UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For The Fiscal Year Ended
December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to _____________
Commission file number 333-1173
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Colorado 84-0467907 (State or other jurisdiction of incorporation or
organization) (I.R.S. Employer Identification No.)
8515 East Orchard Road, Englewood, Colorado 80111
(Address of principal executive offices) (Zip Code)
(303) 737-4128
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
As of December 31, 1999, the aggregate market value of the registrant's
voting stock held by non-affiliates of the registrant was $0.
As of December 31, 1999, 7,032,000 shares of the registrant's common stock
were outstanding, all of which were owned by the registrant's parent
company.
Note: This Form 10-K is filed by the registrant only as a consequence of
the sale by the registrant of a market value adjusted annuity product.
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business........................................................................................
A. Organization and Corporate Structure...................................................
B. Business of the Company ...............................................................
C. Employee Benefits .....................................................................
D. Financial Services ....................................................................
E. Investment Operations.................................................................. F. Regulation
G. Ratings................................................................................
H. Miscellaneous..........................................................................
Item 2. Properties......................................................................................
Item 3. Legal Proceedings...............................................................................
Item 4. Submission of Matters to a Vote of Security Holders.............................................
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................................................
A. Equity Security Holders and Market Information.........................................
B. Dividends..............................................................................
Item 6. Selected Financial Data.........................................................................
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................................................
A. Company Results of Operations..........................................................
B. Employee Benefits Results of Operations................................................
C. Financial Services Results of Operations...............................................
D. Investment Operations .................................................................
E. Liquidity and Capital Resources........................................................
F. Accounting Pronouncements..............................................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................................
Item 8. Financial Statements and Supplementary Data.....................................................
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................................................
PART III
Item 10. Directors and Executive Officers of the Registrant..............................................
A. Identification of Directors............................................................
B. Identification of Executive Officers...................................................
Item 11. Executive Compensation..........................................................................
A. Summary Compensation Table.............................................................
B. Options................................................................................
C. Pension Plan Table.....................................................................
D. Compensation of Directors..............................................................
E. Compensation Committee Interlocks and Insider Participation............................
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................
A. Security Ownership of Certain Beneficial Owners........................................
B. Security Ownership of Management.......................................................
Item 13. Certain Relationships and Related Transactions..................................................
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................
A. Index to Financial Statements..........................................................
B. Index to Exhibits......................................................................
C. Reports on Form 8-K....................................................................
Signatures
</TABLE>
PART I
ITEM 1. BUSINESS
A. ORGANIZATION AND CORPORATE STRUCTURE
Great-West Life & Annuity Insurance Company (the "Company") is a stock life
insurance company originally organized in 1907. The Company is domiciled in
Colorado.
The Company is a wholly-owned subsidiary of GWL&A Financial Inc. ("GWL&A
Financial"), a Delaware holding company. GWL&A Financial is an indirect
wholly-owned subsidiary of The Great-West Life Assurance Company
("Great-West Life"), a Canadian life insurance company. Great-West Life is
a subsidiary of Great-West Lifeco Inc. ("Great-West Lifeco"), a Canadian
holding company. Great-West Lifeco is a subsidiary of Power Financial
Corporation ("Power Financial"), a Canadian holding company with
substantial interests in the financial services industry. Power Financial
Corporation is a subsidiary of Power Corporation of Canada ("Power
Corporation"), a Canadian holding and management company. Mr. Paul
Desmarais, through a group of private holding companies, which he controls,
has voting control of Power Corporation.
Shares of Great-West Lifeco, Power Financial and Power Corporation are
traded publicly in Canada.
B. BUSINESS OF THE COMPANY
The Company is authorized to engage in the sale of life insurance, accident
and health insurance and annuities. It is qualified to do business in all
states in the United States except New York, and in the District of
Columbia, Puerto Rico, Guam and the U.S. Virgin Islands. The Company
conducts business in New York through its subsidiary, First Great-West Life
& Annuity Insurance Company. The Company is also a licensed reinsurer in
the State of New York. As of December 31, 1998, the Company ranked among
the top 25 of all U.S. life insurance companies in terms of admitted
assets.
The Company operates in the following two business segments:
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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 table that follows summarizes premiums and deposits for the years
indicated. For further consolidated financial information concerning the
Company, see Item 6 (Selected Financial Data), and Item 8 (Financial
Statements and Supplementary Data).
For commentary on the information in the following table, see Item 7
(Management's Discussion and Analysis of Financial Condition and Results of
Operations).
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Millions (1) 1999 1998 1997
-------------- --------------- ---------------
Premium Income
Employee Benefits
Group Life & Health $ 991 $ 747 $ 465
-------------- --------------- ---------------
Total Employee Benefits 991 747 465
-------------- --------------- ---------------
Financial Services
Savings 14 17 23
Individual Insurance 158 231 (3) 345 (2)
-------------- --------------- ---------------
Total Financial Services 172 248 368
-------------- --------------- ---------------
Premium income $ 1,163 $ 995 $ 833
============== =============== ===============
Fee Income
Employee Benefits
Group Life & Health $ 454 $ 367 $ 305
401(k) 95 78 53
-------------- --------------- ---------------
-------------- --------------- ---------------
Total Employee Benefits 549 445 358
-------------- --------------- ---------------
-------------- --------------- ---------------
Financial Services
Savings 81 71 62
Individual Insurance 5
-------------- --------------- ---------------
-------------- --------------- ---------------
Total Financial Services 86 71 62
-------------- --------------- ---------------
-------------- --------------- ---------------
Fee income $ 635 $ 516 $ 420
============== =============== ===============
============== =============== ===============
Deposits for Investment-type
Contracts:
Employee Benefits $ 26 $ 37 $ 25
Financial Services 608 1,307 (3) 633
-------------- --------------- ---------------
Total investment-type
deposits $ 634 $ 1,344 $ 658
============== =============== ===============
Deposits to Separate Accounts
Employee Benefits $ 1,745 $ 1,568 $ 1,403
Financial Services 838 640 742
-------------- --------------- ---------------
Total separate accounts
deposits $ 2,583 $ 2,208 $ 2,145
============== =============== ===============
Self-funded equivalents (4) $ 2,979 $ 2,606 $ 2,039
============== =============== ===============
</TABLE>
(1) All information in the above table and other tables herein is derived
from information that has been prepared in conformity with generally
accepted accounting principles, unless otherwise indicated.
(2) This amount includes the recapture of $156 million for the year ended
December 31, 1997 of participating policy reserves previously co-insured
with Great-West Life under a participating life coinsurance agreement.
(3) These amounts include $46 million in premium income for
non-participating life insurance policies and $520 million in deposits for
investment-type contracts which Great-West Life co-insured with the Company
in 1998 under two indemnity reinsurance agreements.
(4) Self-funded equivalents generally represent paid claims under minimum
premium and administrative services only contracts, which amounts
approximate the additional premiums that would have been earned under such
contracts if they had been written as traditional indemnity or HMO
programs. C. EMPLOYEE BENEFITS
1. Principal Products
The Employee Benefits segment of the Company provides a full range of
employee benefits products to more than 12,800 employers across the United
States.
The Company offers customers a variety of health plan options to help them
maximize the value of their employee benefits package. The majority of the
Company's health care business is self-funded, whereby the employer assumes
all or a significant portion of the risk. For companies with better than
average claims experience, this can result in significant health care
savings.
The Company offers employers a total benefits solution - an integrated
package of group life and disability insurance, managed care programs,
401(k) savings plans and flexible spending accounts. Through integrated
pricing, administration, funding and service, the Company helps employers
provide cost-effective benefits that will attract and retain quality
employees, and at the same time, helps employees reach their personal goals
by offering benefit choices, along with information needed to make
appropriate choices. Many customers also find this integrated approach
appealing because their benefit plans are administered through a single
company with linked systems that provide on-line administration and account
access, for enhanced efficiency and simplified plan administration.
The Company offers a choice of managed care products including Health
Maintenance Organization ("HMO") plans, which provide a high degree of
managed care, and Preferred Provider Organization ("PPO") plans and Point
of Service ("POS") plans which offer more flexibility in provider choice
than HMO plans.
Under HMO plans, health care for the member is coordinated by a primary
care physician who is responsible for managing all aspects of the member's
health care. HMO plans offer a broad scope of benefits coverage including
routine office visits and preventive care, as well as lower premiums and
low copayments, which minimize out-of-pocket costs. There are no claims to
file when services are received through a primary care physician.
POS plans also require that a member enroll with a primary care physician
who is responsible for coordinating the member's health care. Similar to an
HMO, members receive the highest benefit coverage and the lowest
out-of-pocket costs when they use their primary care physician to
coordinate their heath care. In contrast to an HMO, members can seek care
outside of the primary physician's direction, at a reduced level of
benefits. Some benefits may not be covered outside the in-network POS plan.
PPO plans offer members a greater choice of physicians and hospitals.
Members do not need to enroll with a primary care physician - they simply
select a contracted PPO provider at the time of the service to receive the
highest level of benefits. If members seek care outside of the PPO network,
they receive a lower level of benefits.
The One Health Plan HMO subsidiary organization administers provider
networks and provides medical management, member services and quality
assurance for the other managed care products of the Company, Alta Health &
Life Insurance Company ("Alta"), formerly known as Anthem Health & Life
Insurance Company, and New England Life Insurance Company ("New England").
In addition to creating economies of scale, this "pooling" of PPO, POS and
HMO membership benefits the Company by improving its position in
negotiating provider reimbursement arrangements, which leads to more
competitive pricing.
The Company offers Internal Revenue Code Section 125 plans which enable
participants to set aside pre-tax dollars to pay for unreimbursed medical
expenses and dependent care expenses. This creates tax efficiencies for
both the employer and its employees.
The Company offers group life insurance. Sales of group life insurance
consist principally of renewable term coverage, the amounts of which are
usually linked to individual employee wage levels. The following table
shows group life insurance in force prior to reinsurance ceded for the
years indicated:
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[Millions] Years Ended December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
In force
end of year $ 83,901(1)$ 84,121(1)$ 53,211 $ 49,500 $ 50,370
</TABLE>
(1) Includes $25,812 and $25,597 of in force group life insurance obtained
from the acquisition of Alta for the years ended December 31, 1999 and
1998, respectively.
The Company's 401(k) product is offered by way of a group fixed and
variable deferred annuity contract. The product provides a variety of
funding and distribution options for employer-approved retirement plans
that qualify under Internal Revenue Code Section 401(k).
The 401(k) product investment options for the employer include guaranteed
interest rates for various lengths of time and variable investment options.
For the fully guaranteed option, the difference between the income earned
on investments in the Company's general account and the interest credited
to the participant's account balance flows through to operating income.
Variable investment options utilize separate accounts to provide
participants with a vehicle to assume the investment risks. Assets held
under these options are invested, as designated by the participant, in
separate accounts which in turn invest in shares of underlying funds
managed by a subsidiary of the Company or by selected external fund
managers.
Of the total 401(k) assets under administration in 1999, 97% were allocated
to variable investment options versus 96% in 1998.
The Company is compensated by the separate accounts for bearing expense
risks pertaining to the variable annuity contract, and for providing
administrative services. For certain funds, a subsidiary of the Company
also receives fees for serving as an investment advisor for those
underlying funds, which are managed by the subsidiary.
In 1999, the Company introduced a self-directed brokerage account option
for its 401(k) product.
Customer retention is a key factor for the profitability of the Company's
401(k) product. The annuity contract imposes a charge for termination
during a designated period of time after the contract's inception. The
charge is determined in accordance with a formula in the contract. Existing
federal tax penalties on distributions prior to age 59 1/2 provide an
additional disincentive to premature surrenders of account balances, but do
not impact rollovers to products of competitors.
The Company offers a rollover Individual Retirement Annuity, which allows
individuals to move retirement funds from a 401(k) plan to a qualified
Individual Retirement Account.
In the following table, the amount of 401(k) business in force is measured
by the total of individual account balances:
[Millions]
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Year Ended
December 31, Fixed Annuities Variable Annuities
------------------------------------ ---------------------- -----------------------------
1995 $ 358 $ 2,227
1996 347 3,229
1997 328 4,568
1998 299 5,770
1999 268 7,339
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2. Method of Distribution
The Company distributes its products and services through field sales staff
of the Company, Alta and New England located in 63 sales offices throughout
the United States. Each sales office works with insurance brokers, agents
and consultants in their local market.
3. Competition
The employee benefits industry is highly competitive. Over the past year,
the United States health care industry has experienced a number of mergers
and consolidations. A number of larger carriers dropped out of the group
health market entirely. Although there are still many different carriers in
the marketplace, it has become dominated by an increasingly smaller number
of carriers, including the Company.
The highly competitive marketplace creates pricing pressures, which
encourage employers to seek competitive bids each year. Although most
employers are looking for affordably priced employee benefits products,
they want to offer product choices because employee needs differ. In many
cases it is more cost-effective and efficient for an employer to contract
with a carrier such as the Company, which offers multiple product lines and
centralized administration.
In addition to price, there are a number of other factors which influence
employer decision-making. These factors include quality of services; scope,
cost-effectiveness and quality of provider networks; product responsiveness
to customers' needs; cost-containment services; and effectiveness of
marketing and sales.
4. Reserves
For group whole life and term insurance products, policy reserve
liabilities are equal to the present value of future benefits and expenses
less the present value of future net premiums using best estimate
assumptions for interest, mortality and expenses (including margins for
adverse deviation). For disability waiver of premium and paid up group
whole life contracts, the policy reserves equal the present value of future
benefits and expenses using best estimate assumptions for interest,
mortality and expenses (including margins for adverse deviation). For group
universal life, the policy reserves equal the accumulated fund balance
(which reflects cumulative deposits plus credited interest less charges
thereon). Reserves for long-term disability products are established for
lives currently in payment status using industry and Company morbidity
factors, and interest rates based on Company experience. In addition,
reserves are held for lives that have not satisfied their waiting period
and for claims that have been incurred but not reported.
For medical, dental and vision insurance products, reserves reflect the
ultimate cost of claims including, on an estimated basis, (i) claims that
have been reported but not settled, and (ii) claims that have been incurred
but not reported. Claim reserves are based upon factors derived from past
experience. Reserves also reflect retrospective experience rating that is
done on certain types of business.
Reserves for investment contracts (401(k) deferred annuities) are equal to
cumulative deposits, less withdrawals and charges, plus credited interest
thereon.
Assumptions for mortality and morbidity experience are periodically
reviewed against published industry data and company experience.
The above mentioned reserves are computed amounts that, with additions from
premiums and deposits to be received, and with interest on such reserves,
are expected to be sufficient to meet the Company's policy obligations at
their maturities, and pay expected death or retirement benefits or
surrender requests.
5. Reinsurance
The Company has a marketing and administrative services arrangement with
New England. Under reinsurance agreements, New England issues group life
and health and 401(k) products and then immediately reinsures 50% of its
group life and health business, and nearly 100% of its guaranteed 401(k)
business, with the Company.
The Company seeks to limit its exposure on any single insured and to
recover a portion of benefits paid by ceding risks to other insurance
enterprises under excess coverage and coinsurance contracts. The maximum
amount of group life insurance retained on any one life is $1.5 million.
The maximum amount of group monthly disability income benefit at risk on
any one life is $6,000 per month.
D. FINANCIAL SERVICES
1. Principal Products
The Financial Services segment of the Company develops, administers and
sells retirement savings and life insurance products and services for
individuals, and for employees of state and local governments, hospitals,
non-profit organizations and public school districts.
The Company's core savings business is in the public/non-profit pension
market. The Company provides investment products, and administrative and
communication services, to employees of state and local governments
(Internal Revenue Code Section 457 plans), as well as employees of
hospitals, non-profit organizations and public school districts (Internal
Revenue Code Section 401, 403(b) and 408 plans). The Company provides
pension plan administrative services through a subsidiary company,
Financial Administrative Services Corporation ("FASCorp"). The Company
provides marketing and communication services through another subsidiary
company, Benefits Communication Corporation, and BenefitsCorp Equities,
Inc., a broker-dealer subsidiary of Benefits Communication Corporation
(collectively, "BenefitsCorp").
The Company's primary marketing emphasis in the public/non-profit pension
market is group fixed and variable annuity contracts for defined
contribution retirement savings plans. Defined contribution plans provide
for benefits based upon the value of contributions to, and investment
returns on, the individual's account. This has been the fastest growing
portion of the pension marketplace in recent years.
The Company has a marketing agreement with Charles Schwab & Co., Inc. to
sell individual fixed and variable qualified and non-qualified deferred
annuities. The variable annuity product offers several investment options.
The fixed product is a Guarantee Period Fund, which was established as a
non-unitized separate account in which the owner does not participate in
the performance of the assets. The assets accrue solely to the benefit of
the Company and any gain or loss in the Guarantee Period Fund is borne
entirely by the Company. Guarantee period durations of one to ten years are
currently being offered by the Company. Distributions from the amounts
allocated to a Guarantee Period Fund more than six months prior to the
maturity date results in a market value adjustment ("MVA"). The MVA
reflects the relationship as of the time of its calculation between the
current U.S. Treasury Strip ask side yield and the U.S. Treasury Strip ask
side yield at the inception of the contract.
The Company's variable annuity products provide the opportunity for
contractholders to assume the risks of, and receive all the benefits from,
the investment of retirement assets. The variable product assets are
invested, as designated by the participant, in separate accounts which in
turn invest in shares of underlying funds managed by a subsidiary of the
Company or by selected external fund managers.
Demand for investment diversification for customers and their participants
continued to grow during 1999. The Company continues to expand the annuity
products available through Maxim Series Fund, Inc., a subsidiary of the
Company, which is an insurance products mutual fund company, and through
arrangements with external fund managers. This array of funds allows
customers to diversify their investments across a wide range of investment
products, including fixed income, stock and international equity fund
offerings.
On a very limited basis the Company offers single premium annuities and
guaranteed certificates, which provide guarantees of principal and interest
with a fixed maturity date.
Customer retention is a key factor for the profitability of annuity
products. To encourage customer retention, annuity contracts typically
impose a surrender charge on policyholder balances withdrawn for a period
of time after the contract's inception. The period of time and level of the
charge vary by product. Existing federal tax penalties on distributions
prior to age 59 1/2 provide an additional disincentive to premature
surrenders of annuity balances, but do not impede transfers of those
balances to products of competitors.
Annuity products generate earnings from the investment spreads on the
guaranteed investment options and from the fees collected for mortality and
expense risks associated with the variable options. The Company also
receives fees for providing administration services to contractholders. A
subsidiary of the Company receives fees for serving as an investment
advisor for underlying funds, which are managed by the subsidiary.
The Company's annuity products are supported by the general account assets
of the Company for guaranteed investment options, and the separate accounts
for the variable investment options.
The amount of annuity products in force is measured by account balances.
The following table shows guaranteed investment contract and group and
individual annuity account balances for the years indicated:
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[Millions]
Year Ended Fixed Variable
December 31, Annuities Annuities
1995 $ 5,722 $ 1,772
1996 5,531 2,256
1997 5,227 3,280
1998 4,849 4,330
1999 4,592 5,137
</TABLE>
In addition to providing administrative services to customers of the
Company's annuities, FASCorp also provides comprehensive third-party
administrative and recordkeeping services for other financial institutions
and employer-sponsored retirement plans. Assets under administration with
unaffiliated organizations totaled $26.7 billion at December 31, 1999 and
$12.6 billion at December 31, 1998.
Life insurance products in force include participating and
non-participating term life, whole life and universal life. Participating
policyholders share in the financial results (differences in experience of
actual financial results versus pricing expectations) of the participating
business in the form of dividends. Participating products are no longer
actively marketed by the Company but continue to produce renewal premium
($271.0 million in 1999). Participating dividends for 1999 and 1998 were
$70.1 million and $71.4 million, respectively. The provision for
participating policyholder earnings is reflected in liabilities under
undistributed earnings on participating policyholders in the consolidated
balance sheets of the Company. Participating policyholder earnings are not
included in the consolidated net income of the Company.
Term life provides coverage for a stated period and pays a death benefit
only if the insured dies within the period. Whole life provides guaranteed
death benefits and level premium payments for the life of the insured.
Universal life products include a cash value component that is credited
with interest at regular intervals. The Company's earnings result from the
difference between the investment income and interest credited on customer
cash values and from differences between charges for mortality and actual
death claims. Universal life cash values are charged for the cost of
insurance coverage and for administrative expenses.
At both December 31, 1999 and 1998, the Company had $3.5 billion of policy
reserves on individual insurance products sold to corporations to provide
coverage on the lives of certain employees - so-called Corporate-Owned Life
Insurance ("COLI"). Due to legislation enacted during 1996 which phased out
the interest deductions on COLI policy loans over a two-year period ending
1998, COLI sales have ceased. The Company continues to work closely with
existing COLI customers to determine the options available to them and is
confident that the effect of the legislative changes will not be material
to the Company's operations.
The Company has shifted its emphasis to the Bank-Owned Life Insurance
("BOLI") market. BOLI was not affected by the 1996 legislation. This
interest-sensitive whole life product funds post-retirement benefits for
bank employees. At December 31, 1999 and 1998, the Company had $1.4 billion
and $0.9 billion, respectively, of BOLI policy reserves.
Sales of life insurance products typically have initial marketing expenses.
Retention, an important factor in profitability, is encouraged through
product features. For example, the Company's universal and whole life
insurance contracts typically impose a surrender charge on policyholder
balances withdrawn within the first ten years of the contract's inception.
The period of time and level of the charge vary by product. In addition,
more favorable credit rates may be offered after policies have been in
force for a period of time.
Certain of the Company's life insurance and group annuity products allow
policy owners to borrow against their policies. At December 31, 1999,
approximately 5% of outstanding policy loans were on individual life
policies that had fixed interest rates ranging from 5% to 8%. The remaining
95% of outstanding policy loans had variable interest rates averaging 7.4%
at December 31, 1999. Investment income from policy loans was $167.8
million for the year ended December 31, 1999.
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The following table summarizes changes in individual life insurance in force prior to reinsurance ceded for the years indicated:
Years Ended December 31,
--------------------------------------------------------------------------
[Millions] 1999 1998 1997 1996 1995
------------- ----------- ------------ ----------- ------------
In force, begin-
ning of year $ 42,966 $ 28,266 $ 26,892 $ 25,865 $ 24,877
Sales and
additions 4,228 16,215 (1) 3,119 2,695 2,520
Terminations 3,363 1,515 1,745 1,668 1,532
------------- ----------- ------------ ----------- ------------
Net 865 14,700 1,374 1,027 988
------------- ----------- ------------ ----------- ------------
In force,
end of year 43,831 42,966 28,266 26,892 25,865
(1) Includes approximately $8.5 billion in adjustments related to COLI policyholders exercising non-forfeiture options to
increase the face value of their policies, and $5.2 billion related to the reinsurance transactions referred to in
footnote (3) on page 2.
</TABLE>
In 1998, the Company obtained membership in the Insurance Marketplace
Standards Association, which is granted in recognition of high standards of
ethical company behavior in advertising, sales and service for individually
sold life insurance and annuity products.
2. Method of Distribution
Financial Services primarily uses BenefitsCorp to distribute pension
products and to provide communication and enrollment services to employers
in the public/non-profit market. Pension products are also distributed
through independent marketing agencies.
The Company distributes universal and joint survivor life and term
insurance, as well as individual fixed and variable qualified and
non-qualified deferred annuities, through Charles Schwab & Co., Inc.
Individual life products are also sold through large banks and other
financial institutions. BOLI products are currently marketed through one
broker, Clark/Bardes, Inc.
3. Competition
The life insurance, savings and investments marketplace is highly
competitive. The Company's competitors include mutual fund companies,
insurance companies, banks, investment advisors and certain service and
professional organizations. No one competitor or small number of
competitors is dominant. Competition focuses on service, technology, cost,
variety of investment options, investment performance, product features,
price and financial strength as indicated by ratings issued by nationally
recognized agencies. For more information on the Company's ratings see Item
1(G) (Ratings).
4. Reserves
Reserves for universal life policies are equal to cumulative deposits, less
withdrawals and mortality and expense charges, plus credited interest.
Reserves for all fixed individual life insurance contracts are computed on
the basis of assumed investment yield, mortality, morbidity and expenses
(including a margin for adverse deviation). These reserves are calculated
as the present value of future benefits (including dividends) and expenses
less the present value of future net premiums. The assumptions used in
calculating the reserves generally vary by plan, year of issue and policy
duration.
For all life insurance contracts (including universal life insurance),
reserves are established for claims that have been incurred but not
reported based on factors derived from past experience.
Reserves for limited payment contracts (immediate annuities with life
contingent payouts) are computed on the basis of assumed investment yield,
mortality, morbidity and expenses. These assumptions generally vary by
plan, year of issue and policy duration. Reserves for investment contracts
(deferred annuities and immediate annuities without life contingent
payouts) are equal to cumulative deposits plus credited interest less
withdrawals and other charges.
The above-mentioned reserves are computed amounts that, with additions from
premiums and deposits to be received, and with interest on such reserves,
are expected to be sufficient to meet the Company's policy obligations at
their maturities, and pay expected death or retirement benefits or
surrender requests.
5. Reinsurance
The Company seeks to limit its exposure to loss on any single insured and
to recover a portion of benefits paid by ceding risks to other insurance
enterprises under excess coverage and coinsurance contracts. The Company
retains a maximum of $1.5 million of coverage per individual life.
E. INVESTMENT OPERATIONS
The Company's investment division manages or administers the Company's
general and separate accounts in support of cash and liquidity requirements
of the Company's insurance and investment products. Total investments at
December 31, 1999 were $25.8 billion, comprised of general account assets
of $13.0 billion and separate account assets of $12.8 billion.
The Company invests in a broad range of asset classes, primarily domestic
and international fixed maturities and mortgage loans. Fixed maturity
investments include public and privately placed corporate bonds, government
bonds and redeemable preferred stocks. The Company also invests in
mortgage-backed securities and asset-backed securities.
The Company manages the characteristics of its investment assets, such as
liquidity, currency, yield and duration, to reflect the underlying
characteristics of related insurance and policyholder liabilities, which
vary among the Company's principal product lines. The Company observes
strict asset and liability matching guidelines, which are designed to
ensure that the investment portfolio will appropriately meet the cash flow
and income requirements of its liabilities. In connection with its
investment strategy, the Company makes limited use of derivative
instruments in hedging applications to manage market risk. Derivative
instruments are not used for speculative purposes. For more information on
derivatives, see Notes 1 and 6 to the consolidated financial statements of
the Company (the "Consolidated Financial Statements"), which are included
in Item 8 (Financial Statements and Supplementary Data).
The Company routinely monitors and evaluates the status of its investments
in light of current economic conditions, trends in capital markets and
other factors. These other factors include investment size, quality,
concentration by industry and other diversification considerations for
fixed maturity investments.
The Company's fixed maturity investments constituted 69% of investment
assets as of December 31, 1999. The Company reduces credit risk for the
portfolio as a whole by investing primarily in investment grade fixed
maturities. As of December 31, 1999, 97% of the bond portfolio carried an
investment grade rating.
The Company's mortgage portfolio constituted 7% of investment assets as of
December 31, 1999. The Company's mortgage investment policy emphasizes a
broadly diversified portfolio of commercial and industrial mortgages.
Mortgage loans are subject to underwriting criteria addressing
loan-to-value ratios, debt service coverage, cash flow, tenant quality,
leasing, market, location and financial strength of borrower. Since 1986,
the Company has reduced the overall weighting of its mortgage portfolio
with a greater emphasis in bond investments.
At December 31, 1999 only 0.8% of investment assets were invested in real
estate.
The following table sets forth the distribution of invested assets, cash
and accrued investment income for the Company's general account, as of the
end of the years indicated:
<TABLE>
<S> <C> <C> <C> <C> <C>
[Carrying Value 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
in Millions]
Debt Securities:
Bonds
U.S. Government
Securities and
obligations of U.S.
Government
Agencies $ 1,859 $ 1,951 $ 2,091 $ 1,947 $ 1,990
Corporate bonds 7,078 7,117 6,544 6,133 6,168
Foreign
Governments 51 69 146 119 159
---------- ---------- ---------- ---------- ----------
Total 8,988 9,137 8,781 8,199 8,317
Common Stock 69 49 39 20 9
Mortgage loans 975 1,133 1,236 1,488 1,713
Real estate 104 73 94 68 61
Policy loans 2,681 2,859 2,657 2,523 2,238
Short-term
investments 241 420 399 419 135
---------- ---------- ---------- ---------- ----------
Total investments $ 13,058 $ 13,671 $ 13,206 $ 12,717 $ 12,473
========== ========== ========== ========== ==========
Cash $ 258 $ 176 $ 126 $ 125 $ 91
Accrued investment
income 138 158 166 198 212
The following table summarizes general account investment results of the Company's operations:
Net Earned Net
[Millions] Investment Investment
Income Income Rate
-------------------- --------------------
For the year:
1999 $ 876 6.96%
1998 897 7.03
1997 882 7.21
1996 835 7.05
1995 835 7.36
</TABLE>
F. REGULATION
1. Insurance Regulation
The business of the Company is subject to comprehensive state and federal
regulation and supervision throughout the United States, which primarily
provides safeguards for policyholders rather than investors. The laws of
the various state jurisdictions establish supervisory agencies with broad
administrative powers with respect to such matters as admittance of assets,
premium rating methodology, policy forms, establishing reserve requirements
and solvency standards, maximum interest rates on life insurance policy
loans and minimum rates for accumulation of surrender values, the type,
amounts and valuation of investments permitted and HMO operations.
The Company's operations and accounts are subject to examination by the
Colorado Insurance Division and other regulators at specified intervals.
The latest financial examination by the Colorado Insurance Division was
completed in 1997, and covered the five year period ending December 31,
1995. This examination produced no significant adverse findings regarding
the Company.
The National Association of Insurance Commissioners has adopted risk-based
capital rules and other financial ratios for life insurance companies.
Based on the Company's December 31, 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.
G. RATINGS
The Company is rated by a number of nationally recognized rating agencies.
The ratings represent the opinion of the rating agencies on the financial
strength of the Company and its ability to meet the obligations of its
insurance policies.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Rating Agency Measurement Rating
- ------------------------------------- ---------------------------------------------------- --------------
A.M. Best Company Financial Strength and Operating Performance A++ *
Duff & Phelps Corporation Claims Paying Ability AAA *
Standard & Poor's Corporation Financial Strength AA+ **
Moody's Investors Service Financial Strength Aa2 ***
</TABLE>
* Highest ratings available.
** Second highest rating out of 21 rating categories.
*** Third highest rating out of 21 rating categories.
H. MISCELLANEOUS
No customer accounted for 10% or more of the Company's consolidated
revenues in 1999. In addition, no segment of the Company's business is
dependent on a single customer or a few customers, the loss of which would
have a significant effect on the Company or any of its business segments.
The loss of business from any one, or a few, independent brokers or agents
would not have a material adverse effect on the Company or any of its
business segments.
The Company had approximately 6,900 employees at December 31, 1999.
ITEM 2. PROPERTIES
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.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or any
of its subsidiaries is a party or of which any of their property is the
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1999 to a vote of
security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
A. EQUITY SECURITY HOLDERS AND MARKET INFORMATION
There is no established public trading market for the Company's common equity.
B. DIVIDENDS
In the two most recent fiscal years, the Company has paid quarterly
dividends on its common shares. Dividends on common stock totaled $92.1
million in 1999 and $73.3 million in 1998. Dividends on preferred stock
totaled $0 and $6.7 million in 1999 and 1998, respectively.
Under Colorado law, the Company cannot, without the approval of the
Colorado Commissioner of Insurance, pay a dividend if, as a result of such
payment, the total of all dividends paid in the preceding twelve months
would exceed the greater of (i) 10% of the Company's statutory surplus as
regards policyholders as at the preceding December 31; or (ii) the
Company's statutory net gain from operations as at the preceding December
31.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of certain financial data of the Company. This
summary has been derived in part from, and should be read in conjunction
with, the Company's Consolidated Financial Statements.
<TABLE>
[Millions]
<S> <C>
Years Ended December 31,
-----------------------------------------------------------------------
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
Total shareholder's equity 1,167 1,199 1,186 1,034 993
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-K contains forward-looking statements. Forward-looking
statements are statements not based on historical information and which
relate to future operations, strategies, financial results or other
developments. In particular, statements using verbs such as "expect,"
"anticipate," "believe" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing, forward-looking
statements include statements which represent the Company's beliefs
concerning future or projected levels of sales of the Company's products,
investment spreads or yields, or the earnings or profitability of the
Company's activities. Forward-looking statements are necessarily based upon
estimates and assumptions that are inherently subject to significant
business, economic and competitive uncertainties and contingencies, many of
which are beyond the Company's control and many of which, with respect to
future business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to
differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company. Whether or not actual results differ
materially from forward-looking statements may depend on numerous
foreseeable and unforeseeable events or developments, some of which may be
national in scope, such as general economic conditions and interest rates,
some of which may be related to the insurance industry generally, such as
pricing competition, regulatory developments and industry consolidation,
and others of which may relate to the Company specifically, such as credit,
volatility and other risks associated with the Company's investment
portfolio, and other factors. Readers are also directed to consider other
risks and uncertainties discussed in documents filed by the Company and
certain of its subsidiaries with the Securities and Exchange Commission.
Management's discussion and analysis of financial condition and results of
operations of the Company for the three years ended December 31, 1999
follows.
A. 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.
B. EMPLOYEE BENEFITS RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Employee
Benefits segment:
<TABLE>
<S> <C>
(Millions) Years Ended December 31,
----------------------------------------------
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.
C. FINANCIAL SERVICES RESULTS OF OPERATIONS
The following is a summary of certain financial data of the Financial Services
segment:
<TABLE>
<S> <C>
(Millions) Years Ended December 31,
-------------------------------------------------
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 o 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.
d. INVESTMENT OPERATIONS
The Company's primary investment objective is to acquire assets whose
durations and cash flows reflect the characteristics of the Company's
liabilities, while meeting industry, size, issuer and geographic
diversification standards. Formal liquidity and credit quality parameters
have also been established.
The Company follows rigorous procedures to control interest rate risk and
observes strict asset and liability matching guidelines. These guidelines
ensure that even under changing market conditions, the Company's assets
will meet the cash flow and income requirements of its liabilities. Through
dynamic modeling, using state-of-the-art software to analyze the effects of
a wide range of possible market changes upon investments and policyholder
benefits, the Company ensures that its investment portfolio is
appropriately structured to fulfill financial obligations to its
policyholders.
A summary of the Company's general account invested assets follows:
[Millions]
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1999 1998
------------ ------------
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.
E. LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have liquidity requirements that vary among the
principal product lines. Life insurance and pension plan reserves are
primarily long-term liabilities. Accident and health reserves, including
long-term disability, consist of both short-term and long-term liabilities.
Life insurance and pension plan reserve requirements are usually stable and
predictable, and are supported primarily by long-term, fixed income
investments. Accident and health claim demands are stable and predictable
but generally shorter term, requiring greater liquidity.
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.
F. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's assets are purchased to fund future benefit payments to its
policyholders and contractholders. The primary risk of these assets is
exposure to rising interest rates. The Company's exposure to foreign
currency exchange rate fluctuations is minimal as only nominal foreign
investments are held.
To manage interest rate risk, the Company invests in assets that are suited
to the products that it sells. For products with fixed and highly
predictable benefit payments such as certificate annuities and payout
annuities, the Company invests in fixed income assets with cash flows that
closely match the liability product cash flows. The Company is then
protected against interest rate changes, as any change in the fair value of
the assets will be offset by a similar change in the fair value of the
liabilities. For products with uncertain timing of benefit payments such as
portfolio annuities and life insurance, the Company invests in fixed income
assets with expected cash flows that are earlier than the expected timing
of the benefit payments. The Company can then react to changing interest
rates sooner as these assets mature for reinvestment.
The Company also manages risk with interest rate derivatives such as
interest rate caps that pay when interest rates rise. These derivatives are
only used to reduce risk and are not used for speculative purposes.
To manage foreign currency exchange risk, the Company uses currency swaps
to convert the foreign currency back to United States dollars. These swaps
are purchased each time a foreign currency denominated asset is purchased.
The Company has estimated the possible effects of interest rate changes at
December 31, 1999. If interest rates increased by 100 basis points (1%),
the fair value of the fixed income assets would decrease by approximately
$365 million. This calculation uses projected asset cash flows, discounted
back to December 31, 1999. The cash flow projections are shown in the table
below. The table shows cash flows rather than expected maturity dates
because many of the Company's assets have substantial expected principal
payments prior to the final maturity date. The fair value shown in the
table below was calculated using spot discount interest rates that varied
by the year in which the cash flow was expected to be received. These spot
rates in the benchmark calculation ranged from 5.25% to 6.93%.
<TABLE>
<S> <C>
Projected Cash Flows by Calendar Year ($ millions)
There- Undiscounted Fair
2000 2001 2002 2003 2004 after Total Value
-------- --------- --------- --------- --------- ----------- ----------------- -----------
Benchmark 1,777 1,683 1,733 1,372 1,199 5,290 13,054 9,401
Interest Rates
up 1% 1,749 1,652 1,710 1,346 1,183 5,537 13,177 9,036
</TABLE>
The Company administers separate account variable annuities for retirement
savings products. The Company collects a fee from each account, and this
fee is a percentage of the account balance. There is a market risk of lost
fee revenue to the Company if equity and bond markets decline. If the
equity and bond portfolios decline by 10%, the Company's fee revenue would
decline by approximately $11 million per year. The Company is managing this
risk for 1999 with a derivative swap that pays the Company a fixed return
in exchange for the performance of a combination of equity and bond
indexes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following are the Company's Consolidated Financial Statements for the
Years Ended December 31, 1999, 1998, and 1997 and the Independent Auditors'
Report thereon.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
In the two most recent fiscal years or any subsequent interim period, there
has been no change in the Company's independent accountants or resulting
disagreements on accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. IDENTIFICATION OF DIRECTORS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Director Age Served as Principal Occupation(s) For
Director From Last Five Years
James Balog 71 1993 Company Director
(1)(2)
James W. Burns, O.C. 70 1991 Chairman of the Boards of Great-West
(1)(2)(4) Lifeco, Great-West Life, London
Insurance Group Inc. and London Life
Insurance Company; Deputy Chairman,
Power Corporation
Orest T. Dackow 63 1991 President and Chief Executive
(1)(2)(4) Officer, Great-West Lifeco
Andre Desmarais 43 1997 President and Co-Chief Executive
(1)(2)(4)(5) Officer, Power Corporation; Deputy
Chairman, Power Financial
Paul Desmarais, Jr. 45 1991 Chairman and Co-Chief Executive
(1)(2)(4)(5) Officer, Power Corporation; Chairman,
Power Financial
Robert G. Graham 68 1991 Company Director since January 1996;
(1)(2)(4) previously Chairman and Chief
Executive Officer, Inter-City
Products Corporation (a company
engaged in the manufacture and
distribution of air conditioning,
heating and related products)
Robert Gratton 56 1991 Chairman of the Board of the Company;
(1)(2)(4) President and Chief Executive
Officer, Power Financial
N. Berne Hart 70 1991 Company Director
(1)(2)(3)
Kevin P. Kavanagh 67 1986 Company Director; Chancellor, Brandon
(1)(3)(4) University
William Mackness 61 1991 Company Director since July 1995;
(1)(2) previously Dean, Faculty of
Management, University of Manitoba
William T. McCallum 57 1990 President and Chief Executive Officer
(1)(2)(4) of the Company; President and Chief
Executive Officer, United States
Operations, Great-West Life
Jerry E.A. Nickerson 63 1994 Chairman of the Board, H.B. Nickerson
(3)(4) & Sons Limited (a management and
holding company)
The Honourable 62 1991 Vice-Chairman, Power Corporation;
P. Michael Pitfield, P.C., Q.C. Member of the Senate of Canada
(1)(2)(4)
Michel Plessis-Belair, F.C.A. 57 1991 Vice-Chairman and Chief Financial
(1)(2)(3)(4) Officer, Power Corporation; Executive
Vice-President and Chief Financial
Officer, Power Financial
Brian E. Walsh 46 1995 Co-Founder and Managing Partner,
(1)(2) Veritas Capital Management, LLC (a
merchant banking company) since
September 1997; previously Partner,
Trinity L.P. (an investment company)
from January 1996; previously
Managing Director and Co-Head, Global
Investment Bank, Bankers Trust
Company (an investment/commercial
bank)
</TABLE>
(1) Member of the Executive Committee
(2) Member of the Investment and Credit Committee
(3) Member of the Audit Committee
(4) Also a director of Great-West Life
(5) Mr. Andre Desmarais and Mr. Paul Desmarais, Jr. are brothers.
Unless otherwise indicated, all of the directors have been engaged for not
less than five years in their present principal occupations or in another
executive capacity with the companies or firms identified.
Directors are elected annually to serve until the following annual meeting
of shareholders.
The following lists directorships held by the directors of the Company, on
companies whose securities are traded publicly in the United States or that
are investment companies registered under the Investment Company Act of
1940.
J. Balog. Transatlantic Holdings
......... .........Phoenix Investment Partners
A. Desmarais The Seagram Company Limited
P. Desmarais, Jr. Rhodia S.A.
<TABLE>
IDENTIFICATION OF EXECUTIVE OFFICERS
<S> <C> <C> <C> <C> <C> <C>
Executive Officer Age Served as Executive Principal Occupation(s) For
Officer From Last Five Years
William T. McCallum President and 57 1984 President and Chief Executive Officer of the
Chief Company; President and Chief Executive
Executive Officer Officer, United States Operations, Great-West
Life
Mitchell T.G. Graye 44 1997 Executive Vice President and Chief Financial
Executive Vice President and Chief Officer of the Company; Executive Vice
Financial Officer President and Chief Financial Officer, United
States, Great-West Life
James D. Motz 50 1992 Executive Vice President, Employee Benefits
Executive Vice President, of the Company and Great-West Life
Employee Benefits
Douglas L. Wooden 43 1991 Executive Vice President, Financial Services
Executive Vice President, of the Company and Great-West Life
Financial Services
Michael R. Bracco Senior Vice President,
Senior Vice President, 32 1999 Employee Benefits of the
Employee Benefits Company and Great-West Life since September
1996; previously Manager, Bain & Company (a
strategy consulting company)
John A. Brown 52 1992 Senior Vice President, Healthcare Markets of
Senior Vice President, Healthcare the Company and Great-West Life
Markets
Donna A. Goldin 52 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)
Mark S. Hollen 41 2000 Senior Vice President, FASCorp of the Company
Senior Vice President, and Great-West Life
FASCorp
Senior Vice President, Chief Investment
John T. Hughes 63 1989 Officer of the Company; Senior Vice
Senior Vice President, President, Chief Investment Officer, United
Chief Investment Officer States, Great-West Life
D. Craig Lennox 52 1984 Senior Vice President, General Counsel and
Senior Vice President, General Secretary of the Company; Senior Vice
Counsel and Secretary President and Chief U.S. Legal Officer,
Great-West Life
Steve H. Miller 47 1997 Senior Vice President, Employee Benefits
Senior Vice President, Employee Sales of the Company and Great-West Life
Benefits Sales
Charles P. Nelson 39 1998 Senior Vice President,
Senior Vice President, Public/Non-Profit Markets of the Company and
Public/Non-Profit Markets Great-West Life
Martin Rosenbaum 47 1997 Senior Vice President, Employee Benefits of
Senior Vice President, Employee the Company and Great-West Life
Benefits
Gregory E. Seller 46 1999 Senior Vice President, Government Markets of
Senior Vice President, Government the Company and Great-West Life
Markets
Robert K. Shaw 44 1998 Senior Vice President, Individual Markets of
Senior Vice President, Individual the Company and Great-West Life
Markets
Senior Vice President, Public/Non-Profit
George D. Webb 56 1999 Operations of the Company and Great-West Life
Senior Vice President, since July 1999; previously Principal,
Public/Non-Profit Operations William M. Mercer Investment Consulting Inc.
(an investment consulting company)
</TABLE>
Unless otherwise indicated, all of the executive officers have been engaged
for not less than five years in their present principal occupations or in
another executive capacity with the companies or firms identified.
The appointments of executive officers are confirmed annually.
ITEM 11. EXECUTIVE COMPENSATION
A. SUMMARY COMPENSATION TABLE
The following table sets out all compensation paid by the Company to the
individuals who were, at December 31, 1999, the Chief Executive Officer and
the other four most highly compensated executive officers of the Company
(collectively the "Named Executive Officers") for the three most recently
completed financial years.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
SUMMARY COMPENSATION TABLE
====================================================================================== ===============================
Annual compensation Long-term compensation awards
- -------------------------------------------------------------------------------------- -------------------------------
- ------------------------------- ----------------- --------------- -------------------- -------------------------------
Name and Year Salary Bonus Options (1)
principal position ($) ($) (#)
- ------------------------------- ----------------- --------------- -------------------- -------------------------------
- ------------------------------- ----------------- --------------- -------------------- -------------------------------
W.T. McCallum 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.
B. OPTIONS
The following table describes options granted to the Named Executive
Officers during the most recently completed fiscal year. All options are
Lifeco Options granted pursuant to the Great-West Lifeco Stock Option Plan.
Lifeco Options are issued with an exercise price in Canadian dollars.
Canadian dollar amounts have been translated to U.S. dollars at a rate of
1/1.44.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
OPTION GRANTS IN LAST FISCAL YEAR
============================================================================================== =============================
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) ($) ($)
- ----------------------- --------------- ---------------- --------------- --------------------- ------------- ---------------
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 -
======================== ==================== ================ ================ ================ ================ =================
</TABLE>
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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
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
============================ =============== ================ ================ ================ ================ =================
C. PENSION PLAN TABLE
The following table sets out the pension benefits payable to the Named Executive Officers by Great-West Life or the Company.
PENSION PLAN TABLE
============================== ===========================================================================
Years of service
---------------------------------------------------------------------------
Remuneration
($)
15 20 25 30
35
- ------------------------------ ---------------------------------------------------------------------------
400,000 120,000 160,000 200,000 240,000 240,000
- ------------------------------ ---------------------------------------------------------------------------
500,000 150,000 200,000 250,000 300,000 300,000
- ------------------------------ ---------------------------------------------------------------------------
600,000 180,000 240,000 300,000 360,000 360,000
- ------------------------------ ---------------------------------------------------------------------------
700,000 210,000 280,000 350,000 420,000 420,000
- ------------------------------ ---------------------------------------------------------------------------
800,000 240,000 320,000 400,000 480,000 480,000
- ------------------------------ ---------------------------------------------------------------------------
- ------------------------------ ---------------------------------------------------------------------------
900,000 270,000 360,000 450,000 540,000 540,000
- ------------------------------ ---------------------------------------------------------------------------
- ------------------------------ ---------------------------------------------------------------------------
1,000,000 300,000 400,000 500,000 600,000 600,000
============================== ===========================================================================
</TABLE>
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.
D. COMPENSATION OF DIRECTORS
For each director of the Company who is not also a director of Great-West
Life, the Company pays an annual fee of $17,500, and a meeting fee of
$1,000 for each meeting of the Board of Directors or a committee thereof
attended. For each director of the Company who is also a director of
Great-West Life, the Company pays a meeting fee of $1,000 for each meeting
of the Board of Directors or a committee thereof attended which is not
coincident with a Great-West Life meeting. In addition, all directors are
reimbursed for incidental expenses.
The above amounts are paid in the currency of the country of residence of
the director.
E. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Executive compensation is determined by the Company's Board of Directors.
W.T. McCallum, President and Chief Executive Officer of the Company, is a
member of the Board of Directors. Mr. McCallum participated in executive
compensation matters generally but was not present when his own
compensation was discussed or determined.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below is certain information, as of March 1, 2000, concerning
beneficial ownership of the voting securities of the Company by entities
and persons who
beneficially own more than 5% of the voting securities of the Company. The
determinations of "beneficial ownership" of voting securities are based
upon Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). This rule provides that securities will be deemed to be
"beneficially owned" where a person has, either solely or in conjunction
with others, (1) the power to vote or to direct the voting of securities
and/or the power to dispose or to direct the disposition of, the securities
or (2) the right to acquire any such power within 60 days after the date
such "beneficial ownership" is determined.
(1) 100% of the Company's 7,032,000 outstanding common shares are owned by
GWL&A Financial Inc., 8515 East Orchard Road, Englewood, Colorado 80111.
(2) 100% of the outstanding common shares of GWL&A Financial Inc. are owned
by GWL&A Financial (Nova Scotia) Co., Suite 800, 1959 Upper Water Street,
Halifax, Nova Scotia, Canada B3J 2X2.
(3) 100% of the outstanding common shares of GWL&A Financial (Nova Scotia)
Co. are owned by The Great-West Life Assurance Company, 100 Osborne Street
North, Winnipeg, Manitoba, Canada R3C 3A5.
(4) 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.
(5) 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.
(6) 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.
(7) 100% of the outstanding common shares of 171263 Canada Inc. are owned
by 2795957 Canada Inc., 751 Victoria Square, Montreal, Quebec, Canada H2Y
2J3.
(8) 100% of the outstanding common shares of 2795957 Canada Inc. are owned
by Power Corporation of Canada, 751 Victoria Square, Montreal, Quebec,
Canada H2Y 2J3.
(9) Mr. Paul Desmarais, 751 Victoria Square, Montreal, Quebec, Canada H2Y
2J3, through a group of private holding companies, which he controls, has
voting control of Power Corporation of Canada.
As a result of the chain of ownership described in paragraphs (1) through
(9) above, each of the entities and persons listed in paragraphs (1)
through (9) would be considered under Rule 13d-3 of the Exchange Act to be
a "beneficial owner" of 100% of the outstanding voting securities of the
Company.
B. SECURITY OWNERSHIP OF MANAGEMENT
The following table sets out the number of equity securities, and
exercisable options (including options which will become exercisable within
60 days) for equity securities, of the Company or any of its parents or
subsidiaries, beneficially owned, as of 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>
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------ -------------------- --------------------- -----------------------
Great-West Lifeco Power Financial Power Corporation of
Inc. Corporation Canada
- ------------------------------ -------------------- --------------------- -----------------------
- ------------------------------ -------------------- --------------------- -----------------------
(1) (2) (3)
- ------------------------------ -------------------- --------------------- -----------------------
- ------------------------------ -------------------- --------------------- -----------------------
Directors
- ------------------------------ -------------------- --------------------- -----------------------
- ------------------------------ -------------------- --------------------- -----------------------
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 - - -
- ------------------------------ -------------------- --------------------- -----------------------
- ------------------------------ -------------------- --------------------- -----------------------
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The documents identified below are filed as a part of this report:
Page
A. INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report on Consolidated Financial Statements
for the Years Ended December 31, 1999, 1998, and 1997
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1999, 1998, and 1997
All schedules and separate financial statements of the Registrant are
omitted because they are not applicable, or not required, or because the
required information is included in the financial statements or notes
thereto.
B. INDEX TO EXHIBITS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Exhibit Number Title Page
3(i) Articles of Redomestication of Great-West Life & Annuity
Insurance Company
Filed as Exhibit 3(i) to Registrant's Form 10-K for the
year ended December 31, 1996 and incorporated herein by
reference.
3(ii) Bylaws of Great-West Life & Annuity Insurance Company
Filed as Exhibit 3(ii) to Registrant's Form 10-K for the
year ended December 31, 1997 and incorporated herein by
reference.
Material Contracts
10.1 - Description of Executive Officer Annual
Incentive Bonus Program
Filed as Exhibit 10.1 to Registrant's Form 10-K for the
year ended December 31, 1997 and incorporated herein by
reference.
10.2 - Great-West Lifeco Inc. Stock Option Plan
Filed as Exhibit 10.2 to Registrant's Form 10-K for the
year ended December 31, 1997 and incorporated herein by
reference.
10.3 - Supplemental Executive Retirement Plan
Filed as Exhibit 10.3 to Registrant's Form 10-K for the
year ended December 31, 1997 and incorporated herein by
reference.
10.4 - Executive Deferred Compensation Plan
Filed as Exhibit 10.4 to Registrant's Form 10-K for the
year ended December 31, 1997 and incorporated herein by
reference.
21 Subsidiaries of Great-West Life & Annuity Insurance Company
24 Directors' Powers of Attorney
Directors' Powers of Attorney filed as Exhibit 24 to
Registrant's Form 10-K for the year ended December 31,
1996, and Exhibit 24 to Registrant's Form 10-K for the year
ended December 31, 1997, and incorporated herein by
reference.
27 Financial Data Schedule
</TABLE>
C. REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
By: /s/ W.T. McCallum
William T. McCallum
President and Chief Executive Officer
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Signature and Title Date
/s/ William T. McCallum March 30, 2000
William T. McCallum
President and Chief Executive Officer
and a Director
/s/ Mitchell T.G. Graye March 30, 2000
Mitchell T.G. Graye
Executive Vice President and Chief Financial Officer
/s/ Glen R. Derback March 30, 2000
Glen R. Derback
Vice President and Controller
/s/ James Balog * March 30, 2000
James Balog, Director
/s/ James W. Burns * March 30, 2000
James W. Burns, Director
/s/ Orest T. Dackow * March 30, 2000
Orest T. Dackow, Director
Signature and Title Date
/s/ Andre Desmarais* March 30, 2000
Andre Desmarais, Director
/s/ Paul Desmarais, Jr. * March 30, 2000
Paul Desmarais, Jr., Director
/s/ Robert G. Graham * March 30, 2000
Robert G. Graham, Director
/s/ Robert Gratton * March 30, 2000
Robert Gratton, Director
/s/ N. Berne Hart * March 30, 2000
N. Berne Hart, Director
/s/ Kevin P. Kavanagh * March 30, 2000
Kevin P. Kavanagh, Director
/s/ William Mackness * March 30, 2000
William Mackness, Director
/s/ Jerry E.A. Nickerson * March 30, 2000
Jerry E.A. Nickerson, Director
/s/ P. Michael Pitfield * March 30, 2000
P. Michael Pitfield, Director
/s/ Michel Plessis-Belair * March 30, 2000
Michel Plessis-Belair, Director
/s/ Brian E. Walsh * March 30, 2000
Brian E. Walsh, Director
Signature and Title Date
* By: /s/ D. Craig Lennox March 30, 2000
D. Craig Lennox
Attorney-in-fact pursuant to filed Powers of Attorney.
</TABLE>
<TABLE>
<S> <C>
EXHIBIT 21
SUBSIDIARIES OF GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
SUBSIDIARIES OF GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
JURISDICTION OF INCORPORATION OR
ORGANIZATION
SUBSIDIARY
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
</TABLE>
(1) Also doing business as Benefits Insurance Services, Inc. (2) Also doing
business as Financial Administrative Services Corporation of Colorado.
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>
