Registration No. 33-62674
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
POST-EFFECTIVE AMENDMENT NO. 5
TO
FORM S-1
under
the Securities Act of 1933
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Great Northern Insured Annuity Corporation
(Exact name of registrant as specified in its charter)
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Washington 91-1127115 6312
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(State or other jurisdiction of (I.R.S. Employer (Primary Standard Induxtrial
incorporation or organization) Identification Number) Classification Code Number)
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Two Union Square, Suite 5600
Seattle, Washington 98111-0490
(206) 625-1755
(Address and telephone number of Principal Executive Offices)
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J. NEIL McMURDIE, ESQ. Copy to:
Associate Counsel and Assistant Vice President J. SUMNER JONES, ESQ.
Great Northern Insured Annuity Corporation Jones & Blouch L.L.P.
Two Union Square, Suite 5600 1025 Thomas Jefferson Street, NW
Seattle, Washington 98111-0490 Suite 405 West
206-625-1755 Washington, DC 20037
(Name, address and telephone number of agent for service)
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GREAT NORTHERN INSURED ANNUITY CORPORATION
CROSS REFERENCE SHEET
Pursuant to Regulation S-K, Item 501(b)
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Form S-1
Item No. Form S-1 Caption Location in the Prospectus
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1. Forepart of the Registration Statement and Outside Outside Front Cover Page
Front Cover Page of Prospectus.
2. Inside Front and Outside Back Cover Pages Table of Contents Summary
of Prospectus.
3. Summary Information, Risk Factors and Outside Front Cover Page;
Ratio of Earnings to Fixed Charges. Special Terms; Summary
4. Use of Proceeds. Investments Supporting the Fixed Guarantee
Periods
5. Determination of Offering Price. Not Applicable
6. Dilution. Not Applicable
7. Selling Security Holders. Not Applicable
8. Plan of Distribution. Distribution of Contracts
9. Description of Securities to be Registered. Summary; Description of the Contract
10. Interests of Named Experts and Counsel. Legal Matters
11. Information with Respect to the Registrant. Great Northern Insured Annuity Corporation;
Federal Tax Matters; More Information About
GNA; Executive Officers and Directors; Legal
Proceedings
12. Disclosure of Commission Position on Indemnification Not Applicable
for Securities Act Liabilities.
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<PAGE>
GREAT NORTHERN INSURED
ANNUITY CORPORATION
Two Union Square, P.O. Box 490
Seattle, Washington 98111-0490
(206) 625-1755
Group and Individual Modified
Guaranteed Annuity Contracts
with Guaranteed Interest Rates
for Periods of from One to Ten Years
The Contract described in this Prospectus is designed to provide annuity
payments in connection with retirement plans that do not qualify for special
federal income tax treatment under the Internal Revenue Code or certain plans
that qualify for special income tax treatment, such as Individual Retirement
Accounts or Annuities or Tax-Sheltered Annuities.
In most states the Contract offered by this Prospectus is a group Contract.
The group Contract may be issued to a broker-dealer or other financial
institution for a group consisting of clients of the broker-dealer or financial
institution. The Contract may also be issued to any other organized group
acceptable to us, including a trust established for account holders of a
broker-dealer or other financial institution. In certain states where the group
Contract is not approved for sale, an individual Contract may be available.
The Contract permits Participants under the Contract to make single
premium payments to be accumulated at a guaranteed rate or rates of interest
depending upon the Guarantee Period or Periods selected by the Participant. A
certificate of participation will be issued for each single premium. Guarantee
Periods range from one to ten years. At the end of any Guarantee Period the
accumulated value is reinvested for one or more new Guarantee Periods at the
current interest rates then offered by us.
A withdrawal made prior to the end of a Guarantee Period will be subject to
a market value adjustment, which could have the effect of either increasing or
decreasing the Participant's values, and may be subject to a withdrawal charge.
(See "Market Value Adjustment" and "Withdrawal Charge" under "Description of the
Contract.")
THESE SECURITIES ARE NOT DEPOSITS WITH, OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR ANY AFFILIATE THEREOF, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT ANGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1997.
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TABLE OF CONTENTS
Table of Contents...............................................................
Definitions.....................................................................
Summary of the Contract.........................................................
Great Northern Insured Annuity Corporation......................................
Description of the Contracts
General....................................................................
Premiums...................................................................
Selecting the Guarantee Period.............................................
Sub-Account and Annuity Values.............................................
Sub-Account Transfers......................................................
Fixing Guaranteed Interest Rates...........................................
Withdrawals................................................................
Market Value Adjustment....................................................
Withdrawal Charge..........................................................
First Withdrawal During Certificate Year...................................
Payment on Death...........................................................
Annuity Provisions.........................................................
Other Provisions...........................................................
Investments Supporting the Contracts............................................
Distribution of the Contracts...................................................
Federal Income Taxes............................................................
More Information About GNA......................................................
History and Business.......................................................
Selected Financial Data....................................................
Management's Discussion and Analysis of Financial Condition and Results
of Operations...........................................................
Reserves...................................................................
Investments................................................................
Competition................................................................
Government Regulation......................................................
Recent Financial Accounting Standards Board Pronouncements.................
Executive Officers and Directors................................................
Executive Compensation.....................................................
Legal Proceedings...............................................................
Legal Matters...................................................................
Experts
Registration Statement..........................................................
Appendix........................................................................
Financial Statements............................................................
No person has been authorized to give any information or to make any
representation other than that contained in this Prospectus in connection with
the offer contained in this Prospectus and, if given or made, such information
or representation must not be relied upon as having been authorized. This
Prospectus does not constitute an offer of, or solicitation of an offer to
acquire, any Contracts or interests therein offered by this Prospectus in any
jurisdiction to anyone to whom it is unlawful to make such an offer or
solicitation in such jurisdiction.
Each participant will be furnished at least once each year prior to his or
her Annuity Date a statement showing his or her Annuity Value, Sub-Account
Values and current interest rates. The statement will not include financial
statements.
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DEFINITIONS
Annuity Value--The sum of all Sub-Account Values.
Annuitant--The person whose age determines the Annuity Date and upon whose
continuation of life annuity payments may depend. The Participant is the
Annuitant unless another person is named.
Annuity Date--The date on which annuity payments are to start.
Annuity--A series of predetermined periodic payments.
Beneficiary--The person to whom payment is to be made on the death of the
Participant (or other appropriate individual).
Certificate*--Under a group Contract, an individual certificate of
participation issued by GNA to each Participant as evidence of his or her rights
and benefits under the Contract.
Certificate Anniversary*--Each anniversary of the Effective Date.
Certificate Year*--The year starting on the Certificate date or a
Certificate Anniversary and ending on the day just prior to the next Certificate
Anniversary.
Contract--The group or individual contract offered by this Prospectus.
Effective Date--The date on which a premium is credited by GNA as set forth
on the Certificate.
Guarantee Period--The period of years for which a rate of interest is
guaranteed to be credited to a Sub-Account.
Net Annuity Value--The sum of all Net Sub-Account Values.
Net Sub-Account Value--The Sub-Account Value after adjustment for any
current market value adjustment and withdrawal charge.
Nonqualified Certificate*--A Certificate issued in connection with a
Nonqualified Plan.
Nonqualified Plan--A retirement plan not eligible for favorable tax
treatment under Section 401, 403, 408 or 457 of the Internal Revenue Code.
Participant*--The individual participating under the Contract to whom a
Certificate has been issued.
Qualified Certificate*--A Certificate issued in connection with a
retirement plan that receives favorable tax treatment under Section 403(b) or
408 of the Internal Revenue Code.
Qualified Plan--A retirement plan that receives favorable tax treatment
under Section 401, 403, 408 or 457 of the Internal Revenue Code.
Sub-Account--An account maintained for a Participant corresponding to a
specified interest rate and Guarantee Period selected by the Participant.
Sub-Account Value--An amount equal to that part of a single premium
allocated by a Participant to a Sub-Account, or any reinvestment in a
Sub-Account, less any applicable premium tax previously deducted, plus credited
interest, and minus any prior withdrawals.
*In the case of an individual Contract, unless the context otherwise requires,
the words "Certificate," "Certificate Anniversary," "Certificate Year,"
"Nonqualified Certificate" and "Qualified Certificate" mean respectively
"Contract," "Contract Anniversary," "Contract Year," "Nonqualified Contract" and
"Qualified Contract," and the word "Participant" means "Owner."
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SUMMARY OF THE CONTRACT
"You" refers to the Participant under a group Contract and the Owner of an
individual Contract. The Participant is entitled (unless otherwise provided) to
exercise all rights summarized in a certificate of participation ("Certificate")
issued under the group Contract. "We," "us," "GNA" or the "Company" refers to
Great Northern Insured Annuity Corporation.
The Contract
This Prospectus describes the Group and Individual Modified Guaranteed
Annuity Contract ("Contract") issued by GNA. The group Contract may be purchased
by any employer, entity or other organized group acceptable to us. The group
Contract is an allocated contract, which means that specific accounts are
maintained for each Participant. Under a group Contract, a Certificate is issued
to each Participant summarizing his or her rights and benefits under the
Contract. In states where the group Contract is not approved for sale and an
individual Contract is available, the individual Contract may be purchased by
any person or entity acceptable to us.
The Contract may be issued pursuant to nonqualified retirement plans or
plans qualifying for special tax treatment, such as Individual Retirement
Annuities or Accounts or Tax-Sheltered Annuities. Certificates may be issued to
trustees of trusts established for other Qualified Plans.
The Sub-Accounts
One or more Sub-Accounts are maintained for each Participant. A Sub-Account
is established for each specified interest rate and Guarantee Period. A
Guarantee Period is the period of years for which a rate of interest is
guaranteed. Currently, you may select Guarantee Periods from one to ten years.
We may, at our discretion, offer additional Guarantee Periods.
At the end of a Guarantee Period, your Sub-Account Value for that Guarantee
Period will be transferred to one or more Sub-Accounts that you specify, except
that you may not select (i) a Sub-Account with a Guarantee Period that would end
after the Annuity Date and (ii) if you are, or a non-spouse Joint Participant
(or, if you are not a living person, any Annuitant) is, age 87 or older, a
Sub-Account with a Guarantee Period longer than 3 years. If we receive no notice
from you, the Sub-Account Value will be automatically transferred to a
Sub-Account with a one-year Guarantee Period, unless you have previously elected
either (i) to have the Sub-Account Value automatically transferred to a
Sub-Account with the longest Guarantee Period in which you have Sub-Account
Values currently invested or (ii) to have the Sub-Account Value automatically
transferred to a Sub-Account with the same Guarantee Period as the Sub-Account
from which the transfer is made, provided that in either case the Guarantee
Period ends before your Annuity Date.
Premiums
One Certificate will be issued for each single premium payment you make
under the Contract. The minimum single premium is $5,000. The minimum allocation
to a Sub-Account is $2,000.
Charges
We make no deductions from your single premium except for premium taxes
(where applicable). The only charge we make is a withdrawal charge in the event
you withdraw all or a portion of the Annuity Value during the first seven
Certificate Years. After the first Certificate Year, that part of the first
withdrawal you make during any Certificate Year that does not exceed the
interest credited during the previous Certificate Year to the Sub-Accounts from
which the withdrawal is to be made may be withdrawn free of any withdrawal
charge or market value adjustment (described below) unless you elect otherwise.
Where applicable, the withdrawal charge is a percent of the amount subject to
the withdrawal charge, which percent is dependent upon the Certificate Year
during which the withdrawal takes place. For withdrawals made during the first
Certificate Year, the applicable percent is 7%. Each year thereafter the
withdrawal charge reduces one percent, so that after the seventh Certificate
Year no withdrawal charge applies.
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Premium taxes, if any, will be deducted at the Annuity Date unless
applicable state law requires that they be paid upon issuance of a Certificate.
(In those states, we may postpone deduction of the premium taxes until
withdrawal, surrender, death or annuitization.)
Market Value Adjustment
A market value adjustment is applied to any withdrawal made from a
Sub-Account prior to the end of its Guarantee Period. It will also be applied at
the Annuity Date with respect to any Sub-Account having a Guarantee Period not
ending on the Annuity Date unless (i) the combined market value adjustments of
all affected Sub-Accounts would reduce your Annuity Value and (ii) annuity
payments will be made for at least ten years or a life annuity option has been
chosen. The adjustment may be positive or negative.
Because of the market value adjustment provision of the Contract, you bear
the investment risk that the guaranteed interest rates we offer at the time you
make a withdrawal or start receiving annuity payments may be higher than the
guaranteed interest rate of the Sub-Account to which the market value adjustment
is applied with the result that the amount you receive may be substantially
reduced.
Annuity Payments
Annuity payments will start on the Annuity Date. You may select the Annuity
Date. If you do not select the Annuity Date, it will be the first day of the
calendar month immediately following the later of (i) the certificate
anniversary immediately after the Annuitant's 85th birthday or (ii) ten years
after the effective date of the Certificate. You may also select an annuity
payment option. If you do not, the annuity option will be a life annuity with a
10-year guarantee. You may change your selections at any time at least thirty
(30) days prior to the Annuity Date.
On the Annuity Date your Net Annuity Value (without assessment of a
withdrawal charge) is applied at our annuity rates to determine the amount of
each annuity payment. In determining the Net Annuity Value, a market value
adjustment may be applied. If your Net Annuity Value at the Annuity Date is less
than $2500, we may pay your Net Annuity Value in a lump sum in lieu of annuity
payments. For tax consequences of a lump sum payment, see "Federal Tax
Considerations" on page 16. If any annuity payment would be less than $100, we
may change the frequency of payments to intervals that will result in payments
of at least $100.
Payment on Death
If the Participant or non-spouse Joint Participant dies prior to the
Annuity Date, we will pay to the beneficiary the greater of the Annuity Value or
the Net Annuity Value on the date of payment. In determining the Net Annuity
Value, no withdrawal charge will be deducted.
On the death of the Annuitant after the Annuity Date, any guaranteed
amounts remaining unpaid will be paid to the beneficiary pursuant to the same
method of distribution in force at the date of death.
Withdrawals
You may withdraw all or a portion of your Net Annuity Value prior to the
earlier of the Annuity Date or the death of any person whose death causes the
payment of a death benefit. For partial withdrawals, the Sub-Account Value of
each remaining Sub-Account, after adjustment for the withdrawal, must be at
least $1,000, and the remaining Annuity Value must be at least $2,500.
Withdrawals from Tax-Sheltered Annuities are restricted. (See "Qualified Plans"
on page 18.) Withdrawals may be subject to a 10% penalty tax under the Internal
Revenue Code. (See "Federal Tax Considerations" on page 16.)
Free Look Right
You may cancel your Certificate within the time period set forth thereon
following your receipt of the Certificate by returning or mailing it to us or
our agent along with a written cancellation request. We will refund your premium
from our home office within ten (10) days of our receipt of the Certificate, and
your rights under the
<PAGE>
Contract will be void from the beginning. We reserve the right to reject an
application from any person who, in connection with a prior application,
previously exercised his or her free look right.
GREAT NORTHERN INSURED ANNUITY CORPORATION
We are a stock life insurance company organized under the laws of the State
of Washington in 1980. We are a wholly owned subsidiary of GE Capital Assurance
Company ("GE Capital Assurance"), which is indirectly a wholly owned subsidiary
of General Electric Capital Corporation ("GE Capital"). Detailed information
concerning us is set forth below under the caption "More Information About GNA."
All communications concerning the Contracts and Certificates should be
addressed to our home office at the address shown on the front cover of this
Prospectus.
DESCRIPTION OF THE CONTRACTS
General
In most states the Contract offered by this Prospectus is a group Contract.
The group Contract is an allocated contract pursuant to which specific accounts
are maintained for each Participant. The group Contract may be issued to a
broker-dealer or other financial institution for a group consisting of clients
of the broker-dealer or financial institution. The Contract may also be issued
to any other organized group acceptable to us, including a trust established for
account holders of a broker-dealer or other financial institution. In certain
states where the group Contract is not approved for sale, an individual Contract
may be available.
The Contract may be issued in connection with either Nonqualified Plans or
certain Qualified Plans. Qualified Plans are limited to Individual Retirement
Annuities or Accounts and Tax-Sheltered Annuities, although interests under
Nonqualified Contracts may be sold to trustees of trusts established for other
Qualified Plans. At the present time, GNA will issue a Tax Sheltered Annuity
only when the funds are directly transferred from an existing Tax Sheltered
Annuity.
A person, or in the case of a group Contract an eligible member of a group
to which a Contract has been issued, may become a Participant by completing an
application and forwarding payment of a single premium to us. The application is
subject to our acceptance. The rights and benefits of a Participant under a
Contract are summarized in a Certificate issued to the Participant. Provisions
of the Contract are controlling. All rights and benefits of a Participant under
a group Contract may be exercised without the consent of the Contract holder.
Provisions of any plan in connection with which a Contract has been issued may
restrict a person's eligibility to purchase or participate under the Contract,
the minimum or maximum amount of the single premium, and the Participant's
ability to exercise the rights and/or receive the benefits provided under the
Contract. In the case of a group Contract, we reserve the right to terminate a
Contract as to eligible members of the group not accepted as Participants at the
time of termination.
Premiums
One Certificate will be issued for each single premium you pay under the
Contract. The effective date of your coverage will be the date we receive the
premium, except that any premium we receive after 2:00 p.m. or on weekends may
be credited on the following business day. The single premium must be at least
$5,000. Your premium will be allocated to one or more Sub-Accounts in accordance
with your selection. The minimum allocation to a Sub-Account is $2,000. We will
confirm our receipt of your payment and the Sub-Accounts established for your
payment.
Selecting the Guarantee Period(s)
You may select the Guarantee Periods for your single premium or portion
thereof. We currently offer Guarantee Periods ranging from one to ten years. We
may, at our own discretion, offer additional Guarantee Periods. Generally, the
longer the Guarantee Period, the higher the interest rate will be, but this will
not always be the case. We will establish a Sub-Account corresponding to each
specified interest rate and Guarantee Period. Once you have made a selection, it
cannot be changed. You cannot transfer amounts from one Sub-Account to another
<PAGE>
prior to the end of the Guarantee Period. You may, however, withdraw the value
of a Sub-Account subject to the restrictions described below and a market value
adjustment and a withdrawal charge. Withdrawals may be subject to a 10% penalty
tax under the Internal Revenue Code.
Sub-Account and Annuity Values
Your Annuity Value is the sum of all of your Sub-Account Values. Each
Sub-Account Value is equal to the amount you allocated to the Sub-Account
(either as part of your single premium or as part of the reinvestment of a
Sub-Account Value at the end of its Guarantee Period), less any applicable
premium tax previously deducted, plus interest credited at the guaranteed rate,
and minus any prior withdrawals. Premium taxes imposed by states and local
jurisdictions currently range from 0% to 3.5% depending on the tax treatment of
the Contract.
We quote a guaranteed interest rate for each Sub-Account. The guaranteed
interest rate will be credited to the Sub-Account daily beginning the date we
issue the Certificate. Interest will be credited on a daily basis, using a
365-day year. (No interest will be credited for February 29.)
Sub-Account Transfers
You may select one or more new Guarantee Periods for the transfer of a
Sub-Account Value at the end of a Guarantee Period. You may not select a
Guarantee Period that would end after the Annuity Date. In addition, once you
are, or a non-spouse Joint Participant (or, if you are not a living person, any
Annuitant) is, age 87 or older, you may not select a Guarantee Period longer
than three (3) years. We will notify you of your right to make the selection at
least thirty (30) days prior to the end of the Guarantee Period. Interest rates
for transfers are guaranteed to be the same as the initial guaranteed interest
rates offered for new Certificates, but there is no guaranteed minimum interest
rate. Prior to the end of the current Guarantee Period, you must advise us of
the new Sub-Accounts to which the Sub-Account Value is to be transferred. The
minimum transfer to any one Sub-Account is the lesser of $2,000 or the total
Sub-Account Value at the time of transfer. If timely instructions are not
received, we will transfer the Sub-Account Value to a Sub-Account with a
one-year Guarantee Period, unless you have elected the Maximum Selected
Guarantee Period Option or the Current Guarantee Period Option.
If the Maximum Selected Guarantee Period Option has been elected, we will
transfer the Sub-Account Value, absent instructions from you, to a Sub-Account
with the longest Guarantee Period in which you have Sub-Account Values currently
invested, provided the Guarantee Period ends before your Annuity Date. The
Maximum Selected Guarantee Period Option may be elected at any time prior to the
end of a Guarantee Period.
If the Current Guarantee Period Option has been elected, we will reinvest
the Sub-Account Value, absent instructions from you, for the same Guarantee
Period in which that Sub-Account is currently invested, provided the Guarantee
Period ends before your Annuity Date. The Current Guarantee Period Option may be
elected at any time prior to the end of a Guarantee Period.
Fixing Guaranteed Interest Rates
Our determination of the guaranteed interest rates for the different
Guarantee Periods will be influenced by, but not necessarily correspond to,
interest rates available on fixed income investments which we may acquire with
the premiums we receive under the Contracts. See "Investments Supporting the
Contracts" on page 14. We will also consider other factors in determining the
guaranteed rates, including regulatory and tax requirements, sales commissions
and administrative expenses borne by us, general economic trends and competitive
factors. We may from time to time, at our sole discretion, declare bonus
interest rates for one or more Guarantee Periods. Any such bonus rate may have a
duration less than the Guarantee Period and will not be considered when
determining any market value adjustment. Our management will make the final
determination of the guaranteed rates we declare. We cannot predict or guarantee
the level of future guaranteed rates.
Withdrawals
You may withdraw all or a portion of your Net Annuity Value upon notice to
us received prior to the earlier of the Annuity Date or the death of any person
whose death causes the payment of a death benefit. The Net Annuity Value is the
sum of all Net Sub-Account Values, and a Net Sub-Account Value is the
Sub-Account Value after
<PAGE>
adjustment for any current market value adjustment and withdrawal charge. Such
values may reflect a deduction for any applicable premium tax that may be
payable. For a full withdrawal, we may require surrender of your Certificate.
Under Tax-Sheltered Annuities, withdrawals attributable to contributions made
pursuant to a salary reduction agreement may be made only after you reach age 59
1/2 or in other limited circumstances. See "Qualified Plans" under "Federal
Income Taxes" on page 18.
For partial withdrawals, the Net Sub-Account Value remaining after the
withdrawal must be at least $1,000, and the remaining Annuity Value must be at
least $2,500. Otherwise, the partial withdrawal will not be permitted. You must
specify the Sub-Accounts from which the withdrawal is to be made. Any market
value adjustment will be made to, and any withdrawal charge will be deducted
from, the amount withdrawn from each Sub-Account.
Market Value Adjustment
Whenever you make a withdrawal from a Sub-Account, other than one made at
the end of its Guarantee Period, a market value adjustment will be made based on
the amount withdrawn (excluding any free withdrawal amount as described below).
A market value adjustment will also be made at the Annuity Date with
respect to any Sub-Account having a Guarantee Period not ending on the Annuity
Date unless the (i) the combined market value adjustments of all affected
Sub-Accounts would reduce your Annuity Value and (ii) annuity payments will be
made for at least ten years or a life annuity option has been chosen. Thus, if
at the Annuity Date a market value adjustment, when applied to all Sub-Accounts,
would increase your Annuity Value, it will be made with the result that the
amount of the annuity payments payable to you will be increased. If the market
value adjustment would reduce your Annuity Value, it will be made only if you
elect an annuity option providing for payments of less than ten years and not
involving a life contingency. Moreover, no negative market value adjustment is
made in the event of a death which triggers payment of a death benefit.
Because of the market value adjustment provision of the Contract, you bear
the investment risk that the guaranteed interest rates we offer at the time you
make a withdrawal or start receiving annuity payments may be higher than the
guaranteed interest rate of the Sub-Account to which the market value adjustment
is applied with the result that the amount you receive may be substantially
reduced.
The market value adjustment we make will depend on the remaining time in
the Guarantee Period of the Sub-Account from which the withdrawal is made or to
which the adjustment is being applied and on the change in the guaranteed
interest rates offered by us that has occurred since establishment of the
Sub-Account. The market value adjustment may be either positive or negative,
depending on the relationship of (1) the current guaranteed interest rate for a
period equal to the time remaining in the Sub-Account, which rate is
interpolated (on a straight line basis) from the rates currently offered by us
for Sub-Accounts with Guarantee Periods closest to such period, to (2) the
guaranteed interest rate for the Sub-Account. If the current guaranteed interest
rate of (1) above is lower than the guaranteed rate of (2), there will be a
positive market value adjustment; if (1) is higher than (2), there will be a
negative market value adjustment. If the adjustment is positive, the additional
amount added to your withdrawal will be provided by us. If negative, the amount
deducted from your withdrawal will be retained by us for our own benefit.
The amount of the market value adjustment is based on the relationship of
the guaranteed interest rates currently offered by us to the guaranteed interest
rate credited to the affected Sub-Account. If the remaining period of time in
the Guarantee Period is a whole number of years, we use the guaranteed interest
rate currently offered by us for a Guarantee Period equal to the number of
remaining years. If the remaining period of time in the Guarantee Period is not
a whole number of years, we derive an interest rate from the guaranteed interest
rates currently offered for the Guarantee Periods nearest the remaining period
of time. This derivation is by straight-line interpolation, except where the
remaining period of time is less than one year in which case we use the current
guaranteed rate for a Guarantee Period of one year. If, for example, the
remaining period is 5.20 years, the interpolated guaranteed interest rate we
will use is equal to the sum of four-fifths of the five year rate and one-fifth
of the six year rate. If the five year rate were 5.25% and the six year rate
were 5.50%, the interpolated rate would be 5.30%, 5.25% times .80 plus 5.50%
times .20.
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The amount of the market value adjustment is determined from the following
formula:
A X [ ( 1+B ) n/365]
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[ ( 1+C ) -1]
where "A" is the total amount withdrawn from the Sub-Account (excluding any free
withdrawal amount), "B" is the guaranteed interest rate (expressed as a decimal)
for the Sub-Account, "C" is the guaranteed interest rate that we are now
offering for a Sub-Account with a Guarantee Period of a duration of years equal
to "n"/365 or that is interpolated for "n"/365 based on the guaranteed interest
rates we are now offering for Sub-Accounts nearest "n"/365, and "n" is the
remaining number of days in the Guarantee Period of the Sub-Account from which
the withdrawal is made or to which the adjustment is applied.
For example, assume that a full withdrawal of the Sub-Account Value of
$10,000 is made from a Sub-Account with 1,898 days (5.20 years) remaining in an
initial Guarantee Period of ten years and a guaranteed interest rate of 5%.
Assume also that the guaranteed interest rates currently offered for Guarantee
Periods of 5 and 6 years are 5.25% and 5.50%, respectively. Finally, assume that
no free withdrawal amount is available. "C" is equal to 5.30%, the sum of 5.25%
times .80 and 5.50% times .20. The market value adjustment, if applicable, is:
$10,000 X [ ( 1.050 ) 5.20] = $ -147.26
[ ( ----- ) ]
[ ( 1.053 ) -1]
Since this figure is a negative number, it is subtracted from the amount
withdrawn, resulting in a net payment (assuming no withdrawal charge) of
$9,852.74 ($10,000--$147.26). If "C" had been 4.70%, instead of 5.30%, the
market value adjustment would have been +$149.90, which would have been added to
the amount withdrawn, resulting in a net payment of $10,149.90.
The greater the difference in interest rates, the greater the effect of the
market value adjustment. If in the above example "C" had been 6%, 7% and 8%, the
market value adjustment would have been -$480.94, -$934.56 and -$1,362.64,
respectively. The market value adjustment is also affected by the remaining
period in the Guarantee Period of the Sub-Account from which the withdrawal is
made, which is "n" in the formula. Thus, if in the first example above
(C = 5.30%) "n"/365 were 3.5 or 1.5, the market value adjustment would be
- -$99.36 or -$42.70, respectively. Tables showing the impact of the market value
adjustment and withdrawal charge on hypothetical full withdrawals are set forth
in the Appendix.
Withdrawal Charge
Except for certain free withdrawals described below, there is a withdrawal
charge if you make a withdrawal of all or any part of the Net Annuity Value at
any time during the first seven Certificate Years. The withdrawal charge is
equal to a percentage of the total amount withdrawn (excluding any free
withdrawal amount), depending upon the Certificate Year during which the
withdrawal takes place. For withdrawals made during the first Certificate Year,
the applicable percent is 7%. Each year thereafter the withdrawal charge reduces
one percent, so that after the seventh Certificate Year no withdrawal charge
applies. The withdrawal charge will be deducted from the total amount withdrawn
from each Sub-Account from which the withdrawal is made, excluding any free
withdrawal amount. Withdrawal charges do not apply to annuity payments or any
payment of the death benefit (See "Payment on Death" below), nor to the "First
Withdrawal" described in the following section ("First Withdrawal during
Certificate Year").
The withdrawal charge is computed without regard to the application of any
market value adjustment to the amount withdrawn, so that in the event of a
negative market value adjustment, the charge will be determined on the basis of
the full amount withdrawn, including the amount payable to us as a result of the
market value adjustment. Conversely, in the event of a positive market value
adjustment, the charge will not be assessed against the increased amount we pay
to the Participant because of the market value adjustment.
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The application of the withdrawal charge may be illustrated by the
following example. (It may be less if a free withdrawal pursuant to the First
Withdrawal feature is available.) Assume a Participant wishes to make a partial
withdrawal that will result in a net payment to him or her of $6,000, such
withdrawal to be made from two Sub-Accounts, one with a Guarantee Period of ten
years, the other with a Guarantee Period of seven years, and each having a
Sub-Account Value of $5,000. Assume further that the Participant directs that
the partial withdrawal be taken from the Sub-Account having the ten-year
Guarantee Period to the maximum extent possible and the remainder taken from the
Sub-Account having the seven year Guarantee Period. Assume also that the market
value adjustment applied to the ten-year Guarantee Period operates to reduce its
value by 20% and that the adjustment applied to the seven-year Guarantee Period
operates to reduce its value by 15%. Finally, assume that the withdrawal is made
in the third Certificate Year, so that the applicable percentage charge is 5% of
the amount withdrawn. The net amount available to the Participant from the
Sub-Account with the ten-year Guarantee Period is $3,750, because of a negative
market value adjustment of $1,000 (20% of $5,000) and a withdrawal charge of
$250 (5% of $5,000). The remaining portion of the amount requested, $2,250, is
taken from the Sub-Account with the seven-year Guarantee Period, the amount
withdrawn being the amount necessary to generate a net payment of $2,250 after
application of the market value adjustment and the withdrawal charge. This
amount--$2,812.50 --is reduced by a negative market value adjustment of $421.88
(15% of $2,812.50) and a withdrawal charge of $140.62 (5% of $2,812.50) to
provide the net payment of $2,250.
From time to time we may agree in writing to reduce the amount of the
withdrawal charge, the period during which it applies, or both, when
Certificates are sold to individuals, entities or groups of individuals in a
manner that reduces our sales expenses. We would consider such factors as (a)
the size and type of group, (b) the amount of the single premium, and/or (c)
other transactions where sales expenses are reduced.
First Withdrawal During Certificate Year
After the first Certificate Year, a portion of your first withdrawal in
each Certificate Year might not be subject to a withdrawal charge or a market
value adjustment. The amount of that first withdrawal taken from a Sub-Account
will be free of a withdrawal charge or market value adjustment to the extent it
does not exceed the interest credited to that Sub-Account during the preceding
Certificate Year or the interest credited during such year to a Sub-Account
which matured and whose value was reinvested in that Sub-Account. (If only a
part of the value of the maturing Sub-Account is reinvested in the Sub-Account
from which the withdrawal was made, the interest credited during the Certificate
Year to the maturing Sub-Account for purposes of this provision will be deemed
to be that portion of the interest credited equal to the portion of the value of
the maturing Sub-Account reinvested in the Sub-Account.) The portion of the
withdrawal from the Sub-Account in excess of this interest amount will be
subject to a withdrawal charge and a market value adjustment. If it would be in
your interest to waive this feature (e.g., if a positive market value adjustment
would exceed the withdrawal charges), you may elect to have withdrawal charges
and a market value adjustment apply to the entire withdrawal. After the seventh
Certificate Year, when no withdrawal charge applies, this free withdrawal
provision will continue to be available so that you may avoid in part the impact
of a negative market value adjustment.
Payment on Death
If the Participant or a non-spouse Joint Participant dies prior to the
Annuity Date, we will pay to the beneficiary the greater of the Annuity Value or
the Net Annuity Value on the date of payment. In determining the Net Annuity
Value, no withdrawal charge will be deducted. Between the date of death and the
date of payment, we will continue to credit interest at the guaranteed rates. If
a Guarantee Period ends between the date of death and the date of payment, that
Sub-Account Value will be transferred to a Sub-Account with a one year Guarantee
Period. If the Participant is not a person, the death benefit described above
will be paid to the beneficiary if the Annuitant (or the first to die if Joint
Annuitants) dies prior to the Annuity Date. No death benefit is payable on the
death of a spouse Joint Participant.
Payment will be made in a lump sum unless an annuity option is chosen. An
Annuity Payment Option election must be chosen within 60 days of the date of
death. For tax consequences of a lump sum payment, see "Federal Tax
Considerations" on page 16. The beneficiary must receive the death benefit
within five years of the date of death. If an annuity option is chosen, annuity
payments must begin within one year of the date of death, or such later date as
the law may allow, and the option must limit payments to a period not exceeding
the beneficiary's lifetime or life expectancy. If the beneficiary is the
surviving spouse of the deceased Participant, or of
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the deceased Annuitant if the Participant is not a person, such beneficiary may
choose to continue the Certificate in force, in which event no death benefit
will be paid. A spouse Joint Participant and the surviving spouse where the
Annuitant and Joint Annuitant are spouses and the Participant is not a person
are automatically deemed to be the beneficiary regardless of any beneficiary
designation.
If we have not received the beneficiary's election, we will pay the death
benefit in a single sum six (6) months after the date we receive due proof of
death. Prior to his or her death, a Participant may make elections regarding
payment options for the beneficiary which will be binding upon the beneficiary.
If the Annuitant dies after the Annuity Date, any guaranteed amounts
remaining unpaid will be paid to the beneficiary under the same method of
distribution in force at the date of death. If no beneficiary survives the
Annuitant, payment will be made to the Participant. For additional provisions
affecting payment of the death benefit, see "Beneficiary" under "Other
Provisions" on page 13.
Annuity Provisions
General. Annuity payments will commence on the Annuity Date and will be
paid to the Annuitant unless the Participant asks that the payment be made to
another payee and we agree. The Participant is the Annuitant unless another
person designated as Annuitant is living. A Participant who is not a person must
name a living person as Annuitant.
The amount of monthly annuity payments will be determined by applying the
Net Annuity Value (without assessment of a withdrawal charge) at the Annuity
Date to the annuity option chosen using our current annuity rates. Those rates
are guaranteed to be no less favorable than the minimum guaranteed annuity rates
shown in the annuity tables contained in the Contract. The minimum guaranteed
rates assume an interest rate of 3% per year.
Any applicable premium taxes, if not previously paid, will be paid at the
Annuity Date. Premium taxes imposed by states and local jurisdictions currently
range from 0% to 3.5% depending on the tax treatment of the Contract.
In determining the Net Annuity Value, a market value adjustment will be
applied to any Sub-Account if the Annuity Date is prior to the end of the
Guarantee Period for that Sub-Account unless (1) the combined effect of the
market value adjustments applied to all affected Sub-Accounts would reduce the
Annuity Value and (2) annuity payments under the option selected will be made
for at least ten years or a life annuity option has been chosen.
Annuity Date and Annuity Options. You may select the Annuity Date and an
annuity option. If you do not do so, the Annuity Date will be the first day of
the calendar month immediately following the later of (i) the certificate
anniversary immediately after the Annuitant's 85th birthday or (ii) ten years
after the effective date of the Certificate, and the annuity option will be a
life annuity with a 10-year guarantee. (For Qualified Certificates, the Annuity
Date generally may not be later than April 1 of the year after the year in which
the Annuitant attains age 70 1/2.)
Change of Annuity Date or Annuity Option. You may change the Annuity Date
or the annuity option on written notice received at our home office at least 30
days prior to the current Annuity Date.
Annuity Options. You may select any one of the following annuity options
or any other option satisfactory to you and us. For Qualified Certificates,
certain restrictions may apply.
Payments for a Fixed Period: Payments will be made for the period
chosen. The period must be at least 10 years.
*Life Annuity: Payments will be made during the life of the
Annuitant. Payments will cease with the last payment due prior to the
Annuitant's death.
Life Annuity With Payments for a Certain Period: Payments will be made
for the guaranteed period chosen (5, 10, 15 or 20 years) and as long
thereafter as the Annuitant lives.
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Life Annuity with Guaranteed Return of Net Annuity Value: Payments
will be made until the sum of the annuity payments equals the Net Annuity
Value applied under this option and as long thereafter as the Annuitant
lives.
*Joint and Survivor Life Annuity: Payments will be made during the
lifetimes of the Annuitant and a designated second person. Payments will
continue as long as either is living.
*THESE OPTIONS ARE LIFE ANNUITIES UNDER WHICH IT IS POSSIBLE FOR YOU TO
RECEIVE ONLY ONE ANNUITY PAYMENT IF THE ANNUITANT (OR THE ANNUITANT AND A
DESIGNATED SECOND PERSON) DIES AFTER THE FIRST PAYMENT, OR TO RECEIVE ONLY TWO
ANNUITY PAYMENTS IF THE ANNUITANT (OR THE ANNUITANT AND A DESIGNATED SECOND
PERSON) DIES AFTER THE SECOND PAYMENT, AND SO ON.
Minimum Annuity Payments. Annuity payments will be made monthly unless you
choose less frequent payments. But if any payment would be less than $100 we may
change the frequency so payments are at least $100 each. If the Net Annuity
Value to be applied at the Annuity Date is less than $2,500, we may elect to pay
that amount in a lump sum. For tax consequences of a lump sum payment, see
"Federal Tax Considerations" on page 16.
Annuity Tables. Our annuity rates will be no less favorable than those
shown in the annuity tables contained in the Contract. Those tables show the
minimum guaranteed amount of each monthly payment for each $1,000 according to
the age and sex of the Annuitant at the Annuity Date. The tables are based on
the 1983 Table "a" for Individual Annuity Valuation (published by the Society of
Actuaries) with interest at 3%, except for Certificates issued in certain states
or in connection with certain employer-sponsored plans where sex-based tables
may not be used. In those circumstances the 1983 Table for females will be used
for all Annuitants.
Proof of Age, Sex and Survival. We may require satisfactory proof of the
age, sex or survival of any person on whose continued life any payment under
this Contract depends.
Misstatement of Age or Sex. If the age or sex of an Annuitant or Joint
Annuitant is misstated, annuity payments will be adjusted to reflect the correct
age and sex. We will deduct any overpayments we have made as the result of the
misstatement from the next payments due, and we will charge interest on the
overpayment at the rate of 6% per year. We will pay in full with the next
payment due any underpayment resulting from the misstatement together with
interest on the underpayment at the rate of 6% per year.
Other Provisions
Ownership. The Participant is entitled to exercise all rights reflected in
a Certificate unless otherwise provided or as may be restricted by the
provisions of any plan in connection with which the Contract or Certificate has
been issued. A Participant may name a Joint Participant. In the case of a group
Contract, the Joint Participant need not be an eligible member of the group to
which the Contract has been issued. Participants and spouse Joint Participants
may exercise rights on behalf of the other, except for changes of Participant or
Joint Participant. Participants and non-spouse Participants must exercise rights
jointly. A Participant may change the Participant by notice to the Company. Such
change will take effect as of the date the notice was signed, except that we
will not be liable for any payments made or actions taken prior to our receipt
of the notice. Special restrictions apply to Qualified Certificates, and joint
ownership of a Certificate is not permitted.
Beneficiary. The beneficiary is the person or persons named in the
Certificate application to whom payment is to be made upon the death of the
Participant (or other appropriate individual) or Annuitant. A spouse Joint
Participant and the surviving spouse where the Annuitant and Joint Annuitant are
spouses and the Participant is not a person are automatically deemed to be the
beneficiary regardless of any beneficiary designation. Unless a beneficiary has
been irrevocably designated, the beneficiary may be changed while the
Participant is alive. A beneficiary may be named irrevocably, in which case a
change in beneficiary can be made only with the beneficiary's consent.
<PAGE>
The estate or heirs of a beneficiary who dies prior to the death which
causes the payment of a death benefit have no rights to any portion of the death
benefit. If no beneficiary survives a sole Participant, payment will be made to
the Participant's estate. If no beneficiary survives the Participant or
non-spouse Joint Participant, payment will be made to the surviving Participant
or Joint Participant. If any beneficiary dies within 15 days after the death
which causes the payment of the death benefit and before we make payment,
payment will be made as if that beneficiary had died before the death which
causes the payment of the death benefit. If the Participant and non-spouse Joint
Participant die within 15 days of each other and there are no surviving
beneficiaries, payment will be made in equal shares to the estates of the
Participant and Joint Participant.
You may designate both primary beneficiaries and contingent beneficiaries.
If there is more than one primary beneficiary entitled to a death benefit,
payment will be made to them in equal shares unless otherwise designated. A
contingent beneficiary is entitled to payment only if there are no surviving
primary beneficiaries. If there is more than one contingent beneficiary entitled
to a death benefit, payment will be made to them in equal shares unless
otherwise designated. If a surviving spouse Joint Participant, as primary
beneficiary, dies prior to receiving the entire death benefit, payment will be
made to any then surviving contingent beneficiary instead of to the spouse Joint
Participant's estate, unless the spouse Joint Participant has designated
otherwise.
Certain restrictions in the application of the foregoing provisions may
apply in the case of Qualified Certificates.
Assignment. Upon notice to us you may make a collateral assignment of your
rights under the Contract by transferring your Certificate to a creditor as
security for a debt. If the Contract is issued pursuant to a Qualified Plan,
your rights under the Contract may not be assigned, pledged or transferred,
unless permitted by law. A collateral assignment does not change ownership of
the Certificate. The rights of a collateral assignee have priority over the
rights of a beneficiary. There may be significant tax consequences associated
with an assignment, and you should consult a competent tax advisor before making
any assignment.
Notices and Elections. All notices, changes and choices you make under the
Contract must be in writing, dated, signed by the proper party, received at our
home office and acceptable to us in our sole discretion to be effective. When
recorded by us, notices, changes and choices relating to beneficiaries will take
effect as of the date signed unless we have already acted in reliance on the
prior status.
Amendment of Contract and Certificates. At any time we may amend the
Contract and the Certificates as required to conform to any applicable law,
regulation or ruling issued by a government agency.
Deferral of Payments. All sums payable by us are payable at our home
office. We may require return of a Certificate prior to making payment. We may
defer payments of partial or full withdrawals for up to 6 months.
Free Look Right. You may cancel your Certificate within the time period set
forth on your Certificate following your receipt of the Certificate by returning
or mailing it to us or our agent along with a written cancellation request. We
will refund your premium from our home office within ten (10) days of our
receipt of the Certificate, and your rights under the Contract will be void from
the beginning. We reserve the right to reject an application from any person
who, in connection with a prior application, previously exercised his or her
free look right.
Statement. We will furnish to you at least once each year prior to the
Annuity Date a statement showing your Annuity Value, Sub-Account Values and
current interest rates. The statement will not include our financial statements.
INVESTMENTS SUPPORTING THE CONTRACTS
Our general account assets must be invested in accordance with applicable
state laws. These laws govern the nature and quality of investments that may be
made by life insurance companies and the percentage of their assets that may be
committed to any particular type of investment. In general, these laws permit
investments, within specified limits and subject to certain qualifications, in
federal, state, and municipal obligations, corporate bonds, preferred stocks,
real estate mortgages, real estate and certain other investments. All of our
general account assets are available to meet our obligations under the
Contracts.
<PAGE>
Premiums received under the Contracts will be allocated to, and accounted
for in, a "nonunitized" separate account established by us under the laws of
Washington. A nonunitized separate account is a separate account in which the
contract owner or participant does not participate in the performance of the
assets through unit values or otherwise. Any favorable performance on the assets
held in the separate account accrues solely to our benefit. We reserve the right
to transfer all assets allocated to the separate account to our general account
and to hold thereafter all assets supporting the Contract reserves and other
Contract liabilities in our general account. Regardless of whether such assets
are held in a separate account or our general account, all benefits available to
Participants under the Contracts are guaranteed by us, and all of our assets,
except those assets we allocate to certain other separate accounts we use for
other contracts, support those guarantees.
We intend to invest assets supporting the Contract reserves and other
Contract liabilities, whether held in a separate account or our general account,
in securities that, in the aggregate, have characteristics, especially cash flow
patterns, reasonably related to the characteristics of the liabilities under the
Contract. We will primarily invest in investment-grade fixed income securities
including:
Securities issued by the United States Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the United
States Government.
Public and/or private placement corporate debt securities that have an
investment grade rating at the time of purchase, within the four highest
grades assigned by Moody's Investors Services, Inc. (Aaa, Aa, A or Baa) or
Standard & Poor's Corporation (AAA, AA, A or BBB).
Mortgage-backed securities collateralized by real estate mortgage
loans, or securities collateralized by other assets, that are insured or
guaranteed by the Federal Home Loan Mortgage Association, the Federal
National Mortgage Association or the Government National Mortgage
Association, or that have an investment grade at time of purchase within
the four highest ratings as described in the above paragraph.
Commercial paper, cash or cash equivalents, and other short-term
investments having a maturity of less than one year that are considered by
our management to have investment quality comparable to securities having
the ratings stated above.
In addition, interest rate swaps, futures, options, rate caps and other
hedging instruments may be used solely for non-speculative hedging purposes.
Anticipated use of these financial instruments shall be limited to protecting
the value of the portfolio sales or purchases, but use of such instruments may
enhance yield.
ALTHOUGH THE FOREGOING GENERALLY DESCRIBES OUR INVESTMENT STRATEGY FOR THE
ASSETS SUPPORTING OUR OBLIGATIONS UNDER THE CONTRACTS, WE ARE NOT OBLIGATED TO
INVEST THOSE ASSETS ACCORDING TO ANY PARTICULAR STRATEGY EXCEPT AS MAY BE
REQUIRED BY STATE INSURANCE LAWS NOR WILL THE GUARANTEED INTEREST RATES WE
ESTABLISH BE DETERMINED BY THE PERFORMANCE OF THE NONUNITIZED SEPARATE ACCOUNT.
DISTRIBUTION OF THE CONTRACTS
We have entered into an agreement with GNA Distributors, Inc. pursuant to
which GNA Distributors, Inc. will act as the principal underwriter of the
Contracts and use its best efforts to promote the sale of the Contracts and
Certificates thereunder. GNA Distributors, Inc. is registered with the
Securities and Exchange Commission as a broker-dealer under the Securities
Exchange Act of 1934 ("1934 Act") and is a member of the National
Association of Securities Dealers, Inc. ("NASD"). GNA Distributors, Inc.
will arrange for distribution of the Contracts and Certificates, primarily by
other broker-dealers registered under the 1934 Act and members of the NASD,
including GNA Securities, Inc. Sales of the Contracts and Certificates
will be made by registered representatives of such broker-dealers (or
individuals not otherwise required to be registered) who are also licensed
insurance agents, either individually or through various licensed
insurance agencies. We or GNA Distributors, Inc. will pay a commission up
to a maximum of six percent (6%) of each premium payment. In some instances a
portion of the commission may be based on reinvested premium and/or Annuity
Value on a certain date. GNA
<PAGE>
Distributors, Inc. and GNA Securities, Inc. are wholly owned subsidiaries of
our indirect parent, GNA Corporation.
FEDERAL INCOME TAXES
Introduction
The Contracts are designed for use in connection with retirement plans that
do not qualify for special federal income tax treatment under the Internal
Revenue Code (the "Code") and also with plans that qualify for special income
tax treatment as Individual Retirement Accounts or Annuities or Tax-Sheltered
Annuities. The ultimate effect of federal income taxes on Annuity Value, on
annuity payments and on the economic benefit to the Participant, Annuitant or
beneficiary depends on our tax status, on the type of retirement plan for which
the Contract or Certificate is purchased and on the tax and employment status of
the individual concerned. The following discussion is general in nature and is
not intended as tax advice. Each person concerned should consult a competent tax
adviser. No attempt is made to consider any applicable state or other tax laws.
This discussion is based on our understanding of current federal income tax laws
as currently interpreted. No representation is made regarding the likelihood of
continuation of those laws or of the current interpretations by the Internal
Revenue Service. WE DO NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF ANY
CONTRACT OR CERTIFICATE OR ANY TRANSACTION INVOLVING THE CONTRACTS OR
CERTIFICATES.
Our Tax Status
We are taxed as a life insurance company under the Internal Revenue Code.
We own all assets supporting our obligations under the Contracts, and any income
earned on those assets is considered our income.
Tax Status of the Certificate
We believe that the Certificate will be treated as an annuity contract and
that we will be treated as owning the assets supporting the Certificate for
federal income tax purposes. However, we reserve the right to modify the
Contract and Certificate as necessary to prevent the Contract holder or
Participant from being considered the owner of the assets supporting the
Certificate for federal tax purposes.
Furthermore, in order to be treated as an annuity contract for federal
income tax purposes, Section 72(s) of the Code requires any Nonqualified
Certificate to provide that (a) if any Participant dies on or after the annuity
commencement date but prior to the time the entire interest in the Certificate
has been distributed, the remaining portion of such interest will be distributed
at least as rapidly as under the method of distribution being used as of the
date of that Participant's death; and (b) if any Participant dies prior to the
annuity commencement date the entire interest in the Certificate will be
distributed within five years after the date of the Participant's death. These
requirements will be considered satisfied as to any portion of the Participant's
interest which is payable to or for the benefit of a "designated beneficiary"
and which is distributed over the life of such "designated beneficiary" or over
a period not extending beyond the life expectancy of the beneficiary, provided
that such distributions begin within one year of that Participant's death. The
Participant's "designated beneficiary" (referred to herein as the "Participant's
beneficiary") is the person designated by such Participant as a beneficiary and
to whom ownership of the Certificate passes by reason of death and must be a
natural person. However, if the Participant's "designated beneficiary" is the
surviving spouse of the Participant, the Certificate may be continued with the
surviving spouse as the new Participant.
The Nonqualified Contracts and Certificates contain provisions which are
intended to comply with the requirements of Section 72(s) of the Code, although
no regulations interpreting these requirements have yet been issued. We intend
to review such provisions and modify them if necessary to assure that they
comply with the requirements of Code Section 72(s) when clarified by regulation
or otherwise.
Other rules may apply to Contracts and Certificates issued in connection
with Qualified Plans.
<PAGE>
THE FOLLOWING DISCUSSION ASSUMES THAT THE
CERTIFICATES WILL QUALIFY AS ANNUITY CONTRACTS FOR
FEDERAL INCOME TAX PURPOSES
Federal Tax Considerations
In General. Section 72 of the Code governs taxation of annuities in
general. We believe that a Participant who is a natural person generally is not
taxed on increases in the value of a Certificate until distribution occurs by
withdrawing all or part of the Annuity Value (e.g., partial withdrawals and
surrenders) or as annuity payments under the annuity option elected. For this
purpose, the assignment, pledge, or agreement to assign or pledge any portion of
the Annuity Value (and in the case of a Qualified Certificate, any portion of an
interest in the Qualified Plan) generally will be treated as a distribution. The
taxable portion of a distribution (in the form of a single sum payment or an
annuity) is taxable as ordinary income.
A participant in any annuity contract who is not a natural person generally
must include in income any increase in the excess of the contract's account
value over the "investment in the contract" (discussed below) during the taxable
year. There are some exceptions to this rule and a prospective participant that
is not a natural person may wish to discuss these with a competent tax adviser.
The following discussion generally applies to Certificates whose
Participants are natural persons.
Withdrawals. In the case of a partial withdrawal or surrender under a
Qualified Certificate under Section 72(e) of the Code, a ratable portion of the
amount received is taxable, generally based on the ratio of the "investment in
the contract" to the Participant's total accrued benefit or balance under the
retirement plan. The "investment in the contract" generally equals the portion,
if any, of any premium payments paid by or on behalf of any individual under a
Certificate which was not excluded from the individual's gross income. For
Qualified Certificates, a Participant's "investment in the contract" can be
zero. Special tax rules may be available for certain distributions under
Qualified Certificates.
With respect to Nonqualified Certificates, partial withdrawals are
generally treated as taxable income to the extent that the Annuity Value
immediately before the withdrawal exceeds the "investment in the contract" at
that time. Although there is no definitive guidance on this subject, it appears
that the Annuity Value immediately before a partial withdrawal must be increased
by any positive market value adjustments that result from such a withdrawal.
In the case of a full withdrawal under a Nonqualified Certificate, under
section 72(e) amounts received are generally treated as taxable income to the
extent the net amount received exceeds the "investment in the contract" at that
time.
Annuity Payments. Although tax consequences may vary depending on the
annuity option elected under the Certificate, under Code Section 72(b),
generally gross income does not include that part of any amount received as an
annuity under an annuity contract that bears the same ratio to such amounts as
the investments in the contract bears to the expected return at the annuity
date. In this respect (prior to recovery of the investment in the contract),
there is generally no tax on the amount of each payment which represents the
same ratio that the "investment in the contract" bears to the total expected
value of the annuity payments for the term of the payments; however, the
remainder of each income payment is taxable. In all cases, after the "investment
in the contract" is recovered, the full amount of any additional annuity
payments is taxable.
Penalty Tax on Certain Withdrawals. In the case of a distribution under a
Nonqualified Certificate, there may be imposed a federal penalty tax equal to
10% of the amount treated as taxable income. In general, however, there is no
penalty tax on distributions: (1) made on or after the date on which the
Participant attains age 59 1/2; (2) made as a result of death or disability of
the Participant; or (3) received in substantially equal periodic payments over
the life or life expectancy of the Participant (or joint life or life expectancy
of the Participant and a designated beneficiary). In certain circumstances,
other exceptions may apply. Other tax penalties may apply to certain
distributions under a Qualified Certificate.
<PAGE>
Taxation of Death Benefit Proceeds. Amounts may be distributed from a
Certificate because of the death of a Participant or an Annuitant. Generally,
such amounts are includable in the income of the recipient as follows: (1) if
distributed in a lump sum, they are taxed in the same manner as a full
withdrawal of the Certificate, as described above, or (2) if distributed under
an annuity option, they are taxed in the same manner as annuity payments, as
described above.
Transfers, Assignments, or Exchanges of a Certificate. A transfer of
ownership of a Certificate; the designation of an Annuitant, Payee, or other
beneficiary who is not also the Participant; the selection of certain Annuity
Dates; or the exchange of a Certificate may result in certain tax consequences
to Participants that are not discussed herein. The assignment, pledge, or
agreement to assign or pledge any portion of the Annuity Value (and in the case
of a Qualified Certificate any portion of an interest in the Qualified Plan)
generally will be treated as a distribution. The taxable portion of a
distribution (in the form of a single sum payment or an annuity) is taxable as
ordinary income. A Participant contemplating any such transfer, assignment, or
exchange of a Certificate should contact a competent tax adviser with respect to
the potential tax effects of such a transaction.
Multiple Contracts. All Nonqualified annuity contracts entered into after
October 21, 1988 that are issued by us (or our affiliates) to the same owner
during any calendar year are treated as one annuity contract for purposes of
determining the amounts includable in gross income under Section 72(e) of the
Code. In addition, the Treasury Department has specific authority to issue
regulations that prevent the avoidance of section 72(e) through the serial
purchase of annuity contracts or otherwise. Congress has also indicated that the
Treasury Department may have authority to treat the combination purchase of an
immediate annuity contract and a separate deferred annuity contract as a single
annuity contract under its general authority to prescribe rules as may be
necessary to enforce the income tax laws.
Withholding. Pension and annuity distributions generally are subject to
withholding for the recipient's federal income tax liability at rates that vary
according to the type of distribution and the recipient's tax status.
Recipients, however, generally are provided the opportunity to elect not to have
tax withheld from distributions. As of January 1, 1993, we are generally
required to withhold on distributions under certain Qualified Contracts or
Certificates.
Possible Tax Legislation. Although Congress is not now actively considering
any proposal that would adversely impact the taxation of deferred annuities,
there is no way of knowing if legislation will be enacted at some future time,
or the extent to which any change would be retroactive in effect (i.e.,
effective prior to the date of enactment).
Other Tax Consequences. As noted above, the foregoing discussion of the
federal income tax consequences under the Certificate is not exhaustive and
special rules are provided with respect to other tax situations not discussed in
this Prospectus. Further, the federal income tax consequences discussed herein
reflect our understanding of current law and the law, or its interpretation by
the Internal Revenue Service, may change. Federal estate and state and local
income, estate, inheritance, and other tax consequences of ownership or receipt
of distribution under a Contract or Certificate depend on the individual
circumstances of each Participant or recipient of the distribution. A competent
tax adviser should be consulted for further information.
Qualified Plans
The Contract or Certificate may be issued in connection with plans
qualifying for special tax treatment as Individual Retirement Accounts or
Annuities or Tax-Sheltered Annuities. The tax rules applicable to Participants
in such plans vary according to the type of plan and the terms and conditions of
the plan itself. Special favorable tax treatment may be available for certain
types of contributions and distributions. Adverse tax consequences may result
from contributions in excess of specified limits; distributions prior to age 59
1/2 (subject to certain exceptions); distributions that do not conform to
specified commencement and minimum distribution rules; aggregate distributions
in excess of a specified annual amount; and in other specified circumstances.
Therefore, no attempt is made to provide more than general information about the
use of the Contracts and Certificates with such plans. Participants, Annuitants
and Beneficiaries are cautioned that the rights of any person to any benefits
under plans may be subject to the terms and conditions of the plans themselves,
regardless of the terms and conditions of the Contract. Some retirement plans
are subject to distribution and other requirements that are not incorporated
into our Contract administration procedures. Owners, Participants and
Beneficiaries are responsible for determining that contributions, distributions
and other transactions with respect to the Contracts comply with
<PAGE>
applicable law. Following are brief descriptions of the various types of plans
in connection with which we will issue a Contract or Certificate. When issued in
connection with such a plan, a Contract or Certificate will be amended as
necessary to conform to the requirements of the Code.
Individual Retirement Accounts and Individual Retirement Annuities. Section
408 of the Internal Revenue Code permits eligible individuals to contribute to
an individual retirement program known as an Individual Retirement Account or
Individual Retirement Annuity (each hereinafter referred to as "IRA"). IRAs are
subject to limits on the amount that may be contributed, the contributions that
may be deducted from taxable income, the persons who may be eligible and the
time when distributions may commence. Also, distributions from certain other
types of plans qualifying for special tax treatment may be "rolled over" on a
tax-deferred basis into an IRA. Sales of the Contracts and Certificates for use
with IRAs may be subject to special disclosure requirements of the Internal
Revenue Service. Purchasers of the Contract or Certificates thereunder for use
with IRAs will be provided with supplemental information required by the
Internal Revenue Service or other appropriate agency. Such purchasers will have
the right to revoke their purchase within 7 days of the earlier of the
establishment of the IRA or their purchase. The Internal Revenue Service has not
reviewed the Contract for qualification as an IRA and has not addressed in a
ruling of general applicability whether a death benefit provision such as the
provision in the Contract comports with IRA qualification requirements.
Purchasers should seek competent advice as to the suitability of the Contract
and Certificates for use with IRAs.
Tax-Sheltered Annuities. Section 403(b) of the Code permits public school
employees and employees of certain types of religious, charitable, educational
and scientific organizations specified in section 501(c)(3) of the Code to
purchase annuity contracts and, subject to certain limitations, exclude the
amount of premiums from gross income for tax purposes. These annuity contracts
are commonly referred to as "Tax-Sheltered Annuities." Premiums excluded from
gross income will be subject to FICA taxes. Purchasers using the Contracts or
Certificates as Tax-Sheltered Annuities should seek competent advice as to
eligibility, limitations on permissible amounts of premiums and tax consequences
on distribution. Withdrawals under Tax-Sheltered Annuities which are
attributable to contributions made pursuant to salary reduction agreements are
prohibited unless made after the Participant attains age 59 1/2, upon the
Participant's separation of service, upon the Participant's death or disability,
or for an amount not greater than the total of such contributions in the case of
hardship. Effective January 1, 1993, distributions under Tax Sheltered Annuities
are generally subject to mandatory income tax withholding. (At the present time,
GNA will issue a Tax Sheltered Annuity only when the funds are directly
transferred from an existing Tax Sheltered Annuity.)
Restrictions under the Texas Optional Retirement Program. Under applicable
state law, participants in the Texas Optional Retirement Program ("ORP") may
withdraw their interest in an annuity contact issued under the ORP only upon (1)
termination of employment in the Texas public institutions of higher education,
(2) retirement, or (3) death. A participant in the ORP (or the participant's
estate if the participant has died) will be required to obtain a certificate of
termination from the employer or a certificate of death before distributions can
be made.
MORE INFORMATION ABOUT GNA
History and Business
Great Northern Insured Annuity Corporation (GNA or the Company) was
incorporated as a stock life insurance company organized under the laws of the
State of Washington on June 4, 1980, and began writing business pursuant to
licensing on October 15, 1980. On June 30, 1983, The Weyerhaeuser Company
(Weyerhaeuser) acquired a controlling interest in GNA. In October 1984, GNA
Corporation, a stock holding company, was formed to hold GNA's stock.
Weyerhaeuser exchanged its shares of GNA stock for shares of GNA Corporation.
Pursuant to a Stock Purchase Agreement dated January 5, 1993, by and between
Weyerhaeuser and General Electric Capital Corporation (GE Capital), 100% of the
outstanding capital stock of GNA Corporation was sold to GE Capital effective
April 1, 1993.
Effective July 14, 1993, GE Capital acquired 100% of the outstanding capital
stock of United Pacific Life Insurance Company (United Pacific Life). GE Capital
transferred controlling ownership of United Pacific Life to GNA. Subsequently,
United Pacific Life's name was changed to General Electric Capital Assurance
Company
<PAGE>
(GE Capital Assurance). GE Capital Assurance, a Delaware life insurer, is
licensed in the District of Columbia, and all states except New York.
On February 1, 1990, GNA acquired 100% of the outstanding stock of First GNA
Life Insurance Company of New York (First GNA). Subsequent to the acquisition of
United Pacific Life, GNA merged First GNA with United Pacific Reliance Life
Insurance Company of New York, a wholly-owned subsidiary of United Pacific Life.
The merged company is 48% owned by GNA and 52% by GE Capital Assurance.
Effective February 1, 1996, First GNA's name was changed to GE Capital Life
Assurance Company of New York (GE Capital Life of New York). GE Capital Life of
New York issues deferred and immediate annuities, life insurance and long-term
care insurance in the state of New York.
Effective October 1, 1995, GNA was party to a reorganization involving GNA
Corporation and certain of its life insurance company subsidiaries (herein
referred to as the Reorganization). As part of the Reorganization, GNA became a
wholly-owned subsidiary of GE Capital Assurance, and GE Capital Assurance became
a wholly-owned subsidiary of GNA Corporation. Previously, all of GE Capital
Assurance's voting common stock was owned by GNA. The Reorganization allows all
life insurance company subsidiaries of GNA Corporation to file a consolidated
federal tax return.
GNA is licensed in the District of Columbia and all states except New
Hampshire and New York. GNA markets fixed-rate deferred annuities, immediate
annuities and structured settlement immediate annuities primarily through banks,
thrifts and other financial institutions.
Deferred Fixed Rate Annuities. The predominant form of deferred annuities
require either single premium or flexible premium payments and have a minimum
annual guaranteed crediting rate. After the initial guarantee period, the
crediting rate may be changed periodically. The policy owner is permitted to
withdraw all or part of the premium paid plus interest credited, less a
surrender charge for withdrawals during the initial penalty period of one to
eight years. The surrender charge is initially 5% to 8% of the contract value
and decreases over the penalty period. Some deferred annuities provide for
penalty-free partial withdrawals of the accumulated interest credited or up to
10% annually of the accumulation value. In 1996, the Company issued $354.4
million in deferred annuities. At December 31, 1996, deferred annuities
comprised $5,317.6 million of total liabilities for future annuity and contract
benefits.
Immediate Annuities. The Company's immediate annuities are designed to
provide a series of periodic payments for a fixed length of time or for life,
according to the annuitant's choice at the time of issue. Once the payments have
begun, the amount, frequency and length of time for which they are payable are
fixed. A primary form of immediate annuities, the structured settlement annuity,
is usually sold as part of a settlement resulting from a personal injury or
wrongful death claim to provide scheduled payments to an injured person or their
dependents. Structured settlement annuities are generally long-term and cannot
be surrendered. In 1996, the Company issued $227.3 million in immediate
annuities. At December 31, 1996, immediate annuities comprised $697.4 million of
total liabilities for future annuity and contract benefits.
GNA leases office space in Seattle, Washington. GNA is reimbursed by
its subsidiaries and affiliates for rent based on direct and indirect allocation
methods.
<PAGE>
Selected Financial Data
The following selected financial data should be read in conjunction with the
financial statements and notes thereto included in this Prospectus.
Selected Financial Data (Dollars in millions)
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1995 1994 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
Pro forma Pro forma
(unaudited) (unaudited)
(1) (1)
<S> <C>
Net investment income $ 462.5 $ 444.5 $ 784.7 $ 391.6 $ 837.8 $ 579.8 $ 406.4
Income before income taxes
and minority interest 76.0 39.1 62.0 70.6 107.7 57.0 53.6
Net income 51.1 26.7 26.3 44.0 47.5 34.1 33.6
Total assets 7,120.0 6,926.5 6,926.5 6,578.0 13,100.2 13,160.1 5,973.9
Shareholder's interest,
excluding net unrealized
investment gain/(loss) 682.9 631.7 631.7 607.3 794.2 754.0 326.3
Net unrealized investment
gain/(loss) 7.0 29.9 29.9 (166.7) (528.8) (16.3) (.5)
Total shareholder's interest 689.9 661.6 661.6 440.6 265.4 737.7 325.8
</TABLE>
(1) Unaudited pro forma results reflect the Reorganization as if it had
occurred at the beginning of the period.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(1) Results of Operations
GNA derives substantially all its income from earnings on investments offset
by interest credited to policyholders of predominantly deferred and immediate
annuities, operating expenses, acquisition costs and taxes. Funds received for
the purchase of immediate annuities with life contingencies, including options
elected under annuity contracts, are reported as premium income. Other income is
primarily surrender fees on deferred annuity policies.
GNA's results of operations for the year ended December 31, 1996 include the
accounts of GNA, as well as the Company's investment in GE Capital Life of New
York, accounted for under the equity method. For the year ended December 31,
1995, GNA's results of operations include GE Capital Assurance and subsidiaries'
results for the nine months ended September 30, 1995.
1996 Compared to 1995
Net investment income decreased $322.2 million to $462.5 million, of which
$343.8 million relates to GE Capital Assurance and subsidiaries that were
divested and are no longer included in the earnings of the Company as of October
1, 1995. The offsetting $21.6 million increase is primarily attributable to
higher invested assets, the equity income of the Company's subsidiary, and the
impact of higher interest rates resulting in higher reinvestment rates.
Net realized investment gains (losses) - Net realized investment gains were
$3.1 million during 1996, compared to a $14.4 million loss in 1995. This change
is related to the Company's asset/liability risk management and varies with
market and economic conditions.
Premiums increased $22.9 million to $200.0 million. This increase primarily
relates to greater recognition of premiums on GNA's life contingent structured
settlement product, offset by the effects of the Reorganization of $9.4 million.
<PAGE>
Interest credited on policyholder deposits decreased $166.5 million to
$295.7 million. The decrease was primarily related to the Reorganization.
Interest crediting rates remained relatively consistent with 1995.
Change in policy reserves increased $26.5 million to $201.0 million. Policy
reserves related to life contingent products increased primarily from greater
life contingent structured settlement premiums, offset by the effects of the
Reorganization of $8.0 million.
Annuity and surrender benefits decreased $106.8 million to $29.9 million.
Offsetting the effects of the Reorganization, which decreased benefits by $116.3
million, annuity and surrender benefits increased by $9.5 million, primarily due
to payments on life contingent structured settlements benefits.
Commissions decreased $15.5 million to $27.4 million. The Reorganization
accounted for $10.7 million of the decrease with the remaining decrease
attributable to a lower sales of single premium deferred annuities.
General expenses decreased $34.7 million to $36.5 million. This decrease is
primarily related to an accrual for guaranty association assessments of $20.4
million recorded in the fourth quarter of 1995. There was no significant
additional accrual necessary during 1996. In addition, the effects of the
Reorganization resulted in a $14.5 million decrease in general expenses.
Amortization of intangibles is a result of the GNA and GE Capital Assurance
acquisitions. The Company established goodwill and present value of future
profits (PVFP) assets in connection with the acquisitions. Amortization of
goodwill is based on a 25 year life and amortization of PVFP is based on
periodic estimates of realized and remaining gross profits. For the years ended
December 31, 1996 and 1995, goodwill amortization was $1.5 million and $4.8
million, respectively, and net PVFP amortization was $32.4 million and $52.4
million, respectively. The decrease is primarily related to the fact that as
result of the Reorganization, the amortization of the goodwill and PVFP balances
of GE Capital Assurance are no longer included in the Company's earnings
effective October 1, 1995.
Increase in deferred acquisition costs decreased $16.2 million to $26.7
million primarily as a result of lower commissions of $4.8 million and the
effect of the Reorganization of $10.8 million.
Provision for income taxes. The effective tax rate for 1996 decreased from
39.5% to 32.8% primarily due to equity income of the Company's subsidiary and
lower state taxes caused by the Reorganization.
Minority interest decreased $11.2 million to zero due to the fact that
subsequent to the third quarter of 1995, after the effects of the
Reorganization, there was no longer minority interest recorded in GNA's
financial statements. The minority interest previously recorded represented GNA
Corporation's proportional ownership of GE Capital Assurance.
1995 Compared to 1994
Net investment income decreased $53.1 million to $784.7 million. This is
primarily related to the Reorganization described above, which reduced earning
assets by $6,506.8 million. As a result of the Reorganization, net investment
income excluded GE Capital Assurance and subsidiaries' fourth quarter net
investment income of $114.7 million. The remaining $61.6 million increase is
primarily attributable to higher invested assets and reinvestment of net
investment proceeds in higher yielding securities.
Net realized investment gains (losses) - As part of the Company's
asset/liability risk management, net realized investment losses were $14.4
million during 1995, compared to a $6.3 million gain in 1994.
Premiums increased $59.5 million to $177.1 million. This increase primarily
relates to increased sales of GNA's structured settlement product of $67.3
million, introduced in June of 1994, offset by the effects of the Reorganization
of $7.8 million.
Interest credited on policyholder deposits decreased $27.2 million to $462.2
million. The decrease was primarily related to the Reorganization as interest
crediting rates remained relatively consistent with 1994.
<PAGE>
Change in policy reserves increased $54.1 million to $174.5 million. Policy
reserves related to life contingent products increased primarily from new
structured settlement premiums and growth in annuitizations of life contingent
products.
Annuity and surrender benefits decreased $24.2 million to $136.7 million.
Offsetting the effects of the Reorganization, which decreased benefits by $40.8
million, annuity and surrender benefits increased by $16.6 million. This
increase is due to structured settlements benefits and increased tax free
exchanges.
Commissions decreased $9.9 million to $42.9 million. This decrease is
primarily due to decreased product sales of $125.1 million to $987.4 million.
General expenses increased $24.4 million to $71.2 million. This increase is
primarily related to an accrual for guaranty association assessments of $20.4
million recorded in the fourth quarter of 1995. These assessments levied by
various state regulators help to ensure payments to policyholders of impaired or
insolvent companies.
Amortization of intangibles is a result of the GNA and GE Capital Assurance
acquisitions. The Company established goodwill and present value of future
profits (PVFP) assets in connection with the acquisition. For the years ended
December 31, 1995 and 1994, goodwill amortization was $4.8 million and $7.8
million, respectively. The decrease is primarily related to the fact that after
the Reorganization, the goodwill balance of GE Capital Assurance was dividended
out and the related amortization was not included in GNA's operations for the
fourth quarter of 1995.
Net PVFP amortization for the years ended December 31, 1995 and 1994 was
$52.4 million and $50.0 million, respectively.
Increase in deferred acquisition costs decreased $20.2 million to $42.9
million primarily as a result of lower commissions and an increase of $10.3
million in amortization of the related balance sheet account.
Provision for income taxes. The effective tax rate for 1995 decreased from
41.5% to 39.5% primarily due to lower state taxes caused by the Reorganization.
Minority interest decreased $4.3 million to $11.2 million primarily due to
the fact that in the fourth quarter of 1995, after the effects of the
Reorganization, there was no longer minority interest recorded in GNA's
financial statements. The minority interest previously recorded represented GNA
Corporation's proportional ownership of GE Capital Assurance.
(2) Liquidity and Capital Resources
The Company's liquidity requirements are met by funds from operations and
investment activity. Premiums and policyholder deposits are invested in assets
that generally have durations similar to the Company's liabilities. Funds from
investment activity included principal and interest payments from the bond and
mortgage portfolio as well as sales, calls and maturities of certain securities.
As of December 31, 1996, investments subject to certain call provisions totaled
$128.6 million; and mortgage-backed securities subject to prepayment risk
totaled $1,863.9 million.
The Company is restricted by Washington State as to the amount of dividends
it may pay within a given calendar year to its parent without regulatory
consent. That restriction is the greater of statutory net gain from operations
for the previous year or 10% of the statutory surplus at the end of the year,
subject to a maximum equal to statutory earned surplus. As of December 31, 1996,
approximately $66.0 million was available for dividend payments in 1997.
Investments
Fixed Maturities. The Company's assets must be invested in accordance with
requirements of applicable state laws and regulations regarding the nature and
quality of investments that may be made by life insurance companies and the
percentage of its assets that may be held in certain types of investments. At
December 31, 1996,
<PAGE>
approximately 38.0% of the fixed maturities were in corporate issues, U.S.
Treasuries, and other foreign securities with expected maturities within five
years. Another 35.4% is invested in securities backed by residential mortgages.
At December 31, 1996, the Company did not hold any fixed maturity securities,
other than securities issued or guaranteed by the U.S. government, which
exceeded 10% of shareholder's interest before net unrealized investment gains
(losses). Approximately 23.5%, 16.9% and 6.3% of the portfolio were concentrated
in the manufacturing, financial and utility industries, respectively. As of
December 31, 1996, .8% of the Company's portfolio was rated below investment
grade and no bonds were in default as to interest and principal.
All of the Company's fixed maturities were designated as available-for-sale
at December 31, 1996 and 1995. Accordingly, such investments were reported at
fair value. Unrealized gains and losses, net of the effects of present value of
future profits, deferred acquisition costs and deferred taxes, have been
included in shareholder's interest as of December 31, 1996 and 1995. At December
31, 1996 and 1995, shareholder's interest included net unrealized gains of $7.0
and $29.9 million, respectively, a difference primarily due to an decrease in
the fair value of fixed maturities, principally resulting from higher interest
rates.
Mortgage-backed securities are subject to risks associated with variable
prepayments. This may result in these securities having a different actual
maturity than planned at the time of purchase. Prepayment speeds are generally
dependent on the relative sensitivity of the underlying mortgages backing the
assets to changing interest rates and the repayment priority of the securities
in the overall securitization structure. Under certain circumstances, the
Company has purchased higher risk securities which do not compromise the safety
of the general portfolio, but rather serve to mitigate the Company's risk
exposure to changing interest rates. There are negligible default risks in the
mortgage-backed securities portfolio as a whole, as the vast majority of the
assets are either guaranteed by U.S. government sponsored entities or are
supported in the securitization structure by junior securities enabling the
assets to achieve high investment grade status.
Mortgage Loans. At December 31, 1996, the mortgage loan portfolio consisted
of 1,044 mortgage loans on commercial real estate properties, 46% of which are
located in California. The loans, which were originated through a network of
mortgage bankers, were made only on completed, leased properties and have
loan-to-value ratios at the date of origination of less than 75%. GNA does not
engage in construction lending or land loans. Nonearning and reduced earning
receivables decreased to $14.3 million at December 31, 1996, compared with $16.2
million at year-end 1995.
Other Invested Assets. The Company's other invested assets consist of
GNA's equity investment in GE Capital Life of New York of $121.0 million and
investments in mutual fund portfolios offered in conjunction with the deferred
variable annuity of $40.7 million.
Competition
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing insurance products. There are numerous stock, mutual and other types
of insurers in the life insurance business in the United States, a significant
number of which are substantially larger than GNA. As of December 31, 1996, the
Company has 480 employees. In addition, the Company has 68 retail sales agents
selling the Company's products through an affiliated company, GNA Insurance
Services, Inc. The number of retail sales agents decreased significantly during
1996 as a result of several banks internalizing sales forces.
A.M. Best has assigned to GNA an A + (Superior) rating. Duff & Phelps has
reaffirmed the Company's AA (Very High) rating, and Standard & Poor's has
reaffirmed an AA (Excellent) rating based on the Company's high claims paying
ability and excellent asset quality.
Government Regulation
GNA is subject to the laws of the State of Washington governing insurance
companies and to the regulations of the Washington Insurance Department. In
addition, GNA is subject to regulation under the insurance laws of other
jurisdictions in which the Company operates. Regulation by other supervisory
agencies includes licensing to transact business, overseeing trade practices,
licensing agents, approving policy forms, establishing reserve requirements,
fixing maximum interest rates on life insurance policy loans and minimum rates
for accumulation of surrender values, prescribing the form and content of
<PAGE>
required financial statements and regulating the type and amounts of investments
permitted. The Company's books and accounts are subject to review by each
Insurance Department and other supervisory agencies at all times, and GNA files
annual statements with these agencies. A full examination of the Company's
operations is conducted periodically by various Insurance Departments and may
include the participation of the insurance departments of other states in which
GNA conducts business. Recent examinations have not resulted in significant
findings.
In addition, many states regulate affiliated groups of insurers (including
GNA) under insurance holding company legislation. Under such laws, intercompany
transactions, including transfers of assets and dividend payments from insurance
subsidiaries, may be subject to prior notice or approval, depending on the size
of the transfers and payments in relation to the financial positions of the
companies involved. Due to the Company's volume of California business, GNA is
considered a California commercially domiciled insurer under California
insurance holding company law.
The National Association of Insurance Commissioners (NAIC) has adopted
Risk-Based Capital (RBC) requirements to evaluate the adequacy of statutory
capital and surplus in relation to risks associated with: (i) asset quality,
(ii) insurance risk, (iii) interest rate risk, and (iv) other business factors.
The RBC formula is designed as an early warning tool for the states to identify
possible under-capitalized companies for the purpose of initiating regulatory
action. In the course of its operations, the Company monitors the level of its
RBC and it exceeds the minimum required levels.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for policyholder losses
incurred by insolvent companies. GNA has estimated assessments related to known
insolvencies, and has recorded a liability of $34.4 million at December 31, 1996
related to this estimated liability. The amount of any future assessments
related to future insolvencies under these laws, however, cannot be reasonably
estimated. Most of these laws do provide that an assessment may be excused or
deferred if it would threaten an insurer's own financial strength.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies and the tax
treatment of insurance and investment products sold by the Company and the
taxation impact on the relative desirability of various investment vehicles.
New Accounting Standards
New accounting standards include Statement of Financial Accounting Standards
(SFAS) No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. Among other things, the new statement
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings, based on control of the transferred assets. SFAS No. 125
is effective for transfers of financial assets occurring after December 31, 1996
and its adoption will not have a material effect on the financial position or
results of operations of GNA.
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS AND DIRECTORS
Position with GNA(1) and
------------------------
Name (Age) Principal Occupation for Last Five Years
----------------- ----------------------------------------
<S><C>
Geoffrey S. Stiff Director of GNA since 1994. President and Chief Executive Officer of GNA since
(45) 1997. Senior Vice President and Chief Financial Officer of since 1993 - 1996.
Vice President, Chief Financial Officer and Director of Employers Reinsurance
Corporation 1987-93.
Stephen P. Joyce Director and Senior Vice President of GNA since 1995. Vice President, Business
(41) Development, GE Capital Corporation 1991- Current. President, Monogram Retailer
Credit, 1990-1993.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position with GNA(1) and
------------------------
Name (Age) Principal Occupation for Last Five Years
----------------- ----------------------------------------
<S><C>
Charles A. Kaminski Director since 1994 and Senior Vice President of GNA since 1993. Vice President of
(48) Investments of GNA 1992-93.
Victor C. Moses Director since 1994 and Senior Vice President since 1992. Chief
(49) Actuary of GNA since 1993. Chief Financial Officer of GNA 1991-93.
Kenneth F. Starr Director since 1994 and Senior Vice President of GNA since 1993. Vice President of
(47) GNA 1982-93.
Marilee Byers Senior Vice President of GNA since 1996. Formerly, Senior Vice President, Pacific
(44) Mutual Life Insurance Company, 1988 - 1996.
Debora Dyer Horvath Senior Vice President and Chief Information Officer of GNA since 1995. Vice
(42) President of GNA 1993-95. Manager, GE Lighting 1982-93.
Marycatherine Yeagley Senior Vice President of GNA since 1995. Vice President of GNA 1990-95.
(49)
John W. Attey Vice President, Counsel and Secretary of GNA since 1995. Associate Counsel
(37) and Assistant Vice President of GNA 1989-1994.
Steven M. Callahan Vice President of GNA since 1996. Vice President/Manager of AMEX Life Assurance
(39) Company (now General Electric Capital Assurance Company, GNA's parent company)
since 1982.
Thomas W. Casey Chief Financial Officer of GNA since 1996. Vice President of GNA since 1993.
(34) Technical Adviser, GE Capital Corporation 1992-93.
Scott Curtis Vice President of GNA since 1996. Sales and Marketing Manager/Director of GNA
(34) 1990-96.
Stephen N. DeVos Vice President and Controller of GNA since 1996.
(36) Technical Advisor, GE Capital Corporation
1994-1996. Manager, Coopers & Lybrand 1986-1994.
James Hedreen Vice President of GNA since 1996. Assistant Vice President of GNA 1994-96.
(33) Manager of GNA 1993-94. Assistant Vice President of Merrill Lynch Insurance Group
1991-93.
Pamela A. Hughes Vice President of GNA since 1992. Regional Marketing Director of GNA 1986-92.
(37)
Jeffrey I. Hugunin Treasurer of GNA since 1994. Vice President and Treasurer of Federal Home Life
(34) Insurance Company and it subsidiaries since 1992. General Accounting Manager HBJ
Insurance Companies 1987-92.
Bill Koski Vice President of GNA since 1995. Assistant Vice President of GNA from 1989-1995.
(43)
Craig F. Likkel Vice President and Actuary of GNA since 1995. Consulting Actuary - Milliman and
(43) Robertson, Inc. 1991-1995.
Laurence M. Richmond Vice President of GNA since 1986.
(49)
J. Michael Singleton Vice President of GNA since 1985.
(56)
Chris Shumate Vice President of GNA since 1996. President of GE Capital Assignment Corporation
(48) since 1995 and Executive Vice President from 1993-1995. Broker, Kidder, Peabody &
Co., Inc., 1991-1992.
Patricia C. Vaselakos Vice President of GNA since 1994. Program and Regional Marketing Director of GNA
(42) 1990-94
Edward J. Wiles, Jr. Vice President, Counsel and Assistant Secretary of GNA since 1989.
(49)
</TABLE>
(1) Each director is elected to serve until the next annual meeting of
shareholders or until his or her successor is elected and shall have
qualified.
<PAGE>
Executive Compensation
GNA's Executive Officers may also serve as officers of one or more of GNA's
affiliated companies. In those cases allocations have been made as to each such
individual's time devoted to his duties as an executive officer of GNA and its
subsidiaries. The following table shows the compensation paid or awarded to, or
earned by, based on these allocations, GNA's Chief Executive Officer and its
four most highly compensated Executive Officers other than the Chief Executive
Officer.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Name and Other Annual Long Term
Principal Position Year Salary Bonus Compensation(1) Compensation(2)
------------------ ---- -------- -------- --------------- ---------------
<S><C>
Geoffrey S. Stiff 1996 $ 53,718 $31,700 $9,384 -0-
President and Chief Executive 1995 50,558 26,945 255 -0-
Officer 1994 48,666 23,775 5,807 -0-
Patrick E. Welch 1996 33,189 14,539 18,954 20,254
President and Chief Executive 1995 141,960 52,500 4,246 77,550
Officer 1994 119,700 39,900 3,136 72,200
Marycatherine Yeagley 1996 53,666 26,520 26,730 -0-
Senior Vice President, Human Resources 1995 55,563 24,000 5,282 -0-
1994 42,000 16,000 3,245 -0-
Steven M. Callahan 1996 124,776 46230 24842 -0-
Vice President
Laurence M. Richmond 1996 71,092 26,975 58,308 10,375
Vice President 1995 99,000 36,000 5,499 15,000
1994 64,000 26,000 3,976 10,000
J. Michael Singleton 1996 104,813 37,100 44,149 17,500
Vice President 1995 85,200 27,600 5,685 -0-
1994 74,250 22,000 3,911 -0-
</TABLE>
* Patrick E. Welch resigned his positions with GNA effective December 13, 1996,
and Geoffrey S. Stiff assumed those responsibilities and became President and
Chief Executive Officer effective December 16, 1996.
(1) Other annual compensation includes car allowance, car expense
reimbursement, group term life insurance premiums and moving expense
reimbursement.
(2) Not included in the above table is an annuity plan available to certain of
GNA's officers which provides for annual payments for a ten year period in
the amount of $25,000 after the completion of ten years of employment
following the date of the award. The following officers listed in the
Summary Compensation Table above have received awards payable as follows:
Patrick E. Welch - $50,000 commencing August 1, 1993; Laurence M. Richmond
- $25,000 commencing December 1, 1993; James M. Singleton - $25,000
commencing January 1, 1996; and Marycatherine Yeagley - $25,000 commencing
January 1, 2000, and $25,000 commencing May 1, 2005. An officer's interest
in the plan benefits vests at a rate of 10% ($2500) for each year following
the date of the award. If an officer dies during the vesting period, his or
her estate will receive 100% of the annual payment beginning on the
commencement date. If an officer otherwise terminates employment during the
vesting period, he or she will be entitled to receive at the commencement
date only the vested portion of the plan benefit as of the date of
termination.
In connection with the acquisition by GE Capital of all of the
outstanding stock of GNA Corporation, The Weyerhaeuser Company, at no cost to
GNA, made commitments to certain of GNA's officers, including each of the
officers listed in the above table except Geoffrey S. Stiff and Steve Callahan,
for a bonus to be paid if the officer were still employed by GNA on April 15,
1994 (one year from the closing date of the acquisition). Each of the eligible
officers listed above received the bonus.
No Executive Officer participates in the formulation of his or her
compensation. The compensation of Executive Officers is determined by the
compensation committee at GNA and the individual to whom the Officer reports and
is approved by the parent company of GNA Corporation.
<PAGE>
LEGAL PROCEEDINGS
There is no material pending litigation to which the Company is a party or
of which any of the Company's property is the subject, and there are no legal
proceedings contemplated by any governmental authorities against the Company of
which management has any knowledge.
LEGAL MATTERS
Certain legal matters concerning the federal securities laws applicable to
the issue and sale of the Contracts and Certificates have been passed upon by
Messrs. Jones & Blouch L.L.P., 1025 Thomas Jefferson Street NW, Suite 405 West,
Washington, DC 20007-0805. The organization of GNA and its authority to issue
the Contracts and the validity of the form of the Contracts have been passed
upon by J. Neil McMurdie, Associate Counsel and Assistant Vice President of GNA.
EXPERTS
GNA's consolidated financial statements for the years ended December
31, 1996, 1995 and 1994 included in this Prospectus have been audited by GNA's
independent public accountants, KPMG Peat Marwick LLP, as indicated in its
report with respect thereto and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
REGISTRATION STATEMENT
A registration statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933 as amended with respect to the
Contracts. This Prospectus does not contain all information set forth in the
registration statement, its amendments and exhibits, to all of which reference
is made for further information concerning us and the Contracts. Statements
contained in this Prospectus as to the content of the Contracts and other legal
instruments are summaries. For a complete statement of the terms thereof,
reference is made to the instruments as filed in the registration statement.
<PAGE>
APPENDIX
The table below is designed to show the impact of the market value
adjustment and withdrawal charge on a single premium of $10,000. It assumes the
premium is allocated to a Sub-Account with a 10-year Guarantee Period with a
guaranteed rate of interest of 5%. The figures for the 5% and 7% current rates
assume after the first Certificate Year the withdrawal of all of the prior
year's interest pursuant to the free withdrawal provision (see "First Withdrawal
During Certificate Year" above). However, the figures for the 3% current rate
assume that the free withdrawal option is not exercised (i.e., the free
withdrawal amount is zero), since in that instance it is to the advantage of the
Participant to have the surrender charge and market value adjustment apply to
the entire amount withdrawn.
The market value adjustments are based on interpolated current interest
rates (defined in the Contract as "C") of 3%, 5% and 7%. The Net Sub-Account
Values shown in the table are the maximum amounts available as cash withdrawals.
Although the withdrawal charge is a fixed percentage of the amount withdrawn,
since the free withdrawal feature affects the amount of the withdrawal subject
to withdrawal charges, the amount of the charge for withdrawals varies depending
upon whether the free withdrawal option is exercised. Values shown in the table
have been rounded to the nearest dollar, and therefore the figures under the Net
Sub-Account Value columns may not equal the sum of corresponding figures under
the Sub-Account Value, Market Value Adjustment and Withdrawal Charge columns.
The five percent guaranteed interest rate assumed in the table is used for
purposes of illustration only and should not be considered a representation of
the interest rate we will guarantee for 10-year Guarantee Periods. Further, the
three, five and seven percent interest rates on which the figures in the table
have been based should not be considered a prediction as to the extent the
current rates we use may vary over the ten year period assumed in the table.
Market Value Adjustments, Withdrawal Charges and Net Sub-Account Values for
a 10-year Sub-Account With a Guaranteed Interest Rate of 5% Based on
Interpolated Current Interest Rates of:
<TABLE>
<CAPTION>
3% 5% 7%
---------- -- -------- ---------- --- -------- ---------- --- -------
End of Sub- Market With- Net Sub- Market With- Net Sub- Market With- Net Sub-
Certificate Account Value drawal Account Value drawal Account Value drawal Account
- ----------- -------
Year Value Adjustment Charge Value Adjustment Charge Value Adjustment Charge Value
---- ----- ---------- ------ ----- ---------- ------ ----- ---------- ------ -----
<S> <C>
1 10,500 1,984 735 11,749 -0- 735 9,765 -1,640 735 8,125
2 11,025 1,834 662 12,197 -0- 632 10,394 -1,475 632 8,919
3 11,576 1,668 579 12,666 -0- 553 11,024 -1,367 553 9,656
4 12,155 1,487 486 13,156 -0- 464 11,691 -1,242 464 10,449
5 12,763 1,288 382 13,668 -0- 366 12,397 -1,097 366 11,300
6 13,401 1,072 268 14,204 -0- 256 13,145 -930 256 12,215
7 14,071 836 141 14,766 -0- 134 13,937 -739 134 13,197
8 14,775 579 -0- 15,354 -0- -0- 14,775 -522 -0- 14,252
9 15,513 301 -0- 15,815 -0- -0- 15,513 -277 -0- 15,236
10 16,289 -0- -0- 16,289 -0- -0- 16,289 -0- -0- 16,289
</TABLE>
The formulas used in determining the amounts shown in the above table are
as follows:
(1) Market Value Adjustment Factor (MVA) =
(1 + Guaranteed Interest Rate) n/365-1
-----------------------------
1 + Current Interest Rate
(2) Maximum Free Withdrawal Amount (MFW) = Prior Year's Interest
(3) Net Sub-Account Value = [(Sub-Account Value-MFW) x (1 + MVA-Withdrawal
Charge Percent)] + MFW
(4) Withdrawal Charge = (Sub-Account Value-MFW) x Withdrawal Charge Percent
(5) Market Value Adjustment = [(Sub-Account Value-MFW) x MVA]
<PAGE>
FINANCIAL STATEMENTS
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Contents
Page
----
<S> <C>
Consolidated Financial Statements:
Great Northern Insured Annuity Corporation and Subsidiaries
Independent Auditors' Report.............................................
Consolidated Balance Sheets as of December 31, 1996 and 1995.............
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994.......................................
Consolidated Statements of Shareholder's Interest for the
Years Ended December 31, 1996, 1995 and 1994 ..........................
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994.................................
Notes to Consolidated Financial Statements ..............................
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Great Northern Insured Annuity Corporation:
We have audited the accompanying consolidated balance sheets of Great
Northern Insured Annuity Corporation and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of income, shareholder's
interest, and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Great
Northern Insured Annuity Corporation and subsidiaries as of December 31, 1996
and 1995, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1996 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Seattle, Washington
January 17, 1997
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS 1996 1995
- ------------------------------------------------------------------------------------------------------- -------- --------
<S> <C>
Investments:
Fixed maturities, at fair value (amortized cost of $5,254.4 in 1996 and $4,942.2 in 1995............. $5,270.1 $5,064.6
Mortgage loans, net of valuation allowance of $35.6 in 1996 and $35.3 in 1995........................ 1,159.7 1,282.4
Policy loans......................................................................................... 3.3 3.9
Short-term investments............................................................................... 3.9 28.1
Other invested assets................................................................................ 161.7 165.1
-------- --------
Total investments................................................................................. 6,598.7 6,544.1
Cash................................................................................................... 2.3 1.9
Accrued investment income.............................................................................. 112.2 85.6
Deferred acquisition costs............................................................................. 129.6 88.8
Intangible assets...................................................................................... 181.0 156.3
Deferred income tax benefit............................................................................ 19.1 --
Other assets........................................................................................... 44.4 32.2
Separate account assets................................................................................ 32.7 17.6
-------- --------
Total assets...................................................................................... $7,120.0 $6,926.5
-------- --------
-------- --------
<CAPTION>
LIABILITIES AND SHAREHOLDER'S INTEREST
- -------------------------------------------------------------------------------------------------------
<S> <C>
Liabilities:
Future annuity and contract benefits................................................................. $6,075.1 $5,977.9
Policy and contract claims........................................................................... 96.8 89.5
Other policyholder liabilities....................................................................... 48.1 73.6
Deferred income tax liability........................................................................ -- 2.2
Accounts payable and accrued expenses................................................................ 177.4 104.1
Separate account liabilities......................................................................... 32.7 17.6
-------- --------
Total liabilities................................................................................. 6,430.1 6,264.9
Shareholder's interest:
Common stock, $100 par value. Authorized, issued and outstanding 25,000 shares....................... 2.5 2.5
Additional paid-in capital........................................................................... 542.0 541.9
Net unrealized investment gain....................................................................... 7.0 29.9
Retained earnings.................................................................................... 138.4 87.3
-------- --------
Total shareholder's interest...................................................................... 689.9 661.6
-------- --------
Total liabilities and shareholder's interest...................................................... $7,120.0 $6,926.5
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLAR AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C>
Revenues:
Net investment income.......................................................................... $462.5 $784.7 $837.8
Net realized investment gains (losses)......................................................... 3.1 (14.4) 6.3
Premiums....................................................................................... 200.0 177.1 117.6
Surrender fee and other income................................................................. 8.1 16.7 11.2
------ ------ ------
Total revenues.............................................................................. 673.7 964.1 972.9
------ ------ ------
Benefits and expenses:
Interest credited.............................................................................. 295.7 462.2 489.4
Change in policy reserves...................................................................... 201.0 174.5 120.4
Annuity and surrender benefits................................................................. 29.9 136.7 160.9
Commissions.................................................................................... 27.4 42.9 52.8
General expenses............................................................................... 36.5 71.2 46.8
Amortization of intangibles, net............................................................... 33.9 57.5 58.0
Increase in deferred acquisition costs, net.................................................... (26.7) (42.9) (63.1)
------ ------ ------
Total benefits and expenses................................................................. 597.7 902.1 865.2
------ ------ ------
Income before income taxes and minority interest............................................ 76.0 62.0 107.7
Provision for income taxes....................................................................... 24.9 24.5 44.7
------ ------ ------
Income before minority interest............................................................. 51.1 37.5 63.0
Minority interest................................................................................ -- 11.2 15.5
------ ------ ------
Net income.................................................................................. $ 51.1 $ 26.3 $ 47.5
------ ------ ------
------ ------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S INTEREST
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLAR AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL INVESTMENT
------------------ PAID-IN GAINS RETAINED
SHARES AMOUNT CAPITAL (LOSSES) EARNINGS
------ -------- ---------- ---------- --------
<S> <C>
Balances at December 31, 1993............................ 25,000 $ 2.5 $ 726.7 $ (16.3) $ 24.8
Net income.......................................... -- -- -- -- 47.5
Purchase price adjustments.......................... -- -- (7.3) -- --
Net unrealized investment losses.................... -- -- -- (512.5) --
------ -------- ---------- ---------- --------
Balances at December 31, 1994............................ 25,000 2.5 719.4 (528.8) 72.3
Net income.......................................... -- -- -- -- 26.3
Dividend of GE Capital Assurance.................... -- -- (175.2) -- (11.3)
Purchase price adjustments.......................... -- -- (2.3) -- --
Net unrealized investment gains..................... -- -- -- 558.7 --
------ -------- ---------- ---------- --------
Balances at December 31, 1995............................ 25,000 2.5 541.9 29.9 87.3
Net income.......................................... -- -- -- -- 51.1
Purchase price adjustments.......................... -- -- .1 -- --
Net unrealized investment losses.................... -- -- -- (22.9) --
------ -------- ---------- ---------- --------
Balances at December 31, 1996............................ 25,000 $ 2.5 $ 542.0 $ 7.0 $138.4
------ -------- ---------- ---------- --------
------ -------- ---------- ---------- --------
<CAPTION>
TOTAL
SHAREHOLDER'S
INTEREST
-----------------
<S> <C>
Balances at December 31, 1993............................ $ 737.7
Net income.......................................... 47.5
Purchase price adjustments.......................... (7.3)
Net unrealized investment losses.................... (512.5)
--------
Balances at December 31, 1994............................ 265.4
Net income.......................................... 26.3
Dividend of GE Capital Assurance.................... (186.5)
Purchase price adjustments.......................... (2.3)
Net unrealized investment gains..................... 558.7
--------
Balances at December 31, 1995............................ 661.6
Net income.......................................... 51.1
Purchase price adjustments.......................... .1
Net unrealized investment losses.................... (22.9)
--------
Balances at December 31, 1996............................ $ 689.9
--------
--------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLAR AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C>
Cash flows from operating activities:
Net income............................................................................... $ 51.1 $ 26.3 $ 47.5
--------- -------- --------
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest..................................................................... -- 11.2 15.5
Equity in earnings of GE Capital Life of New York..................................... (7.6) (1.3) --
Increase in future policy benefits.................................................... 496.7 636.7 609.8
Net realized investment (gains) losses................................................ (3.1) 14.4 (6.3)
Amortization of investment premiums and discounts..................................... 27.7 61.4 83.6
Amortization of intangibles........................................................... 33.9 57.5 58.0
Deferred income tax provision (benefit)............................................... (10.4) 4.0 30.2
Change in certain assets and liabilities:
Decrease (increase) in:
Accrued investment income........................................................ (26.6) (6.5) 6.5
Deferred acquisition costs....................................................... (26.7) (42.9) (63.1)
Other assets..................................................................... (12.4) 12.6 (10.7)
Increase (decrease) in:
Other policyholder liabilities................................................... (25.5) (25.7) 122.7
Accounts payable and accrued expenses............................................ 73.3 24.1 (13.0)
--------- -------- --------
Total adjustments................................................................ 519.3 745.5 833.2
--------- -------- --------
Net cash provided by operating activities........................................ 570.4 771.8 880.7
--------- -------- --------
Cash flows from investing activities:
Proceeds from investments in fixed maturities and real estate............................ 868.2 1,735.6 1,970.8
Principal collected on mortgage loans.................................................... 163.9 124.4 93.1
Purchases of fixed maturities............................................................ (1,199.5) (1,846.5) (2,413.7)
Mortgage loan originations............................................................... (42.3) (159.9) (389.2)
Dividends received....................................................................... 7.5 7.1 --
--------- -------- --------
Net cash used in investing activities............................................ (202.2) (139.3) (739.0)
--------- -------- --------
Cash flows from financing activities:
Proceeds from issue of investment contracts.............................................. 415.6 810.3 994.9
Redemption and benefit payments on investment contracts.................................. (807.6) (1,469.2) (1,220.6)
Cash distributed in conjunction with dividend of GE Capital Assurance.................... -- (31.5) --
Short-term borrowings.................................................................... -- -- (5.0)
--------- -------- --------
Net cash used in financing activities............................................ (392.0) (690.4) (230.7)
--------- -------- --------
Net decrease in cash and cash equivalents........................................ (23.8) (57.9) (89.0)
Cash and cash equivalents at beginning of year............................................. 30.0 87.9 176.9
--------- -------- --------
Cash and cash equivalents at end of year................................................... $ 6.2 $ 30.0 $ 87.9
--------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(DOLLAR AMOUNTS IN MILLIONS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
These consolidated financial statements have been prepared on the basis of
generally accepted accounting principles (GAAP) for stock life insurance
companies, which vary in several respects from accounting practices prescribed
or permitted by the Insurance Commissioner of the State of Washington, where
Great Northern Insured Annuity Corporation (GNA or the Company) is domiciled.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect reported amounts and
related disclosures. Actual results could differ from those estimates.
Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements to conform to the 1996 presentation. These
reclassifications have no effect on reported net income or shareholder's
interest.
(B) ACQUISITIONS
Effective April 1, 1993, General Electric Capital Corporation (GE Capital),
all of whose common stock is indirectly owned by General Electric Company,
completed the acquisition of GNA's parent company, GNA Corporation. Effective
July 14, 1993, GE Capital acquired 100% of the issued and outstanding capital
stock of United Pacific Life Insurance Company and four of its seven
wholly-owned subsidiaries (collectively, the Acquisitions). During 1994, United
Pacific Life Insurance Company was renamed General Electric Capital Assurance
Company (GE Capital Assurance).
(C) REORGANIZATION
Effective October 1, 1995, the Company was party to a reorganization (the
Reorganization) involving GNA Corporation and certain of its life insurance
company subsidiaries. The Reorganization allows all life insurance company
subsidiaries of GNA Corporation to file a consolidated federal tax return.
Prior to the Reorganization, GE Capital Assurance's voting common stock was
owned by GNA and its preferred and nonvoting common stock was owned by GNA
Corporation, thus resulting in minority interest. As part of the Reorganization,
GNA became a wholly-owned subsidiary of GE Capital Assurance and GE Capital
Assurance became a wholly-owned subsidiary of GNA Corporation. Consequently,
there was no minority interest recorded on the balance sheets of GNA as of
December 31, 1996 and 1995. In order for GE Capital Assurance to become the
direct parent of GNA, GNA Corporation contributed all of the stock of GNA to GE
Capital Assurance in exchange for voting shares of GE Capital Assurance. On
October 1, 1995, GNA distributed its holdings of GE Capital Assurance common
stock to GE Capital Assurance with the result that GE Capital Assurance is now
wholly-owned by GNA Corporation and a decrease in shareholder's interest of
$186.5.
The accompanying consolidated financial statements include the accounts of
GNA and its subsidiaries prior to the Reorganization, GE Capital Assurance and
First GNA Life Insurance Company of New York (First GNA), owned 48% by GNA and
52% by GE Capital Assurance. The results subsequent to the Reorganization
include GNA, as well as its proportionate share of First GNA, accounted for
under the equity method. Effective February 1, 1996, First GNA was renamed GE
Capital Life Assurance Company of New York (GE Capital Life of New York).
Following are pro forma results of operations of GNA for the year ended
December 31, 1995, as if the Reorganization had occurred at the beginning of the
period presented:
<TABLE>
<S> <C>
Total revenues.......................................................................... $ 631.4
Net income.............................................................................. 26.7
Total assets............................................................................ 6,926.5
Total shareholders' interest............................................................ 661.6
</TABLE>
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
(D) PRODUCTS
The primary products of the Company are investment type deferred annuities
and structured settlement immediate annuities. The Company considers the sale of
annuity and life insurance products to be a single segment/line of business. GNA
primarily sells its products through banks, thrifts and other financial
institutions.
(E) STATEMENTS OF CASH FLOWS
All highly liquid investments with an original maturity of three months or
less are classified as short-term investments on the consolidated balance sheets
and considered cash equivalents in the consolidated statements of cash flows.
During the years ended December 31, 1996, 1995, and 1994, the Company paid
federal and state income taxes of $50.4, $1.7 and $6.8, respectively.
(F) INVESTMENTS
The Company has designated its fixed maturities as available for sale. The
fair value for fixed maturities and equity securities is based on quoted market
prices, where available. For securities not actively traded, fair values are
estimated using values obtained from independent pricing services or, in the
case of private placements, are estimated by discounting expected future cash
flows using a current market rate applicable to the yield, credit quality, call
features and maturity of the investments, as applicable. Changes in the market
values of fixed maturities, net of the effect on deferred policy acquisition
costs, present value of future profits and deferred federal income taxes, and
market values of equity securities, net of deferred federal income taxes, are
reflected as unrealized appreciation and depreciation in a separate component of
shareholder's interest and, accordingly, have no effect on net income.
Unrealized losses that are other than temporary are recognized in earnings.
The Company does not engage in derivatives trading, market-making or other
speculative activities. The Company had no significant open or outstanding
derivative transactions during the years 1996, 1995 or 1994.
Mortgage and policy loans are stated at the unpaid principal balance of
such loans, net of allowances for probable uncollectible balances.
(G) DEFERRED ACQUISITION COSTS
Acquisition costs include costs and expenses which vary with and are
primarily related to the acquisition of insurance and investment contracts, such
as commissions, direct advertising and printing, and certain support costs such
as underwriting and policy issue expenses. Acquisition costs capitalized are
determined by actual costs and expenses incurred by product in the year of
issue.
(H) INTANGIBLE ASSETS
PRESENT VALUE OF FUTURE PROFITS
In conjunction with the Acquisitions, a portion of the purchase price was
assigned to the right to receive future gross profits arising from existing
insurance and investment contracts. This intangible asset, called the present
value of future profits (PVFP), is actuarially determined based on the present
value of projected future gross profits on contracts acquired.
GOODWILL
Goodwill is amortized over its estimated period of benefit on a
straight-line basis. No amortization period exceeds 25 years. Goodwill in excess
of associated expected operating undiscounted cash flows is considered to be
impaired and is written down to fair value.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
(I) FUTURE ANNUITY AND CONTRACT BENEFITS
Future annuity and contract benefits are comprised of the liabilities for
life insurance policies and immediate and deferred annuity contracts. Depending
on the type of contract, these liabilities are calculated based upon actuarial
assumptions as to mortality, interest, expense and withdrawals, with experience
for adverse deviation where appropriate.
(J) REVENUES
Investment income is recorded when earned. Investment gains and losses are
calculated on the basis of specific identification. Premiums on long-duration
insurance products are recognized as earned when due or, in the case of life
contingent annuities, when the contracts are issued. Premiums received under
annuity contracts without significant mortality risk are not reported as
revenues but as future annuity benefit liabilities. Surrender charges are
recognized as income when the policy is surrendered.
(K) FEDERAL INCOME TAX
The Company is included with GE Capital Assurance in a life insurance
consolidated federal income tax return. Current and deferred taxes are allocated
by applying the asset and liability method of accounting for deferred income
taxes to members of the group as if each member was a separate taxpayer.
Intercompany balances are settled annually.
(L) SEPARATE ACCOUNTS
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity contract owners. The Company receives
mortality risk fees and administration fees from the variable annuity mutual
fund portfolios and separate account assets.
(2) INVESTMENTS
For the years ended December 31, the sources of investment income of the
Company were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C>
Fixed maturities...................................................... $353.0 $662.9 $724.9
Mortgage loans........................................................ 102.8 122.3 105.7
GE Capital Life of New York equity method income...................... 7.6 1.3 --
Other................................................................. 2.4 4.9 13.7
------ ------ ------
Gross investment income............................................... 465.8 791.4 844.3
Investment expenses................................................... (3.3) (6.7) (6.5)
------ ------ ------
Net investment income................................................. $462.5 $784.7 $837.8
------ ------ ------
------ ------ ------
</TABLE>
(A) FIXED MATURITIES
For the years ended December 31, the Company realized sales proceeds, gross
investment gains and losses as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C>
Sales proceeds........................................................ $192.8 $998.9 $860.1
------ ------ ------
Gross realized investment:
Gains................................................................. $ 8.1 $ 16.6 $ 17.5
Losses................................................................ (5.0) (31.0) (11.2)
------ ------ ------
Net realized investment gains (losses)................................ $ 3.1 $(14.4) $ 6.3
------ ------ ------
------ ------ ------
</TABLE>
The additional proceeds from investments in fixed maturities in the
consolidated statements of cash flows result from principal collected on
mortgage-backed securities, maturities, calls and sinking fund payments.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(2) INVESTMENTS -- CONTINUED
Fixed maturities are considered available for sale. Accordingly, fixed
maturities are accounted for at fair value, with the resulting unrealized gain
or loss recorded through shareholder's interest, net of the following
adjustments:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C>
Fixed maturities................................................................ $ 15.7 $122.4
Other invested assets........................................................... 5.4 5.2
Deferred acquisition costs...................................................... (3.6) (17.7)
Present value of future profits................................................. (6.4) (65.1)
Deferred income taxes........................................................... (4.1) (14.9)
------ ------
Net unrealized investment gains.......................................... $ 7.0 $ 29.9
------ ------
------ ------
</TABLE>
At December 31, the amortized cost, gross unrealized gains and losses, and
fair value of the Company's fixed maturities available-for-sale portfolio were
as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------- FAIR
1996 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------- --------- ------ ------ --------
<S> <C>
United States and agency........................................................... $ 144.5 $ 9.9 $ (1.4) $ 153.0
Foreign............................................................................ 200.9 6.7 (1.5) 206.1
Corporate securities............................................................... 3,065.0 10.1 (28.0) 3,047.1
Mortgage-backed securities......................................................... 1,844.0 36.5 (16.6) 1,863.9
--------- ------ ------ --------
Totals...................................................................... $5,254.4 $ 63.2 $(47.5) $5,270.1
--------- ------ ------ --------
--------- ------ ------ --------
<CAPTION>
1995
- -----------------------------------------------------------------------------------
<S> <C>
United States and agency........................................................... $ 140.6 $ 13.1 $ (.7) $ 153.0
Corporate securities............................................................... 3,162.2 99.5 (11.7) 3,250.0
Mortgage-backed securities......................................................... 1,639.4 44.2 (22.0) 1,661.6
--------- ------ ------ --------
Totals...................................................................... $4,942.2 $156.8 $(34.4) $5,064.6
--------- ------ ------ --------
--------- ------ ------ --------
</TABLE>
The maturity distribution of the fixed maturities portfolio at December 31
was as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- -------- --------- --------
<S> <C>
Due in one year or less........................................................ $ 471.9 $ 472.6 $ 345.8 $ 345.7
Due between one year through five years........................................ 1,585.1 1,529.2 1,873.6 1,916.2
Due between five years through ten years....................................... 650.1 663.3 636.7 655.6
Due after ten years............................................................ 703.3 741.1 446.7 485.5
--------- -------- --------- --------
Subtotals............................................................... 3,410.4 3,406.2 3,302.8 3,403.0
Mortgage-backed securities.............................................. 1,844.0 1,863.9 1,639.4 1,661.6
--------- -------- --------- --------
Totals.................................................................. $5,254.4 $5,270.1 $4,942.2 $5,064.6
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
At December 31, 1996, approximately 23.5%, 16.9% and 6.3% of the Company's
investment portfolio is comprised of securities issued by the manufacturing,
financial and utility industries, respectively, the vast majority of which are
rated investment grade, and which are senior secured bonds. This portfolio is
widely diversified among various geographic regions in the United States, and is
not dependent on the economic stability of one particular region.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(2) INVESTMENTS -- CONTINUED
The fixed maturities portfolio at December 31 consisted of the following
classes of securities:
<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
FAIR FAIR
VALUE PERCENT VALUE PERCENT
-------- ------- -------- -------
<S> <C>
Agencies and treasuries............................................................. $1,400.5 26.6% $1,377.2 27.2%
AAA................................................................................. 476.7 9.0 283.7 5.6
AA.................................................................................. 284.6 5.4 214.7 4.3
A................................................................................... 1,412.7 26.8 1,546.3 30.5
BBB................................................................................. 1,275.1 24.2 1,225.6 24.2
BB.................................................................................. 40.7 .8 71.0 1.4
B................................................................................... -- -- 5.2 .1
Not rated........................................................................... 379.8 7.2 340.9 6.7
-------- ------- -------- -------
Totals....................................................................... $5,270.1 100.0% $5,064.6 100.0%
-------- ------- -------- -------
-------- ------- -------- -------
</TABLE>
Bonds with ratings ranging from AAA to BBB are generally regarded as
investment grade securities. Some agencies and treasuries (that is, those
securities issued by the United States government or an agency thereof) are not
rated, but all are considered to be investment grade securities. Finally, some
securities, such as private placements, have not been assigned a rating by any
rating service and are therefore categorized as "not rated;" this has neither
positive nor negative implications regarding the value of the security.
At December 31, 1996, there were no bonds in default as to interest and
principal.
(B) MORTGAGE LOANS
At December 31, 1996 and 1995, the Company's mortgage loan portfolio
consisted of 1,044 and 1,161, respectively, first mortgage loans on commercial
real estate properties. The loans, which are originated by the Company through a
network of mortgage bankers, are made only on completed, leased properties and
have a maximum loan-to-value ratio of 75% at the date of origination. The
Company does not engage in construction lending or land loans.
The Company originated $12.5, $18.5 and $62.3 of mortgages secured by real
estate in California, which represent 29%, 13% and 16% of total originations for
the years ended December 31, 1996, 1995 and 1994, respectively. At December 31,
1996 and 1995, respectively, the Company held $449.0 and $519.2 in mortgages
secured by real estate in California; this is 38% of the total mortgage
portfolio for 1996 and 40% of the total portfolio for 1995.
"Impaired" loans are defined by generally accepted accounting principles as
loans for which it is probable that the lender will be unable to collect all
amounts due according to terms of the original contractual terms of the loan
agreement. That definition excludes, among other things, leases, or large groups
of smaller-balance homogeneous loans, and therefore applies principally to GNA's
commercial loans.
Under these principles, GNA has two types of "impaired" loans as of
December 31, 1996 and 1995: loans requiring allowances for losses ($1.7 and
$3.2, respectively) and loans expected to be fully recoverable because the
carrying amount has been reduced previously through charge-offs or deferral of
income recognition ($12.6 and $13.0, respectively); allowance for losses on
these loans were $0.8 and $0.1, respectively. Average investment during 1996 and
1995 was $15.6 and $11.3, respectively and interest income earned on these loans
while they were considered impaired was $.7 and $1.3, respectively.
The following table shows the activity in the allowance for losses during
the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C>
Balance at January 1...................................................... $35.3 $32.0 $30.5
Dividend of GE Capital Assurance.......................................... -- (.3) --
Additions................................................................. 2.5 2.8 2.4
Amounts written off, net.................................................. (2.2) .8 (.9)
----- ----- -----
Balance at December 31.................................................... $35.6 $35.3 $32.0
----- ----- -----
----- ----- -----
</TABLE>
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(2) INVESTMENTS -- CONTINUED
The net write-offs represented 0.18% of average mortgage loans outstanding
during 1996, compared with 0.15% and 0.07% during 1995 and 1994, respectively.
The allowance for losses on mortgage loans at December 31, 1996 and 1995
represented 3.1% and 2.7% of total mortgage loans, respectively.
(C) INVESTMENT IN GE CAPITAL LIFE OF NEW YORK
A portion of other invested assets at December 31, 1996 and 1995 included
$121.0 and $123.6, respectively, for the Company's 48% investment in GE Capital
Life of New York, accounted for under the equity method. Investment income for
1996 includes $7.6 for equity in earnings of GE Capital Life of New York. For
1995, investment income includes $1.3 for equity in earnings of GE Capital Life
of New York subsequent to the Reorganization on October 1, 1995. Prior to the
Reorganization, GE Capital Life of New York was consolidated. Following is the
summarized financial information for GE Capital Life of New York as of and for
the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C>
Total revenue............................................................... $ 163.3 $ 102.0
Total expenses.............................................................. 137.6 84.1
Income before income taxes........................................... 25.7 17.9
Provision for income taxes.................................................. 9.8 8.4
-------- --------
Net income........................................................... $ 15.9 $ 9.5
-------- --------
-------- --------
Total investments........................................................... $1,554.1 $1,491.6
Other assets................................................................ 154.9 100.1
-------- --------
Total assets......................................................... $1,709.0 $1,591.7
-------- --------
-------- --------
Total liabilities........................................................... $1,459.8 $1,334.9
Shareholder's interest...................................................... 249.2 256.8
-------- --------
Total liabilities and shareholder's interest......................... $1,709.0 $1,591.7
-------- --------
-------- --------
</TABLE>
(3) DEFERRED ACQUISITION COSTS
For investment contracts, deferred acquisition costs are amortized based on
the present value of the anticipated gross profits from investments, interest
credited, surrender charges, mortality and maintenance expenses. As actual gross
profits vary from projected, the impact on amortization is included in net
income. For insurance contracts, the acquisition costs are amortized in relation
to the benefit payments or the present value of expected future premiums.
Recoverability of deferred acquisition costs is evaluated periodically by
comparing the current estimate of expected future gross profits to the
unamortized asset balances. If such comparison indicates that the expected gross
profits will not be sufficient to recover the asset, the difference is charged
to expense.
Activity in deferred acquisition costs was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -----
<S> <C>
Unamortized balance at January 1................................................. $106.5 $ 90.2 $27.1
Dividend of GE Capital Assurance................................................. -- (26.6) --
Costs deferred................................................................... 36.0 53.0 62.8
Amortization, net................................................................ (9.3) (10.1) .3
------ ------ -----
Unamortized balance at December 31............................................... 133.2 106.5 90.2
Cumulative effect of net unrealized investment (gains) losses.................... (3.6) (17.7) 1.9
------ ------ -----
Recorded balance................................................................. $129.6 $ 88.8 $92.1
------ ------ -----
------ ------ -----
</TABLE>
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(4) INTANGIBLE ASSETS
(A) PRESENT VALUE OF FUTURE PROFITS
The method used by the Company to value PVFP is summarized as follows: (1)
identify the future gross profits attributable to certain lines of business, (2)
identify the risks inherent in realizing those gross profits, and (3) discount
these gross profits at the rate of return that the Company believes it must earn
in order to accept the inherent risks.
After PVFP is determined, the amount is amortized, net of accreted
interest, based on the incidence of the expected gross profits. Interest
accretes at rates credited to policyholders on underlying contracts. As actual
gross profits for investment contracts vary from projection, the impact on
amortization is included in net income.
Recoverability of PVFP is evaluated periodically by comparing the current
estimate of expected future gross profits to the unamortized asset balances. If
such comparison indicates that the expected gross profits will not be sufficient
to recover PVFP, the difference is charged to expense.
The following table presents the activity in PVFP for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C>
Unamortized balance at January 1............................................... $187.5 $313.9 $363.9
Dividend of GE Capital Assurance............................................... -- (74.0) --
Interest accrued at 5.4% in 1996, 4.8% in 1995 and 4.9% in 1994................ 10.0 15.4 17.8
Amortization................................................................... (42.4) (67.8) (67.8)
------ ------ ------
Unamortized balance at December 31............................................. 155.1 187.5 313.9
Cumulative effect of net unrealized investment gains (losses).................. (6.4) (65.1) 101.2
------ ------ ------
Recorded balance............................................................... $148.7 $122.4 $415.1
------ ------ ------
------ ------ ------
</TABLE>
The estimated percentage of the December 31, 1996 balance before the effect
of unrealized investment gains or losses to be amortized over the next five
years is as follows:
1997 19.3%
1998 16.3
1999 13.3
2000 10.7
2001 8.9
(B) GOODWILL
In conjunction with the acquisitions, $150.6 of goodwill was recorded. In
conjunction with the Reorganization, goodwill was reduced by $103.4. During the
years ended December 31, 1996, 1995 and 1994, $1.5, $4.8 and $7.8, respectively,
was amortized. As of December 31, 1996, the unamortized balance of goodwill was
$31.2.
(5) FUTURE ANNUITY AND CONTRACT BENEFITS
(A) INVESTMENT AND UNIVERSAL LIFE TYPE CONTRACTS
Investment contracts are broadly defined to include contracts without
significant mortality or morbidity risk. Payments received from sales of
investment and universal life type contracts are recognized by providing a
liability equal to the current account value of the policyholders' contracts.
Interest rates credited to these contracts are guaranteed for the policy term
with renewal rates determined by management. At December 31, 1996 and 1995,
investment contracts comprised $5,564.1 and $5,668.2, respectively.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(5) FUTURE ANNUITY AND CONTRACT BENEFITS -- CONTINUED
(B) INSURANCE CONTRACTS
Insurance contracts are broadly defined to include contracts with
significant mortality and/or morbidity risk. The liability for future benefits
is the present value of such benefits based on mortality, and other assumptions
which were appropriate at the time the policies were issued. These assumptions
are periodically evaluated for potential premium deficiencies. At December 31,
1996 and 1995, insurance contracts comprised $511.0 and $309.7, respectively.
Interest rate assumptions used in calculating the present value of future
annuity and contract benefits for insurance contracts range from 6.1% to 9.9%.
(6) RELATED-PARTY TRANSACTIONS
During the years ended December 31, 1996, 1995 and 1994, the Company
recognized $3.4, $1.6 and $2.6, respectively, from its affiliates, GNA
Securities, Inc. and GNA Distributors, Inc. for reimbursement of marketing,
administrative and general office expenses.
During the years ended December 31, 1996 and 1995, the Company received a
dividend from GE Capital Life of New York of $7.5 and $7.1, respectively.
Prior to the Reorganization, the Company received $3.6 from GE Capital Life
of New York and paid $31.2 to GE Capital Assurance for settlement of
intercompany tax payments.
(7) COMMITMENTS AND CONTINGENCIES
(A) MORTGAGE LOAN COMMITMENTS
As of December 31, 1996 and 1995, the Company was committed to fund $27.7
and $20.2, respectively, in mortgage loans.
(B) GUARANTY ASSOCIATION ASSESSMENTS
The Company is required by law to participate in the guaranty associations
of the various states in which it does business. The state guaranty associations
ensure payment of guaranteed benefits, with certain restrictions to
policyholders of impaired or insolvent insurance companies, by assessing all
other companies involved in similar lines of business.
There are currently several insurance companies which had substantial
amounts of annuity business, in the process of liquidation or rehabilitation.
The Company paid $3.9, $6.6 and $10.3 to various state guaranty associations
during the years ended December 31, 1996, 1995 and 1994, respectively. At
December 31, 1996 and 1995, accounts payable and accrued expenses include $34.4
and $38.2, respectively, related to estimated assessments. The Company expensed
$20.4 of related assessments during the fourth quarter of 1995.
(C) LEASES
The Company leases the office space used in its operations. Future minimum
commitments under operating leases as of December 31, 1996 aggregate to $11.5,
terminating in the year 2001.
Rates for certain office space leases are subject to inflationary
increases. The effect of such inflationary increases has not been reflected in
the future minimum commitments.
(D) LITIGATION
There is no material pending litigation to which the Company is a party or
of which any of the Company's property is the subject, and there are no legal
proceedings contemplated by any governmental authorities against the Company of
which management has any knowledge.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(8) INCOME TAXES
The total provision for income taxes for the years ended December 31
consisted of the following components:
<TABLE>
<CAPTION>
1996 1995 1994
------ ----- -----
<S> <C>
Current federal income tax provision.............................................. $ 34.3 $19.5 $12.0
Deferred federal income tax provision............................................. (10.1) 3.9 29.2
------ ----- -----
Subtotal -- federal provision................................................ 24.2 23.4 41.2
------ ----- -----
Current state income tax provision................................................ 1.0 1.0 2.5
Deferred state income tax provision............................................... (.3) .1 1.0
------ ----- -----
Subtotal -- state provision.................................................. .7 1.1 3.5
------ ----- -----
Total provision for income taxes............................................. $ 24.9 $24.5 $44.7
------ ----- -----
------ ----- -----
</TABLE>
The following reconciles the federal statutory tax rate of 35% to the
reported income tax provision (benefit):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -----
<S> <C>
Statutory U.S. federal income tax rate........................................... 35.0% 35.0% 35.0%
Equity in earnings of GE Capital Life of New York................................ (3.5) (.7) --
State income tax................................................................. .6 1.2 2.2
Goodwill amortization............................................................ .7 2.7 2.5
Other, net....................................................................... -- 1.3 1.8
------ ------ -----
Effective rate.............................................................. 32.8% 39.5% 41.5%
------ ------ -----
------ ------ -----
</TABLE>
The components of the net deferred income tax benefit at December 31 were
as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C>
Assets:
Mortgage loans and real estate.......................................................... $ 6.2 $ 4.4
Future annuity and contract benefits.................................................... 68.2 58.5
Guaranty association assessments........................................................ 14.1 15.6
Other................................................................................... .7 1.5
------ ------
Total deferred tax assets............................................................ 89.2 80.0
------ ------
Liabilities:
Net unrealized gains on investment securities........................................... (4.1) (14.9)
Investments............................................................................. (2.0) --
Present value of future profits......................................................... (45.2) (55.7)
Deferred acquisition costs.............................................................. (16.4) (6.1)
Other................................................................................... (2.4) (5.5)
------ ------
Total deferred tax liabilities....................................................... (70.1) (82.2)
------ ------
Net deferred income tax benefit (liability).......................................... $ 19.1 $ (2.2)
------ ------
------ ------
</TABLE>
Based on an analysis of the Company's tax position, management believes it
is more likely than not that the results of future operations and tax planning
strategies will generate sufficient taxable income to realize deferred tax
assets. No valuation allowance for deferred tax assets was deemed necessary for
1996 or 1995.
<PAGE>
GREAT NORTHERN INSURED ANNUITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
On December 31, 1995, the Company adopted SFAS No. 119, DISCLOSURE ABOUT
DERIVATIVE FINANCIAL INSTRUMENTS. This statement required disclosures about
amounts, nature and trems of derivative financial instruments and modifies
existing disclosure requirements for other financial instruments.
The Company has no derivative financial instruments other than mortgage
loan commitments of $27.7 and $20.2 at December 31, 1996 and 1995, respectively.
The fair values of financial instruments presented in the applicable notes
to the Company's consolidated financial statements are estimates of the fair
values at a specific point in time using available market information and
appropriate valuation methodologies. These estimates are subjective in nature
and involve uncertainties and significant judgment in the interpretation of
current market data. Therefore, the fair values presented are not necessarily
indicative of amounts the Company could realize or settle currently. The Company
does not necessarily intend to dispose of or liquidate such instruments prior to
maturity. Financial instruments that, as a matter of accounting policy, are
reflected in the accompanying consolidated financial statements at fair value
are not included in the following disclosures. Such items include cash and cash
equivalents, investment securities, policy loans and other invested assets.
The fair value of mortgage loans is estimated by discounting the estimated
future cash flows using current loan origination rates adjusted for credit
risks.
The estimated fair value of investment contracts is the amount payable on
demand (cash surrender value) for deferred annuities and the net present value,
based on interest rates currently offered on similar contracts, for non-life
contingent immediate annuities. Fair value disclosures are not required for
insurance contracts.
At December 31, the carrying amounts and fair values of the Company's
financial instruments were as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
FINANCIAL INSTRUMENTS AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------- -------- -------- -------- --------
<S> <C>
Mortgage loans......................................... $1,159.7 $1,171.2 $1,282.4 $1,344.9
-------- -------- -------- --------
Investment contracts................................... $5,504.0 $5,364.5 $5,668.2 $5,514.9
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
(10) STATUTORY BASIS DATA AND RESTRICTION OF RETAINED EARNINGS
The Company files financial statements with state insurance regulatory
authorities and the National Association of Insurance Commissioners (NAIC) that
are prepared on an accounting basis prescribed or permitted by such authorities
(statutory basis). Statutory accounting practices differ from GAAP in several
respects, causing differences in reported net income and shareholder's interest.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed but that have been specifically granted by state insurance
authorities. The Company, however, has no significant permitted accounting
practices which vary from prescribed accounting practices or GAAP.
Statutory net income for the years ended December 31, 1996, 1995 and 1994
was $65.4, $76.7 and $82.6, respectively. Statutory capital and surplus as of
December 31, 1996 and 1995 was $411.2 and $356.9, respectively.
The NAIC has adopted Risk-Based Capital (RBC) requirements to evaluate the
adequacy of statutory capital and surplus in relation to risks associated with:
(i) asset quality, (ii) insurance risk, (iii) interest rate risk, and (iv) other
business factors. The RBC formula is designed as an early warning tool for the
states to identify possible under-capitalized companies for the purpose of
initiating regulatory action. In the course of its operations, the Company
monitors the level of its RBC and it exceeds the minimum required levels.
The Company is restricted by Washington State as to the amount of dividends
it may pay within a given calendar year to its parent without regulatory
consent. That restriction is the greater of statutory net gain from operations
for the previous year or 10% of the statutory surplus at the end of the year,
subject to a maximum limit equal to statutory earned surplus. As of December 31,
1996, approximately $66.0 was available for dividend payments in 1997.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
<PAGE>
Item 13. Other Expenses of issuance and Distribution.
The expenses of the issuance and distribution of the Contracts, other than any
underwriting discounts and commissions, are as follows:
Amount
------
NASD Fee $ 5,500
Securities and Exchange Commission
Registration Fee
17,241
Printing and Engraving 100,800
Accounting fees and expenses 101,750
Legal fees and expenses 43,600
----------
Total Expenses $ 268,891
Item 14. Indemnification of Officers and Directors.
The registrant's By-Laws provide, inter alia, that any director, officer or
employee of the registrant may be indemnified by the registrant against
liability (including fines, penalties and amounts paid or incurred in settlement
of any action or in the satisfaction of a judgment except a judgment in favor of
the registrant) and reasonable expenses incurred by him or her in connection
with any action of whatever nature, whether civil, criminal, administrative or
investigative, in which her or she may be involved by reason of his or her
having been a director, officer or employee of the registrant. In the case of an
action brought by or in the right of the registrant, a person who has been
successful on the merits shall be indemnified as of right, no person who has
been adjudged to be liable for negligence or misconduct in the performance of
his or her duty to the registrant shall be indemnified, and any other party
shall be indemnified if the Board of Directors, acting by a quorum consisting of
directors not having an interest in the action, determines that such person has
not been guilty of negligence or misconduct in the performance of his or her
duty to the registrant. In the case of any other action, a person who has been
successful on the merits shall be indemnified as of right and any other person
shall be indemnified if the Board of Directors, acting by a quorum consisting of
directors not having an interest in the action, determines that such person
acted in good faith for a purpose which he or she reasonably believed to be in
the best interests of the registrant and, in any criminal action or proceeding,
that such person had no reasonable cause to believe that his or her conduct was
unlawful.
Item 15. Recent Sales of Unregistered Securities.
During the past three years the registrant has sold no securities which were
not registered pursuant to the Securities Act of 1933.
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
1.1 Form of Underwriting Agreement between Great Northern
Insured Annuity Corporation and GNA Distributors, Inc.
Previously filed as Exhibit 1.1 with pre-effective amendment
No. 1 to Form S-1 filed on January 14, 1994.
3.1 Articles of Incorporation of Great Northern Insured
Annuity Corporation. Previously filed as Exhibit 3.1 to Form
S-1 on May 14, 1993.
3.2 By-laws of Great Northern Insured Annuity
Corporation. Previously filed as Exhibit 3.2 to Form S-1 on
May 14, 1993.
4.1 Group Modified Guaranteed Annuity Contract.
Previously filed as Exhibit 4.1 to Form S-1 on May 14, 1993.
4.2 Addendum to Contract or Certificate for Modified
Guaranteed Annuity. Previously filed as Exhibit 4.2 to Form
S-1 on May 14, 1993
4.3 Certificate of Participation. Previously filed as
Exhibit 4.3 to Form S-1 on May 14, 1993.
4.4 Addendum to Modified Guaranteed Annuity Certificate
for 403(b) Annuity. Previously filed as Exhibit 4.4 to Form
S-1 on May 14, 1993.
4.5 Addendum to Modified Guaranteed Annuity Certificate
for Individual Retirement Annuity. Previously filed as Exhibit
4.5 to Form S-1 on May 14, 1993.
5. Opinion and Consent of J. Neil McMurdie, Esq.,
Associate Counsel and Assistant Vice President.
24.1 Consent of KPMG Peat Marwick LLP.
24.2 Consent of Jones & Blouch L.L.P.
27. Financial Data Schedule
(b) Financial Statement Schedules.
See Financial Statements in Prospectus.
Item 17. Undertakings.
(a) Rule 415 Offering.
Previously furnished.
<PAGE>
(b) Indemnification.
Previously furnished.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1993, the
Registrant has duly caused this amended registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Seattle, State of Washington, on this 14th day of April, 1997.
---- -----
Great Northern Insured Annuity Corporation
------------------------------------------
(Registrant)
By: /s/ Geoffrey S. Stiff
---------------------------------------
Geoffrey S. Stiff, President
ATTEST:
/s/ John W. Attey
- -------------------------------------
John W. Attey, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
amended registration statement has been signed by the following person in the
capacities indicated on this 14th day of April, 1997.
----- ------
Signature Title
- --------- -----
/s/ Geoffrey S. Stiff Director, President and Chief Executive
- ------------------------------- Officer (Principal Executive Officer)
Geoffrey S. Stiff
- ------------------------------- Director and Senior Vice President
Stephen P. Joyce
/s/ Charles A. Kaminski
- ------------------------------- Director and Senior Vice President
Charles A. Kaminski
/s/ Victor C. Moses
- ------------------------------- Director and Senior Vice President
Victor C. Moses
SIGNATURES (continued)
Signature Title
- --------- -----
/s/ Kenneth F. Starr
- ------------------------------ Director and Senior Vice President
Kenneth F. Starr
/s/ Thomas W. Casey Officer (Principal Accounting Officer)
- ------------------------------ Vice President and Chief Financial
Thomas W. Casey Officer (Principal Financial Officer)
/s/ Stephen N. DeVos Vice President and Controller.
- ------------------------------ (Principal Accounting Officer)
Stephen N. DeVos
<PAGE>
EXHIBITS
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page in Sequential Numbering System
Exhibit No. Description Where Exhibit Located
<S><C>
1.1 Form of Underwriting Agreement Between Great Previously filed as Exhibit 1.1 with
Northern Insured Annuity Corporation and GNA Pre-effective amendment No. 1 to Form
Distributors, Inc. S-1 filed on January 14, 1994.
3.1 Articles of Incorporation of Great Northern Previously filed as Exhibit 3.1 to
Insured Annuity Corporation. Form S-1 on May 14, 1993.
3.2 By-Laws of Great Northern Insured Annuity Previously filed as Exhibit 3.2 to
Corporation. Form S-1 on May 14, 1993.
4.1 Group Modified Guaranteed Annuity Contract. Previously filed as Exhibit 4.1 to
Form S-1 on May 14, 1993.
4.2 Addendum to Contract or Certificate for Previously filed as Exhibit 4.2 to
Modified Guaranteed Annuity . Form S-1 on May 14, 1993.
4.3 Certificate of Participation. Previously filed as Exhibit 4.3 to
Form S-1 on May 14, 1993.
4.4 Addendum to Modified Guaranteed annuity Previously filed as Exhibit 4.4 to
Certificate for 403(b) Annuity. Form S-1 on May 14, 1993.
4.5 Addendum to Modified Guaranteed Annuity Previously filed as Exhibit 4.5 to
Certificate for Individual Retirement Annuity. Form S-1 on May 14, 1993.
5. Opinion and Consent of J. Neil McMurdie, Esq.,
Associate Counsel and Assistant Vice President.
24.1 Consent of KPMG Peat Marwick LLP
24.2 Consent of Jones & Blouch L.L.P.
27. Financial Data Schedule
</TABLE>
EXHIBIT 5
Opinion and Consent of J. Neil McMurdie, Esq.
Associate Counsel and Assistant Vice President.
<PAGE>
April 12, 1997
Board of Directors
Great Northern Insured Annuity Corporation
Two Union Square, Suite 5600
Seattle, WA 98101-2336
Re: Post-Effective Amendment No. 5
Registration Statement on S-1; Registration No. 33-62674
Ladies and Gentlemen:
I have acted as counsel to Great Northern Insured Annuity Corporation
("Company") in connection with the filing with the Securities and Exchange
Commission of Post-Effective Amendment No. 5 to the above-referenced
Registration Statement on Form S-1 for the Group and Individual Modified
Guaranteed Annuity Contracts (the "Contracts") to be issued by the Company. I
have made such examination of the law and have examined such records and
documents as in my judgment are necessary or appropriate to enable me to render
the following opinion:
1. The Company is a duly organized, validly existing stock life insurance
company of the state of Washington.
2. The Company is authorized to issue Contracts in those states in which
it is admitted and granted authority by such states and upon compliance
with applicable local law.
3. All of the prescribed corporate procedures for the issuance of the
Contracts have been followed, and, when such Contracts are issued in
accordance with the prospectus contained in the Registration Statement,
and upon compliance with applicable law, such Contracts will be legally
issued and binding obligations of the Company in accordance with their
terms.
I hereby consent to the use of this letter, or a copy hereof, as an exhibit to
the Registration Statement, and the reference to me under the caption "Legal
Matters" in the prospectuses contained in the registration statement.
Very truly yours,
/s/ J. Neil McMurdie
- ---------------------
J. Neil McMurdie
Associate Counsel and
Assistant Vice President
EXHIBIT 24.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Great Northern Insured Annuity Corporation:
We consent to the use of our report included herein (post-effective amendment
no. 5 to Form S-1 of registration no. 33-62674) and to the reference to our firm
under the heading "Experts" in the prospectus.
Seattle, Washington
April 15, 1997
EXHIBIT 24.2
Written Consent of Jones & Blouch L.L.P.
Jones & Blouch L.L.P.
1025 Thomas Jefferson Street, N.W.
Washington, D.C. 20007
(202) 223-3500
April 10, 1997
Great Northern Insured Annuity Corporation
Two Union Square, P.O. Box 490
Seattle, WA 98111-0490
Dear Sirs:
We hereby consent to the reference to this firm under the
caption "Legal Matters" in the prospectus contained in Post-
Effective Amendment No. 5 to the registration statement on Form
S-1, File No. 33-62674, to be filed with the Securities and
Exchange Commission pursuant to the Securities Act of 1933.
Very truly yours,
/s/ Jones & Blouch L.L.P.
- --------------------------
Jones & Blouch L.L.P.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF GREAT NORTHERN INSURED ANNUITY CORPORATION CONTAINED
IN THE PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<DEBT-HELD-FOR-SALE> 5,270 5,065
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 0 0
<MORTGAGE> 1,160 1,282
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 6,599 6,544
<CASH> 6 30
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 130 89
<TOTAL-ASSETS> 7,120 6,927
<POLICY-LOSSES> 6,172 6,067
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 48 74
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 0 0
0 0
0 0
<COMMON> 3 3
<OTHER-SE> 687 659
<TOTAL-LIABILITY-AND-EQUITY> 7,120 6,927
200 177
<INVESTMENT-INCOME> 463 785
<INVESTMENT-GAINS> 3 (14)
<OTHER-INCOME> 8 17
<BENEFITS> 30 137
<UNDERWRITING-AMORTIZATION> (27) (43)
<UNDERWRITING-OTHER> 64 114
<INCOME-PRETAX> 76 62
<INCOME-TAX> 25 25
<INCOME-CONTINUING> 51 26
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 51 26
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
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</TABLE>
