised options at Value of unexercised
fiscal year-end in-the-money options at
(#) fiscal year-end
($)
- --------------------------------------------------- --------------------------- ============================
Shares
acquired Value
Name on exercise realized Exercisable Exercisable
(#) ($) Unexercisable Unexercisable
==================== ---------------- ------------- ------------- ------------- ------------- ==============
W.T. McCallum - - 240,000 960,000 2,748,543 7,952,872
------------- ==============
==================== ---------------- ------------- ------------- ------------- ------------- ==============
D.L. Wooden - - 80,000 420,000 916,181 3,289,300
------------- ==============
==================== ---------------- ------------- ------------- ------------- ------------- ==============
J.T. Hughes - - 64,000 96,000 732,945 1,099,417
------------- ==============
- -------------------- ---------------- ------------- ------------- ------------- ------------- ==============
J.D. Motz - - 100,000 500,000 1,108,898 4,060,166
- -------------------- ---------------- ------------- ------------- ------------- ------------- ==============
==================== ================ ============= ============= ============= ============= ==============
M.T.G. Graye - - 56,400 243,600 618,226 1,871,554
==================== ================ ============= ============= ============= ============= ==============
C. PENSION PLAN TABLE
The following table sets out the pension benefits payable to the Named Executive
Officers by Great-West Life or the Company.
PENSION PLAN TABLE
========================= =============================================================
Years of service
=============================================================
Remuneration
($)
15 20 25 30 35
========================= =============================================================
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>
<PAGE>
The Named Executive Officers have the following years of service.
Name Years of Service
W.T. McCallum 33
D.L. Wooden 8
J.T. Hughes 9
J.D. Motz 28
M.T.G. Graye 5
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 M.T.G. Graye, J.T.
Hughes, J.D. Motz 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.
D. COMPENSATION OF DIRECTORS
1. Great-West Life Directors
As indicated above, 11 directors of the Company are also directors of Great-West
Life. The following sets out remuneration paid by Great-West Life to its
directors.
Great-West Life pays an annual fee of $17,500 to each director. Great-West Life
pays an annual fee of $10,000 to the Chairman of each of the Audit Committee,
the Conduct Review Committee and the Corporate Management Committee, $20,000 to
the Chairman of each of the Canadian Investment and Credit Committee and the
United States Investment and Credit Committee, $25,000 to the Chairman of each
of the Canadian Executive Committee and the United States Executive Committee,
and $25,000 to the Chairman of the Board. Great-West Life pays a meeting fee of
$1,000 to each director for each meeting of the Board of Directors or a
committee thereof attended. In addition, all directors are reimbursed for
incidental expenses.
The above amounts are paid in the currency of the country of residence of the
director.
2. 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 $17,500, and a meeting fee of $1,000 for each
meeting of the Board of Directors or a committee thereof attended. 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.
E. 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below is certain information, as of February 1, 1999, concerning
beneficial ownership of the voting securities of the Company by entities and
persons who beneficially own more than 5% of the voting securities of the
Company. The determinations of "beneficial ownership" of voting securities are
based upon Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). This rule provides that securities will be deemed to be
"beneficially owned" where a person has, either solely or in conjunction with
others, (1) the power to vote or to direct the voting of securities and/or the
power to dispose or to direct the disposition of, the securities or (2) the
right to acquire any such power within 60 days after the date such "beneficial
ownership" is determined.
(1) 100% of the Company's 7,032,000 outstanding common shares are owned by
GWL&A Financial Inc., 8515 East Orchard Road, Englewood, Colorado
80111.
(2) 100% of the outstanding common shares of GWL&A Financial Inc. are owned
by GWL&A Financial (Nova Scotia) Co., Suite 800, 1959 Upper Water
Street, Halifax, Nova Scotia, Canada B3J 2X2.
(3) 100% of the outstanding common shares of GWL&A Financial (Nova Scotia)
Co. are owned by The Great-West Life Assurance Company, 100 Osborne
Street North, Winnipeg, Manitoba, Canada R3C 3A5.
(4) 99.6% 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.
(5) 81.1% of the outstanding common shares of Great-West Lifeco Inc. are
controlled by Power Financial Corporation, 751 Victoria Square,
Montreal, Quebec, Canada H2Y 2J3.
(6) 67.5% of the outstanding common shares of Power Financial Corporation
are owned by 171263 Canada Inc., 751 Victoria Square, Montreal,
Quebec, Canada H2Y 2J3.
(7) 100% of the outstanding common shares of 171263 Canada Inc. are owned
by 2795957 Canada Inc., 751 Victoria Square, Montreal, Quebec, Canada
H2Y 2J3.
(8) 100% of the outstanding common shares of 2795957 Canada Inc. are owned
by Power Corporation of Canada, 751 Victoria Square, Montreal, Quebec,
Canada H2Y 2J3.
(9) 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.
As a result of the chain of ownership described in paragraphs (1) through (9)
above, each of the entities and persons listed in paragraphs (1) through (9)
would be considered under Rule 13d-3 of the Exchange Act to be a "beneficial
owner" of 100% of the outstanding voting securities of the Company.
B. SECURITY OWNERSHIP OF MANAGEMENT
The following table sets out the number of equity securities, and exercisable
options (including options which will become exercisable within 60 days) for
equity securities, of the Company or any of its parents or subsidiaries,
beneficially owned, as of February 1, 1999, 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>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- ------------------------- ------------------------------------------------------------------------
Company
------------------------------------------------------------------------
----------------- ---------------- ------------------ ------------------
The Great-West Great-West Power Financial Power
Life Assurance Lifeco Inc. Corporation Corporation of
Company Canada
(1) (2) (3) (4)
----------------- ---------------- ------------------ ------------------
Directors
- --------------------------------------------------------------------------------------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
J. Balog - - - -
- ------------------------- ----------------- ---------------- ------------------ ------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
J. W. Burns 50 112,000 8,000 400,640
200,000 options
- ------------------------- ----------------- ---------------- ------------------ ------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
O.T. Dackow 16 72,837 - -
200,000 options
- ------------------------- ----------------- ---------------- ------------------ ------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
A. Desmarais 50 40,000 21,600 40,800
1,100,500 options
- ------------------------- ----------------- ---------------- ------------------ ------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
P. Desmarais, Jr. 50 32,000 - 890,500 options
- ------------------------- ----------------- ---------------- ------------------ ------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
R.G. Graham - - - -
- ------------------------- ----------------- ---------------- ------------------ ------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
R. Gratton - 330,000 310,000 5,000
5,280,000 options 300,000 options
- ------------------------- ----------------- ---------------- ------------------ ------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
N.B. Hart - - - -
- ------------------------- ----------------- ---------------- ------------------ ------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
K. P. Kavanagh - 20,000 - -
- ------------------------- ----------------- ---------------- ------------------ ------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
W. Mackness - - - -
- ------------------------- ----------------- ---------------- ------------------ ------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
W.T. McCallum 17 71,362 80,000 -
240,000 options
- ------------------------- ----------------- ---------------- ------------------ ------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
J.E.A. Nickerson - - - -
- ------------------------- ----------------- ---------------- ------------------ ------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
P.M. Pitfield - 100,000 80,000 100,000
309,000 options
- ------------------------- ----------------- ---------------- ------------------ ------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
M. Plessis-Belair - 20,000 2,000 15,800
53,300 options
- ------------------------- ----------------- ---------------- ------------------ ------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
B.E. Walsh - - - -
- ------------------------- ----------------- ---------------- ------------------ ------------------
- --------------------------------------------------------------------------------------------------
Named Executive Officers
- --------------------------------------------------------------------------------------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
W.T. McCallum 17 71,362 80,000 -
240,000 options
- ------------------------- ----------------- ---------------- ------------------ ------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
D.L. Wooden - 80,000 options 176,000 options -
- ------------------------- ----------------- ---------------- ------------------ ------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
J.T. Hughes - 9,989 - -
64,000 options
- ------------------------- ----------------- ---------------- ------------------ ------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
J.D. Motz - 14,033 - -
100,000 options
- ------------------------- ----------------- ---------------- ------------------ ------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
M.T.G. Graye - 506 140,000 options -
56,400 options
- ------------------------- ----------------- ---------------- ------------------ ------------------
- --------------------------------------------------------------------------------------------------
Directors and Executive
Officers as a Group
- --------------------------------------------------------------------------------------------------
- ------------------------- ----------------- ---------------- ------------------ ------------------
183 862,822 622,546 563,040
998,000 options 5,635,054 options 2,853,300 options
- ------------------------- ----------------- ---------------- ------------------ ------------------
</TABLE>
(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 1.6% 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 1.8% 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 1.7% 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
<TABLE>
<S> <C> <C>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The documents identified below are filed as a part of this report:
Page
A. INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report on Consolidated Financial Statements
for the Years Ended December 31, 1998, 1997, and 1996 36
Consolidated Balance Sheets as of December 31, 1998 and 1997 37
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997, and 1996 39
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1998, 1997, and 1996 40
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996 41
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1998, 1997, and 1996 43
</TABLE>
All schedules and separate financial statements of the Registrant are omitted
because they are not applicable, or not required, or because the required
information is included in the financial statements or notes thereto.
<PAGE>
B. INDEX TO EXHIBITS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Exhibit Number Title Page
3(i) Articles of Redomestication of Great-West Life &
Annuity Insurance Company
Filed as Exhibit 3(i) to Registrant's Form 10-K for
the year ended December 31, 1996 and incorporated
herein by reference.
3(ii) Bylaws of Great-West Life & Annuity Insurance
Company
Filed as Exhibit 3(ii) to Registrant's Form 10-K
for the year ended December 31, 1997 and
incorporated herein by reference.
Material Contracts
10.1 - Description of Executive Officer Annual
Incentive Bonus Program
Filed as Exhibit 10.1 to Registrant's Form 10-K for
the year ended December 31, 1997 and incorporated
herein by reference.
10.2 - Great-West Lifeco Inc. Stock Option Plan
Filed as Exhibit 10.2 to Registrant's Form 10-K
for the year ended December 31, 1997 and
incorporated herein by reference.
10.3 - Supplemental Executive Retirement Plan
Filed as Exhibit 10.3 to Registrant's Form 10-K for
the year ended December 31, 1997 and incorporated
herein by reference.
10.4 - Executive Deferred Compensation Plan
Filed as Exhibit 10.4 to Registrant's Form 10-K for
the year ended December 31, 1997 and incorporated
herein by reference.
21 Subsidiaries of Great-West Life & Annuity 84
Insurance Company
24 Directors' Powers of Attorney
Directors' Powers of Attorney filed as Exhibit 24
to Registrant's Form 10-K for the year ended
December 31, 1996, and Exhibit 24 to Registrant's
Form 10-K for the year ended December 31, 1997, and
incorporated herein by
reference.
27 Financial Data Schedule 86
C. REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1998.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
By: /s/ W.T. McCallum
William T. McCallum
President and Chief Executive Officer
Date: March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature and Title Date
/s/ William T. McCallum March 26, 1999
William T. McCallum
President and Chief Executive Officer
and a Director
/s/ Mitchell T.G. Graye March 26, 1999
Mitchell T.G. Graye
Executive Vice President and Chief Financial Officer
/s/ Glen R. Derback March 26, 1999
Glen R. Derback
Vice President and Controller
<PAGE>
Signature and Title Date
/s/ James Balog * March 26, 1999
James Balog, Director
/s/ James W. Burns * March 26, 1999
- --------------------
James W. Burns, Director
/s/ Orest T. Dackow * March 26, 1999
- ---------------------
Orest T. Dackow, Director
/s/ Andre Desmarais* March 26, 1999
Andre Desmarais, Director
/s/ Paul Desmarais, Jr. * March 26, 1999
- -------------------------
Paul Desmarais, Jr., Director
/s/ Robert G. Graham * March 26, 1999
- ------------------------
Robert G. Graham, Director
/s/ Robert Gratton * March 26, 1999
Robert Gratton, Director
/s/ N. Berne Hart * March 26, 1999
- -------------------
N. Berne Hart, Director
/s/ Kevin P. Kavanagh * March 26, 1999
- -----------------------
Kevin P. Kavanagh, Director
/s/ William Mackness * March 26, 1999
William Mackness, Director
/s/ Jerry E.A. Nickerson * March 26, 1999
- --------------------------
Jerry E.A. Nickerson, Director
<PAGE>
Signature and Title Date
/s/ P. Michael Pitfield * March 26, 1999
- -------------------------
P. Michael Pitfield, Director
/s/ Michel Plessis-Belair * March 26, 1999
Michel Plessis-Belair, Director
/s/ Brian E. Walsh * March 26, 1999
- --------------------
Brian E. Walsh, Director
* By: /s/ D. Craig Lennox March 26, 1999
---------------------
D. Craig Lennox
Attorney-in-fact pursuant to filed Powers of Attorney.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<PAGE>
SUBSIDIARIES OF GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
JURISDICTION OF INCORPORATION OR
ORGANIZATION
SUBSIDIARY
Anthem Health & Life Insurance Company Indiana
Benefits Communication Corporation (1) Delaware
BenefitsCorp Equities, Inc. Delaware
Financial Administrative Services Corporation (2) Colorado
First Great-West Life & Annuity Insurance Company New York
Great-West Benefit Services, Inc. Delaware
Great-West Realty Investments, Inc. Delaware
Greenwood Investments, Inc. Colorado
Greenwood Property Corporation Colorado
GW Capital Management, LLC Colorado
GWL Properties, Inc. Colorado
Maxim Series Fund, Inc. Maryland
One Corporation Colorado
One Health Plan, Inc. Vermont
One Health Plan of Alaska, Inc. Alaska
One Health Plan of Arizona, Inc. Arizona
One Health Plan of California, Inc. California
One Health Plan of Colorado, Inc. Colorado
One Health Plan of Florida, Inc. Florida
One Health Plan of Georgia, Inc. Georgia
One Health Plan of Illinois, Inc. Illinois
One Health Plan of Indiana, Inc. Indiana
One Health Plan of Maine, Inc. Maine
One Health Plan of Massachusetts, Inc. Massachusetts
One Health Plan of Nevada, Inc. Nevada
One Health Plan of New Hampshire, Inc. New Hampshire
One Health Plan of New Jersey, Inc. New Jersey
One Health Plan of North Carolina, Inc. North Carolina
One Health Plan of Ohio, Inc. Ohio
One Health Plan of Oregon, Inc. Oregon
One Health Plan of South Carolina, Inc. South Carolina
One Health Plan of Tennessee, Inc. Tennessee
One Health Plan of Texas, Inc. Texas
One Health Plan of Washington, Inc. Washington
One Health Plan of Wyoming, Inc. Wyoming
One of Arizona, Inc. Arizona
One Orchard Equities, Inc. Colorado
Orchard Capital Management, LLC Colorado
Orchard Series Fund Delaware
Orchard Trust Company Colorado
(1) Also doing business as Benefits Insurance Services, Inc.
(2) Also doing business as Financial Administrative Services Corporation
of Colorado.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
</LEGEND>
<CIK> 0000744455
<NAME> Great-West Life & Annuity Insurance Company
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.000
<DEBT-HELD-FOR-SALE> 6936726
<DEBT-CARRYING-VALUE> 2199818
<DEBT-MARKET-VALUE> 2298936
<EQUITIES> 48640
<MORTGAGE> 1133468
<REAL-ESTATE> 0
<TOTAL-INVEST> 13670536
<CASH> 176119
<RECOVER-REINSURE> 192958
<DEFERRED-ACQUISITION> 238901
<TOTAL-ASSETS> 25123145
<POLICY-LOSSES> 12331646
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 395026
<NOTES-PAYABLE> 39731
0
0
<COMMON> 7032
<OTHER-SE> 1191527
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994863
<INVESTMENT-INCOME> 897360
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<EPS-PRIMARY> 196915
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<PROVISION-CURRENT> 0
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</TABLE>
