As filed with the Securities and Exchange Commission on April 3, 2000
Registration No. 333-11493
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
AMENDMENT NO. 4 to
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
- --------------------------------------------------------------------------------
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(Exact name of Registrant)
COLORADO 63 84-0467907
(State of Incorporation) (Primary Standard (I.R.S. Employer
Industrial Classification Identification No.)
Code Number)
8515 East Orchard Road
Englewood, CO 80111
(800) 537-2033
(Address, including zip code, and
telephone number, including
area code, or registrant's
principal executive
officer)
- --------------------------------------------------------------------------------
William T. McCallum
President and Chief Executive Officer
Great-West Life & Annuity Insurance Company
8515 East Orchard Road
Englewood, CO 80111
(Name and Address of Agent for Service)
copy to:
James F. Jorden, Esq.
Jorden Burt Boros Cicchetti Berenson & Johnson LLP
1025 Thomas Jefferson Street, N.W., Suite 400 East
Washington, D.C. 20007-0805
- --------------------------------------------------------------------------------
Approximate Date of Proposed Public Offering: Upon the effective date of this
Registration Statement
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following: X
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: ______
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement for the same offering: ______
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box:
The Schwab Fixed Annuity(R)
A flexible premium deferred fixed annuity
Distributed by
Charles Schwab & Co., Inc.
Issued by
Great-West Life & Annuity Insurance Company
- --------------------------------------------------------------------------------
Overview
This Prospectus describes The Schwab Fixed Annuity--a flexible premium deferred
annuity contract which allows you to accumulate assets on a tax-deferred basis
for retirement or other long-term purposes. This Contract is issued either on a
group basis or as individual contracts by Great-West Life & Annuity Insurance
Company (we, us, Great-West or GWL&A) - both will be referred to as the
"Contract" throughout this prospectus. How to Invest The minimum initial
investment (a "Contribution") is:
o $5,000
o $2,000 if an IRA
o $1,000 if subsequent Contributions are made via Automatic Contribution Plan
The minimum subsequent Contribution is:
o $500 per Contribution
o $100 per Contribution if made via Automatic Contribution Plan
Allocating Your Money
You can allocate the money you contribute to the Guarantee Period Fund. The
Guarantee Period Fund allows you to select one or more Guarantee Periods that
offer specific interest rates for a specific period. Please note that the
Contract may not be available in all states.
You may be subject to a Market Value Adjustment which may increase or decrease
the amount Transferred or withdrawn from the value of a Guarantee Period if the
Guarantee Period is broken prior to the Guarantee Period Maturity Date. A
negative adjustment may result in an effective interest rate lower than the
stated rate of interest for the applicable Guarantee Period and the Contractual
Guarantee of a Minimum Rate of Interest and the value of the Contribution(s)
allocated to the Guarantee Period being less than the Contribution(s) made.
Sales and Surrender Charges
A maximum Surrender Charge of three percent may be applicable for amounts
withdrawn in the first three years. Free Look Period After you receive your
Contract, you can look it over free of obligation for at least 10 days or longer
if required by your state law (up to 35 days for replacement policies), during
which you may cancel your Contract. Payout Options The Schwab Fixed Annuity
offers a variety of annuity payout and periodic withdrawal options. Depending on
the option you select, income can be guaranteed for your lifetime, your spouse's
and/or beneficiaries' lifetime or for a specified period of time.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy or adequacy of the Prospectus. Any
representation to the contrary is a criminal offense. No person is authorized by
Great-West to give information or to make any representation, other than those
contained in this Prospectus, in connection with the offers contained in this
Prospectus. This Prospectus does not constitute an offering in any jurisdiction
in which such offering may not lawfully be made. Please read this Prospectus and
keep it for future reference.
The date of this Prospectus is May 1, 2000.
The Contracts are not deposits of, or guaranteed or endorsed by any bank, nor
are the Contracts federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency. The
Contracts involve certain investment risks, including possible loss of
principal.
For account information, please contact:
Annuity Administration Department
P.O. Box 173920
Denver, Colorado 80217-3920
800-838-0650
This prospectus presents important information you should review before
purchasing The Schwab Fixed Annuity. Please read it carefully and keep it for
future reference.
You may obtain a copy without charge by contacting the Annuity Administration
Department at the above address or phone number. Or, you can obtain it by
visiting the Securities and Exchange Commission's web site at www.sec.gov. This
web site also contains other information about us that has been filed
electronically.
<PAGE>
This Prospectus does not constitute an offering in any jurisdiction in which
such offering may not lawfully be made. No dealer, salesperson or other person
is authorized to give any information or make any representations in connection
with this offering other than those contained in this Prospectus, and, if given
or made, such other information or representations must not be relied on.
The Contract is not available in all states.
- --------------------------------------------------------------------------------
Table of Contents
<PAGE>
Definitions...............................................4
Summary...................................................6
How to contact Schwab..................................6
Fee Table.................................................7
Great-West Life & Annuity Insurance
Company..................................................10
The Guarantee Period Fund................................12
Investments of the Guarantee Period Fund..............13
Subsequent Guarantee Periods..........................13
Breaking a Guarantee Period...........................14
Interest Rates........................................14
Market Value Adjustment...............................14
Application and Initial Contributions....................14
Free Look Period.........................................14
Subsequent Contributions.................................15
Annuity Account Value....................................15
Transfers................................................16
Possible Restrictions.................................16
Cash Withdrawals.........................................17
Withdrawals to Pay Investment Manager or
Financial Advisor Fees................................18
Tax Consequences of Withdrawals.......................18
Telephone Transactions...................................18
Death Benefit............................................18
Beneficiary...........................................19
Distribution of Death Benefit.........................19
Charges and Deductions...................................20
Contract Maintenance Charge...........................21
Transfer Fees.........................................21
Premium Tax...........................................21
Other Taxes...........................................21
Payout Options...........................................21
Periodic Withdrawals..................................21
Periodic Withdrawal Payout Options....................22
Annuity Date..........................................22
Annuity Options.......................................23
Annuity Payout Options................................24
Seek Tax Advice..........................................24
Federal Tax Matters......................................24
Taxation of Annuities.................................25
Individual Retirement Annuities.......................25
Assignments or Pledges...................................27
Distribution of the Contracts............................27
Selected Financial Data..................................29
Management's Discussion and Analysis of Financial Conditions and Results of
Operations 30
Rights Reserved by Great-West............................45
Legal Proceedings........................................45
Legal Matters............................................45
Experts..................................................45
Available Information....................................46
.........................................................47
Appendix A--Market Value Adjustments......................49
Consolidated Financial Statements and Independent Auditor's Report 52
- --------------------------------------------------------------------------------
Definitions
<PAGE>
1035 Exchange--A provision of the Internal Revenue Code of 1986, as amended,
that allows for the tax-free exchange among certain types of insurance
contracts.
Accumulation Period--The time period between the Effective Date and the Annuity
Commencement Date. During this period, you're contributing to the annuity.
Annuitant--The person named in the application upon whose life the payout of an
annuity is based and who will receive annuity payouts. If a Contingent Annuitant
is named, the Annuitant will be considered the Primary Annuitant.
Annuity Account--An account established by us in your name that reflects all
account activity under your Contract. Annuity Account Value--The sum of the
value of all Guarantee Periods credited to your Annuity Account--less partial
withdrawals, amounts applied to an annuity payout option, periodic withdrawals,
charges deducted under the Contract, and Premium Tax, if any.
Annuity Commencement Date--The date annuity payouts begin.
Annuity Individual Retirement Account (or Annuity IRA)--An annuity contract used
in a retirement savings program that is intended to satisfy the requirements of
Section 408 of the Code.
Annuity Payout Period--The period beginning on the Annuity Commencement Date and
continuing until all annuity payouts have been made under the Contract. During
this period, the Annuitant receives payouts from the annuity.
Automatic Contribution Plan--A feature which allows you to make automatic
periodic Contributions. Contributions will be withdrawn from an account you
specify and automatically credited to your Annuity Account.
Beneficiary--The person(s) designated to receive any Death Benefit under the
terms of the Contract.
Contingent Annuitant--The person you may name in the application who becomes the
Annuitant when the Primary Annuitant dies. The Contingent Annuitant must be
designated before the death of the Primary Annuitant.
Contributions--The amount of money you invest or deposit into your annuity.
Death Benefit--The amount payable to the Beneficiary when the Owner or the
Annuitant dies.
- --------------------------------------------------------------------------------
Distribution Period--The period starting with your Payout Commencement Date.
Effective Date--The date on which the first Contribution is credited to your
Annuity Account.
Fixed Account Value--The value of the fixed investment option credited to you
under the Annuity Account
Guarantee Period--The number of years available in the Guarantee Period Fund
during which Great-West will credit a stated rate of interest. Great-West may
discontinue offering a period at any time for new Contributions. Amounts
allocated to one or more guaranteed periods may be subject to a Market Value
Adjustment.
Guarantee Period Fund--A fixed investment option which pays a stated rate of
interest for a specified time period.
Guarantee Period Maturity Date--The last day of any Guarantee Period.
Guaranteed Interest Rate--The minimum annual interest rate in effect that
applies to each Guarantee Period at the time the Contribution is made.
Market Value Adjustment (or MVA)--An amount added to or subtracted from certain
transactions involving the Guarantee Period Fund to reflect the impact of
changing interest rates.
Non-Qualified Annuity Contract--An annuity contract funded with money outside a
tax qualified retirement plan.
Owner (Joint Owner) or You--The person(s) named in the application who is
entitled to exercise all rights and privileges under the Contract, while the
Annuitant is living. Joint Owners must be husband and wife as of the date the
Contract is issued. The Annuitant will be the Owner unless otherwise indicated
in the application. If a Contract is purchased in an IRA, the Owner and the
Annuitant must be the same individual and a Joint Owner is not allowed.
Payout Commencement Date--The date on which annuity payouts or periodic
withdrawals begin under a payout option. The Payout Commencement Date must be at
least one year after the Effective Date of the Contract. If you do not indicate
a Payout Commencement Date on your application, annuity payouts will begin on
the first day of the month of the Annuitant's 91st birthday.
Premium Tax--A tax charged by a state or other governmental authority. Varying
by state, the current range of Premium Taxes is 0% to 3.5% and may be assessed
at the time you make a Contribution or when annuity payments begin.
Request--Any written, telephoned, or computerized instruction in a form
satisfactory to Great-West and Schwab received at the Annuity Administration
Department (or other annuity service center subsequently named) from you, your
designee (as specified in a form acceptable to Great-West and Schwab) or the
Beneficiary (as applicable) as required by any provision of the Contract.
Surrender Charge--A maximum charge of three percent will be assessed if funds
are withdrawn in the first three Contract years.
Surrender Value--The value of your annuity account with any applicable Market
Value Adjustment, less any applicable Surrender Charge on the Effective Date of
the surrender, less Premium Tax, if any.
Transaction Date--The date on which any Contribution or Request from you will be
processed. Contributions and Requests received after 4:00 p.m. EST/EDT will be
deemed to have been received on the next business day. Requests will be
processed on each day that the New York Stock Exchange is open for trading.
Transfer--Moving money among the Guaranteed Periods.
<PAGE>
- --------------------------------------------------------------------------------
Summary
The Schwab Fixed Annuity allows you to accumulate assets on a tax-deferred basis
by investing in a fixed investment option (the Guarantee Period Fund). The
Guarantee Period Fund is comprised of Guarantee Periods, each of which has its
own stated rate of interest and its own maturity date.
You may be subject to a Market Value Adjustment which may increase or decrease
the amount Transferred or withdrawn from the value of a Guarantee Period if the
Guarantee Period is broken prior to the Guarantee Period Maturity Date. A
negative adjustment may result in an effective interest rate lower than the
stated rate of interest for the applicable Guarantee Period and the Contractual
Guarantee of a Minimum Rate of Interest and the value of the Contribution(s)
allocated to the Guarantee Period being less than the Contribution(s) made.
The Schwab Fixed Annuity can be purchased on a non-qualified basis or purchased
and used in connection with an IRA. You can also purchase it through a 1035
Exchange from another insurance contract.
Tax deferral under IRAs arises under the Code. Tax deferral under non-qualified
Contracts arises under the Contract.
- --------------------------------------------------------------------------------
To contact Schwab:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Schwab Insurance & Annuity Service Center
- --------------------------------------------------------------------------------
P.O. Box 7666
San Francisco, CA 94120-7666
- --------------------------------------------------------------------------------
800-838-0650
- --------------------------------------------------------------------------------
Your initial Contribution must be at least $5,000; $2,000 if an IRA; $1,000 if
you are setting up an Automatic Contribution Plan. Subsequent Contributions must
be either $500; or $100 if made through an Automatic Contribution Plan.
The money you contribute to the Contract will be invested at your direction.
Prior to the Payout Commencement Date, you can withdraw all or a part of your
Annuity Account Value. There is a maximum Surrender Charge of three percent if
funds are withdrawn in the first three Contract years. Certain withdrawals may
be subject to federal income tax as well as a federal penalty tax.
When you're ready to start taking money out of your Contract, you can select
from a variety of payout options, including fixed annuity payouts as well as
periodic payouts.
If the Annuitant dies before the Annuity Commencement Date, we will pay the
Death Benefit to the Beneficiary you select. If the Owner dies before the entire
value of the Contract is distributed, the remaining value will be distributed
according to the rules outlined in the "Death Benefit" section on page x.
There is no annual contract maintenance charge.
You may cancel your Contract during the "free look period" by sending it to the
Annuity Administration Department. If you are replacing an existing insurance
contract with the Contract, the free look period may be extended based on your
state of residence. We will refund the greater of:
o Contributions received, less surrenders, withdrawals and distributions, or o
The Annuity Account Value
This summary highlights some of the more significant aspects of The Schwab Fixed
Annuity. You'll find more detailed information about these topics throughout the
prospectus and in your Contract. Please keep them both for future reference.
<PAGE>
- --------------------------------------------------------------------------------
Fee Table
<PAGE>
The purpose of this table is to help you understand the various costs and
expenses in connection with investing in the Contract. The information set forth
should be considered together with the narrative provided under the heading
"Charges and Deductions." In addition to the expenses listed below, Premium Tax
may be applicable.
Sales load None
Surrender fee Maximum 3%
Annual Contract Maintenance Charge None
Transfer fee $10.00
(no transfer fee is charged for the
first 12 transfers in any calendar year)
<PAGE>
- --------------------------------------------------------------------------------
Great-West Life & Annuity Insurance Company
Great-West is a stock life insurance company that was originally organized under
the laws of the state of Kansas as the National Interment Association. Our name
was changed to Ranger National Life Insurance Company in 1963 and to
Insuramerica Corporation prior to changing to our current name in 1982. In
September of 1990, we re-domesticated under the laws of the state of Colorado.
We are authorized to do business in 49 states, the District of Columbia, Puerto
Rico, U.S. Virgin Islands and Guam.
- --------------------------------------------------------------------------------
The Guarantee Period Fund
Amounts allocated to the Guarantee Period Fund will be deposited to, and
accounted for, in a non-unitized market value separate account. As a result, you
do not participate in the performance of the assets through unit values.
The assets accrue solely to the benefit of Great-West and any gain or loss in
the separate account is borne entirely by Great-West. You will receive the
Contract guarantees made by Great-West for amounts you contribute to the
Guarantee Period Fund.
When you contribute or Transfer amounts to the Guarantee Period Fund, you select
a new Guarantee Period from those available. All Guarantee Periods will have a
term of at least one year. Contributions allocated to the Guarantee Period Fund
will be credited on the Transaction Date we receive them.
Each Guarantee Period will have its own stated rate of interest and maturity
date determined by the date the Guarantee Period is established and the term you
choose.
Currently, Guarantee Periods with annual terms of 1 to 10 years are offered only
in those states where the Guarantee Period Fund is available. The Guarantee
Periods may change in the future, but this will not have an impact on any
Guarantee Period already in effect.
The value of amounts in each Guarantee Period equals Contributions plus interest
earned, less any Premium Tax, amounts distributed, withdrawn (in whole or in
part), amounts Transferred or applied to an annuity option, periodic withdrawals
and charges deducted under the Contract. If a Guarantee Period is broken, a
Market Value Adjustment may be assessed (please see "Breaking a Guarantee
Period" on page xx). Any amount withdrawn or Transferred prior to the Guarantee
Period Maturity Date will be paid in accordance with the Market Value Adjustment
formula. You can read more about Market Value Adjustments on page xx.
Investments of the Guarantee Period Fund
We use various techniques to invest in assets that have similar characteristics
to our general account assets--especially cash flow patterns. We will primarily
invest in investment-grade fixed income securities including:
o Securities issued by the U.S. Government or its agencies or
instrumentalities, which may or may not be guaranteed by the U.S.
Government.
o Debt securities which have an investment grade, at the time of purchase,
within the four highest grades assigned by Moody's Investment Services,
Inc. (Aaa, Aa, A or Baa), Standard & Poor's Corporation (AAA, AA, A or BBB)
or any other nationally recognized rating service.
o Other debt instruments, including, but not limited to, issues of banks or
bank holding companies and of corporations, which obligations--although not
rated by Moody's, Standard & Poor's, or other nationally recognized rating
firms--are deemed by us to have an investment quality comparable to
securities which may be purchased as stated above.
o Commercial paper, cash or cash equivalents and other short-term investments
having a maturity of less than one year which are considered by us to have
investment quality comparable to securities which may be purchased as
stated above.
In addition, we may invest in futures and options solely for non-speculative
hedging purposes. We may sell a futures contract or purchase a put option on
futures or securities to protect the value of securities held in or to be sold
for the general account or the non-unitized separate if the securities prices
are anticipated to decline. Similarly, if securities prices are expected to
rise, we may purchase a futures contract or a call option against anticipated
positive cash flow or may purchase options on securities.
The above information generally describes the investment strategy for the
Guarantee Period Fund. However, we are not obligated to invest the assets in the
Guarantee Period Fund according to any particular strategy, except as may be
required by Colorado and other state insurance laws. And, the stated rate of
interest that we establish will not necessarily relate to the performance of the
non-unitized market value separate account.
Subsequent Guarantee Periods
Before annuity payouts begin, you may reinvest the value of amounts in a
maturing Guarantee Period in a new Guarantee Period of any length we offer at
that time. On the quarterly statement issued to you prior to the end of any
Guarantee Period, we will notify you of the upcoming maturity of a Guarantee
Period. The Guarantee Period available for new Contributions may be changed at
any time, including between the date we notify you of a maturing Guarantee
Period and the date a new Guarantee Period begins.
If you do not tell us where you would like the amounts in a maturing Guarantee
Period allocated by the maturity date, we will automatically allocate the amount
to a Guarantee Period of the same length as the maturing period. If the term
previously chosen is no longer available, the amount will be allocated to the
next shortest available Guarantee Period term. If none of the above are
available, the value of matured Guarantee Periods will be allocated to the
Schwab Money Market Sub-Account.
No Guarantee Period may mature later than six months after your Payout
Commencement Date. For example, if a 3-year Guarantee Period matures and the
Payout Commencement Date begins 1 3/4 years from the Guarantee Period maturity
date, the matured value will be transferred to a 2-year Guarantee Period.
Breaking a Guarantee Period
If you begin annuity payouts, Transfer or withdraw prior to the Guarantee Period
maturity date, you are breaking a Guarantee Period. When we receive a request to
break a Guarantee Period and you have another Guarantee Period that is closer to
its maturity date, we will break that Guarantee Period first.
If you break a Guarantee Period, you may be assessed an interest rate adjustment
called a Market Value Adjustment.
Interest Rates
The declared annual rates of interest are guaranteed throughout the Guarantee
Period. For Guarantee Periods not yet in effect, Great-West may declare interest
rates different than those currently in effect. When a subsequent Guarantee
Period begins, the rate applied will be equal to or more than the rate currently
in effect for new Contracts with the same Guarantee Period.
The stated rate of interest must be at least equal to the Guaranteed Interest
Rate, but Great-West may declare higher rates. The Guaranteed Interest Rate is
based on the applicable state standard non-forfeiture law. The standard
nonforfeiture rate in all states is 3%, except in for Florida, Mississippi and
Oklahoma, it's 0%.
The determination of the stated interest rate is influenced by, but does not
necessarily correspond to, interest rates available on fixed income investments
which Great-West may acquire using funds deposited into the Guarantee Period
Fund. In addition, Great-West considers regulatory and tax requirements, sales
commissions and administrative expenses, general economic trends and competitive
factors in determining the stated interest rate.
Market Value Adjustment
Amounts you allocate to the Guarantee Period Fund may be subject to an interest
rate adjustment called a Market Value Adjustment if, six months or more before
the Guarantee Period Fund's maturity date, you:
o surrender your investment in the Guarantee Period Fund, o transfer money from
the Guarantee Period Fund, o partially withdraw money from the Guarantee Period
Fund,
o apply amounts from the Guarantee Period Fund to purchase an annuity to
receive payouts from your account, or
o take a distribution from the Guarantee Period Fund upon the death of the
Owner or the Annuitant.
The Market Value Adjustment will not apply to any Guarantee Period having fewer
than six months prior to the Guarantee Period maturity date in each of the
following situations: o Transfer to another Guarantee Period offered under this
Contract o Surrenders, partial withdrawals, annuitization or periodic
withdrawals o A single sum payout upon death of the Owner or Annuitant
A Market Value Adjustment may increase or decrease the amount payable on the
above-described distributions. The formula for calculating Market Value
Adjustments is detailed in Appendix A. Appendix A also includes examples of how
Market Value Adjustments work.
- --------------------------------------------------------------------------------
Application and Initial Contributions
The first step to purchasing The Schwab Variable Annuity is to complete your
Contract application and submit it with your initial minimum Contribution of
$5,000; $2,000 if an IRA; or $1,000 if you are setting up an Automatic
Contribution Plan. Initial Contributions can be made by check (payable to GWL&A)
or transferred from a Schwab brokerage account.
If your application is complete, your Contract will be issued and your
Contribution will be credited within two business days after receipt at the
Annuity Administration Department. Acceptance is subject to sufficient
information in a form acceptable to us. We reserve the right to reject any
application or Contribution.
If your application is incomplete, the Annuity Administration Department will
complete the application from information Schwab has on file or contact you by
telephone to obtain the required information. If the information necessary to
complete your application is not received within five business days, we will
return to you both your check and the application. If you provide consent we
will retain the initial Contribution and credit it as soon as we have completed
your application.
- --------------------------------------------------------------------------------
Free Look Period
During the free look period (ten-days or longer where required by law), you may
cancel your Contract. During the free look period, all Contributions will be
allocated to one or more of the available Guarantee Periods in accordance with
your instructions in the application and will be effective upon the Transaction
Date.
Contracts returned during the free look period will be void from the date we
issued the Contract and the greater of the following will be refunded: o
Contributions less withdrawals and distributions, or o The Annuity Account
Value.
If you exercise the free look privilege, you must return the Contract to
Great-West or to the Annuity Administration Department.
- --------------------------------------------------------------------------------
Subsequent Contributions
Once your application is complete and we have received your initial
Contribution, you can make subsequent Contributions at any time prior to the
Payout Commencement Date, as long as the Annuitant is living. Additional
Contributions must be at least $500; or $100 if made via an Automatic
Contribution Plan. Total Contributions may exceed $1,000,000 with our prior
approval.
Subsequent Contributions can be made by check or via an Automatic Contribution
plan directly from your bank or savings account. You can designate the date
you'd like your subsequent Contributions deducted from your account each month.
If you make subsequent Contributions by check, your check should be payable to
GWL&A.
You'll receive a confirmation of each Contribution you make upon its acceptance.
Great-West reserves the right to modify the limitations set forth in this
section.
- --------------------------------------------------------------------------------
Annuity Account Value
Before the date annuity payouts begin, your Annuity Account Value is the sum of
your Fixed Account under your Contract.
Unlike a brokerage account, amounts held under a Contract are not covered by the
Securities Investor Protection Corporation ("SIPC").
- --------------------------------------------------------------------------------
Transfers
Prior to the Annuity Commencement Date you may Transfer all or part of your
Annuity Account Value among the available Guarantee Periods by telephone, by
sending a Request to the Annuity Administration Department or by calling our
touch-tone account and trading service.
Your Request must specify:
o the amounts being Transferred,
o the Guarantee Period(s) from which the Transfer is to be made, and o the
Guarantee Period(s) that will receive the Transfer.
Currently, there is no limit on the number of Transfers you can make during any
calendar year. However, we reserve the right to limit the number of Transfers
you make.
There is no charge for the first twelve Transfers each calendar year, but there
will be a charge of $10 for each additional Transfer made. The charge will be
deducted from the amount Transferred. All Transfers made on a single Transaction
Date will count as only one Transfer toward the twelve free Transfers.
A Transfer generally will be effective on the date the Request for Transfer is
received by the Annuity Administration Department if received before 4:00 p.m.
Eastern time. Under current tax law, there will not be any tax liability to you
if you make a Transfer.
When you make a Transfer from amounts in a Guarantee Period before the Guarantee
Period maturity date, the amount Transferred may be subject to a Market Value
Adjustment as discussed on page xx. If you request in advance to Transfer
amounts from a maturing Guarantee Period upon maturity, your Transfer will not
count toward the 12 free Transfers and no Transfer fees will be charged.
Possible Restrictions
We reserve the right without prior notice to modify, restrict, suspend or
eliminate the Transfer privileges (including telephone Transfers) at any time.
We reserve the right to require that all Transfer requests be made by you and
not by your designee and to require that each Transfer request be made by a
separate communication to us. We also reserve the right to require that each
Transfer request be submitted in writing and be signed by you
- --------------------------------------------------------------------------------
Cash Withdrawals
You may withdraw all or part of your Annuity Account Value at any time during
the life of the Annuitant and prior to the date annuity payouts begin by
submitting a written withdrawal request to the Annuity Administration
Department. Withdrawals are subject to the rules below and federal or state
laws, rules or regulations may also apply. The amount payable to you if you
surrender your Contract is your Annuity Account Value, with any applicable
Market Value Adjustment and with any applicable Surrender Charge, on the
Effective Date of the surrender, less any applicable Premium Tax. No withdrawals
may be made after the date annuity payouts begin.
If you request a partial withdrawal, your Annuity Account Value will be reduced
by the dollar amount withdrawn. A Market Value Adjustment may apply. Market
Value Adjustments are discussed on page xx.
Partial withdrawals are unlimited. However, you must specify the Guarantee
Period(s) from which the withdrawal is to be made. After any partial withdrawal,
if your remaining Annuity Account Value is less than $2,000, then a full
surrender may be required. The minimum partial withdrawal (before application of
the MVA) is $500.
The following terms apply to withdrawals:
o Partial withdrawals or surrenders are not permitted after the date annuity
payouts begin.
o A partial withdrawal or a surrender will be effective upon the Transaction
Date. o A partial withdrawal or a surrender may be subject to the Market Value
Adjustment
provisions, and the Guarantee Period Fund provisions of the Contract.
o A partial withdrawal may be subject to a Surrender Charge.
Withdrawal requests must be in writing with your original signature. If your
instructions are not clear, your request will be denied and no withdrawal or
partial withdrawal will be processed.
After a withdrawal of all of your Annuity Account Value, or at any time that
your Annuity Account Value is zero, all your rights under the Contract will
terminate.
Withdrawals to Pay Investment Manager or Financial Advisor Fees
You may request partial withdrawals from your Annuity Account Value and direct
us to remit the amount withdrawn directly to your designated Investment Manager
or Financial Advisor (collectively "Consultant"). A withdrawal request for this
purpose must meet the $500 minimum withdrawal requirements and comply with all
terms and conditions applicable to partial withdrawals, as described above. Tax
consequences of withdrawals are detailed below, but you should consult a
competent tax advisor prior to authorizing a withdrawal from your Annuity
Account to pay Consultant fees.
Tax Consequences of Withdrawals
Withdrawals made for any purpose may be taxable--including payments made by us
directly to your Consultant.
In addition, the Code may require us to withhold federal income taxes from
withdrawals and report such withdrawals to the IRS. If you request partial
withdrawals to pay Consultant fees, your Annuity Account Value will be reduced
by the sum of the fees paid to the Consultant and the related withholding.
You may elect, in writing, to have us not withhold federal income tax from
withdrawals, unless withholding is mandatory for your Contract. If you are
younger than 59 1/2, the taxable portion of any withdrawal is generally
considered to be an early withdrawal and is subject to an additional federal
penalty tax of 10%.
Some states also require withholding for state income taxes. For details about
state withholding, please see "Federal Tax Matters" on page XX.
If you are interested in this Contract as an IRA, please refer to Section 408 of
the Code for limitations and restrictions on cash withdrawals.
- --------------------------------------------------------------------------------
Telephone Transactions
You may make Transfer requests by telephone. Telephone Transfer requests
received before 4:00 p.m. Eastern time will be made on that day. Calls completed
after 4:00 p.m. Eastern time will be made on the next business day we and the
NYSE are open for business.
We will use reasonable procedures to confirm that instructions communicated by
telephone are genuine, such as: o requiring some form of personal identification
prior to acting on instructions, o providing written confirmation of the
transaction and/or o tape recording the instructions given by telephone.
If we follow such procedures we will not be liable for any losses due to
unauthorized or fraudulent instructions.
We reserve the right to suspend telephone transaction privileges at any time,
for some or all Contracts, and for any reason. Withdrawals are not permitted by
telephone.
- --------------------------------------------------------------------------------
Death Benefit
Before the date when annuity payouts begin, the Death Benefit, if any, will be
equal to the greater of:
o the Annuity Account Value with an MVA, if applicable, as of the date the
request for payout is received, less any Premium Tax, or
o the sum of Contributions, less partial withdrawals and/or periodic
withdrawals, less any Premium Tax.
The Death Benefit will become payable following our receipt of the Beneficiary's
claim in good order. When an Owner or the Annuitant dies before the Annuity
Commencement Date and a Death Benefit is payable to a Beneficiary, the Death
Benefit proceeds will remain invested according to the allocation instructions
given by the Owner(s) until new allocation instructions are requested by the
Beneficiary or until the Death Benefit is actually paid to the Beneficiary.
The amount of the Death Benefit will be determined as of the date payouts begin.
Subject to the distribution rules below, payout of the Death Benefit may be made
as follows:
o payout in a single sum that may be subject to a Market Value Adjustment, or
o payout under any of the annuity options provided under this Contract that
may be subject to a Market Value Adjustment
o payout on the Guarantee Period Maturity Date in order that the payment will
not be subject to a Market Value Adjustment
Any payment within 6 months of the Guarantee Period Maturity Date will not be
subject to a Market Value Adjustment.
In any event, no payout of benefits provided under the Contract will be allowed
that does not satisfy the requirements of the Code and any other applicable
federal or state laws, rules or regulations.
Beneficiary
You may select one or more Beneficiaries. If more than one Beneficiary is
selected, they will share equally in any Death Benefit payable unless you
indicate otherwise. You may change the Beneficiary any time before the
Annuitant's death.
A change of Beneficiary will take effect as of the date the request is processed
by the Annuity Administration Department, unless a certain date is specified by
the Owner. If the Owner dies before the request is processed, the change will
take effect as of the date the request was made, unless we have already made a
payout or otherwise taken action on a designation or change before receipt or
processing of such request. A Beneficiary designated irrevocably may not be
changed without the written consent of that Beneficiary, except as allowed by
law.
The interest of any Beneficiary who dies before the Owner or the Annuitant will
terminate at the death of the Beneficiary. The interest of any Beneficiary who
dies at the time of, or within 30 days after the death of an Owner or the
Annuitant will also terminate if no benefits have been paid to such Beneficiary,
unless the Owner otherwise indicates by request. The benefits will then be paid
as though the Beneficiary had died before the deceased Owner or Annuitant. If no
Beneficiary survives the Owner or Annuitant, as applicable, we will pay the
Death Benefit proceeds to the Owner's estate.
If the Beneficiary is not the Owner's surviving spouse, she/he may elect, not
later than one year after the Owner's date of death, to receive the Death
Benefit in either a single sum or payout under any of the variable or fixed
annuity options available under the Contract, provided that:
o such annuity is distributed in substantially equal installments over the
life or life expectancy of the Beneficiary or over a period not extending
beyond the life expectancy of the Beneficiary and
o such distributions begin not later than one year after the Owner's date of
death. If an election is not received by Great-West from a non-spouse
Beneficiary and substantially equal installments begin no later than one year
after the Owner's date of death, then the entire amount must be distributed
within five years of the Owner's date of death. The Death Benefit will be
determined as of the date the payouts begin.
If a corporation or other non-individual entity is entitled to receive benefits
upon the Owner's death, the Death Benefit must be completely distributed within
five years of the Owner's date of death.
Distribution of Death Benefit
Death of Annuitant
Upon the death of the Annuitant while the Owner is living, and before the
Annuity Commencement Date, we will pay the Death Benefit to the Beneficiary
unless there is a Contingent Annuitant.
If a Contingent Annuitant was named by the Owner(s) prior to the Annuitant's
death, and the Annuitant dies before the Annuity Commencement Date while the
Owner and Contingent Annuitant are living, no Death Benefit will be payable and
the Contingent Annuitant will become the Annuitant.
If the Annuitant dies after the date annuity payouts begin and before the entire
interest has been distributed, any benefit payable must be distributed to the
Beneficiary according to and as rapidly as under the payout option which was in
effect on the Annuitant's date of death.
If the deceased Annuitant is an Owner, or if a corporation or other
non-individual is an Owner, the death of the Annuitant will be treated as the
death of an Owner and the Contract will be subject to the "Death of Owner"
provisions described below.
Death of Owner Who Is Not the Annuitant
If there is a Joint Owner who is the surviving spouse and the Beneficiary of the
deceased Owner, the Joint Owner becomes the Owner and Beneficiary and the Death
Benefit will be paid to the Joint Owner or the Joint Owner may elect to take the
Death Benefit or to continue the Contract in force.
- --------------------------------------------------------------------------------
Contingent Annuitant
While the Annuitant is living, you may, by Request, designate or change a
Contingent Annuitant from time to time. A change of Contingent Annuitant will
take effect as of the date the Request is processed at the
Annuity
Administration Department, unless a
certain date is specified by the Owner(s). Please note,
you are not required to designate a Contingent Annuitant.
If the Owner dies after annuity payouts commence and before the entire interest
has been distributed while the Annuitant is living, any benefit payable will
continue to be distributed to the Annuitant as rapidly as under the payout
option applicable on the Owner's date of death. All rights granted the Owner
under the Contract will pass to any surviving Joint Owner and, if none, to the
Annuitant.
In all other cases, we will pay the Death Benefit to the Beneficiary even if a
Joint Owner (who was not the Owner's spouse on the date of the Owner's death),
the Annuitant and/or the Contingent Annuitant are alive at the time of the
Owner's death, unless the sole Beneficiary is the deceased Owner's surviving
spouse who may elect to become the Owner and Annuitant and to continue the
Contract in force.
Death of Owner Who Is the Annuitant
If there is a Joint Owner who is the surviving spouse of the deceased Owner and
a Contingent Annuitant, the Joint Owner becomes the Owner and the Beneficiary,
the Contingent Annuitant will become the Annuitant, and the Contract will
continue in force.
If there is a Joint Owner who is the surviving spouse and the Beneficiary of the
deceased Owner but no Contingent Annuitant, the Joint Owner will become the
Owner, Annuitant and Beneficiary and may elect to take the Death Benefit or
continue the Contract in force.
In all other cases, we will pay the Death Benefit to the Beneficiary, even if a
Joint Owner (who was not the Owner's spouse on the date of the Owner's death),
Annuitant and/or Contingent Annuitant are alive at the time of the Owner's
death, unless the sole Beneficiary is the deceased Owner's surviving spouse who
may elect to become the Owner and Annuitant and to continue the Contract in
force.
- --------------------------------------------------------------------------------
Charges and Deductions
No amounts will be deducted from your Contributions except for any applicable
Premium Tax. As a result, the full amount of your Contributions (less any
applicable Premium Tax) are invested in the Contract.
As more fully described below, charges under the Contract are assessed only as
deductions for:
o Certain Transfers,
o Surrender Charges, and
o Premium Tax, if applicable
Transfer Fee
There will be a $10 charge for each Transfer in excess of 12 Transfers in any
calendar year. We do not expect a profit from the Transfer fee.
Surrender Charge
We may deduct a maximum Surrender Charge of three percent (3%) from amounts
withdrawn or distributed within the first three Contract years. The Surrender
Charge applies to the amounts withdrawn or distributed after they have been
adjusted by any applicable Market Value Adjustment. The applicable Surrender
Charge will decrease over time as indicated in the table below.
Years Completed Percentage of Distribution
- -------------------------------------- -----------------------------------------
1 3%
2 2%
3 1%
4+ 0%
Premium Tax
We may be required to pay state Premium Taxes or retaliatory taxes currently
ranging from 0% to 3.5% in connection with Contributions or values under the
Contracts. Depending upon applicable state law, we will deduct charges for the
Premium Taxes we incur with respect to your Contributions, from amounts
withdrawn, or from amounts applied on the Payout Commencement Date. In some
states, charges for both direct Premium Taxes and retaliatory Premium Taxes may
be imposed at the same or different times with respect to the same Contribution,
depending on applicable state law.
Other Taxes
Under present laws, we will incur state or local taxes (in addition to the
Premium Tax described above) in several states. No charges are currently made
for taxes other than Premium Tax. However, we reserve the right to deduct
charges in the future for federal, state, and local taxes or the economic burden
resulting from the application of any tax laws that we determine to be
attributable to the Contract.
- --------------------------------------------------------------------------------
Payout Options
During the Distribution Period, you can choose to receive payouts in four
ways--through periodic withdrawals,fixed annuity payouts or in a single,
lump-sum payment.
You may change the Payout Commencement Date within 60 days prior to commencement
of payouts or your Beneficiary may change it upon the death of the Owner.
If this is an IRA, payouts which satisfy the minimum distribution requirements
of the Code must begin no later than April 1 of the calendar year following the
calendar year in which you become age 70 1/2.
Periodic Withdrawals
You may request that all or part of the Annuity Account Value be applied to a
periodic withdrawal option. The amount applied to a periodic withdrawal is the
Annuity Account Value with any applicable MVA, less any applicable Surrender
Charge, less Premium Tax, if any.
In requesting periodic withdrawals, you must elect: o The withdrawal frequency
of either 1-, 3-, 6- or 12-month intervals o A minimum withdrawal amount of at
least $100 o The calendar day of the month on which withdrawals will be made
o One of the periodic withdrawal payout options discussed below-- you may
change the withdrawal option and/or the frequency once each calendar year
Your withdrawals may be prorated across the Guarantee Period Fund (if applicable
in proportion to their assets. Or, they can be made specifically from a
Guarantee Period(s) until they are depleted. Then, we will automatically prorate
the remaining withdrawals against any remaining Guarantee Period(s) assets
unless you request otherwise.
While periodic withdrawals are being received:
o You may continue to exercise all contractual rights, except that no
Contributions may be made. o A Market Value Adjustment, if applicable, will be
assessed for periodic withdrawals from Guarantee Periods six
or more months prior to its Guarantee Period Maturity Date.
o You may keep the same Guarantee Periods as were in force before periodic
withdrawals began. o Surrender Charges and/or any other charges and fees under
the Contract continue to apply. o Maturing Guarantee Periods renew into the
shortest Guarantee Period then available.
Periodic withdrawals will cease on the earlier of the date:
o the amount elected to be paid under the option selected has been reduced to
zero.
o the Annuity Account Value is zero.
o You request that withdrawals stop.
o The Owner or the Annuitant dies.
If periodic withdrawals stop, you may resume making Contributions. However, we
may limit the number of times you may restart a periodic withdrawal program.
Periodic withdrawals made for any purpose may be taxable, subject to withholding
and to the 10% federal penalty tax if you are younger than age 59 1/2. IRAs are
subject to complex rules with respect to restrictions on and taxation of
distributions, including penalty taxes.
- --------------------------------------------------------------------------------
If you choose to receive payouts from your Contract through periodic
withdrawals, you may select from the following payout options: o Income for a
specified period (at least 36 months)--You elect the length of time over which
withdrawals will be
made. The amount paid will vary based on the duration you choose.
- --------------------------------------------------------------------------------
o Income of a specified amount (at least 36 months)--You elect the dollar
amount of the withdrawals. Based on the amount elected, the duration may
vary.
- --------------------------------------------------------------------------------
o Interest only--Your withdrawals will be based on the amount of interest
credited to the Guarantee Period Fund between withdrawals.
- --------------------------------------------------------------------------------
o Minimum distribution--If you are using this Contract as an IRA, you may
request minimum distributions as specified under Code Section 401(a)(9).
- --------------------------------------------------------------------------------
o Any other form of periodic withdrawal acceptable to Great-West which is for a
period of at least 36 months.
- --------------------------------------------------------------------------------
In accordance with the provisions outlined in this section, you may request a
periodic withdrawal to remit fees paid to your Investment Manager or Financial
Advisor. There may be income tax consequences to any periodic withdrawal made
for this purpose. Please see "Cash Withdrawals" on page XX.
Annuity Payout Information
You can choose the date you'd like annuity payouts to start either when you
purchase the Contract or at a later date. The date you choose must be at least
one year after your initial Contribution. If you do not select a payout start
date, payouts will begin on the first day of the month of the Annuitant's 91st
birthday. You can change your selection at any time up to 30 days before the
annuity date you selected.
If you have not elected a payout option within 30 days of the Annuity
Commencement Date, your Annuity Account Value will be paid out as a fixed life
annuity with a guarantee period of 20 years.
The amount to be paid out is the Annuity Account Value on the Annuity
Commencement Date. The minimum amount that may be withdrawn from the Annuity
Account Value to purchase an annuity payout option is $2,000 with a Market Value
Adjustment, if applicable. If after the Market Value Adjustment, your Annuity
Account Value is less than $2,000, we may pay the amount in a single sum subject
to the Contract provisions applicable to a partial withdrawal.
- --------------------------------------------------------------------------------
You may select from the following payout options:
o Income of specified amount--The amount applied under this option may be
paid in equal annual, semi-annual, quarterly or monthly installments in the
dollar amount elected for not more than 240 months.
o Income for a specified period--Payouts are paid annually, semi-annually,
quarterly or monthly, as elected, for a selected number of years not to
exceed 240 months.
o Fixed life annuity with guaranteed period--This option provides monthly
payouts during a guaranteed period or for the lifetime of the Annuitant,
whichever is longer. The guaranteed period may be 5, 10, 15 or 20 years.
o Fixed life annuity--This option provides for monthly payouts during the
lifetime of the Annuitant. The annuity ends with the last payout due prior
to the death of the Annuitant. Since no minimum number of payouts is
guaranteed, this option may offer the maximum level of monthly payouts. It
is possible that only one payout may be made if the Annuitant died before
the date on which the second payout is due.
o Any other form of a fixed annuity acceptable to us.
- --------------------------------------------------------------------------------
A portion or the entire amount of the annuity payouts may be taxable as ordinary
income. If, at the time the annuity payouts begin, we have not received a proper
written election not to have federal income taxes withheld, we must by law
withhold such taxes from the taxable portion of such annuity payouts and remit
that amount to the federal government (an election not to have taxes withheld is
not permitted for certain Qualified Contracts). State income tax withholding may
also apply. Please see "Federal Tax-Matters" below for details.
Annuity IRAs
The annuity date and options available for IRAs may be controlled by
endorsements, the plan documents, or applicable law.
Under the Code, a Contract purchased and used in connection with an Individual
Retirement Account or with certain other plans qualifying for special federal
income tax treatment is subject to complex "minimum distribution" requirements.
Under a minimum distribution plan, distributions must begin by a specific date
and the entire interest of the plan participant must be distributed within a
certain specified period of time. The application of the minimum distribution
requirements vary according to your age and other circumstances.
- --------------------------------------------------------------------------------
Seek Tax Advice
The following discussion of the federal income tax consequences is only a brief
summary and is not intended as tax advice. The federal income tax consequences
discussed here reflect our understanding of current law and the law may change.
Federal estate tax consequences and state and local estate, inheritance, and
other tax consequences of ownership or receipt of distributions under a Contract
depend on your individual circumstances or the circumstances of the person who
receives the distribution. A tax adviser should be consulted for further
information.
- --------------------------------------------------------------------------------
Federal Tax Matters
The following discussion is a general description of federal income tax
considerations relating to the Contracts and is not intended as tax advice. This
discussion assumes that the Contract qualifies as an annuity contract for
federal income tax purposes. This discussion is not intended to address the tax
consequences resulting from all situations. If you are concerned about these tax
implications relating to the ownership or use of the Contract, you should
consult a competent tax adviser before initiating any transaction.
- --------------------------------------------------------------------------------
Because tax laws, rules and regulations are constantly changing, we do not make
any guarantees about the Contract's tax status.
- --------------------------------------------------------------------------------
This discussion is based upon our understanding of the present federal income
tax laws as they are currently interpreted by the Internal Revenue Service. No
representation is made as to the likelihood of the continuation of the present
federal income tax laws or of the current interpretation by the Internal Revenue
Service. Moreover, no attempt has been made to consider any applicable state or
other tax laws.
The Contract may be purchased on a non-tax qualified basis ("Non-Qualified
Contract") or purchased and used in connection with IRAs. The ultimate effect of
federal income taxes on the amounts held under a Contract, on annuity payouts,
and on the economic benefit to you, the Annuitant, or the Beneficiary may depend
on the type of Contract, and on the tax status of the individual concerned.
Certain requirements must be satisfied in purchasing an Annuity IRA and
receiving distributions from an Annuity IRA in order to continue receiving
favorable tax treatment. As a result, purchasers of Annuity IRAs should seek
competent legal and tax advice regarding the suitability of the Contract for
their situation, the applicable requirements and the tax treatment of the rights
and benefits of the Contract. The following discussion assumes that an Annuity
IRA is purchased with proceeds and/or Contributions that qualify for the
intended special federal income tax treatment.
Taxation of Annuities
Section 72 of the Code governs taxation of annuities. You, as a "natural person"
will not generally be taxed on increases, if any, in the value of your Annuity
Account Value until a distribution occurs by withdrawing all or part of the
Annuity Account Value (for example, withdrawals or annuity payouts under the
annuity payout option elected). However, under certain circumstances, you may be
subject to taxation currently. In addition, an assignment, pledge, or agreement
to assign or pledge any portion of the Annuity Account Value generally will be
treated as a distribution. The taxable portion of a distribution (in the form of
a single sum payout or an annuity) is taxable as ordinary income. An IRA
Contract may not be assigned as collateral.
If the Contract is not owned by a natural person (for example, a corporation or
certain trusts), you generally must include in income any increase in the excess
of the Annuity Account Value over the "investment in the Contract" (discussed
below) during each taxable year. The rule does not apply where the non-natural
person is the stated Owner of a Contract and the beneficial Owner is a natural
person.
The rule also does not apply where:
o The annuity Contract is acquired by the estate of a decedent. o The Contract
is held under an IRA. o The Contract is a qualified funding asset for a
structured settlement.
o The Contract is purchased on behalf of an employee upon termination of a
qualified plan.
The following discussion generally applies to a Contract owned by a natural
person.
Withdrawals
In the case of a withdrawal under an IRA, including withdrawals under the
periodic withdrawal option, a portion of the amount received may be non-taxable.
The amount of the non-taxable portion is generally determined by the ratio of
the "investment in the Contract" to the individual's total accrued benefit under
the plan. The "investment in the Contract" generally equals the amount of any
nondeductible Contributions paid by or on behalf of any individual. Special tax
rules may be available for certain distributions from an IRA.
With respect to Non-Qualified Contracts, partial withdrawals, including periodic
withdrawals, are generally treated as taxable income to the extent that the
Annuity Account Value immediately before the withdrawal exceeds the "investment
in the Contract" at that time. If a partial withdrawal is made from a Guarantee
Period which is subject to a Surrender Charge or a Market Value Adjustment, then
the Annuity Account Value immediately before the withdrawal will not be altered
to take into account the Surrender Charge or the Market Value Adjustment. As a
result, for purposes of determining the taxable portion of the partial
withdrawal, the Annuity Account Value will not reflect the amount, if any,
deducted from or added to the Guarantee Period due to the Surrender Charge or
the Market Value Adjustment. Full surrenders are treated as taxable income to
the extent that the amount received exceeds the "investment in the Contract."
The taxable portion of any annuity payout is taxed at ordinary income tax rates.
Annuity payouts
Although the tax consequences may vary depending on the annuity form elected
under the Contract, in general, only the portion of the annuity payout that
represents the amount by which the Annuity Account Value exceeds the "investment
in the Contract" will be taxed. After the investment in the Contract is
recovered, the full amount of any additional annuity payouts is taxable. For
fixed annuity payouts, in general there is no tax on the portion of each payout
which represents the same ratio that the "investment in the Contract" bears to
the total expected value of the annuity payouts for the term of the payouts.
However, the remainder of each annuity payout is taxable. Once the investment in
the Contract has been fully recovered, the full amount of any additional annuity
payouts is taxable.
Penalty tax
For distributions from a Non-Qualified Contract, there may be a federal income
tax penalty imposed equal to 10% of the amount treated as taxable income. In
general, however, there is no penalty tax on distributions: o Made on or after
the date on which the Owner reaches age 59 1/2.
o Made as a result of death or disability of the Owner.
o Received in substantially equal periodic payouts (at least annually) for
your life (or life expectancy) or joint lives (or the joint life
expectancies) of you and the Beneficiary.
Other exemptions or tax penalties may apply to distributions from a
Non-Qualified Contract or certain distributions from an IRA. For more details
regarding these exemptions or penalties consult a competent tax adviser.
Taxation of Death Benefit Proceeds
Amounts may be distributed from the Contract because of the death of an Owner or
the Annuitant. Generally such amounts are included in the income of the
recipient as follows:
If distributed in a lump sum, they are taxed in the same manner as a full
surrender, as described above.
If distributed under an annuity form, they are taxed in the same manner as
annuity payouts, as described above.
Distribution at death
In order to be treated as an annuity contract, the terms of the Contract must
provide the following two distribution rules:
If the Owner dies before the date annuity payouts start, your entire interest
must generally be distributed within five years after the date of your death. If
payable to a designated Beneficiary, the distributions may be paid over the life
of that designated Beneficiary or over a period not extending beyond the life
expectancy of that Beneficiary, so long as payouts start within one year of your
death. If the sole designated Beneficiary is your spouse, the Contract may be
continued in the name of the spouse as Owner.
If the Owner dies on or after the date annuity payouts start, and before the
entire interest in the Contract has been distributed, the remainder of your
interest will be distributed on the same or on a more rapid schedule than that
provided for in the method in effect on the date of death.
If the Owner is not an individual, then for purposes of the distribution at
death rules, the Primary Annuitant is considered the Owner. In addition, when
the Owner is not an individual, a change in the Primary Annuitant is treated as
the death of the Owner.
Distributions made to a Beneficiary upon the Owner's death from an IRA must be
made pursuant to the rules in Section 401(a)(9) of the Code.
Transfers, Assignments or Exchanges
A transfer of ownership of a Contract, the designation of an Annuitant, Payee or
other Beneficiary who is not also the Owner, or the exchange of a Contract may
result in adverse tax consequences that are not discussed in this Prospectus.
Multiple Contracts
All deferred, Non-Qualified Annuity Contracts that are issued by Great-West (or
our affiliates) to the same Owner during any calendar year will be treated as
one annuity contract for purposes of determining the taxable amount.
Withholding
Annuity distributions generally are subject to withholding at rates that vary
according to the type of distribution and the recipient's tax status.
Recipients, however, generally are provided the opportunity to elect not to have
tax withheld from distributions. Certain distributions from IRAs are subject to
mandatory federal income tax withholding.
Section 1035 Exchanges
Section 1035 of the Code provides that no gain or loss shall be recognized on
the exchange of one insurance contract for another. Generally, contracts issued
in an exchange for another annuity contract are treated as new for purposes of
the penalty and distribution at death rules.
Individual Retirement Annuities
The Contract may be used with IRAs as described in Section 408 of the Code.
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an Individual Retirement Annuity. Also,
certain kinds of distributions from certain types of qualified and non-qualified
retirement plans may be "rolled over" following the rules set out in the Code.
If you purchase this Contract for use with an IRA, you will be provided with
supplemental information. And, you have the right to revoke your purchase within
seven days of purchase of the IRA Contract.
If a Contract is purchased to fund an IRA, the Annuitant must also be the Owner.
In addition, if a Contract is purchased to fund an IRA, minimum distributions
must commence not later than April 1st of the calendar year following the
calendar year in which you attain age 70 1/2. You should consult your tax
adviser concerning these matters.
Various tax penalties may apply to Contributions in excess of specified limits,
distributions that do not satisfy specified requirements, and certain other
transactions. The Contract will be amended as necessary to conform to the
requirements of the Code if there is a change in the law. Purchasers should seek
competent advice as to the suitability of the Contract for use with IRAs.
When you make your initial Contribution, you must specify whether you are
purchasing a Non-Qualified Contract or an IRA. If the initial Contribution is
made as a result of an exchange or surrender of another annuity contract, we may
require that you provide information with regard to the federal income tax
status of the previous annuity contract.
We will require that you purchase separate Contracts if you want to invest money
qualifying for different annuity tax treatment under the Code. For each separate
Contract you will need to make the required minimum initial Contribution.
Additional Contributions under the Contract must qualify for the same federal
income tax treatment as the initial Contribution under the Contract. We will not
accept an additional Contribution under a Contract if the federal income tax
treatment of the Contribution would be different from the initial Contribution.
If a Contract is issued in connection with an employer's Simplified Employee
Pension plan, Owners, Annuitants and Beneficiaries are cautioned that the rights
of any person to any of the benefits under the Contract will be subject to the
terms and conditions of the plan itself, regardless of the terms and conditions
of the Contract.
- --------------------------------------------------------------------------------
Assignments or Pledges
Generally, rights in the Contract may be assigned or pledged for loans at any
time during the life of the Annuitant. However, if the Contract is an IRA, you
may not assign the Contract as collateral.
If a non-IRA Contract is assigned, the interest of the assignee has priority
over your interest and the interest of the Beneficiary. Any amount payable to
the assignee will be paid in a single sum.
A copy of any assignment must be submitted to the Annuity Administration
Department. All assignments are subject to any action taken or payout made by
Great-West before the assignment was processed. We are not responsible for the
validity or sufficiency of any assignment.
If any portion of the Annuity Account Value is assigned or pledged for a loan,
it may be treated as a distribution. Please consult a competent tax adviser for
further information.
- --------------------------------------------------------------------------------
Distribution of the Contracts
Charles Schwab & Co., Inc. (Schwab) is the principal underwriter and distributor
of the Contracts. Schwab is registered with the Securities and Exchange
Commission as a broker/dealer and is a member of the National Association of
Securities Dealers, Inc. (NASD). Its principal offices are located at 101
Montgomery, San Francisco, California 94104, telephone 800-838-0650.
Certain administrative services are provided by Schwab to assist Great-West in
processing the Contracts. These services are described in written agreements
between Schwab and Great-West. Great-West has agreed to indemnify Schwab (and
its agents, employees, and controlling persons) for certain damages arising out
of the sale of the Contracts, including those arising under the securities laws.
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
The following is a summary of certain financial data of GWL&A. This summary has
been derived in part from, and should be read in conjunction with, GWL&A's
Consolidated Financial Statements.
[Millions]
Years Ended December 31,
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT 1999 1998 1997 1996 1995
----------------------------------------------- -------------- -------------
DATA
Premiums $ 1,163 $ 995 $ 833 $ 829 $ 732
Fee income 635 516 420 347 335
Net investment income 876 897 882 835 835
Realized investment
gains (losses) 1 38 10 (21) 8
----------------------------------------------- -------------- -------------
Total Revenues 2,675 2,446 2,145 1,990 1,910
Policyholder benefits 1,582 1,462 1,385 1,356 1,269
------------ ------------ ------------- ------------- -------------
Operating expenses 804 688 552 469 464
----------- ----------- ----------- ----------- ------------
Total benefits and
expenses 2,386 2,150 1,937 1,825 1,733
----------------------------------------------- -------------- -------------
Income from operations 289 296 208 165 177
Income tax expense 83 99 49 30 49
----------------------------------------------- -------------- -------------
Net Income $ 206 $ 197 $ 159 $ 135 $ 128
=============================================== ============== =============
Deposits for investment-
type contracts $ 634 $ 1,344 $ 658 $ 815 $ 868
Deposits to separate
accounts 2,583 2,208 2,145 1,438 1,165
Self-funded premium
equivalents 2,979 2,606 2,039 1,940 2,140
December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------- -------------- -------------
BALANCE SHEET DATA
Investment assets $ 13,058 $ 13,671 $ 13,206 $ 12,717 $ 12,473
Separate account assets 12,780 10,100 7,847 5,485 3,999
Total assets 27,393 25,123 22,078 19,351 17,682
Total policy benefit
liabilities 12,386 12,583 11,706 11,600 11,408
Due to Parent Corporation 35 52 118 120 122
Due to GWL&A Financial 175
40
Total shareholder's equity 1,167 1,199 1,186 1,034 993
Management's Discussion and Analysis of Financial Condition and Results of Operations
</TABLE>
<PAGE>
The Company
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.
Shares of Great-West Lifeco, Power Financial and Power Corporation are traded
publicly in Canada.
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, 1998, the Company ranked among the top 25 of all U.S. life insurance
companies in terms of admitted assets.
<PAGE>
The Company operates in the following two business segments:
<TABLE>
<S> <C>
Employee Benefits life, health and 401(k) products for group clients
Financial Services savings products for both public and non-profit employers and individuals
(including 401, 403(b), 408 and 457 plans), and
life insurance products for individuals and
businesses
</TABLE>
The following discussion 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, 1999 follows.
COMPANY RESULTS OF OPERATIONS
1. Consolidated Results
The Company's consolidated net income increased $8.8 million or 5% in 1999 when
compared to the year ended December 31, 1998, reflecting improved results in the
Employee Benefits segment, offset by a slight decrease in the Financial Services
segment. The Employee Benefits segment contributed $9.5 million to the improved
consolidated results compared to the Financial Services segment which recorded a
$0.7 million decrease. Of total consolidated net income in 1999 and 1998, the
Employee Benefits segment contributed 57% and 54%, respectively, while the
Financial Services segment contributed 43% and 46%, respectively.
The Company's consolidated net income increased $38.1 million or 24% in 1998
when compared to the year ended December 31, 1997. In 1998, the Employee
Benefits segment contributed $8.8 million or 23% to the overall growth and the
Financial Services segment contributed $29.3 million or 77% to the overall
growth.
Pursuant to a required change in accounting policy, the Company capitalized
$18.4 million of software development costs (see Note 1 to the consolidated
financial statements), which increased the 1999 consolidated net income.
The Company's 1999 and 1997 consolidated net income increased by $8.3 million
and $21.1 million, respectively, due to changes in income tax provisions for
these years. The current income tax provisions were decreased by $17.2 million
and $42.2 million for 1999 and 1997, 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 1999 and 1997, $8.9 million and $15.1 million,
respectively, 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 provision for 1997 also reflected an increase 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.
In 1999 total revenues increased $228.9 million or 9% to $2.7 billion when
compared to the year ended December 31, 1998. The growth in revenues in 1999 was
comprised of increased premium income of $168.3 million, increased fee income of
$119.1 million, decreased net investment income of $21.4 million and decreased
realized gains on investments of $37.1 million. 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.
The increased premium income in 1999 was comprised of growth in Employee
Benefits premium income of $243.5 million, offset by a decrease in Financial
Services premium income of $75.2 million. The growth in premium income in the
Employee Benefits segment primarily reflected an increase of $205.9 million of
premium income derived from Alta Health & Life Insurance Company ("Alta"),
formerly known as Anthem Health & Life Insurance Company, which the Company
acquired in July 1998 (see Other Matters). The decrease of $75.2 million in
Financial Services premium income was due primarily to reinsurance transactions
in 1998 of $46.2 million. There were no significant reinsurance transactions in
1999. 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 Alta. The decrease of $120.2 million in
Financial Services premium income was primarily due to reinsurance transactions
in 1997 of $155.8 million versus only $46.2 million in premiums due to
reinsurance transactions in 1998.
The increased fee income in 1999 was comprised of growth in Employee Benefits
fee income and Financial Services fee income of $103.9 million and $15.2
million, respectively. The growth in Employee Benefits fee income reflected an
increase of $42.0 million of fee income derived from Alta during 1999. The
remaining increase was the result of new group health sales and increased fees
on 401(k) variable funds related to growth in equity markets. The increase in
fee income in 1998 was comprised of 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 Alta. The remaining increase was the result of new group
health sales and increased fees on 401(k) variable funds related to growth in
equity markets.
Realized investment gains decreased from a realized investment gain of $38.2
million in 1998 to a realized investment gain of $1.1 million in 1999. Realized
investment gains were $9.8 million in 1997. The increase in interest rates in
1999 contributed to $7.8 million of fixed maturity losses, while the decrease in
interest rates in 1998 and 1997 resulted in gains on sales of fixed maturities
totaling $38.4 and $16.0 million, respectively. Increases (decreases) in the
provision for asset losses of $(7.0) and $0.6 million, respectively, were
recognized in 1999 and 1998.
Total benefits and expenses increased $235.7 million or 11% in 1999 when
compared to the year ended December 31, 1998. The increase in 1999 was due to
Alta, which resulted in an increase in benefits and expenses of $245.3 million.
Excluding Alta, benefits and expenses would have decreased $9.6 million or 0.4%
in 1999. The decrease included the effect of a change in accounting policy,
which resulted in the capitalization of $18.4 million of software costs in 1999.
Overall, total benefits and expenses have increased due to higher costs of
managed care operations. The increase of $213.9 from 1997 to 1998 was a
combination of the acquisition of Alta, which resulted in benefits and expenses
increasing $258.3, partially offset by a decrease in policyholder benefits
related to reinsurance transactions of $109.4 million.
In June 1997, the Company recaptured all the remaining pieces of an individual
participating block of business previously reinsured to Great-West Life. The
Company recorded various assets and liabilities related to the recapture as
discussed in Note 3 to the Consolidated Financial Statements. In recording the
recapture, both life insurance premiums and benefits were increased by the
amount recaptured ($155.8 million). Consequently, the net income of the Company
was not impacted by the reinsurance transaction.
Income tax expense decreased $15.6 million or 16% in 1999 when compared to the
year ended December 31, 1998, which reflects a net $17.2 million release of
contingent tax liabilities relating to prior open tax years, as discussed above.
Income tax expense increased $49.0 million or 98% in 1998 when compared to the
year ended December 31, 1997. The increase in income tax expense from 1997 to
1998 reflected higher earnings in 1998, as well as the fact that the 1997 income
tax provision included a net $26.2 release 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 2% and 30% in 1999 and
1998, respectively. 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 decreased $709.6 million or 53% in 1999
when compared to the year ended December 31, 1998. Deposits for investment-type
contracts increased $686.0 million or 104% in 1998 when compared to the year
ended December 31, 1997. The decrease in 1999 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 during 1998. This transaction increased deposits by $519.6 million in
1998 and accounted for (73)% and 76% of the increase (decrease) in 1999 and
1998, respectively.
Deposits for separate accounts increased $374.4 million or 17% in 1999 when
compared to the year ended December 31, 1998. This was due primarily to $200
million of BOLI deposits associated with the variable life product, and a
continuing movement toward variable funds and away from guaranteed interest rate
options. Deposits for separate accounts increased $63.7 million or 3% in 1998
when compared to the year ended December 31, 1997. This increase in 1998
reflected a continuing movement toward variable funds and away from guaranteed
interest rate options.
Self-funded premium equivalents increased $372.7 million or 14% in 1999 when
compared to the year ended December 31, 1998. The increase in 1999 was primarily
due to an increase in self-funded premium equivalents from Alta of $155.2
million, with the remainder coming from the growth in business. Self-funded
premium equivalents increased $567.1 million or 28% in 1998 when compared to the
year ended December 31, 1997. Approximately half of the 1998 increase ($281.3
million) was due to the acquisition of Alta, with the remainder coming from
sales growth.
Total assets increased $2.3 billion or 9% in 1999 when compared to the year
ended December 31, 1998. Separate account assets increased $2.7 billion
primarily due to the strength of the equity markets in the United States. The
$0.4 billion decrease in the general account reflected the continuing movement
away from guaranteed products.
2. Other Matters
Effective January 1, 2000, the Company coinsured the majority of General
American Life Insurance Company's ("General American") group life and health
insurance business, which primarily consists of administrative services only and
stop loss policies. This added over 900,000 medical members representing
approximately $1.7 billion of premium and premium equivalents. The agreement
will convert to an assumption reinsurance agreement by January 1, 2001, subject
to regulatory approval. On January 1, 2000, the Company assumed approximately
$150 million of policy reserves and miscellaneous liabilities in exchange for an
equal amount of cash and other assets from General American.
On October 6, 1999, the Company entered into an agreement with Allmerica
Financial Corporation ("Allmerica") to acquire Allmerica's group life and health
insurance business on March 1, 2000. This acquisition is anticipated to add
300,000 medical members and approximately $800 million of premium and premium
equivalents. This business primarily consists of administrative services only
and stop loss policies. The in-force business is expected to be underwritten and
retained by the Company upon each policy renewal date. The purchase price is
based on a percentage of the premium and administrative fees in force at March
1, 2000 and March 1, 2001.
On July 8, 1998, the Company acquired the outstanding common stock of Alta,
which was a subsidiary of Anthem, Inc. (the Blue Cross and Blue Shield licensee
for Indiana, Kentucky, Ohio, and Connecticut). The cost of the acquisition was
$82.7 million. The purchase price was based on adjusted book value and was
subject to further 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. The goodwill representing the purchase price in excess of fair
value of net assets acquired is included in other assets and is being amortized
over 30 years on a straight-line basis.
The majority of Alta's customers are in the Company's target market of small to
mid-size employers who prefer to self-fund their benefit plans. New and existing
customers have been migrated to the Company's One Health Plan network, which
provided substantial new growth for the One Health Plan subsidiary organization.
Life and health premium and fee income for Alta totaled $489.0 million and
$241.1 million for the periods ended December 31, 1999 and 1998, respectively,
while self-funded premium equivalents were $436.5 million and $281.3 million for
the years ended December 31, 1999 and 1998, respectively. The Company recorded
small losses associated with Alta operations in 1999 and 1998, respectively. The
results of Alta since the date of acquisition are included in the Employee
Benefits segment.
<PAGE>
EMPLOYEE BENEFITS RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Employee Benefits
segment:
<TABLE>
(Millions) Years Ended December 31,
----------------------------------------------
<S> <C> <C> <C>
INCOME STATEMENT 1999 1998 1997
------------- ------------ -----------
DATA
Premiums $ 990 $ 747 $ 465
Fee income 549 445 358
Net investment income 80 95 100
------------- ------------ -----------
Realized investment gains (losses) (1) 8 3
------------- ------------ -----------
Total Revenues 1,618 1,295 926
Policyholder benefits 789 590 371
------------- ------------ -----------
------------- ------------ -----------
Operating expenses 661 547 428
------------- ------------ -----------
------------- ------------ -----------
Total benefits and expenses 1,450 1,137 799
------------- ------------ -----------
Income from operations 168 158 127
Income tax expense 51 51 29
------------- ------------ -----------
Net Income $ 117 $ 107 $ 98
============= ============ ===========
Deposits for investment-type
contracts $ 26 $ 37 $ 25
Deposits to separate accounts 1,745 1,568 1,403
Self-funded premium equivalents 2,979 2,606 2,039
</TABLE>
During 1999, the Employee Benefits segment experienced:
o significant growth in 401(k) assets under administration,
o increased sales offset by some deterioration in customer retention in group
life and health,
o favorable morbidity results, and
o license approval for one additional HMO subsidiary, for a total of 15 fully
operational HMOs.
Net income for Employee Benefits increased 9% in 1999 and 9% in 1998. The
improvement in earnings in 1999 reflected increased fee income from variable
401(k) assets, improved group morbidity experience and the capitalization of
$17.1 million of software costs in 1999, offset by a decrease in realized gains.
The improvement in earnings in 1998 reflected increased fee income from variable
401(k) assets and improved group mortality experience. The changes in income tax
provisions discussed above under "Company Results of Operations" resulted in an
increase in net income for the Employee Benefits segment of $4.7 million in
1999.
401(k) premiums and deposits for 1999 and 1998 increased 11% and 14%,
respectively, as the result of higher recurring deposits from existing customers
and new sales. Assets under administration (including third-party
administration) in 401(k) increased 26% over 1998 to $8.5 billion and 26% from
1997 to 1998, primarily due to strong equity markets.
Equivalent premium revenue and fee income for group life and health increased
19% from 1998 levels as the result of a combination of price increases and the
Alta acquisition. From 1997 to 1998, equivalent premium revenue and fee income
had increased 32% as a result of a combination of increased sales and the Alta
acquisition.
1. Group Life and Health
The Employee Benefits segment experienced a net increase of 468 group health
care customers (employer groups) during 1999 (versus 593 in 1998). 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.
The Company experienced a 6% decrease in total health care membership from
2,266,700 at the end of 1998 to 2,130,400 at year-end 1999 as the result of
certain large case terminations. Gatekeeper (i.e., POS and HMO) members grew 5%
from 522,300 in 1998 to 549,900 in 1999. The Company expects this segment of the
business to grow as additional HMO licenses are obtained and additional Alta
members are converted.
Total health care membership increased from 1997 to 1998 by 35% (Alta accounted
for 76% of this growth). Gatekeeper members grew 26% from 414,500 in 1997 to
522,300 in 1998, including 61,800 Alta members. Excluding the Alta acquisition,
gatekeeper members increased 19%.
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 2% to 811 in 1999 from
828 in 1998 (1,235 in 1997). The 401(k) block of business under administration
totaled 6,400 employer groups and more than 500,000 individual participants,
compared to 6,100 employer groups and 475,000 individual participants in 1998,
and 5,700 employer groups and 430,000 individual participants in 1997.
During 1999, the in-force block of 401(k) business continued to perform well,
with customer retention of 92.9% versus 93.0% in 1998. This, combined with
strong equity markets, resulted in a 26% increase in assets under management
during 1999 and 1998, 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 1999 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
The Alta, General American, and Allmerica acquisitions will help to provide the
Company with critical mass to compete in the consolidating health care market.
Through a combination of internal growth and new business acquisitions, the
Company expects to grow from 2.1 million members to 3.4 million members by the
end of the first quarter of 2001. The Company's life and health and 401(k) sales
are projected to double from 1999 results. In order to remain competitive, a
focused effort on provider contracting will be essential to ensure competitive
morbidity results. A continuing focus on expense levels and synergies will
ensure competitive administrative expenses. The ongoing consolidation of the
Company's benefit payment offices will remain an important operational issue
from both a cost and quality perspective.
The Company will continue the expansion of its One Health Plan managed care
subsidiaries. In 2000, it is anticipated that three new licensed HMOs, in
Kansas, Missouri and Pennsylvania, will be approved. This will bring the total
number of licensed One Health Plan HMOs to 18, which will provide current
customers with a comprehensive national managed care network.
Delivering cost-effective, value-added services via the Internet will continue
to be a focus for the Company. The Company has already introduced online
enrollment capability for 401(k) participants, and later in 2000 it will
introduce the same capability for life and health members. In addition, the
Company has signed an agreement with an online investment advisor to provide
401(k) participants with personal investment advice via the Internet. This
action, combined with a very competitive product portfolio should result in an
increase in new case sales.
FINANCIAL SERVICES RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Financial Services
segment:
<TABLE>
(Millions) Years Ended December 31,
-------------------------------------------------
<S> <C> <C> <C>
INCOME STATEMENT 1999 1998 1997
-------------- ------------ -------------
DATA
Premiums $ 173 $ 248 $ 368
Fee income 86 71 62
Net investment income 796 802 782
-------------- ------------ -------------
Realized investment gains (losses) 2 30 7
-------------- ------------ -------------
Total Revenues 1,057 1,151 1,219
Policyholder benefits 793 872 1,014
-------------- ------------ -------------
Operating expenses 143 141 124
-------------- ------------ -------------
Total benefits and expenses 936 1,013 1,138
-------------- ------------ -------------
Income from operations 121 138 81
Income tax expense 32 48 20
-------------- ------------ -------------
Net Income $ 89 $ 90 $ 61
============== ============ =============
Deposits for investment-type
contracts $ 608 $ 1,307 $ 633
Deposits to separate accounts 838 640 742
</TABLE>
During 1999, the Financial Services segment experienced:
o significant growth in participants and separate account funds primarily
attributable to the public/non-profit business,
o very strong persistency in all lines of business, and
increased sales of BOLI.
Net income for Financial Services decreased 1% in 1999 and increased 48% in
1998. The earnings in 1999 were favorably impacted by improved investment
margins and increased fee income, but were adversely impacted by the large
decrease in realized investment gains. The improvement in earnings in 1998
reflected higher earnings from an increased asset base, an increase in
investment margins, and larger capital gains on fixed maturities. The changes in
income tax provisions discussed above under "Company Results of Operations"
resulted in an increase in net income for the Financial Services segment of $3.6
million in 1999.
1. Savings
Premiums decreased $2.5 million or 14%, from $16.8 million in 1998 to $14.3
million in 1999. Premiums decreased $5.8 million or 26%, from $22.6 million in
1997 to $16.8 million in 1998. 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 with life
contingencies.
Fee income related to savings products increased $10.3 million or 15%, from
$71.0 million in 1998 to $81.3 million in 1999. Fee income increased $8.6
million or 14%, from $62.4 million in 1997 to $71.0 million in 1998. The growth
in fee income in 1999 and 1998 was the result of new sales and increased fees on
variable funds related to growth in equity markets.
Deposits for investment-type contracts decreased $3.1 million or 1%, from $239.0
million in 1998 to $235.9 million in 1999. Deposits for investment-type
contracts increased $20.4 million or 9%, from $218.6 million in 1997 to $239.0
million in 1998.
Deposits to separate accounts decreased $2.9 million or 0.4%, from $640.6
million in 1998 to $637.7 million in 1999. Deposits to separate accounts
decreased $101.5 million or 14%, from $742.1 million in 1997 to $640.6 million
in 1998. 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 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 2% and 9% during 1999 and 1998 to $7.9 billion and $7.8
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 increase was offset by a decrease primarily
due to one major case moving to an independent money manager. The Company did
maintain the administrative services contract and fee income associated with
this client.
The Financial Services segment's savings business experienced strong growth in
1999. The number of new participants in 1999 was 214,100 compared to 151,300 in
1998 (129,200 in 1997), bringing the total lives under administration to 806,700
in 1999 and 642,500 in 1998.
The Financial Services segment again experienced a very high retention rate on
public/non-profit contract renewals, renewing 100% of contracts that were
eligible for renewal during the year. 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 62% in 1999, to $104.7 million. In 1998, GIC assets decreased
33% from 1997, to $274.8 million.
Customer demand for investment diversification continued to grow during 1999.
New contributions to variable business represented 64% of the total 1999
premiums versus 63% in 1998. 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 1999 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
$653.7 million in 1999, compared to $562.3 million in 1998 and $466.2 million in
1997.
FASCorp administered records for approximately 1,595,000 participants in 1999
versus 1,307,000 in 1998. FASCorp's fee income was $53.8 million, $44.0 million
and $36.1 million at December 31, 1999, 1998 and 1997, respectively.
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 $735.3 million in
1999 decreased 43% from 1998 primarily due to reinsurance transactions with
Great-West Life, which resulted in $565.8 million of premiums and deposits in
1998. Excluding these reinsurance transactions, individual life insurance
revenue premiums and deposits increased 0.1% from 1998. 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.
In 1996, the U.S. Congress enacted legislation to phase out the tax
deductibility of interest on policy loans on COLI products. Since then, renewal
premiums and deposits for COLI products have decreased to $128.5 million in 1999
from $139.8 million in 1998 and $299.8 million in 1997, 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 $436.3 million during 1999,
compared to $408.3 million in 1998 and $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 2000, the Company expects to continue its growth of the third party
administration business through FASCorp. The savings business will continue to
improve customer service and, at the same time, lower unit costs through the use
of Internet services.
The Company will continue to emphasize the development of the institutional life
insurance and annuity markets. Internet sales and service is also expected to
play a significant role in the life insurance business lines. Increased emphasis
was placed on improving Internet functionality during 1999, and it will continue
to be a focus in the coming year in the bank and institutional markets.
Strong sales are expected in the BOLI market - the Company's new variable life
product has been well received in the market as the separate account option
limits credit risk.
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:
<TABLE>
[Millions]
1999 1998
------------ ------------
<S> <C> <C>
Fixed maturities, available for sale, at fair value $ 6,728 $ 6,937
Fixed maturities, held-to-maturity, at amortized cost 2,260 2,200
Mortgage loans 975 1,133
Real estate and common stock 173 122
Short-term investments 241 420
Policy loans 2,681 2,859
------------ ------------
Total invested assets $ 13,058 $ 13,671
============ ============
</TABLE>
1. Fixed Maturities
Fixed maturity investments include public and privately placed corporate bonds,
government bonds and mortgage-backed and asset-backed securities. The Company's
strategy related to mortgage-backed and asset-backed securities is to focus on
those with lower volatility and minimal credit risk. The Company does not invest
in higher risk collateralized mortgage obligations 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:
<TABLE>
<S> <C> <C>
Credit Rating 1999 1998
----------------- -----------------
AAA 48.9% 45.6%
AA 8.9 9.4
A 19.6 23.8
BBB 22.3 20.7
BB and Below (non-investment grade) 0.3 0.5
----------------- -----------------
TOTAL 100.0% 100.0%
</TABLE>
At December 31, 1999 and 1998, the Company owned no bonds in default.
2. Mortgage Loans
During 1999, the mortgage portfolio declined 14% to $1.0 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 increased to $43.9 million in 1999
compared with $31.2 million in 1998, and there were no foreclosures in 1999,
compared to $3.0 million in 1998. 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, 1999 and 1998,
the Company's loan portfolio included $75.7 million and $52.9 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 ($91.1 million) and properties acquired through the foreclosure of
troubled mortgages ($10.1 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 added a third tower to its
Head Office complex during the first quarter of 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 2000.
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 1999. The Company
does not expect to recognize any asset writedowns or restructurings in 2000 that
would result in a material adverse effect upon the Company's financial
condition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have liquidity requirements that vary among the
principal product lines. Life insurance and pension plan reserves are primarily
long-term liabilities. Accident and health reserves, including long-term
disability, consist of both short-term and long-term liabilities. Life insurance
and pension plan reserve requirements are usually stable and predictable, and
are supported primarily by long-term, fixed income investments. Accident and
health claim demands are stable and predictable but generally shorter term,
requiring greater liquidity.
Generally, the Company has met its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and utilizing
positive cash flows from operations. Liquidity for the Company has remained
strong, as evidenced by significant amounts of short-term investments and cash,
which totaled $498.6 million and $596.3 million as of December 31, 1999 and
1998, 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 no
commercial paper outstanding at December 31, 1999, compared with $39.7 million
at December 31, 1998. 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. In addition, the Company issued a
surplus note to GWL&A Financial in 1999. The surplus note bears interest at
7.25% and is due June 30, 2048.
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement No. 133,
"Accounting for Derivative Instruments and for Hedging Activities", which, as
amended, is required to be adopted in years beginning after June 15, 2000. This
Statement provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. Although management has
not completed its analysis of the impact of this Statement, management does not
anticipate that the adoption of the new Statement will have a significant effect
on earnings or the financial position of the Company because of the Company's
minimal use of derivatives.
See the Note 1 to the Consolidated Financial Statements for additional
information regarding accounting pronouncements.
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, 1999 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 $7.1 million as of December 31, 1999 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 $3.4
million at December 31, 1999.
5. Canadian Regulation
Because the Company is an indirect 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. Congress has from time to time considered legislation
relating to health care reform and managed care issues (including patients'
rights, privacy of medical records and managed care plan or enterprise
liability), changes in the deferral of taxation on the accretion of value within
certain annuities and life insurance products, changes in regulation for the
Employee Retirement Income Security Act of 1974, as amended, and changes as to
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.
GWL&A is rated by a number of nationally recognized rating agencies. The ratings
represent the opinion of the rating agencies on the financial strength of GWL&A
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 Performance A++ *
Duff & Phelps Corporation Claims Paying Ability AAA *
Standard & Poor's Corporation Claims Paying Ability AA+ **
Moody's Investors Service Insurance Financial Strength Aa2 ***
* Highest ratings available.
** Second highest rating out of 19 rating categories. *** Third highest rating
out of 19 rating categories.
</TABLE>
MISCELLANEOUS
No customer accounted for 10% or more of GWL&A's consolidated revenues in 1999.
In addition, no segment of GWL&A's business is dependent on a single customer or
a few customers, the loss of which would have a significant effect on GWL&A 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 GWL&A
or any of its business segments.
GWL&A had approximately 6,900 employees at December 31, 1999.
The Head Office of the Company consists of a 752,000 square foot office complex
located in Greenwood Village, Colorado. The office complex is owned by a
subsidiary of the Company. The Company leases sales and claims offices
throughout the United States.
DIRECTORS AND EXECUTIVE OFFICERS
Following is information concerning GWL&A's directors and executive officers,
together with their principal occupation for the past five years. Unless
otherwise indicated, all of the directors and 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.
Directors are elected annually to serve until the following annual meeting of
shareholders.
The appointments of executive officers are confirmed annually.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Director Served as Principal Occupation(s) For
Director From Last Five Years
James Balog 1993 Company Director
(1)(2)
James W. Burns, O.C. 1991 Chairman of the Boards of Great-West Lifeco,
(1)(2)(4) Great-West Life, London Insurance Group Inc. and
London Life Insurance Company; Deputy Chairman,
Power Corporation
Orest T. Dackow 1991 President and Chief Executive Officer, Great-West
(1)(2)(4) Lifeco
Andre Desmarais 1997 President and Co-Chief Executive Officer, Power
(1)(2)(4)(5) Corporation; Deputy Chairman, Power Financial
Paul Desmarais, Jr. 1991 Chairman and Co-Chief Executive Officer, Power
(1)(2)(4)(5) Corporation; Chairman, Power Financial
Robert G. Graham 1991 Company Director since January 1996; previously
(1)(2)(4) 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 1991 Chairman of the Board of GWL&A; President and
(1)(2)(4) Chief Executive Officer, Power Financial
N. Berne Hart 1991 Company Director
(1)(2)(3)
Kevin P. Kavanagh 1986 Company Director; Chancellor, Brandon University
(1)(3)(4)
William Mackness 1991 Company Director since July 1995; previously
(1)(2) Dean, Faculty of Management, University of
Manitoba
William T. McCallum 1990 President and Chief Executive Officer of GWL&A;
(1)(2)(4) President and Chief Executive Officer, United
States Operations, Great-West Life
Jerry E.A. Nickerson 1994 Chairman of the Board, H.B. Nickerson & Sons
(3)(4) Limited (a management and holding company)
The Honourable 1991 Vice-Chairman, Power Corporation; Member of the
P. Michael Pitfield, P.C., Q.C. Senate of Canada
(1)(2)(4)
Michel Plessis-Belair, F.C.A. 1991 Vice-Chairman and Chief Financial Officer, Power
(1)(2)(3)(4) Corporation; Executive Vice-President and Chief
Financial Officer, Power Financial
Director Served as Principal Occupation(s) For
Director From Last Five Years
Brian E. Walsh 1995 Co-Founder and Managing Partner, Veritas Capital
(1)(2) 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)
(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.
</TABLE>
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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
J. Balog Transatlantic Holdings
Phoenix
Investment Partners
A. Desmarais The Seagram Company Limited
P. Desmarais, Jr. Rhodia, S.A.
EXECUTIVE OFFICERS
Executive Officer Served as Executive Principal Occupation(s) For
Officer From Last Five Years
William T. McCallum President and 1984 President and Chief Executive Officer of GWL&A;
Chief Executive Officer President and Chief Executive Officer, United
States Operations, Great-West Life
Mitchell T.G. Graye 1997 Executive Vice President and Chief Financial
Executive Vice President and Chief Officer of GWL&A; Executive Vice President and
Financial Officer Chief Financial Officer, United States, Great-West
Life
James D. Motz 1992 Executive Vice President, Employee Benefits of
Executive Vice President, GWL&A and Great-West Life
Employee Benefits
Douglas L. Wooden 1991 Executive Vice President, Financial Services of
Executive Vice President, GWL&A and Great-West Life
Financial Services
Michael R. Bracco 1999 Senior Vice President, Employee Benefits of GWL&A
Senior Vice President, Employee and Great-West Life since September 1996;
Benefits previously Manager, Bain & Company (a strategy
consulting company)
John A. Brown 1992 Senior Vice President, Healthcare Markets of GWL&A
Senior Vice President, Healthcare and Great-West Life
Markets
Donna A. Goldin 1996 Executive Vice President and Chief Operating
Executive Vice President and Chief Officer, One Corporation since June 1996;
Operating Officer, previously Executive Vice President and Chief
One Corporation 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)
Mark S. Hollen 2000 Senior Vice President, FASCorp of GWL&A and
Senior Vice President, FASCorp Great-West Life
John T. Hughes 1989 Senior Vice President, Chief Investment Officer of
Senior Vice President, GWL&A; Senior Vice President, Chief Investment
Chief Investment Officer Officer, United States, Great-West Life
D. Craig Lennox 1984 Senior Vice President, General Counsel and
Senior Vice President, General Secretary of GWL&A; Senior Vice President and
Counsel and Secretary Chief U.S. Legal Officer, Great-West Life
Steve H. Miller 1997 Senior Vice President, Employee Benefits Sales of
Senior Vice President, Employee GWL&A and Great-West Life
Benefits Sales
Charles P. Nelson 1998 Senior Vice President,
Senior Vice President, Public/Non-Profit Markets of GWL&A and Great-West
Public/Non-Profit Markets Life
Martin Rosenbaum 1997 Senior Vice President, Employee Benefits of GWL&A
Senior Vice President, Employee and Great-West Life
Benefits
Gregory E. Seller 1999 Senior Vice President, Government Markets of GWL&A
Senior Vice President, Government and Great-West Life
Markets
Robert K. Shaw 1998 Senior Vice President, Individual Markets of GWL&A
Senior Vice President, Individual and Great-West Life
Markets
George D. Webb 1999 Senior Vice President, Public/Non-Profit
Senior Vice President, Operations of GWL&A and Great-West Life since July
Public/Non-Profit Operations 1999; previously Principal, William M. Mercer
Investment Consulting, Inc.
</TABLE>
EXECUTIVE COMPENSATION
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 GWL&A (collectively the "Named Executive
Officers") for services rendered to GWL&A and its subsidiaries, and Great-West
Life, in all capacities for fiscal years ended 1997, 1998 and 1999,
respectively.
<TABLE>
SUMMARY COMPENSATION TABLE
====================================================================================== ===============================
Annual compensation Long-term compensation awards
- -------------------------------------------------------------------------------------- -------------------------------
- ------------------------------- ----------------- --------------- -------------------- -------------------------------
Name and Year Salary Bonus Options (1)
principal position ($) ($) (#)
- ------------------------------- ----------------- --------------- -------------------- -------------------------------
- ------------------------------- ----------------- --------------- -------------------- -------------------------------
<S> <C> <C> <C> <C>
W.T. McCallum 1999 955,303 680,000 100,000(2)
President and 1998 651,667 432,250 -
Chief Executive Officer 1997 608,708 406,250 600,000 (3)
- ------------------------------- ----------------- --------------- -------------------- -------------------------------
- ------------------------------- ----------------- --------------- -------------------- -------------------------------
D.L. Wooden 1999 365,000 219,000 -
Executive Vice President, 1998 330,000 198,000 -
Financial Services 1997 300,000 150,000 300,000 (3)
- ------------------------------- ----------------- --------------- -------------------- -------------------------------
- ------------------------------- ----------------- --------------- -------------------- -------------------------------
J.D. Motz 1999 385,000 192,500 -
Executive Vice President, 1998 350,000 157,500 -
Employee Benefits 1997 300,000 151,300 100,000 (2)
300,000 (3)
- ------------------------------- ----------------- --------------- -------------------- -------------------------------
- ------------------------------- ----------------- --------------- -------------------- -------------------------------
J.T. Hughes 1999 350,000 185,500 -
Senior Vice President, Chief 1998 338,000 185,900 -
Investment Officer 1997 324,000 162,000 -
- ------------------------------- ----------------- --------------- -------------------- -------------------------------
- ------------------------------- ----------------- --------------- -------------------- -------------------------------
M.T.G. Graye Executive Vice 1999 315,000 189,000 -
President and Chief Financial 1998 275,000 151,250 18,000 (2)
Officer 18,000 (3)
1997 219,469 117,958 132,000 (3)
=============================== ================= =============== ==================== ===============================
</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.
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 1/1.44.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
============================================================================================== =============================
Potential realizable value
at assumed annual rates of
Individual grants stock price appreciation
for option term
- ---------------------------------------------------------------------------------------------- -----------------------------
Percent of
total options
Options granted to Exercise or
Name granted employees in base price Expiration date 5% 10%
(#) fiscal year ($/share) ($) ($)
- ----------------------- --------------- ---------------- --------------- --------------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
W.T. McCallum 100,000 11.01 15.37 June 9, 2009 967,000 2,450,000
- ----------------------- --------------- ---------------- --------------- --------------------- ------------- ---------------
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 1999, and all unexercised PFC Options
held as of December 31, 1999, 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 1/1.44.
AGGREGATED PFC OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
============================================================== ================================= ==================================
Unexercised options at fiscal Value of unexercised
year-end in-the-money options at fiscal
(#) year-end
($)
- -------------------------------------------------------------- --------------------------------- ----------------------------------
Shares
acquired Value
Name on exercise realized Exercisable Unexercisable Exercisable Unexercisable
(#) ($)
- ------------------------ -------------------- ---------------- ---------------- ---------------- ---------------- -----------------
D.L. Wooden - - 176,000 - 2,309,809 -
-------------------- ---------------- ---------------- ---------------- ---------------- -----------------
- ------------------------ -------------------- ---------------- ---------------- ---------------- ---------------- -----------------
M.T.G. Graye 70,000 1,150,716 70,000 - 919,813 -
======================== ==================== ================ ================ ================ ================ =================
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 1999, and all unexercised Lifeco Options held as of
December 31, 1999, 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 1/1.44.
AGGREGATED LIFECO OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
============================================================== ================================= ==================================
Unexercised options at fiscal Value of unexercised
year-end in-the-money options at fiscal
(#) year-end
($)
- -------------------------------------------------------------- --------------------------------- ----------------------------------
Shares
acquired Value
Name on exercise realized Exercisable Unexercisable Exercisable Unexercisable
(#) ($)
- ------------------------ -------------------- ---------------- ---------------- ---------------- ---------------- -----------------
W.T. McCallum - - 360,000 940,000 3,717,991 5,528,894
---------------- -----------------
- ------------------------ -------------------- ---------------- ---------------- ---------------- ---------------- -----------------
D.L. Wooden - - 120,000 380,000 1,239,331 2,308,855
---------------- -----------------
- ------------------------ -------------------- ---------------- ---------------- ---------------- ---------------- -----------------
J.D. Motz - - 160,000 440,000 1,575,242 2,812,722
- ------------------------ -------------------- ---------------- ---------------- ---------------- ---------------- -----------------
- ------------------------ -------------------- ---------------- ---------------- ---------------- ---------------- -----------------
J.T. Hughes - - 96,000 64,000 991,464 660,976
---------------- -----------------
- ------------------------ -------------------- ---------------- ---------------- ---------------- ---------------- -----------------
M.T.G. Graye - - 82,800 217,200 825,726 900,072
======================== ==================== ================ ================ ================ ================ =================
<PAGE>
PENSION PLAN TABLE
The following table sets out the pension benefits payable to the Named Executive
Officers by Great-West Life or GWL&A.
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>
The Named Executive Officers have the following years of service.
Name Years of Service
W.T. McCallum 34
D.L. Wooden 9
J.D. Motz 29
J.T. Hughes 10
M.T.G. Graye 6
For W.T. McCallum, the benefits shown are payable commencing December 31, 2000,
and remuneration is the average of the highest 36 consecutive months of
compensation during the last 84 months of employment. For 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.
COMPENSATION OF DIRECTORS
For each director of GWL&A who is not also a director of Great-West Life, GWL&A
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
GWL&A who is also a director of Great-West Life, GWL&A pays a meeting fee of
$1,000 for each meeting of the Board of Directors or a committee thereof
attended which is not coincident with a Great-West Life meeting. In addition,
all directors are reimbursed for incidental expenses.
The above amounts are paid in the currency of the country of residence of the
director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Executive compensation is determined by GWL&A's Board of Directors. W.T.
McCallum, President and Chief Executive Officer of GWL&A, is a member of the
Board of Directors. Mr. McCallum participated in executive compensation matters
generally but was not present when his own compensation was discussed or
determined.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below is certain information, as of March 1, 2000, concerning
beneficial ownership of the voting securities of GWL&A by entities and persons
who beneficially own more than 5% of the voting securities of GWL&A. 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 GWL&A's 7,032,000 outstanding common shares are owned by GWL&A
Financial Inc., 8515 East Orchard Road, Englewood, Colorado 80111.
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.
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.
100% 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.
81.2% of the outstanding common shares of Great-West Lifeco Inc. are controlled
by Power Financial Corporation, 751 Victoria Square, Montreal, Quebec, Canada
H2Y 2J3.
67.4% of the outstanding common shares of Power Financial Corporation are owned
by 171263 Canada Inc., 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3.
100% of the outstanding common shares of 171263 Canada Inc. are owned by 2795957
Canada Inc., 751 Victoria Square, Montreal, Quebec, Canada H2Y 2J3.
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.
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 GWL&A.
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 March 1, 2000, 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.
<TABLE>
- ------------------------------ ----------------------------------------------------------------------------------------
Power-Corporation Inc. Power Financial Corporation
of Canada
----------------------------------------------------------------------------------------
-------------------- --------------------- -----------------------
(1) (2) (3)
------------------------------------------ ---------------------------------------------
-------------------- --------------------- -----------------------
Directors
- -----------------------------------------------------------------------------------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J. Balog - - -
- ------------------------------ ------------------------------------------ ---------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
J. W. Burns 153,659 8,000 400,640
200,000 options
- ------------------------------ ------------------------------------------ ---------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
O.T. Dackow 78,398 - -
300,000 options
- ------------------------------ ------------------------------------------ ---------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
A. Desmarais 51,659 21,600 140,800
1,658,000 options
- ------------------------------ ------------------------------------------ ---------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
P. Desmarais, Jr. 43,659 - 1,448,000
- ------------------------------ ------------------------------------------ ---------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
R.G. Graham - - -
- ------------------------------ ------------------------------------------ ---------------------------------------------
<PAGE>
- ------------------------------ -------------------- --------------------- -----------------------
Great-West Lifeco Power Financial Power Corporation of
Inc. Corporation Canada
- ------------------------------ -------------------- --------------------- -----------------------
- ------------------------------ -------------------- --------------------- -----------------------
(1) (2) (3)
- ------------------------------ -------------------- --------------------- -----------------------
- ------------------------------ -------------------- --------------------- -----------------------
Directors
- ------------------------------ -------------------- --------------------- -----------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
R. Gratton 330,000 310,000 5,000
5,280,000 options 300,000 options
- ------------------------------ ------------------------------------------ ---------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
N.B. Hart - - -
- ------------------------------ ------------------------------------------ ---------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
K. P. Kavanagh 18,500 - -
- ------------------------------ ------------------------------------------ ---------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
W. Mackness - 4,000 -
- ------------------------------ ------------------------------------------ ---------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
W.T. McCallum 82,800 80,000 -
360,000 options
- ------------------------------ ------------------------------------------ ---------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
J.E.A. Nickerson - 4,000 4,000
- ------------------------------ ------------------------------------------ ---------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
P.M. Pitfield 90,000 75,000 100,000
309,000 options
- ------------------------------ ------------------------------------------ ---------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
M. Plessis-Belair 20,000 2,000 15,800
223,300 options
- ------------------------------ ------------------------------------------ ---------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
B.E. Walsh - - -
- ------------------------------ ------------------------------------------ ---------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Named Executive Officers
- -----------------------------------------------------------------------------------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
W.T. McCallum 82,800 80,000 -
360,000 options
- ------------------------------ ------------------------------------------ ---------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
D.L. Wooden 120,000 options 176,000 options -
- ------------------------------ ------------------------------------------ ---------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
J.D. Motz 12,549 - -
160,000 options
- ------------------------------ ------------------------------------------ ---------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
J.T. Hughes 10,471 - -
96,000 options
- ------------------------------ ------------------------------------------ ---------------------------------------------
- ------------------------------ ------------------------------------------ ---------------------------------------------
M.T.G. Graye 747 70,000 -
86,400 options 70,000 options
- ------------------------------ ------------------------------------------ ---------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Directors and Executive Officers as a Group
- -----------------------------------------------------------------------------------------------------------------------
- ------------------------------ -------------------- --------------------- -----------------------
990,785 734,600 2,114,240
1,516,800 options 5,526,000 options 2,690,300 options
- ------------------------------ -------------------- --------------------- -----------------------
</TABLE>
(1) All holdings are common shares, or where indicated, exercisable options
for common shares, of Great-West Lifeco Inc.
(2) All holdings are common shares, or where indicated, exercisable options
for common shares, of Power Financial Corporation.
(3) 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 2.1 % 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.
<PAGE>
55
- ------------------------------------------------------------------------
Rights Reserved by Great-West
We reserve the right to make certain changes we believe would best serve the
interests of Owners and Annuitants or would be appropriate in carrying out the
purposes of the Contracts. Any changes will be made only to the extent and in
the manner permitted by applicable laws. Also, when required by law, we will
obtain your approval of the changes and approval from any appropriate regulatory
authority. Approval may not be required in all cases, however. Examples of the
changes we may make include:
To make any changes required by the Code or by any other applicable law in order
to continue treatment of the Contract as an annuity.
To change the time or time of day at which a valuation date is deemed to have
ended.
To make any other necessary technical changes in the Contract in order to
conform with any action the above provisions permit us to take, including
changing the way we assess charges, without increasing them for any outstanding
Contract beyond the aggregate amount guaranteed.
- -------------------------------------------------------------------------------
Currently, Great-West is not currently a party to, and its property is not
currently subject to, any material legal proceedings. The lawsuits to which
Great-West is a party are, in the opinion of management, in the ordinary course
of business, and are not expected to have a material adverse effect on the
financial results, conditions or prospects of Great-West.
- --------------------------------------------------------------------------------
Advice regarding certain legal matters concerning the federal securities laws
applicable to the issue and sale of the Contract has been provided by Jorden
Burt Boros Cicchetti Berenson & Johnson LLP.
- --------------------------------------------------------------------------------
Experts
The consolidated financial statements of Great-West Life & Annuity Insurance
Company at December 31, 1999 and 1998, and for each of the three years in the
period ended December 31, 1998 included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein, and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
- --------------------------------------------------------------------------------
Available Information
We have filed a registration statement ("Registration Statement") with the
Commission under the 1933 Act relating to the Contracts offered by this
Prospectus. This Prospectus has been filed as a part of the Registration
Statement and does not contain all of the information contained in the
Registration Statement and its exhibits. Additionally, statements in this
Prospectus about the content of the Contract and other legal instruments are
summaries. Please refer to the Registration Statement and its exhibits for
further information. Great-West is also subject to the informational
requirements of the Securities Exchange Act of 1934, as amended and in
accordance with that act Great-West has filed reports and other information with
the Commission. You can review the Registration Statement and its exhibits and
other reports and information filed with the Commission at the Commission's
offices located at 450 Fifth Street, N.W., Washington, D.C. The Commission
maintains a Web Site that contains reports and information statements and other
information regarding Great-West, at the following address http://www.sec.gov.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Appendix A--Market Value Adjustments
The amount available for a full surrender, partial withdrawal or Transfer equals
the amount requested plus the Market Value Adjustment (MVA). The MVA is
calculated by multiplying the amount requested by the Market Value Adjustment
Factor (MVAF).
The MVA formula
The MVA is determined using the following formula:
MVA = (amount applied) x (Market Value Adjustment Factor) The Market Value
Adjustment Factor is:
{[(1 + i)/(1 + j +.10%)] N/12} - 1
Where:
i is the U.S. Treasury Strip ask side yield as published in the Wall Street
Journal on the last business day of the week prior to the date the stated rate
of interest was established for the Guarantee Period. The term of i is measured
in years and equals the term of the Guarantee Period
j is the U.S. Treasury Strip ask side yield as published in the Wall Street
Journal on the last business day of the week prior to the week the Guarantee
Period is broken. The term of j equals the remaining term to maturity of the
Guarantee Period, rounded up to the higher number of years
N is the number of complete months remaining until maturity
The MVA will equal 0 if:
if i and j differ by less than .10%
N is less than 6.
Examples
Following are four examples of Market Value Adjustments illustrating (1)
increasing interest rates, (2) decreasing interest rates, (3) flat interest
rates (i and j are within .10% of each other), and (4) less than 6 months to
maturity.
Example 1--Increasing Interest Rates
- ------------------------- -------------------------------------
- ------------------------ $25,000 on November 1, 1996
Deposit
- ------------------------- -------------------------------------
- ------------------------- -------------------------------------
Maturity date December 31, 2005
- ------------------------- -------------------------------------
- ------------------------- -------------------------------------
Interest Guarantee 10 years
Period
- ------------------------- -------------------------------------
- ------------------------- -------------------------------------
i assumed to be 6.15%
- ------------------------- -------------------------------------
- ------------------------- -------------------------------------
Surrender date July 1, 2000
- ------------------------- -------------------------------------
- ------------------------- -------------------------------------
j 7.00%
- ------------------------- -------------------------------------
- ------------------------- -------------------------------------
Amount surrendered $10,000
- ------------------------- -------------------------------------
- ------------------------- -------------------------------------
N 65
- ------------------------- -------------------------------------
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1
= {[1.0615/1.071]65/12} - 1
= .952885 - 1
= -.047115
MVA = (amount transferred or surrendered) x MVAF = $10,000 x - .047115 = -
$471.15
Surrender Value = (amount transferred or surrendered + MVA)
= ($10,000 + - $471.15)
= $9,528.85
Example 2--Decreasing Interest Rates
- -------------------------- ------------------------------------
Deposit $25,000 on November 1, 1996
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Maturity date December 31, 2005
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Interest Guarantee Period 10 years
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
i assumed to be 6.15%
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Surrender date July 1, 2000
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
j 5.00%
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Amount surrendered $10,000
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
N 65
- -------------------------- ------------------------------------
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1
= {[1.0615/1.051]65/12} - 1
= .055323
MVA = (amount transferred or surrendered) x MVAF = $10,000 x .0055323 =
$553.23
Surrender Value = (amount transferred or surrendered + MVA)
= ($10,000 + $553.23)
= $10,553.23
Example 3--Flat Interest Rates (i and j are within .10% of each other)
- -------------------------- ------------------------------------
Deposit $25,000 on November 1, 1996
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Maturity date December 31, 2005
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Interest Guarantee Period 10 years
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
i assumed to be 6.15%
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Surrender date July 1, 2000
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
j 6.24%
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Amount surrendered $10,000
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
N 65
- -------------------------- ------------------------------------
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1
= {[1.0615/1.0634]65/12} - 1
= .99036 - 1
= -.00964
However, [i-j] <.10%, so MVAF = 0
MVA = (amount transferred or surrendered) x MVAF = $10,000 x 0 = $0
Surrender Value = (amount transferred or surrendered + MVA)
= ($10,000 + $0)
= $10,000
Example 4--N equals less than 6 months to maturity
- -------------------------- ------------------------------------
Deposit $25,000 on November 1, 1996
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Maturity date December 31, 2005
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Interest Guarantee Period 10 years
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
i assumed to be 6.15%
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Surrender date July 1, 2005
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
j 7.00%
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
Amount surrendered $10,000
- -------------------------- ------------------------------------
- -------------------------- ------------------------------------
N 5
- -------------------------- ------------------------------------
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1
= {[1.0615/1.071]5/12} - 1
= .99629 - 1
= -.00371
However, N<6, so MVAF = 0
MVA = (amount transferred or surrendered) x MVAF = $10,000 x 0 = $0
Surrender Value = (amount transferred or surrendered + MVA)
= ($10,000 + $0)
= $10,000
<PAGE>
56
- --------------------------------------------------------------------------------
<PAGE>
Consolidated Financial Statements and Independent Auditors' Report
<PAGE>
On the following pages, you'll find the consolidated financial statements and
the independent auditors' report for Great-West Life & Annuity Insurance Company
for the years ended December 1999, 1998 and 1997.
- --------------------------------------------------------------------------------
<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, 1999, 1998, and 1997 and
Independent Auditors' Report
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,
1999 and 1998, 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, 1999. 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, 1999 and 1998, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1999, the Company adopted Statement of Position No. 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use" and, accordingly, changed its method of accounting for
software development costs.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
January 31, 2000
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
===================================================================================================================================
1999 1998
---------------------- -----------------------
ASSETS
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost (fair value
$2,238,581 and $2,298,936) $ 2,260,581 $ 2,199,818
Available-for-sale, at fair value (amortized cost
$6,953,383 and $6,752,532) 6,727,922 6,936,726
Common stock, at fair value (cost $43,978 and 69,240 48,640
$41,932)
Mortgage loans on real estate, net 974,645 1,133,468
Real estate, net 103,731 73,042
Policy loans 2,681,132 2,858,673
Short-term investments, available-for-sale (cost
approximates fair value) 240,804 420,169
---------------------- -----------------------
Total Investments 13,058,055 13,670,536
Cash 257,840 176,119
Reinsurance receivable
Related party 5,015 5,006
Other 168,307 187,952
Deferred policy acquisition costs 282,295 238,901
Investment income due and accrued 137,810 157,587
Other assets 308,419 311,078
Premiums in course of collection 142,199 84,940
Deferred income taxes 253,323 191,483
Separate account assets 12,780,016 10,099,543
---------------------- -----------------------
TOTAL ASSETS $ 27,393,279 $ 25,123,145
====================== =======================
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
====================================================================================================================================
1999 1998
----------------- -----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
POLICY BENEFIT LIABILITIES:
Policy reserves
Related party $ 555,783 $ 555,300
Other 11,181,900 11,347,548
Policy and contract claims 391,968 428,798
Policyholders' funds 185,623 181,779
Provision for policyholders' dividends 70,726 69,530
GENERAL LIABILITIES:
Due to Parent Corporation 35,979 52,877
Due to GWL&A Financial 175,035
Repurchase agreements 80,579 244,258
Commercial paper 39,731
Other liabilities 638,469 761,505
Undistributed earnings on participating business 130,638 143,717
Separate account liabilities 12,780,016 10,099,543
----------------- -----------------
Total Liabilities 26,226,716 23,924,586
----------------- -----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Preferred stock, $1 par value, 50,000,000 shares authorized,
0 shares issued and outstanding
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 700,316 699,556
Accumulated other comprehensive income (loss) (84,861) 61,560
Retained earnings 544,076 430,411
----------------- -----------------
Total Stockholder's Equity 1,166,563 1,198,559
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 27,393,279 $ 25,123,145
================= =================
</TABLE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
===================================================================================================================================
1999 1998 1997
---------------- ---------------- ----------------
REVENUES:
Premiums
Related party (including premiums
recaptured totaling $0,
$0, and $155,798) $ $ 46,191 $ 155,798
Other (net of premiums ceded totaling
$85,803, $86,511 and $61,194) 1,163,183 948,672 677,381
Fee income 635,147 516,052 420,730
Net investment income
Related party (10,923) (9,416) (8,957)
Other 886,869 906,776 890,630
Net realized gains on investments 1,084 38,173 9,800
---------------- ---------------- ----------------
2,675,360 2,446,448 2,145,382
---------------- ---------------- ----------------
BENEFITS AND EXPENSES:
Life and other policy benefits (net of
reinsurance recoveries totaling $80,681,
$81,205, and $44,871) 970,250 768,474 543,903
Increase in reserves
Related party 46,191 155,798
Other 33,631 78,851 90,013
Interest paid or credited to contractholders 494,081 491,616 527,784
Provision for policyholders' share of earnings
on participating business 13,716 5,908 3,753
Dividends to policyholders 70,161 71,429 63,799
---------------- ---------------- ----------------
1,581,839 1,462,469 1,385,050
Commissions 173,405 144,246 102,150
Operating expenses (income):
Related party (768) (5,094) (6,292)
Other 593,575 518,228 431,714
Premium taxes 38,329 30,848 24,153
---------------- ---------------- ----------------
2,386,380 2,150,697 1,936,775
INCOME BEFORE INCOME TAXES 288,980 295,751 208,607
---------------- ---------------- ----------------
PROVISION FOR INCOME TAXES:
Current 72,039 81,770 61,644
Deferred 11,223 17,066 (11,797)
---------------- ---------------- ----------------
83,262 98,836 49,847
---------------- ---------------- ----------------
NET INCOME $ 205,718 $ 196,915 $ 158,760
================ ================ ================
</TABLE>
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(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 (Loss) Earnings Total
------------------------ -------------------- --------- ------------------------ ------------
BALANCE, JANUARY 1, 1997 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
Net income 205,718 205,718
Other comprehensive loss (146,421) (146,421)
------------
Total comprehensive loss 59,297
------------
Capital contributions
Dividends (92,053) (92,053)
Income tax benefit on stock
Compensation 760 760
------------------------ -------------------- --------- ------------------------ ------------
BALANCE, DECEMBER 31, 1999 0 0 7,032,000 7,032 $ 700,316 (84,861) 544,076 $ 1,166,563
======================== ==================== ========= ======================== ============
</TABLE>
See notes to consolidated financial statements.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
===================================================================================================================================
1999 1998 1997
---------------- ---------------- ----------------
OPERATING ACTIVITIES:
Net income $ 205,718 $ 196,915 $ 158,760
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain allocated to participating
policyholders 13,716 5,908 3,753
Amortization of investments (22,514) (15,068) 409
Net realized gains on investments (1,084) (38,173) (9,800)
Depreciation and amortization 47,339 55,550 46,929
Deferred income taxes 11,223 17,066 (11,824)
Changes in assets and liabilities:
Policy benefit liabilities 650,959 938,444 498,114
Reinsurance receivable 19,636 (43,643) 112,594
Accrued interest and other receivables (37,482) 28,467 30,299
Other, net (146,150) (184,536) 64,465
---------------- ---------------- ----------------
Net cash provided by operating activities 741,361 960,930 893,699
---------------- ---------------- ----------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to maturity
Sales 9,920
Maturities and redemptions 520,511 471,432 359,021
Available-for-sale
Sales 3,176,802 6,169,678 3,174,246
Maturities and redemptions 822,606 1,268,323 771,737
Mortgage loans 165,104 211,026 248,170
Real estate 5,098 16,456 36,624
Common stock 18,116 3,814 17,211
Purchases of investments:
Fixed maturities
Held-to-maturity (563,285) (584,092) (439,269)
Available-for-sale (4,019,465) (7,410,485) (4,314,722)
Mortgage loans (2,720) (100,240) (2,532)
Real estate (41,482) (4,581) (64,205)
Common stock (19,698) (10,020) (29,608)
---------------- ---------------- ----------------
Net cash provided by (used in)
investing activities $ 61,587 $ 41,231 $ (243,327)
================ ================ ================
</TABLE>
(Continued)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
==================================================================================================================================
1999 1998 1997
---------------- ---------------- ----------------
FINANCING ACTIVITIES:
Contract withdrawals, net of deposits $ (583,900) $ (507,237) $ (577,538)
Due to Parent Corporation (16,898) (73,779) (19,522)
Due to GWL&A Financial 175,035
Dividends paid (92,053) (80,036) (71,394)
Net commercial paper repayments (39,731) (14,327) (30,624)
Net repurchase agreements (repayments)
borrowings (163,680) (81,280) 38,802
Capital contributions 8,808 11,000
Purchase of preferred shares (121,800)
Acquisition of subsidiary (82,669)
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Net cash used in financing activities (721,227) (952,320) (649,276)
---------------- ---------------- ----------------
NET INCREASE IN CASH 81,721 49,841 1,096
CASH, BEGINNING OF YEAR 176,119 126,278 125,182
---------------- ---------------- ----------------
CASH, END OF YEAR $ 257,840 $ 176,119 $ 126,278
================ ================ ================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 76,150 $ 111,493 $ 86,829
Interest 14,125 13,849 15,124
</TABLE>
See notes to consolidated financial statements. (Concluded)
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Amounts in Thousands, except Share Amounts)
===============================================================================
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Great-West Life & Annuity Insurance Company (the Company) is
a wholly-owned subsidiary of GWL&A Financial Inc., a holding company formed
in 1998 (GWL&A Financial) and 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 inter-company transactions and balances have been eliminated in
consolidation.
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 presentation.
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 (loss) 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 (loss).
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 credit losses on its impaired
loans. Management's judgement 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.
Internal Use Software - Effective January 1, 1999, the Company adopted
Statement of Position (SOP) No. 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 provides
guidance on accounting for costs associated with computer software
developed or obtained for internal use. As a result of the adoption of SOP
98-1, the Company capitalized $18,373 in internal use software development
costs for the year ended December 31, 1999.
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 $43,512, $51,724, and $44,298 in 1999, 1998, and 1997,
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 $7,169,885 and $6,866,478 at December
31, 1999 and 1998, 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 $4,468,685 and $4,908,964
at December 31, 1999 and 1998, 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 $4,297,823 and $4,108,314 at December 31, 1999 and 1998, respectively.
Participating business approximates 31.0%, 32.7%, and 50.5% of the
Company's ordinary life insurance in force and 94.0%, 71.9% and 91.1% of
ordinary life insurance premium income for the years ended December 31,
1999, 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 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 charges, are recognized
when due. Benefits and expenses on policies with life contingencies impact
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 6.2%, 6.3%,
and 6.6% in 1999, 1998, and 1997.
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.
Derivatives - The Company makes limited use of derivative financial
instruments to manage interest rate, market, and foreign exchange risk.
Such hedging activity consists primarily of interest rate swap agreements,
interest rate floors and caps, foreign currency exchange contracts, options
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. Written call
options are stock conversion protection agreements that require the
counter-party to automatically call the bond for cash when the issuer
elects to convert the bond to common stock. 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.
The Financial Accounting Standards Board has issued Statement No. 133,
"Accounting for Derivative Instruments and for Hedging Activities", which,
as amended, is required to be adopted in years beginning after June 15,
2000. This Statement provides a comprehensive and consistent standard for
the recognition and measurement of derivatives and hedging activities.
Although management has not completed its analysis of the impact of this
Statement, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial
position of the Company because of the Company's minimal use of
derivatives.
Stock Options - The Company applies the intrinsic value measurement
approach under APB Opinion No. 25 to stock-based compensation awards to
employees.
2. ACQUISITION
On July 8, 1998, the Company paid $82,669 in cash to acquire all of the
outstanding shares of Alta Health & Life Insurance Company (Alta), formerly
known as Anthem Health & Life Insurance Company. The purchase price was
based on Alta's adjusted book value, and was subject to further minor
adjustments. The results of Alta's operations, which had an insignificant
effect on net income in 1998, 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 goodwill representing the purchase price in excess of
fair value of net assets acquired is included in other assets and is being
amortized over 30 years on a straight-line basis.
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
increase in reserves, associated with certain policies, as a result of this
transaction. Of the $137,638 in reserves that was 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:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
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
============ ============
</TABLE>
===========================================================================
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
increase in reserves as a result of this transaction. Of the $428,152 in
reserves that was 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:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Assets Liabilities and Stockholder's Equity
===========================================
===========================================
Bonds $ 147,475 Policy reserves $ 428,152
===========================================
Mortgages 82,637 Due to Parent Corporation 20,820
===========================================
Cash 134,900
===========================================
Deferred policy acquisition costs 9,724
===========================================
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 its 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 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:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
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
==================================== ================ ================
</TABLE>
In connection with this transaction, the Parent Corporation made a capital
contribution of $11,000 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.
The Company performs administrative services for the U.S. operations of the
Parent Corporation. The following represents revenue from 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>
<S> <C>
Years Ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Investment management revenue $ 130 $ 475 $ 801
Administrative and underwriting revenue 768 5,094 6,292
</TABLE>
At December 31, 1999 and 1998, due to Parent Corporation includes $10,641
and $17,930 due on demand and $25,338 and $34,947 of notes payable which
bear interest and mature on October 1, 2006. 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 (6.7% and 6.1% at
December 31, 1999 and 1998, respectively) while the note payable bears
interest at 5.4%.
On May 4, 1999, the Company issued a $175,000 subordinated note to GWL&A
Financial, the proceeds of which were used for general corporate purposes.
The subordinated note bears interest at 7.25% and is due June 30, 2048.
Payments of principal and interest under this subordinated note shall be
made only with prior written approval of the Commissioner of Insurance of
the State of Colorado. Payments of principal and interest on this
subordinated note are payable only out of surplus funds of the Company and
only at such time as the financial condition of the Company is such that at
the time of payment of principal or interest, its surplus after the making
of any such payment would exceed the greater of $1,500 or 1.25 times the
company action level amount as required by the most recent risk based
capital calculations.
Interest expense attributable to these related party obligations was
$11,053, $9,891, and $9,758 for the years ended December 31, 1999, 1998 and
1997, 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, 1999 and 1998, the
reinsurance receivable had a carrying value of $173,322 and $192,958,
respectively.
The following schedule details life insurance in force and life and
accident/health premiums:
<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, 1999:
Life insurance in force:
Individual $ 35,362,934 $ 5,195,961 $ 8,467,877 $ 38,634,850 21.9%
Group 80,717,198 2,212,741 82,929,939 2.7%
--------------- ---------------- ---------------- ----------------
Total $ 116,080,132 $ 5,195,961 $ 10,680,618 $ 121,564,789
=============== ================ ================ ================
Premium Income:
Life insurance $ 306,101 $ 27,399 $ 46,715 $ 325,417 14.4%
Accident/health 801,755 58,247 79,753 823,261 9.7%
--------------- ---------------- ---------------- ----------------
Total $ 1,107,856 $ 85,646 $ 126,468 $ 1,148,678
=============== ================ ================ ================
December 31, 1998:
Life insurance in force:
Individual $ 34,017,379 $ 4,785,079 $ 8,948,442 $ 38,180,742 23.4%
Group 81,907,539 2,213,372 84,120,911 2.6%
--------------- ---------------- ---------------- ----------------
Total $ 115,924,918 $ 4,785,079 $ 11,161,814 $ 122,301,653
=============== ================ ================ ================
Premium Income:
Life insurance $ 352,710 $ 24,720 $ 65,452 $ 393,442 16.6%
Accident/health 571,992 61,689 74,284 584,587 12.7%
--------------- ---------------- ---------------- ----------------
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 insurance $ 320,456 $ (127,388) $ 19,923 $ 467,767 4.3%
Accident/health 341,837 32,645 34,994 344,186 10.2%
--------------- ---------------- ---------------- ----------------
Total $ 662,293 $ (94,743) $ 54,917 $ 811,953
=============== ================ ================ ================
</TABLE>
5. NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net investment income is summarized as follows:
Years Ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Investment income:
Fixed maturities and short-term investments $ 636,946 $ 638,079 $ 633,975
Mortgage loans on real estate 88,033 110,170 118,274
Real estate 19,618 20,019 20,990
Policy loans 167,109 180,933 194,826
Other 138 285 18
--------------- --------------- ---------------
911,844 949,486 968,083
Investment expenses, including interest on
amounts charged by the related parties
of $11,053, $9,891, and $9,758 35,898 52,126 86,410
--------------- --------------- ---------------
Net investment income $ 875,946 $ 897,360 $ 881,673
=============== =============== ===============
Net realized gains (losses) on investments are as follows:
Years Ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Realized gains (losses):
Fixed maturities $ (7,858) $ 38,391 $ 15,966
Mortgage loans on real estate 1,429 424 1,081
Real estate 513 363
Provisions 7,000 (642) (7,610)
--------------- --------------- ---------------
Net realized gains on investments $ 1,084 $ 38,173 $ 9,800
=============== =============== ===============
6. SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 1999 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 $ 63,444 $ 448 $ 687 $ 63,205 $ 63,444
Collateralized mortgage
obligations 115,357 9,360 105,997 115,357
Public utilities 223,705 2,773 3,011 223,467 223,705
Corporate bonds 1,724,915 19,179 30,753 1,713,341 1,724,915
Foreign governments 10,000 213 10,213 10,000
State and municipalities 123,160 738 1,540 122,358 123,160
------------ -------------- ------------- ------------ ------------
$ 2,260,581 $ 23,351 $ 45,351 $ 2,238,581 $ 2,260,581
============ ============== ============= ============ ============
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 $ 752,130 $ 2,342 $ 21,459 $ 733,013 $ 733,013
Direct mortgage pass-
through certificates 304,099 1,419 11,704 293,814 293,814
Other 178,142 77 1,431 176,788 176,788
Collateralized mortgage
obligations 909,105 1,183 39,980 870,308 870,308
Public utilities 468,087 1,106 14,242 454,951 454,951
Corporate bonds 3,929,160 24,287 148,923 3,804,524 3,804,524
Foreign governments 41,224 654 1,256 40,622 40,622
State and municipalities 371,436 108 17,642 353,902 353,902
------------ -------------- ------------- ------------ ------------
$ 6,953,383 $ 31,176 $ 256,637 $ 6,727,922 $ 6,727,922
============ ============== ============= ============ ============
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 U.S.
Government Agencies $ 34,374 $ 1,822 $ $ 36,196 $ 34,374
Collateralized mortgage
obligations 10,135 194 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 10,133 782 10,915 10,133
State and municipalities 121,963 9,298 131,261 121,963
------------ -------------- ------------- ------------ ------------
$ 2,199,818 $ 103,755 $ 4,637 $ 2,298,936 $ 2,199,818
============ ============== ============= ============ ============
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 $ 863,479 $ 39,855 $ 1,704 $ 901,630 $ 901,630
Direct mortgage pass-
through certificates 467,100 4,344 692 470,752 470,752
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 56,505 2,732 59,237 59,237
State and municipalities 226,208 4,588 1,008 229,788 229,788
------------ -------------- ------------- ------------ ------------
$ 6,752,532 $ 207,791 $ 23,597 $ 6,936,726 $ 6,936,726
============ ============== ============= ============ ============
</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, 1999, by projected maturity, are shown below. Actual
maturities will likely differ from these projections because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity Available-for-Sale
------------------------------------- ------------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
----------------- ----------------- ----------------- ----------------
Due in one year or less $ 221,172 $ 220,644 $ 323,466 $ 334,701
Due after one year
through five years 945,199 941,685 1,286,402 1,251,690
Due after five years
through ten years 684,729 677,531 716,353 684,513
Due after ten years 118,170 121,921 690,073 650,432
Mortgage-backed
securities 115,357 105,997 1,965,334 1,897,135
Asset-backed securities 175,954 170,803 1,971,755 1,909,451
----------------- ----------------- ----------------- ----------------
$ 2,260,581 $ 2,238,581 $ 6,953,383 $ 6,727,922
================= ================= ================= ================
</TABLE>
Proceeds from sales of securities available-for-sale were $3,176,802,
$6,169,678, and $3,174,246 during 1999, 1998, and 1997, respectively. The
realized gains on such sales totaled $10,080, $41,136, and $20,543 for
1999, 1998, and 1997, respectively. The realized losses totaled $19,720,
$8,643, and $10,643 for 1999, 1998, and 1997, respectively. During the
years 1999, 1998, and 1997, held-to-maturity securities with and amortized
cost of $0, $9,920 and $0 were sold due to deterioration with insignificant
gains and losses.
At December 31, 1999 and 1998, pursuant to fully collateralized securities
lending arrangements, the Company had loaned $0 and $115,168 of fixed
maturities, respectively.
The Company engages in hedging activities to manage interest rate, market
and foreign exchange risk. The following table summarizes the 1999
financial hedge instruments:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Notional Strike/Swap
December 31, 1999 Amount Rate Maturity
----------------------------- --------------- ------------------------------ -------------------------
Interest Rate Caps $ 1,362,000 7.64% - 11.82% (CMT) 6/00 - 12/04
Interest Rate Swaps 217,528 4.94%-6.8% 02/00 - 12/06
Foreign Currency
Exchange Contracts 19,478 N/A 03/00 - 07/06
Equity Swap 104,152 5.15% - 5.93% 01/01
Options 54,100 Various 01/02 - 12/02
The following table summarizes the 1998 financial hedge instruments:
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
LIBOR - London Interbank Offered Rate
CMT - Constant Maturity Treasury Rate
</TABLE>
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, 1999, approximately 34% 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 mortgage loans:
<TABLE>
<S> <C> <C>
1999 1998
====================================================================== ---------------- ----------------
======================================================================
Loans with related allowance for credit losses of
======================================================================
$14,727 and $2,492 $ 25,877 $ 13,192
======================================================================
Loans with no related allowance for credit losses 17,880 10,420
======================================================================
Average balance of impaired loans during the year 43,866 31,193
======================================================================
Interest income recognized (while impaired) 1,877 2,308
======================================================================
Interest income received and recorded (while impaired)
======================================================================
using the cash basis method of recognition 1,911 2,309
======================================================================
</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, aggregated
$75,691 and $52,913 at December 31, 1999 and 1998, respectively.
The following table presents changes in allowance for credit losses:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
--------------- --------------- ---------------
Balance, beginning of year $ 67,242 $ 67,242 $ 65,242
Provision for loan losses (7,000) 642 4,521
Chargeoffs - (787) (2,521)
Recoveries 1,000 145
--------------- --------------- ---------------
Balance, end of year $ 61,242 $ 67,242 $ 67,242
=============== =============== ===============
</TABLE>
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, 1999, no commercial paper
was outstanding. 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%.
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<S> <C>
December 31,
---------------------------------------------------------------------
1999 1998
--------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- -------------- -------------- --------------
ASSETS:
Fixed maturities and
short-term investments $ 9,229,307 $ 9,207,307 $ 9,556,713 $ 9,655,831
Mortgage loans on real
Estate 974,645 968,964 1,133,468 1,160,568
Policy loans 2,681,132 2,681,132 2,858,673 2,858,673
Common stock 69,240 69,240 48,640 48,640
LIABILITIES:
Annuity contract reserves
without life contingencies 4,468,685 4,451,465 4,908,964 4,928,800
Policyholders' funds 185,623 185,623 181,779 181,779
Due to Parent Corporation 35,979 33,590 52,877 52,877
Due to GWL&A Financial 175,035 137,445 - - - -
Repurchase agreements 80,579 80,579 244,258 244,258
Commercial paper - - - - 39,731 39,731
</TABLE>
<TABLE>
<S> <C>
December 31,
---------------------------------------------------------------------
1999 1998
--------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- -------------- -------------- --------------
HEDGE CONTRACTS:
Interest rate floor - - - - 17 17
Interest rate caps 4,140 4,140 971 971
Interest rate swaps (1,494) (1,494) 6,125 6,125
Foreign currency exchange
contracts (10) (10) 689 689
Equity swap (7,686) (7,686) (8,150) (8,150)
Options (6,220) (6,220) - - - -
</TABLE>
The estimated fair values of financial instruments have been determined
using available information and appropriate valuation methodologies.
However, considerable judgement is 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 discounted cash
flows. 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 rates on high quality investments.
The fair value of due to GWL&A Financial reflects the price determined in
the public market at December 31, 1999.
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 loss position for interest rates swaps are $772 and $0
of unrealized losses in 1999 and 1998, respectively. Included in the net
gain position for foreign currency exchange contracts are $518 and $932 of
loss exposures in 1999 and 1998, respectively.
The carrying amounts for receivables and liabilities reported in the
balance sheet approximate fair value due to their short term nature.
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:
<TABLE>
<S> <C> <C>
Prepaid pension cost $ 19,091 Undistributed earnings on $ 3,608
====================================
Participating business
====================================
Stockholder's equity 15,483
====================================
---------------- ----------------
$ 19,091 $ 19,091
==================================== ================ ================
</TABLE>
The following table summarizes changes for the three years December 31,
1999, 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 Alta.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Post-Retirement
Pension Benefits Medical Plan
-------------------------------------- --------------------------------------
1999 1998 1997 1999 1998 1997
----------- ---------- ----------- ----------- ---------- ----------
Change in benefit obligation
Benefit obligation at beginning
of year $ 131,305 $ 115,057 $ 96,417 $ 19,944 $ 19,454 $ 16,160
Service cost 7,853 6,834 5,491 2,186 1,365 1,158
Interest cost 8,359 7,927 7,103 1,652 1,341 1,191
Addition of former Alta employees 4,155
Actuarial (gain) loss (22,363) 5,117 9,470 3,616 (1,613) 1,500
Prior service for former Alta
employees 2,471
Benefits paid (3,179) (3,630) (3,424) (641) (603) (555)
----------- ---------- ----------- ----------- ---------- ----------
Benefit obligation at end of year 126,130 131,305 115,057 29,228 19,944 19,454
----------- ---------- ----------- ----------- ---------- ----------
Change in plan assets
Fair value of plan assets at
beginning of year $ 183,136 $ 162,879 $ 138,221 $ $ $
Actual return on plan assets 12,055 23,887 28,082
Addition of former Alta employees
and other adjustments 81
Benefits paid (3,179) (3,630) (3,424)
----------- ---------- ----------- ----------- ---------- ----------
Fair value of plan assets at
end of year 192,093 183,136 162,879
----------- ---------- ----------- ----------- ---------- ----------
Funded status 65,963 51,831 47,822 (29,228) (19,944) (19,454)
Unrecognized net actuarial
(gain) loss (30,161) (11,405) (6,326) 3,464 (113) 1,500
Unrecognized prior service cost 3,614 2,310
Unrecognized net obligation or
(asset) at transition (18,170) (19,684) (21,198) 13,736 14,544 15,352
----------- ---------- ----------- ----------- ---------- ----------
Prepaid (accrued) benefit cost $ 21,246 $ 20,742 $ 20,298 $ (9,718) $ (5,513) $ (2,602)
=========== ========== =========== =========== ========== ==========
Weighted-average
assumptions as of
December 31
Discount rate 7.50% 6.50% 7.00% 7.50% 6.50% 7.00%
Expected return on plan assets 8.50% 8.50% 8.50% 8.50% 8.50% 8.50%
Rate of compensation increase 5.00% 4.00% 4.50% 5.00% 4.00% 4.50%
Components of net
periodic benefit
Cost
Service cost $ 7,853 $ 6,834 $ 5,491 $ 2,186 $ 1,365 $ 1,158
Interest cost 8,360 7,927 7,103 1,652 1,341 1,191
Expected return on plan assets (15,664) (13,691) (12,286)
Amortization of transition (1,514) (1,514) (1,514) 808 808 808
obligation
Amortization of unrecognized prior
service cost 541 162
Amortization of gain from earlier
periods (80) 38
----------- ---------- ----------- ---------- ----------
----------- ---------- ----------- ----------- ---------- ----------
Net periodic (benefit) cost $ (504) $ (444) $ (1,206) $ 4,846 $ 3,514 $ 3,157
=========== ========== =========== =========== ========== ==========
</TABLE>
The Company-sponsored post-retirement medical plan (medical plan) provides
health benefits to retired 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. The Company made no contributions to this plan in
1999, 1998, or 1997.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the medical plan. For measurement purposes, a 7.5%
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:
<TABLE>
<S> <C> <C>
1-Percentage 1-Percentage
Point Point
Increase Decrease
-------------------- --------------------
Increase (decrease) on total of service and interest cost
on components $ 1,678 $ (1,285)
Increase (decrease) on post-retirement benefit obligation 7,897 (6,186)
</TABLE>
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. For employees hired after January 1, 1999, the
Company matches 50% of the first 8% of participant pre-tax contributions.
Company contributions for the years ended December 31, 1999, 1998, and 1997
totaled $5,504, $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
$17,367, $16,102, and $13,952 for years ending December 31, 1999, 1998, and
1997, respectively. The participant deferrals earn interest at a rate based
on the average ten-year composite government securities rate plus 1.5%. The
interest expense related to the plan for the years ending December 31,
1999, 1998, and 1997 were $1,231, $1,185, and $1,019, 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 1999, 1998, and 1997 was $3,002, $2,840, and $2,531,
respectively. The total liability of $14,608, $11,323, and $8,828 as of
December 31, 1999, 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:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
------------ ------------- ------------
Federal tax rate 35.0 % 35.0 % 35.0 %
Change in tax rate resulting from:
Settlement of Parent tax exposures (5.9) (20.2)
Provision for contingencies (0.5) 7.7
Policyholder share of earnings 1.7 0.7 0.6
Other, net (1.5) (2.3) 0.8
------------ ------------- ------------
Total 28.8 % 33.4 % 23.9 %
============ ============= ============
</TABLE>
The Company's income tax provision was favorably impacted in 1999 and 1997
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 release recorded
in 1999 reflected the resolution of certain tax issues with the Internal
Revenue Service (IRS) relating to the 1992 - 1993 audit years. The release
recorded in 1997 reflected the resolution of certain tax issues with the
IRS relating to the 1990-1991 audit years. The release totaled $17,150 for
1999 and $42,150 for 1997; however, $8,900 of the 1999 release and $15,100
of the 1997 release 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).
In addition to this release of contingent tax liabilities, the Company's
income tax provision for 1997 also reflects 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. This increase in contingent tax liabilities
has been reflected as a component of the deferred income tax provisions as
the Company does not expect near term resolution of these contingencies.
Excluding the effect of the 1999 and 1997 tax items discussed above, the
effective tax rate for 1999 and 1997 was 35.2% and 36.4%.
Temporary differences which give rise to the deferred tax assets and
liabilities as of December 31, 1999 and 1998 are as follows:
<TABLE>
<S> <C> <C>
1999 1998
--------------------------------- ------------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
--------------- --------------- -------------- -------------
Policyholder reserves $ 131,587 $ $ 143,244 $
Deferred policy acquisition costs 49,455 39,933
Deferred acquisition cost proxy
tax 103,529 100,387
Investment assets 69,561 19,870
Net operating loss carryforwards 444 2,867
Other 582 6,566
--------------- --------------- -------------- -------------
Subtotal 305,121 50,037 253,064 59,803
Valuation allowance (1,761) (1,778)
--------------- --------------- -------------- -------------
Total Deferred Taxes $ 303,360 $ 50,037 $ 251,286 $ 59,803
=============== =============== ============== =============
</TABLE>
Amounts included in investment assets above include $58,711 and $(34,556)
related to the unrealized gains/(losses) on the Company's fixed maturities
available-for-sale at December 31, 1999 and 1998, respectively.
The Company will file a consolidated tax return for 1999. Losses incurred
by subsidiaries in prior years cannot be offset against operating income of
the Company. At December 31, 1999, the Company's subsidiaries had
approximately $1,271 of net operating loss carryforwards, expiring through
the year 2014. The tax benefit of subsidiaries' net operating loss
carryforwards are included in the deferred tax assets at December 31, 1999
and 1998, respectively.
The Company's valuation allowance was increased (decreased) in 1999, 1998,
and 1997 by $(17), $(1,792), and $34, 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 established 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 stockholder's 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. The 1997 financial
statements have been reclassified to conform to the requirements of
Statement No. 130.
Other comprehensive loss at December 31, 1999 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 (losses) arising
==================================================
during the period $ (303,033) $ 106,061 $ (196,972)
==================================================
Less: reclassification adjustment for
==================================================
(gains) losses realized in net income (9,958) 3,485 (6,473)
==================================================
---------------- ---------------- -----------------
Net unrealized gains (losses) (312,991) 109,546 (203,445)
==================================================
==================================================
Reserve and DAC adjustment 87,729 (30,705) 57,024
---------------- ---------------- -----------------
---------------- ---------------- -----------------
Other comprehensive loss $ (225,262) $ 78,841 $ (146,421)
================================================== ================ ================ =================
</TABLE>
<TABLE>
<S> <C> <C>
Other comprehensive income at December 31, 1998 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 $ 39,430 $ (13,800) $ 25,630
Less: reclassification adjustment for
(gains) losses realized in net income (14,350) 5,022 (9,328)
---------------- ---------------- -----------------
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 (losses) arising
==================================================
during the period $ 80,821 $ (28,313) $ 52,508
==================================================
Less: reclassification adjustment for
==================================================
(gains) losses realized in net income 2,012 (704) 1,308
==================================================
---------------- ---------------- -----------------
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
================================================== ================ ================ =================
</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. At December 31, 1999 and 1998, the Company has 1,500 authorized
shares each of Series A, Series B, Series C and Series D cumulative
preferred stock; and 2,000,000 authorized shares of non-cumulative
preferred stock.
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:
1999 1998 1997
-------------- --------------- ---------------
(Unaudited)
Net income 253,123 $ 225,863 $ 181,312
Capital and surplus 1,007,245 727,124 759,429
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,
1999 were $1,007,245 and $245,148 (unaudited), respectively. The Company
should be able to pay up to $245,148 (unaudited) of dividends in 2000.
Dividends of $0, $6,692, and $8,854 were paid on preferred stock in 1999,
1998, and 1997, respectively. In addition, dividends of $92,053, $73,344,
and $62,540 were paid on common stock in 1999, 1998, and 1997,
respectively. Dividends are paid as determined by the Board of Directors.
13. STOCK OPTIONS
Great-West Lifeco Inc. (Lifeco) is the parent of the Parent Corporation.
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, 1999, 1998, and 1997, stock available for
award to Company employees under the Lifeco plan aggregated 885,150,
1,424,400, and 3,440,000 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 1998 and
1997 to Company employees totaling 278,000 and 1,832,000, 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 1999
and 1998, 11,250 and 30,000 of these options vested and accordingly, the
Company recognized compensation expense of $23 and $116, respectively. 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 granted to Company employees which are 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>
1999 1998 1997
-------------------------- -------------------------- -------------------------
Options WAEP Options WAEP Options WAEP
------------- ---------- ------------- ---------- ------------- ---------
Outstanding, Jan. 1, 6,544,824 $ 8.07 5,736,000 $ 7.71 4,104,000 $ 6.22
Granted 575,500 16.48 988,000 13.90 1,932,000 11.56
Exercised 234,476 5.69 99,176 5.93 16,000 5.95
Expired or canceled 318,750 13.81 80,000 13.05 284,000 6.17
------------- ---------- ------------- ---------- ------------- ---------
Outstanding, Dec. 31, 6,567,098 9.04 6,544,824 8.07 5,736,000 7.71
============= ========== ============= ========== ============= =========
Options exercisable
at year-end 2,215,998 $ 6.31 1,652,424 $ 5.72 760,800 $ 5.96
============= ========== ============= ========== ============= =========
Weighted average fair
value of options
granted during year $ 5.23 $ 4.46 $ 2.83
============= ============= =============
The following table summarizes the range of exercise prices for outstanding
Lifeco common stock options granted to Company employees at December 31,
1999:
Outstanding Exercisable
======================== ------------------------------------------------ ---------------------------------
Average Average
========================
Exercise Average Exercise Exercise
========================
Price Range Options Life Price Options Price
------------------------ ---------------- ------------ ------------- ---------------- --------------
$ 5.87 - 7.80 3,554,348 6.63 $ 5.95 2,108,748 $ 5.92
========================
$11.25 - 15.81 2,842,000 7.86 $ 12.37 107,250 $ 14.03
========================
$16.53 - 18.65 170,500 9.18 17.93 - -
========================
</TABLE>
Of the exercisable Lifeco options, 2,174,748 relate to basic option grants
and 41,250 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 in Canada.
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, 1999, 1998 and
1997, stock available for award under the PFC plan aggregated 4,340,800,
4,400,800, and 4,400,800 shares.
Options granted to officers of the Company under the PFC plan became
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
granted to Company officers which remain 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>
1999 1998 1997
-------------------------- -------------------------- -------------------------
Options WAEP Options WAEP Options WAEP
------------- ---------- ------------- ---------- ------------- ---------
Outstanding, Jan. 1, 355,054 $ 2.89 1,076,000 $ 3.05 1,329,200 $ 3.14
Exercised 70,000 2.28 720,946 2.98 253,200 2.93
------------- ---------- ------------- ---------- ------------- ---------
Outstanding, Dec. 31, 285,054 3.23 355,054 2.89 1,076,000 3.05
============= ========== ============= ========== ============= =========
Options exercisable
at year-end 285,054 $ 3.23 355,054 $ 2.89 1,076,000 $ 3.05
============= ========== ============= ========== ============= =========
</TABLE>
As of December 31, 1999, the PFC options outstanding have exercise prices
between $2.38 and $3.65 and a weighted-average remaining contractual life
of 1.7 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 $1,039,
$727, and $608, in 1999, 1998, and 1997, 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
assumptions used for those options granted in 1999, 1998, and 1997,
respectively: dividend yields of 3.63%, 3.0% and 3.0%, expected volatility
of 32.4%, 34.05%, and 24.04%, risk-free interest rates of 6.65%, 4.79%, and
4.72%, 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:
<TABLE>
Year ended December 31, 1999
Operations:
<S> <C> <C> <C> <C> <C> <C>
Employee Financial Total
================================================
Benefits Services U.S.
================================================ ----------------- ----------------- -----------------
Revenue:
================================================
Premium income $ 990,449 $ 172,734 $ 1,163,183
================================================
Fee income 548,580 86,567 635,147
================================================
Net investment income 80,039 795,907 875,946
================================================
Realized investment gains (losses) (1,224) 2,308 1,084
================================================ ----------------- ----------------- -----------------
Total revenue 1,617,844 1,057,516 2,675,360
================================================
Benefits and Expenses:
================================================
Benefits 789,084 792,755 1,581,839
================================================
Operating expenses 661,119 143,422 804,541
================================================ ----------------- ----------------- -----------------
Total benefits and expenses 1,450,203 936,177 2,386,380
================================================ ----------------- ----------------- -----------------
----------------- ----------------- -----------------
================================================
================================================
Net operating income before income 167,641 121,339 288,980
taxes
================================================
Income taxes 51,003 32,259 83,262
----------------- ----------------- -----------------
Net income $ 116,638 $ 89,080 $ 205,718
================================================ ================= ================= =================
Assets:
Employee Financial Total
================================================
Benefits Services U.S.
================================================ ----------------- ----------------- -----------------
Investment assets $ 1,467,464 $ 11,590,591 $ 13,058,055
================================================
Other assets 646,036 909,172 1,555,208
================================================
Separate account assets 7,244,145 5,535,871 12,780,016
================================================ ----------------- ----------------- -----------------
Total assets $ 9,357,645 $ 18,035,634 $ 27,393,279
================================================ ================= ================= =================
Year ended December 31, 1998
Operations:
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 157,793 137,958 295,751
taxes
================================================
Income taxes 50,678 48,158 98,836
----------------- ----------------- -----------------
Net income $ 107,115 $ 89,800 $ 196,915
================================================ ================= ================= =================
Assets:
Employee Financial Total
================================================
Benefits Services U.S.
================================================ ----------------- ----------------- -----------------
Investment assets $ 1,434,691 $ 12,235,845 $ 13,670,536
================================================
Other assets 567,126 785,940 1,353,066
================================================
Separate account assets 5,704,313 4,395,230 10,099,543
================================================ ----------------- ----------------- -----------------
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 126,972 81,635 208,607
taxes
================================================
Income taxes 28,726 21,121 49,847
----------------- ----------------- -----------------
Net income $ 98,246 $ 60,514 $ 158,760
================================================ ================= ================= =================
The following table, which summarizes premium and fee income by segment, represents supplemental information.
1999 1998 1997
====================================== ---------------- ---------------- -----------------
----------------
Premium Income:
======================================
======================================
Employee Benefits
======================================
Group Life & Health $ 990,449 $ 746,898 $ 465,143
====================================== ---------------- ---------------- -----------------
Total Employee Benefits 990,449 746,898 465,143
---------------- ---------------- -----------------
---------------- ---------------- -----------------
Financial Services
======================================
======================================
Savings 14,344 16,765 22,634
======================================
Individual Insurance 158,390 231,200 345,402
---------------- ---------------- -----------------
---------------- ---------------- -----------------
Total Financial Services 172,734 247,965 368,036
====================================== ---------------- ---------------- -----------------
Total premium income $ 1,163,183 $ 994,863 $ 833,179
====================================== ================ ================ =================
----------------
Fee Income:
======================================
======================================
Employee Benefits
======================================
Group Life & Health $ 454,071 $ 366,805 $ 305,302
======================================
(uninsured plans)
======================================
401(k) 94,509 77,844 52,703
---------------- ---------------- -----------------
---------------- ---------------- -----------------
Total Employee Benefits 548,580 444,649 358,005
====================================== ---------------- ---------------- -----------------
---------------- ---------------- -----------------
Financial Services
======================================
======================================
Savings 81,331 71,403 62,725
======================================
Individual Insurance 5,236
---------------- ---------------- -----------------
---------------- ---------------- -----------------
Total Financial Services 86,567 71,403 62,725
====================================== ---------------- ---------------- -----------------
Total fee income $ 635,147 $ 516,052 $ 420,730
====================================== ================ ================ =================
</TABLE>
15. COMMITMENTS AND CONTINGENCIES
On October 6, 1999, the Company entered into a purchase and sale agreement
(the Agreement) with Allmerica Financial Corporation (Allmerica) to acquire
Allmerica's group life and health insurance business on March 1, 2000. This
business primarily consists of administrative services only and stop loss
policies. The in-force business is expected to be underwritten and retained
by the Company upon each policy renewal date. The purchase price, as
defined in the Agreement, will be based on a percentage of the amount
in-force at March 1, 2000 contingent on the persistency of the block of
business through March 2001. Management does not expect the purchase price
to have a material impact on the Company's consolidated financial
statements.
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.
16. SUBSEQUENT EVENTS
Effective January 1, 2000, the Company coinsured the majority of General
American Life Insurance Company's (General American) group life and health
insurance business which primarily consists of administrative services only
and stop loss policies. The agreement is expected to convert to an
assumption reinsurance agreement by January 1, 2001, pending regulatory
approval. The Company assumed approximately $150,000 of policy reserves and
miscellaneous liabilities in exchange for an equal amount of cash and
miscellaneous assets from General American.
<PAGE>
- --------------------------------------------------------------------------------
Back Cover
The Securities and Exchange Commission maintains an Internet web site
(http://www.sec.gov) that contains additional information about Great-West Life
& Annuity Insurance Company, and the Contract which may be of interest to you.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of the issuance and distribution of the
Contracts, other than commissions on sales of the Contracts are as follows:
Securities and Exchange Commission fee $ 21,551.72
Accounting fees and expenses $ 5,000.00
Legal fees and expenses $ 20,000.00
Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Provisions exist under the Colorado Business Corporation Act and the
Bylaws of GWL&A whereby GWL&A may indemnify a director, officer, or controlling
person of GWL&A against liabilities arising under the Securities Act of 1933.
The following excerpts contain the substance of these provisions:
Colorado Business Corporation Act
Article 109 - INDEMNIFICATION
Section 7-109-101. Definitions.
As used in this Article:
(1) "Corporation" includes any domestic or foreign entity that is a
predecessor of the corporation by reason of a merger, consolidation, or
other transaction in which the predecessor's existence ceased upon
consummation of the transaction.
(2) "Director" means an individual who is or was a director of a
corporation or an individual who, while a director of a corporation, is
or was serving at the corporation's request as a director, officer,
partner, trustee, employee, fiduciary or agent of another domestic or
foreign corporation or other person or employee benefit plan. A
director is considered to be serving an employee benefit plan at the
corporation's request if his or her duties to the corporation also
impose duties on or otherwise involve services by, the director to the
plan or to participants in or beneficiaries of the plan.
(3) "Expenses" includes counsel fees.
(4) "Liability" means the obligation incurred with respect to a
proceeding to pay a judgment, settlement, penalty, fine, including an
excise tax assessed with respect to an employee benefit plan, or
reasonable expenses.
(5) "Official capacity" means, when used with respect to a director,
the office of director in the corporation and, when used with respect
to a person other than a director as contemplated in Section 7-109-107,
means the office in the corporation held by the officer or the
employment, fiduciary, or agency relationship undertaken by the
employee, fiduciary, or agent on behalf of the corporation. "Official
capacity" does not include service for any other domestic or foreign
corporation or other person or employee benefit plan.
(6) "Party" includes a person who was, is, or is threatened to be made
a named defendant or respondent in a proceeding.
(7) "Proceeding" means any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or
investigative and whether formal or informal.
Section 7-109-102. Authority to indemnify directors.
(1) Except as provided in subsection (4) of this section, a corporation
may indemnify a person made a party to the proceeding because the
person is or was a director against liability incurred in any
proceeding if:
(a) The person conducted himself or herself in good faith
(b) The person reasonably believed:
(I) In the case of conduct in an official capacity with the
corporation, that his or her conduct was in the
corporation's best interests; or
(II) In all other cases, that his or her conduct was at
least not opposed to the corporation's best interests; and
(c) In the case of any criminal proceeding, the person had no
reasonable cause to believe his or her conduct was unlawful.
(2) A director's conduct with respect to an employee benefit plan for a
purpose the director reasonably believed to be in the interests of the
participants in or beneficiaries of the plan is conduct that satisfies
the requirements of subparagraph (II) of paragraph (b) of subsection
(1) of this section. A director's conduct with respect to an employee
benefit plan for a purpose that the director did not reasonably believe
to be in the interests of the participants in or beneficiaries of the
plan shall be deemed not to satisfy the requirements of subparagraph
(a) of subsection (1) of this section.
(3) The termination of any proceeding by judgment, order, settlement,
or conviction, or upon a plea of nolo contendere or its equivalent, is
not, of itself, determinative that the director did not meet the
standard of conduct described in this section.
(4) A corporation may not indemnify a director under this section:
(a) In connection with a proceeding by or in the right of
the corporation in which the director was adjudged liable to
the corporation; or
(b) In connection with any proceeding charging that the
director derived an improper personal benefit, whether or not
involving action in his official capacity, in which proceeding
the director was adjudged liable on the basis that he or she
derived an improper personal benefit.
(5) Indemnification permitted under this section in connection with a
proceeding by or in the right of a corporation is limited to reasonable
expenses incurred in connection with the proceeding.
Section 7-109-103. Mandatory Indemnification of Directors.
Unless limited by the articles of incorporation, a corporation shall be
required to indemnify a person who is or was a director of the corporation and
who was wholly successful, on the merits or otherwise, in defense of any
proceeding to which he was a party, against reasonable expenses incurred by him
in connection with the proceeding.
Section 7-109-104. Advance of Expenses to Directors.
(1) A corporation may pay for or reimburse the reasonable expenses
incurred by a director who is a party to a proceeding in advance of the
final disposition of the proceeding if:
(a) The director furnishes the corporation a written
affirmation of his good-faith belief that he has met the
standard of conduct described in Section 7-109-102;
(b) The director furnishes the corporation a written
undertaking, executed personally or on the director's behalf,
to repay the advance if it is ultimately determined that he or
she did not meet such standard of conduct; and
(c) A determination is made that the facts then known to those
making the determination would not preclude indemnification
under this article.
(2) The undertaking required by paragraph (b) of subsection (1) of this
section shall be an unlimited general obligation of the director, but
need not be secured and may be accepted without reference to financial
ability to make repayment.
(3) Determinations and authorizations of payments under this section
shall be made in the manner specified in Section 7-109-106.
Section 7-109-105. Court-Ordered Indemnification of Directors.
(1) Unless otherwise provided in the articles of incorporation, a
director who is or was a party to a proceeding may apply for indemnification to
the court conducting the proceeding or to another court of competent
jurisdiction. On receipt of an application, the court, after giving any notice
the court considers necessary, may order indemnification in the following
manner:
(a) If it determines the director is entitled to mandatory
indemnification under section 7-109-103, the court shall order
indemnification, in which case the court shall also order the
corporation to pay the director's reasonable expenses incurred
to obtain court-ordered indemnification.
(b) If it determines that the director is fairly and
reasonably entitled to indemnification in view of all the
relevant circumstances, whether or not the director met the
standard of conduct set forth in section 7-109-102 (1) or was
adjudged liable in the circumstances described in Section
7-109-102 (4), the court may order such indemnification as the
court deems proper; except that the indemnification with
respect to any proceeding in which liability shall have been
adjudged in the circumstances described Section 7-109-102 (4)
is limited to reasonable expenses incurred in connection with
the proceeding and reasonable expenses incurred to obtain
court-ordered indemnification.
Section 7-109-106. Determination and Authorization of Indemnification of
Directors.
(1) A corporation may not indemnify a director under Section 7-109-102
unless authorized in the specific case after a determination has been
made that indemnification of the director is permissible in the
circumstances because he has met the standard of conduct set forth in
Section 7-109-102. A corporation shall not advance expenses to a
director under Section 7-109-104 unless authorized in the specific case
after the written affirmation and undertaking required by Section
7-109-104(1)(a) and (1)(b) are received and the determination required
by Section 7-109-104(1)(c) has been made.
(2) The determinations required to be made under subsection (1) of this section
shall be made:
(a) By the board of directors by a majority vote of those
present at a meeting at which a quorum is present, and only
those directors not parties to the proceeding shall be counted
in satisfying the quorum.
(b) If a quorum cannot be obtained, by a majority vote of a
committee of the board of directors designated by the board of
directors, which committee shall consist of two or more
directors not parties to the proceeding; except that directors
who are parties to the proceeding may participate in the
designation of directors for the committee.
(3) If a quorum cannot be obtained as contemplated in paragraph (a) of
subsection (2) of this section, and the committee cannot be established
under paragraph (b) of subsection (2) of this section, or even if a
quorum is obtained or a committee designated, if a majority of the
directors constituting such quorum or such committee so directs, the
determination required to be made by subsection (1) of this section
shall be made:
(a) By independent legal counsel selected by a vote of the
board of directors or the committee in the manner specified in
paragraph (a) or (b) of subsection (2) of this section or, if
a quorum of the full board cannot be obtained and a committee
cannot be established, by independent legal counsel selected
by a majority vote of the full board of directors; or
(b) By the shareholders.
(4) Authorization of indemnification and evaluation as to
reasonableness of expenses shall be made in the same manner as the
determination that indemnification is permissible; except that, if the
determination that indemnification is permissible is made by
independent legal counsel, authorization of indemnification and advance
of expenses shall be made by the body that selected such counsel.
<PAGE>
Section 7-109-107. Indemnification of Officers, Employees, Fiduciaries, and
Agents.
(1) Unless otherwise provided in the articles of incorporation:
(a) An officer is entitled to mandatory indemnification under
section 7-109-103, and is entitled to apply for court-ordered
indemnification under section 7-109-105, in each case to the
same extent as a director;
(b) A corporation may indemnify and advance expenses to an
officer, employee, fiduciary, or agent of the corporation to
the same extent as a director; and
(c) A corporation may indemnify and advance expenses to an
officer, employee, fiduciary, or agent who is not a director
to a greater extent, if not inconsistent with public policy,
and if provided for by its bylaws, general or specific action
of its board of directors or shareholders, or contract.
Section 7-109-108. Insurance.
A corporation may purchase and maintain insurance on behalf of a person
who is or was a director, officer, employee, fiduciary, or agent of the
corporation and who, while a director, officer, employee, fiduciary, or agent of
the corporation, is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, fiduciary, or agent of any other
domestic or foreign corporation or other person or of an employee benefit plan
against any liability asserted against or incurred by the person in that
capacity or arising out of his or her status as a director, officer, employee,
fiduciary, or agent whether or not the corporation would have the power to
indemnify the person against such liability under the Section 7-109-102,
7-109-103 or 7-109-107. Any such insurance may be procured from any insurance
company designated by the board of directors, whether such insurance company is
formed under the laws of this state or any other jurisdiction of the United
States or elsewhere, including any insurance company in which the corporation
has an equity or any other interest through stock ownership or otherwise.
Section 7-109-109. Limitation of Indemnification of Directors.
(1) A provision concerning a corporation's indemnification of, or
advance of expenses to, directors that is contained in its articles of
incorporation or bylaws, in a resolution of its shareholders or board
of directors, or in a contract, except for an insurance policy or
otherwise, is valid only to the extent the provision is not
inconsistent with Sections 7-109-101 to 7-109-108. If the articles of
incorporation limit indemnification or advance of expenses,
indemnification or advance of expenses are valid only to the extent not
inconsistent with the articles of incorporation.
(2) Sections 7-109-101 to 7-109-108 do not limit a corporation's power
to pay or reimburse expenses incurred by a director in connection with
an appearance as a witness in a proceeding at a time when he or she has
not been made a named defendant or respondent in the proceeding.
Section 7-109-110. Notice to Shareholders of Indemnification of Director.
If a corporation indemnifies or advances expenses to a director under
this article in connection with a proceeding by or in the right of the
corporation, the corporation shall give written notice of the indemnification or
advance to the shareholders with or before the notice of the next shareholders'
meeting. If the next shareholder action is taken without a meeting at the
instigation of the board of directors, such notice shall be given to the
shareholders at or before the time the first shareholder signs a writing
consenting to such action.
Bylaws of GWL&A
Article II, Section 11. Indemnification of Directors.
The Company may, by resolution of the Board of Directors, indemnify and
save harmless out of the funds of the Company to the extent permitted by
applicable law, any director, officer, or employee of the Company or any member
or officer of any committee, and his heirs, executors and administrators, from
and against all claims, liabilities, costs, charges and expenses whatsoever that
any such director, officer, employee or any such member or officer sustains or
incurs in or about any action, suit, or proceeding that is brought, commenced,
or prosecuted against him for or in respect of any act, deed, matter or thing
whatsoever made, done, or permitted by him in or about the execution of his
duties of his office or employment with the Company, in or about the execution
of his duties as a director or officer of another company which he so serves at
the request and on behalf of the Company, or in or about the execution of his
duties as a member or officer of any such Committee, and all other claims,
liabilities, costs, charges and expenses that he sustains or incurs, in or about
or in relation to any such duties or the affairs of the Company, the affairs of
such Committee, except such claims, liabilities, costs, charges or expenses as
are occasioned by his own wilful neglect or default. The Company may, by
resolution of the Board of Directors, indemnify and save harmless out of the
funds of the Company to the extent permitted by applicable law, any director,
officer, or employee of any subsidiary corporation of the Company on the same
basis, and within the same constraints as, described in the preceding sentence.
Item 15. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
<TABLE>
<S> <C>
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Form of Principal Underwriter and Distribution Agreement incorporated by reference1.
2. Not applicable.
3. (a) Articles of Incorporation of Great-West Life & Annuity Insurance Company incorporated by reference1.
(b) Bylaws of Great-West Life & Annuity Insurance Company incorporated by reference1.
4. (a) Form of Fixed Group Annuity Contract was filed electronically with the Registration Statement on
September 6, 1996.
(b) Form of Fixed Individual Annuity Contract was filed
electronically with the Registration Statement on
September 6, 1996.
(c) Form of IRA Endorsement was filed electronically with the
Registration Statement on September 6, 1996.
5. Opinion and consent of Ruth B. Lurie, Vice President, Counsel and Associate Secretary as to the legality
of the securities being registered was filed with Amendment No. 2 to the Registration Statement and
incorporated herein by reference.
6. Not applicable.
7. Not applicable.
8. Not applicable.
9. Not applicable.
10. Not applicable.
11. Not applicable.
12. Not applicable.
13. Not applicable.
14. Not applicable.
15. Not applicable.
16. Not applicable.
17. Not applicable.
18. Not applicable.
19. Not applicable.
20. Not applicable.
21. List of significant subsidiaries of Great-West Life & Annuity Insurance Company, is attached as Exhibit 21.
22. Not applicable.
23. (a) Consent of Jorden Burt Berenson & Johnson LLP is attached as Exhibit 23a
(b) Consent of Deloitte & Touche LLP is attached as Exhibit 23b.
24. Power of Attorney for Messrs. Balog, Burns, Dackow, Desmarais, Jr., Gratton, Hart, Mackness, McCallum,
Nickerson, Pitfield, Plessis-Belair, Turner and Walsh, Graham and Kavanagh were filed electronically with
the Registration Statement on September 6, 1996.
25. Not applicable.
26. Not applicable.
27. Financial Data Schedule for Great-West Life & Annuity Insurance Company is attached as Exhibit 27.
</TABLE>
Item 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in this registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this
registration statement or any material change to such
information, including (but not limited to) any addition or
deletion of a managing underwriter.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment No. 4 to the
Registration Statement on Form S-1 to be signed on its behalf, in the City of
Englewood, State of Colorado, on this 3rd day of April , 2000.
GREAT-WEST LIFE & ANNUITY
INSURANCE COMPANY
(Depositor)
By: /s/ William T. McCallum
William T. McCallum, President
and Chief Executive Officer
As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities with Great-West Life
& Annuity Insurance Company and on the dates indicated:
Signature and Title Date
/s/ Robert Gratton* 4/3 , 2000
Director, Chairman of the
Board (Robert Gratton)
/s/ William T. McCallum 4/3 , 2000
Director, President and Chief Executive
Officer (William T. McCallum)
/s/ M.T.G. Graye 4/3 , 2000
Executive Vice President and Chief
Financial Officer (M.T.G. Graye)
Signature and Title Date
/s/ James Balog* 4/3 , 2000
Director, (James Balog)
/s/ James W. Burns* 4/3 , 2000
Director, (James W. Burns)
/s/ Orest T. Dackow* 4/3 , 2000
Director (Orest T. Dackow)
4/3 , 2000
Director (Andre Desmarais)
/s/ Paul Desmarais, Jr.* 4/3 , 2000
Director (Paul Desmarais, Jr.)
/s/ R.G. Graham* 4/3 , 2000
Director (Robert G. Graham)
/s/ N. Berne Hart* 4/3 , 2000
Director (N. Berne Hart)
/s/ Kevin P. Kavanagh* 4/3 , 2000
Director (Kevin P. Kavanagh)
/s/ William Mackness* 4/3 , 2000
Director (William Mackness)
Signature and Title Date
/s/ Jerry E.A. Nickerson* 4/3 , 2000
Director (Jerry E.A. Nickerson)
/s/ P. Michael Pitfield* 4/3 , 2000
Director (P. Michael Pitfield)
/s/ Michel Plessis-Belair 4/3 , 2000
Director (Michel Plessis-Belair)
/s/ Brian E. Walsh* 4/3 , 2000
Director (Brian E. Walsh)
*By: /s/ D.C. Lennox 4/3 , 2000
D. C. Lennox
Attorney-in-fact pursuant to Powers of Attorney
filed with the Registration Statement and Amendment No. 1 thereto.
Exhibit Table
Form S-1
Exhibit
1. Form of Underwriting agreement and
and Distribution Agreement 1
3. (i) Articles of Incorporation 1
(ii) Bylaws 1
4. (i) Form of Combination Fixed and
Variable Annuity Contract 2
(ii) Form of IRA Endorsement 2
5. Opinion and consent of Ruth B. Lurie 3
21. List of Subsidiaries 4
23. (a) Consent of Jorden Burt Berenson & Johnson LLP 4
(b) Consent of Deloitte & Touche 4
24. Powers of Attorney for Messrs. Balog, Burns, Dackow,
Desmarais, Jr., Graham, Gratton, Hart, Kavanagh,
Mackness, McCallum, Nickerson, Pitfield,
Plessis-Belair and Walsh 2
27. Financial Data Schedule 4
1 Filed with Post-Effective Amendment No. 1 to Registration Statement on Form
N-4 (File No. 333-01153 and 811-07549) and on Form S-1 (File No. 333-01173) and
incorporated herein by reference.
2 Filed with the Registration Statement and incorporated herein by reference.
3 Filed with Amendment No. 2 to the Registration Statement and incorporated
herein by reference.
4 Filed with this Amendment No. 4 to the Registration Statement.
- --------
1 Filed with Post-Effective Amendment No. 1 of the Registration Statement on
Form N-4 (File No. 333-01153 and 811-07549) and Post-Effective Amendment No. 1
of the Registration Statement on Form S-1 (File No. 333-01173) and incorporated
by reference herein. 1 Filed with Post-Effective Amendment No. 1 of the
Registration Statement on Form N-4 (File No. 333-01153 and 811-07549) and
Post-Effective Amendment No. 1 of the Registration Statement on Form S-1 (File
No. 333-01173) and incorporated herein by reference.
EXHIBIT 21
SUBSIDIARIES OF GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
SUBSIDIARY JURISDICTION OF INCORPORATION OR
ORGANIZATION
Alta Health & Life Insurance Company Indiana
AH&L Agency, Inc. New York
Benefits Communication Corporation (1) Delaware
BenefitsCorp Equities, Inc. Delaware
Deferred Compensation of Michigan, Inc. Michigan
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
National Plan Coordinators of Delaware, Inc. Delaware
National Plan Coordinators of Ohio, Inc. Ohio
National Plan Coordinators of Washington, Inc. Washington
NPC Administrative Services Corporation Delaware
NPC Securities, Inc. California
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
P.C. Enrollment Services & Insurance Brokerage, Inc. Massachusetts
Renco, Inc. Delaware
(1) Also doing business as Benefits Insurance Services, Inc.
(2) Also doing business as Financial Administrative Services Corporation of Colorado.
</TABLE>
EXHIBIT 23(a)
<PAGE>
Jorden Burt Boros Cicchetti Berenson & Johnson LLP
Suite 400 East
1025 Thomas Jefferson Street, N.W.
Washington, D.C. 20007
(202) 965-8100
April 3, 2000
Great-West Life & Annuity Insurance Company
8525 East Orchard Road
Englewood, Colorado 80111
Re: Post-Effective Amendment No. 4 to the Registration Statement on Form S-1
File No. 333-11493
Ladies and Gentlemen:
We have acted as counsel to Great-West Life & Annuity Insurance
Company, a Colorado corporation, regarding the federal securities laws
applicable to the issuance and sale of the Contracts described in the
above-referenced registration statement. We hereby consent to the reference to
us under the heading "Legal Matters" in the prospectus filed today with the
Securities and Exchange Commission. In giving this consent, we do not admit that
we are in the category of persons whose consent is required under Section 7 of
the Securities Act of 1933.
Very truly yours,
/s/ Jorden Burt Boros Cicchetti Berenson & Johnson LLP
JORDEN BURT BOROS CICCHETTI BERENSON & JOHNSON LLP
EXHIBIT 23(b)
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 4 to Registration
Statement No. 333-11493 of Great-West Life & Annuity Insurance Company of our
report dated January 31, 2000, appearing in the Prospectus, which is part of
such Registration Statement, and to the reference to us under the heading
"Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Denver, Colorado
April 3, 2000
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
<ARTICLE> 7
<LEGEND>
Great-West Life & Annuity Insurance Company
</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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 6727922
<DEBT-CARRYING-VALUE> 2260581
<DEBT-MARKET-VALUE> 2238581
<EQUITIES> 69240
<MORTGAGE> 974645
<REAL-ESTATE> 0
<TOTAL-INVEST> 13060960
<CASH> 258312
<RECOVER-REINSURE> 173322
<DEFERRED-ACQUISITION> 282295
<TOTAL-ASSETS> 27396687
<POLICY-LOSSES> 12129651
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 256349
<NOTES-PAYABLE> 0
0
0
<COMMON> 250
<OTHER-SE> 1169724
<TOTAL-LIABILITY-AND-EQUITY> 27396687
1163183
<INVESTMENT-INCOME> 876037
<INVESTMENT-GAINS> 1084
<OTHER-INCOME> 635147
<BENEFITS> 1581839
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 43512
<INCOME-PRETAX> 761030
<INCOME-TAX> 289070
<INCOME-CONTINUING> 83294
<DISCONTINUED> 205776
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
